Foreign investment in Mongolia is largely directed towards the country's vast, largely untapped mineral resources. Russia, Mongolia's second largest trading partner, has an inside advantage, as it provides approximately 90 percent of the country's oil imports and nearly all of its wheat imports. Moscow is now focusing on acquiring a dominant position in developing Mongolia's uranium resources, but Russia’s heavy-handed capitalist policies are provoking a political backlash.

BACKGROUND: Russian interest in Mongolia’s uranium ore deposits dates back to the early 1980s, when joint Mongolian-Soviet geological teams prospected for uranium in the eastern aimags, or provinces. Geological studies determined that Mongolia currently contains six uranium strata and more than 100 uranium deposits. Mongolian geologists now believe that Mongolia has 60,000 metric tons of uranium reserves, while Russian experts have much higher estimates, ranging from 120,000 to 150,000 metric tons. The higher Russian estimates place Mongolia high on the list of global uranium reserves, after Kazakhstan, Australia, South Africa, the U.S., Canada, Brazil and Namibia. Only 35 countries worldwide possess reported uranium reserves.

Seeking to ingratiate itself with the Mongol leadership, Moscow has made a number of gestures to invoke Mongolia's goodwill. Five years ago, Russia wrote off  $11 million of Mongolia’s Soviet-era debts, 98 percent of the outstanding amount. Bilateral trade subsequently developed quickly, reaching $593 million in 2006 and in 2007 increased by 33 percent to $785 million.

Soaring prices, however, threaten Mongolia’s economic gains. The World Bank reports that while Mongolia’s real GDP grew by 9.9 percent in 2007, inflation soared to a decade-high level of 15.1 percent, driven by rapid monetary growth, public sector wage increases and price hikes on a number of imports, notably food and fuel. Russia is using its position as a primary supplier of Mongolia’s food and energy needs to leverage additional concessions.

Inflation over the last two months has seen Rosneft, which supplies more than 90 percent of Mongolia's oil, increase its prices by 14-26 percent. Mongolia imports nearly all of its wheat from Russia; in April alone the price of bread increased by 50 percent and the cost of a 55-pound bag of flour tripled. Last month, consumer prices increased by 5.1 percent over those of March, with food increasing overall by 11.1 percent.

IMPLICATIONS: Soaring inflation and its attendant economic unrest are threatening Ulaan Baatar’s efforts to assert increasing control over its mineral resources. At issue is Mongolia's 1997 Mineral Law. In May 2006, the law was amended to include a windfall tax, which raised tariffs to 68 percent on gold when its world market price exceeds $500 an ounce, and copper when it surpassed $2,600 per ton. For the last several years, the intertwined issues of state ownership and taxation of minerals deemed of strategic importance to the state have become increasingly contentious political concerns.

D. Bayar, an adviser to Minister of Trade and Industry Khalzkhuu Narankhuu said, "If a mineral has an impact on the economy, it is a strategic deposit. The Mongolian people want to have better living conditions, so we aim to use the revenues to benefit the regional economy."

Ulaan Baatar defines “strategic” mining projects as those with revenue exceeding five percent of Mongolia's gross domestic product, currently around $3 billion. According to Mongolia’s Mineral Resources and Petroleum Authority chairman Bold Luvsanvandan, "There are about 15 projects and they are valued in the tens of billions of dollars. These are very big projects."

In January 2006, the government identified 49 strategically significant mineral deposits; the uranium sites included were Mardai, Dornod and Gurvanbulag, all located in Dornod aimag. In urging Parliament to consider the government’s list, President Nambaryn Enkhbayar said, “I direct the Government of Mongolia to follow policy to set state shares of strategic mineral deposits, whose resources were uncovered during geological exploration funded by the state budget, at more than 50 percent of the deposits and negotiate with license owners about this,” while the government should negotiate with the license owners about deposits uncovered by privately funded research to determine the level of state shares “in accordance with the interests of the country.” Enkhbayar envisaged using profits from state shares to develop a “treasure fund,” similar to a sovereign wealth fund, from which the government would annually give each Mongolian citizen a “gift.” Enkhbayar directed his government specifically to consider uranium deposits in their deliberations to develop state policy prior to opening negotiations with foreign and state-owned companies.

Two years later, however, Parliament is still grid-locked over the Mining Law’s proposed amendments, as parliamentarians continue to debate whether the government can claim a minimum of 51 percent and 34 percent of strategically “significant” mineral deposits explored by state and private funding, respectively.

Enkhbayar used the fact that the country’s Mining Law is vague about uranium to play for time in negotiations; besides Russia, Japanese, Canadian, Kazakh and French companies are interested in the country’s uranium. Enkhbayar said, “Mongolia at present has no clear legal guidelines on the extraction of nuclear fuel. Partnership proposals can be seriously discussed only after a proper legal framework is set up.”

Russia is in a unique position to benefit from the mounting food and energy crises, as they have weakened Mongolia's negotiating position. Moscow regards Mongolia’s uranium reserves as the country’s biggest mineralogical prize, since their development dovetails nicely with the Kremlin’s own plans for economic expansion.

The collapse of the USSR left Russia isolated from deposits discovered by Soviet geologists in Central Asia. Currently Russia’s sole uranium deposit is its Streltsovsky mining and chemical plant in Chita.

Furthering strengthening the Kremlin’s hand, in February wheat shortages forced Mongolia to seek emergency imports from Russia; the government struck a deal for 200,000 tons of wheat at subsidized prices.

In April,  Mongolian Prime Minister Sanjaa Bayar made a three-day official visit to Moscow. Bayar's trek resulted in a Russian agreement to supply Mongolia immediately with the first tranche of 100,000 tons of wheat on preferential terms.

Russia's payback for the largesse was not long in coming. On April 11, the two countries signed agreements for Russian specialists to assist in the prospecting, production and reprocessing of Mongolia's uranium. According to Rosatom state corporation chief Sergei Kirienko, the document "should secure a comprehensive approach to the development of the nuclear industry in Mongolia. Mongolia should not only produce uranium, but also conduct the initial ore processing."

Spurred by still-rising fuel and food prices, Enkhbayar hastened to Moscow, where he met Russian President Dmitrii Medvedev on May 16. According to a Russian presidential administrative source, Medvedev and Enkhbayar had "a substantial dialogue concerning joint initial steps in the Mongolian mining sector." Besides Rosatom, other Russian companies interested in Mongolian mineralogical resources include Basic Element, Renova, Severstal, Polimetall and Gazprombank.

CONCLUSIONS: The amendments to Mongolia's Mineral Law are part of a government effort to use rising mineral prices to reduce poverty, but even if they now pass, it seems likely that Russia will receive preferential treatment.

Luvsanvandan believes that once the amendments to the country’s Mining Law are codified, foreign investors will pump more than $10 billion into Mongolia’s mining sector. According to government data, mining accounts for 30 percent of Mongolia's gross domestic product and 78 percent of exports.

Russia’s commanding lead in the race to exploit Mongolia's minerals can only increase, not least because Russia owns a 49 percent share in the Ulaan Baatar Railway Joint Stock Company, founded in 1949. The railroad serves as the country's main export route for minerals, but it needs substantial upgrading. Another example of Russia's penetration of the Mongolian economy is the state-run Erdenet Mining Corp., a copper mining venture in production since 1978. Mongolia owns 51 percent of Erdenet and Russia owns the remaining 49 percent.

Russia has competition in the race to exploit Mongolia's uranium resources. In 2006 France’s Areva nuclear concern signed a memorandum of understanding concerning the Mardai and Sainchand uranium mines but there has been little progress, despite a visit by Enkbayar to Paris in February 2007. Russia will not have to compete with Mongolia’s largest trading partner, as in February China National Nuclear Corp. said that Inner Mongolia’s Ordos Basin has enough uranium to meet China’s current demands.

Russian dominance over Mongolia’s additional uranium assets mean that by 2030, Russia’s potential natural and weapons-grade uranium reserves will give the Kremlin control of 45 percent of the world's uranium enrichment market and 20-25 percent of the world’s nuclear plant construction market. Further enriching Russia, a market is next door, as in East and South Asia there are currently 109 nuclear power stations, 18 under construction and plans to build 110 more. Worldwide uranium prices over the past three years have doubled. Under current arrangements Mongols will be lucky to see 51 percent of the profit on their uranium. The flipside for Russian and Mongolian politicians is that hungry and cold Mongolian voters have now displayed displeasure at such sweetheart deals over their “strategic” minerals.

AUTHOR’S BIO: John C.K. Daly is an international correspondent for UPI.