Mongolia pays price for Russian
fuel supply By Mendee
Jargalsaikhany
An expected price increase
of gasoline by Mongolian distributors presents new
challenges for the coalition government and
worries for the public and businesses. As informed
by Mongolian fuel importers, Rosneft, the largest
Russian oil company, has begun to charge extra for
the popular gasoline brand AI-92 as well as for
diesel because of recent structural changes and
production expansion costs from November 1, 2012.
Any slight change in the gasoline retail
price often leads to price increases in Mongolia
for other goods and services, as well as panic
buying due to fuel shortage fears. In the absence
of natural gas and inadequate electricity grids,
many rural communities are still dependent on
diesel power generators. In addition, the country
is experiencing increased consumption of fuel in the
mining sector,
agriculture, freight forwarding companies as well
as due to the growing number of vehicle owners.
To avoid potential market panic, Prime
Minister Norovyn Altankhuyag has engaged in
discussions with the key Mongolian distributors,
encouraging them not to increase the retail price,
while the Authority for Fair Competition and
Consumer Protection has criticized distributors
for suggesting unreasonable price increases.
Although the government has promised
several financial incentives to fuel distributors,
these are only short-term solutions and may even
become hostage to domestic politics around the
upcoming local elections in November as well as
the presidential election in 2013.
As
usual, following the anticipated fuel crisis,
officials and the public have discussed
diversifying fuel suppliers, constructing
facilities to refine its limited oil reserves or
to liquefy coal sources, and increasing the
country's oil reserves. Since 1990, all succeeding
governments have sought ways to diversify sources
in order to maintain a stable fuel supply, but
options are limited.
By the fate of its
geography, Mongolia has only two possible options
to import fuel: from either China or Russia.
Because China is also an importer, the only option
for large, stable gasoline imports comes from
Russia.
Mongolia has been dependent on
Russian state-owned Rosneft for over 90% of its
total fuel imports. Russia has often responded to
Mongolia's request for a reliable, stable gasoline
supply with price increases at critical seasons
for the country's mining and agricultural economy
- according to Mongolian politicians and fuel
importers.
Sometimes, high-level meetings
between Ulaanbaatar and Moscow appear to be
dominated by the Russian state-run oil company.
For instance, the main success of President
Tsakhiagiin Elbegdorj's trip to Moscow last year
was reportedly the assurance of the Kremlin to
maintain the fuel supply to Mongolia.
Similarly, Rosneft's proposal to establish
100 gas stations in Mongolia was also perceived in
Ulaanbaatar as Russian economic pressure. On the
one hand, Rosneft's proposal could be understood
as the Russian oil company's effort to increase
its exports to Mongolia. On the other hand, the
proposal triggered sudden protectionist debates
among Mongolian politicians, fuel distributors and
the public.
According to Russian
Ambassador to Mongolia Victor Samoilenko's
explanation, price changes and shortages in the
fuel supply need to be explained in the context of
the international market, policies of Mongolian
fuel distributors and the increasing fuel
consumption in Mongolia. Mongolia's fuel usage
jumped from between 30 and 35 tons per year to 85
tons in 2011. And the number of heavy trucks in
the Mongolian fleet used to export coal to the
Chinese market reached 5,000. Despite these
reasonable explanations, Mongolia - as a small
country situated between two larger neighbors -
still tends to perceive fuel price fluctuations
through geopolitical and geo-economic lenses.
Since the collapse of the Soviet Union,
Mongolia has viewed Russia as a reliable,
strategic partner. Although Ulaanbaatar made
numerous efforts to revive its bilateral relations
with Moscow, particularly in trade, to
counterbalance the fast-growing economic relations
with Beijing, Russia was unable to pay significant
attention to Mongolia's request due to its own
political and socio-economic challenges. In
addition, despite its "third neighbor" policy of
building ties with developed democracies,
Mongolian foreign policy priorities have always
concentrated on its neighbors, particularly on
Russia.
Russia's response to Mongolia's
diplomatic overtures developed slowly, but was
eventually revived with President Vladimir Putin's
visit to Ulaanbaatar in late 2000. Moscow's
economic and geopolitical interests were expressed
more clearly during President Dmitry Medvedev's
visit in 2009 on the occasion of the 70th
anniversary of the Soviet-Mongolian victory over
Japan's Kwantung Army in the battle of Khalkhin
Gol.
During the visit, both sides agreed
to develop their strategic partnership with an
explicit focus on economic cooperation - in the
areas of mining and infrastructure development.
Russia agreed to invest in extraction of uranium,
extension of Mongolian domestic railroad networks,
and joint mining ventures (Strategic Partnership
Declaration, 2009). Even though Mongolia's fuel
imports have constituted the majority of the
bilateral trade from 1990, they were not mentioned
in the declaration.
In addition to fuel
leverage, Russia maintains several important
business stakes in Mongolia. The Erdenet copper
mine, which produces 40% of Mongolia's gross
domestic product (GDP), is equally owned by
Russia. Also, the state-owned joint mining
concern, Mongolrostsevetment, and the
trans-Mongolian railroad are also jointly run by
Russia.
These joint ventures provide
significant economic leverage in Mongolian
politics. For instance, Russia successfully
discouraged Mongolia's efforts to receive $188
million of assistance from the US Millennium
Challenge Account to renovate its railroads and to
build a second trans-Mongolian link with Chinese
developmental assistance. Also, Russia
wholeheartedly supported Mongolia's decision to
expand its domestic railroad links using the
Russian standard gauge rather than linking key
mining sites in the Gobi area directly to China's
rail network. During their subsequent visits to
Mongolia in 2009, President Medvedev and Prime
Minister Putin agreed to provide $250 million for
a railroad modernization project and 1,000 cargo
train cars.
From the fuel supply to joint
ventures, Russia remains a visible factor in
Mongolian politics and its economy. However,
Rosneft's monopolistic policy over Mongolia's fuel
market has begun to intensify Mongolia's efforts
to find alternative fuel suppliers, such as
Kazakhstan and the Gulf states, as well as to
refine its crude oil rather than exporting to
China. But for the time being, Mongolia's
burgeoning economy will remain vulnerable to
imports of Russian gasoline.
Jargalsaikhany Mendee is a
political science PhD student at the University of
British Columbia. He has worked at the Mongolian
Ministry of Defense, Embassy in Washington, DC,
and Institute for Strategic Studies.
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