The Mongolian people sit atop massive combined and mostly untapped reserves of coal, uranium, rare earths, copper, gold, zinc, oil, silver and more. It has about 10 percent of the world’s known coal reserves. It has some of the highest quality coking coal on the planet. Its Tavan Tolgoi mine alone could have 7.4 billion tons of coal. Mongolia is about 11th, right after China, in uranium reserves. The Oyu Tolgoi mine could be one of the top three copper mines on the globe, and it has very large gold reserves as well. Some think that when Oyu Tolgoi is at its peak production it could produce enough minerals in value to be 25-30 percent of the GDP of Mongolia. The list of the mines and the values of the mines is mind-boggling, most particularly when one thinks about how much of this is untapped and that there may be even far greater resources yet to be discovered. The value of Mongolia’s mineral reserves could end up to be, given the prices they can get for this underground wealth, well over $1 trillion. This is for a country with only 3 million people. The Mongolian people are literally living on top mines that could represent a very prosperous future for them.
Assets waiting to be used
If they and the revenues from them are developed properly. During its boom years when commodity prices were skyrocketing Mongolia was nicknamed Mine-golia. Mongolia’s GDP was growing at double-digit rates. In 2011-2012 it may have been the fastest growing economy in the world at 17%GDP growth. Mongolia rode the commodity prices up. Unfortunately for the people of the country it also rode the commodity prices down – as it built up massive debts. In 2005 its external debts were about 50 percent of its GDP, which was manageable. For a few years thereafter this percentage dropped. However the external debt grew to 120% of GDP by 2012 and now may be about 200% of GDP. The country mortgaged its future wealth to have quick economic development. Mongolia’s GDP growth rate this year could be less than 1%. Mongolia has massive debt payments due in early 2017. It is turning to the IMF for help. China has said it would help, but the Mongolians seem wary to take the money from China because China could ask something in return that could be far more costly than billions that need to be paid back.
It has about 10% of the world's known coal reserves. It has some of the highest quality coking coal on the planet. Its Tavan Tolgoi mine alone could have 7.4 billion tons of coal
An economy attempting to recover
The Mongolian currency collapsed by 14% this summer. The Tughrik had been in decline on average for some time previous to this, but this collapse was a real wake-up call. The Mongolian Central Bank’s response to this was to raise the interbank overnight rate by 450 basis points – at one time in August 2016. This is one of the highest one-time interest rate increases in modern history. This stopped the collapse of the currency for now. (The currency recently got stronger based on some increases in mineral prices and the settling of some court cases, amongst other things). However, such a quick rise in interest rates also can slow the economy down further and cause an increase in its already high unemployment and underemployment rates. Inflation has declined over the last few years and seems in check so far, but the standard of living of the average Mongolian has been in decline as the economy as a whole has slowed down, and especially because of the declining volumes and values of exports over the last few years. Much of that has been in the decline of many mineral prices since 2012, but increasingly the decline has been from the slowdown of the Chinese economy and the drop in China’s needs for Mongolia’s mineral commodities. Foreign direct investment has declined. The attractiveness of Mongolia’s bond issues have declined rapidly. Some changes in foreign investment rules and some legal wrangling on some mine investments have also, one would hope temporarily, slowed down much needed foreign investment. Some of the most public (and valuable) wrangling has been on the Oyu Tolgoi and Tavan Tolgoi mines. Mining is often political. When a country has such massive reserves mining becomes very political.
Investors' eyes on the subsoil
Mongolia is wary of foreigners controlling its underground wealth, and hence most of its wealth. Yet Mongolia wants and needs more foreign investment. It is struggling to get this to happen while at the same time not giving the sense that it is giving away the store to foreigners. This is a tough political tradeoff.
Mongolia has scared way some investors, but the potential wealth in the ground is too much to keep the savviest and most sophisticated investors away. Even with the political, legal and currency risks the resources in ground are just too much to just leave it there for some investors. But these sorts of investors have deep pockets and can plan to ride out some of the political and economic storms for longer run returns. Rio Tinto is one of them, yet China lurks to pounce on these resources. A few foreign investors jailed for tax-evasion and other investment issues. Some investments have been slowed down and even stopped due to disputes over revenue sharing with the government. These events have tossed a cold towel on some investors. However, any investor in Mongolia needs to understand that these resources are the Mongolians and that they have to deal with Mongolia and the Mongolian people on their territory and within their legal, economic and political systems -- even as the country may settle into a more productive and effective way of handling foreign investments and foreign investors in the long run. The Mongolian government has to also keep an eye on how its people are seeing their benefits from the development of its mineral wealth. The politics of mining in Mongolia is complicated.
The consequences of the climate on the mining industry
Nearly 30% of the Mongolian people are below their national poverty line and poverty has been increasing. Unemployment also has been increasing as the economy has tumbled off the commodity boom. The people of Mongolia have been hit with an increasing number of natural disasters called dzudhs, where the temperatures get so low and sometimes the snows are so deep that millions of their livestock die in the fields. During a few horrible weather winters in the 2000s so many of the livestock of this nation that used to rely a lot on herding died that hundreds of thousands of now destitute herders moved to the capital city of Ulan Baator. Their move has brought them mostly poverty and a loss of their previous livelihood. This has brought further budgetary stress to the government. The people who live in these gurs on the hills surrounding Ulan Baator mostly cook and heat their gurs, or rounded-top tents, with coal. This makes the air of Ulan Baator some of the worst in the world in the colder parts of the year, such as February, when temperatures can regularly reach biting cold weather of -20 degrees C. In some parts of Mongolia seeing -30 degrees C and very high winds can be fairly normal in the coldest months. The dzudhs are extreme versions of these temperatures and wind combinations, which are sometimes combined with deep and drifting snows. The weather and its effects can also enter the politics of mining in the country as the people are asking for more from the potential wealth of the country.
Trade relations with China and Russia
About 90% of Mongolia’s exports are minerals. About 80% of its exports go to China. China squeezes them on the prices of these mineral exports given the limited routes for Mongolia’s exports. Often Mongolia has to settle for far lower than the international market price for its mineral exports to China. China’s economy has been slowing down and its needs for imported coal and other minerals from Mongolia have been in a swift decline. Given that these exports are a big part of the Mongolian economy this has added further misery to the Mongolian economy. China and its other neighbor, Russia, have often ruled out Mongolia’s developing alternative routes for its exports. However, Russia and China recently made an agreement with Mongolia to develop further routes as part of a China-Mongolia-Russia economic corridor, and for China this is part of the One Belt, One Road developments that will tie many resource and commodity exporters to, and export markets for China in a vast $ 4 trillion enterprise that could develop the largest economic empire the world has seen – that would be centered on China. Mongolia could benefit from this, but at what cost is the question many Mongolians and others are asking. If you look at the map where Mongolia is you see it is sandwiched between Russia and China. Russia and China have used that tyranny of geography to profit from and to try to keep Mongolia in geopolitical line. For example about 30% of Mongolia’s GDP is from its exports to China. Mongolia relies on Russia and China for often over 50% of its direct imports, and much of its indirect imports from other countries go via Russia and China – with fees attached. For China and Russia making the profits from Mongolia have been a lot easier that keeping this very independent minded people in line politically. Mongolians have a vast and deep history, and they know it. There are also many historical and present-day reasons for enmity between Mongolia and its giant and powerful neighbors that surround it. Mongolia sees the United States as it "Third Neighbor" to counter the power of Russia and China. Obviously, Russia and China try to counter that in many ways. Mongolia is also turning to Japan and other powerful countries to try to diversify away from its economic and political vulnerability.
Focusing on innovation to exit the crisis
Mongolia’s strengths include its massive mineral wealth in the ground. It also has potentially great strength in its people, if education, training and investment in those people are done properly. Reducing poverty, unemployment and underemployment is highly likely for a country that has such massive mineral wealth. Mongolia can use its mineral wealth to develop value adding industries for the future of its people. It can also convert its mineral wealth into better human development and human security for its people. However, Mongolia needs to get its political and legal acts together. It needs to reduce corruption. Mongolia needs to diversify away from its huge reliance on China. It needs to find a way out of the tyranny of geography of being the meat in the sandwich between Russia and China. There are some shadows lurking in the future of Mongolia. There are also many bright spots, including the recent increases in coking coal prices (if they prove to be longer lasting) and the likelihood that other commodity prices could start to increase. As with oil the solution to low coal, gold and copper prices is low coal, gold and copper prices. Low prices prompt a decline in mining investments. Declining investments in mining the commodities create the seeds of commodity price booms in the future. Near future elasticity of supplies of commodities decline with declines in present and near future investments in mining. When demand goes up supply cannot respond enough to keep prices low – and then we enter the next price cycles of boom and bust. Mongolia is in many ways at the whim and whimsy of global commodity markets with the further restrictions brought on by the dominance of China in its export markets. Mongolia needs to diversify its markets. It needs to diversify its economy. It needs to first get out of its short term debt and slow-growth problems and then face head-on its long term economic and human development efforts. I have hope for Mongolia, but it may take some time for it to get closer to its potential, which is massive for both its economy and its people.
**All opinions are Professor Sullivan’s alone