Goldmines dig up trouble for for Mongolia

Giles Whittell

Chilly? Spare a thought for the people of Mongolia. This is their minus 30 time of year.

Since the age of the great Khans, the nomads of the Gobi Desert have coped heroically with the most extreme weather on earth. This year is no exception, but there are complications. Their frozen landscape is host to an over-heated economy, an undernourished democracy and a general sense that Central Asia’s quiet success story may be grinding to a halt.

The focus of what ails Mongolia is also the main source of its wealth. About 400 miles south of Ulan Bator a Canadian firm part-owned by Rio Tinto – which yesterday fired its CEO over unrelated losses in Mozambique – is about to start extracting ore from a hole in the ground so huge and rich that it could account for nearly a third of Mongolia’s GDP over the next half-century.

The Oyu Tolgoi mine’s prodigious gold and copper deposits have been valued at close to $300 billion in today’s money. Already about $6 billion has been ploughed into it, making it the main driver of Mongolia’s breakneck economic expansion even before it yields its first ounce of gold.

So, who gets the money? The state has a 34 per cent stake, but Rio Tinto and its subsidiaries have the other 66 per cent and most of the profits for the next 30 years. This may sound like a good deal for Big Mining, and it is. But when the Government produced a draft law last month giving Mongolians an automatic 34 per cent stake in all future mining ventures, business cried foul. Foreign investors and their local partners wrote to the President warning that the new law would “shut down the entire minerals industry of Mongolia”.

Translation: put foreign capital in a straitjacket and you put yourself in the same category as Mongolia’s less savoury neighbours. Mining will continue in your country, but with less of our investment and know-how and less of the transparency required of us by the Western jurisdictions where we are domiciled.

The protesters have a point. Mongolia’s growth rate is already falling sharply and its foreign business community is increasingly spooked by apparently arbitrary official harassment on the Putin-era Russian model. The larger problem is the Government’s direction of travel towards populism and resource nationalism – at a time when people such as Vladimir Putin and Hugo Chavez have given them a bad name, and in a country that has done so well from doing right by investors.

Critics of the new law say it will replace a burgeoning market economy with sclerosis and corruption dominated by a few oligarchs. One critic in particular accuses the current regime of making sweetheart deals with the Oyu Tolgoi investors at the public’s expense – but his voice is seldom heard these days because he’s been locked up.

Nambaryn Enkhbayar, President of Mongolia until 2009, was arrested last year and jailed on one of the more comical rap sheets faced by a post-Soviet leader. The charges against him include one of abusing his office to require the national airline to ship eight books from Korea to Mongolia “without charge”. There are also corruption allegations relating to an ex-employee and a coal mine, but so far he has not been allowed to answer them.

If his case sounds a bit like those of Yulia Timoshenko in Ukraine and Mikhail Khodorkovsky, going quietly spare in a Siberian labour camp across Mongolia’s northern border, it should. None is a saint, but all are once-powerful reformist figures seen as contenders for leadership through the ballot box by rivals who have therefore muzzled them.

Sad, but true: a full generation after the fall of Soviet Communism there is not one country in the former Soviet bloc east of the Soviet Union’s old western border that has successfully combined a functioning democracy and the rule of law.

For many years, Mongolia looked like the exception – and a possible model for other landlocked, resource-rich countries scrabbling for a foothold in the global economy, like Afghanistan. Its backsliding on free markets and judicial transparency is by no means irreversible, but swift, enlightened action by the current Government is needed to reassure the world that it is serious about building an open society as well as getting rich on gold. Due process for Enkhbayar would be a good place to start.
 

The Times says…

Wednesday June 13, 2012

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