On July 1 voter unrest over Mongolia’s recent parliamentary elections boiled over into street demonstrations during which five people were killed, 300 injured and more than 700 arrested, leading the government to declare a state of emergency. Underlying voter unrest were concerns about economic issues, including record-high inflation and contracts with foreign mining concerns eager to exploit the country’s vast mineralogical wealth. Seizing on the issue of imminent massive foreign investment both leading parties promised voters a “share of the treasure” equivalent to the average worker’s annual salary. In reality however, amendments to the country’s 1996 Mining Law have yet to pass Parliament, frustrating foreign investors and leaving national windfall profits to the future even as the recent elections raised the issue’s visibility among the electorate.

BACKGROUND: On June 29 Mongolia held its fifth round of elections for the Ulsyn Ikh Khural (State Great Hural, or parliament) since the country abandoned Soviet influence in 1990 and Communism two years later. While 13 parties contested the seats, the two main contenders were the ruling Mongol Ardyn Khuv'sgalt Nam (Mongolian People's Revolutionary Party, MPRP), the former Communist Party and the Ardchilsan Nam (Democratic Party, or DP.) On July 1 voter resentment, rising over perceived electoral irregularities, resulted in rioting in Ulaan Baatar. During the tumult the MPRP headquarters was burnt, five people were killed, 300 injured and more than 700 arrested. President Nambaryn Enkhbayar, an MPRP member, announced a four-day state of emergency, the first in the history of the country, where calm has since been restored.

A key electoral issue during the campaign was government plans to develop the country’s massive but largely untapped mineral wealth, and how much percentage the government should seek of foreign ventures. The DP sought support by promising each Mongolian a one million tugrik ($884) “share of treasure;” the MPRP upped the ante, subsequently promising that each Mongolian’s "country's profit" share would be 1.5 million tugriks, no small consideration in a country where the World Bank last year estimated annual income at $880. The Irgenii Zorig Nam (Civic Will Party) coalition chairman Galbasuren Batzandan said, "We support foreign investors, but our platform says the Mongolian state needs to keep a controlling stake, at least 51 percent."

For foreign investors the Ivanhoe Mines and Rio Tinto Oyu Tolgoi (“Turquoise Hill”) concession, discovered in 2001, is the bell weather case. A definitive Mineral Law delineating investment issues has languished in parliament for years as amendments over foreign participation and governmental ownership are repeatedly introduced, debated and revised yet again. The current legislation gives the state either a 34 percent stake or a controlling 51 percent stake in mining projects, depending on whether the site was discovered with governmental or foreign investor resources.

Ivanhoe and Rio Tinto have touted Oyu Togloi, in the Gobi desert 50 miles from the Chinese border, as the world’s largest undeveloped copper project, with the potential of an average of 440,000 tons of copper and 320,000 ounces of gold annually over the next 35 years, and maintain that Oyu Tolgoi’s revenues alone could increase Mongolia's GDP by more than a third.

In 2007, Ivanhoe agreed to a draft investment providing the Mongolian government a 34 percent stake in Oyu Tolgoi, but the government withdrew the offer earlier this year in the wake of opposition from smaller parties in the coalition government.

The foreign investment community favors taxation over direct government percentage ownership, and their view is supported by Mongolian National Mining Association president D. Ganbold, who said, "Participation through taxation yields the most effective outcome because there are taxes that have to be paid even at times production goes down."

Here too however, foreign investors are unhappy; in 2006, the Mongolian Parliament enacted a windfall profits tax. It has a top rate of 68 percent under conditions set by world market mineral prices, when gold exceeds $500/oz or copper more than $2,600 per ton. While the government made concessions on negotiating the windfall tax rate on mining projects, Oyu Tolgoi’s output would face substantial royalties if the ores were not refined in Mongolia. Analysts suggested that Ivanhoe and Rio Tinto could exempt their project from the windfall profits tax regime by building a 100,000-300,000-ton smelter and refinery complex. What investors dream of for Mongolia is a 15 percent flat tax regime similar to Russia’s or China’s.

Ivanhoe has enlisted some heavy political support for its case. When Canadian Trade Minister David Emerson visited Ulaan Baatar in January he said, "the fundamental rationale for going to Mongolia is that we have a substantial number of Canadian mining companies that are involved in Mongolia,” adding in a moment of understatement, “There are legal and regulatory issues there."

What foreign investors have yet to appreciate fully is the Mongolian electorate’s desire for an improved standard of living not beholden to foreigners. Mongolia is far from economic autarchy; Russia supplies over 90 percent of its oil imports and massive volumes of wheat, while China, which takes over 70 percent of Mongolia’s exports, also provides substantial grain and produce imports.

Mining issues and their revenue potential are not likely to go away as a political issue anytime soon. According to the Asian Development Bank, in 2007 foreign direct investment in Mongolia was $500 million, of which nearly two-thirds was in the mining sector, while the World Bank estimated that mining accounted for about 20 percent of Mongolia’s GDP, 56 percent of gross industrial output, 69 percent of exports, and 36 percent of the government’s revenue. Given the pattern of foreign investment, such percentages will only grow over time.

If final parliamentary approval takes place this year, Oyu Tolgoi could begin commercial production by mid-2010. The foreign investment community was hoping that the June elections would provide a clear mandate to the MPRP, allowing the country to sidestep the instability that followed the 2004 election of a hung parliament, when the MPRP and the DP were forced to share power, as each had won 36 seats.

In the June elections, which international observers deemed overall to be fair and accurate, according to General Election Committee spokesman Purevdorjiin Naranba the MPRP won 47 of the 76 seats in parliament, while the DP gained 26 seats; the remaining three places were won by two smaller parties and an independent candidate. Ulaan Baatar, where a third of the country’s population lives, is a DP stronghold.

According to the World Bank, although Mongolia's economy grew 9.9 percent last year, inflation reached 15.1 percent, its highest level in a decade, no small consideration in a country where estimates show that over 36 percent of the population lives below the poverty line, struggling to survive on $2 a day.

Added to the average Mongol’s perception of imminent great mineral revenue flooding the country is the increasing issue of corruption, which Transparency International says has worsened since 2001, a conclusion corroborated by the World Bank’s 2006 Investment Climate Survey.

CONCLUSIONS: All parties raised the issue of imminent riches for the electorate as a campaign issue and will have to live with the consequences. For the foreign investment community, which clearly hoped that a massive MPRP victory would break the political logjam of the last four years, there must dawn the realization that the Mongolian debate over natural resources is but a subset of a larger one sweeping the post-Soviet space over Western buccaneering practices of seeking resources at fire-sale prices, and the electorate’s growing perceptions that local politicians who endorse such agreements must in fact themselves be corrupt. If the Mongolian government wishes to avoid a replay of July’s turmoil it must incorporate its electorate’s aspirations into its drafting of legislation. For Ivanhoe and Rio Tinto, if a possible 49 percent share of profits on annual production of 440,000 tons of copper and 320,000 ounces of gold is unacceptable, there are doubtless Russian and Chinese companies who would feel considerably less aggrieved. Mongolia’s official Montsame news agency noted that next month, Kazakh President Nursultan Nazarbayev will make an official visit to Mongolia, “accompanied by a large group of business representatives.” The competition is in the wings.

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