Mongolia’s future is in Rio’s hands
The announcement on Monday by Rio Tinto subsidiary Turquoise Hill Resources that the Mongolian government has requested that it agree to renegotiate the Oyu Tolgoi Investment Agreement highlights the risks faced by investors in the Central Asian country.
The Mongolian economy is the fastest growing in the world. The World Bank has forecast its growth at 17.2 per cent in 2012. However, for all the hyperbole, Mongolia’s economic boom is based on the development of one project – Rio Tinto ’s giant $6 billion Oyu Tolgoi copper and goldmine.
It is not accurate to describe a country with one major mine as undergoing a mining boom.
Whether Mongolia can turn its latent mineral wealth into sustained growth and a broad-based minerals economy will depend on crucial decisions that the new Parliament makes. This latest development is a bad sign.
One of the central issues debated in the lead-up to the country’s June 28 election was whether the previous government had been successful negotiating the Oyu Tolgoi agreement. The signing of the agreement in 2009 was the trigger for Rio Tinto to fund the construction of the mine.
Critics of the agreement within Mongolia claim the government gave away too much to foreign investors. In 2011, a group of 20 MPs signed a petition calling on the then government to amend the agreement to increase its interest in the project from 34 per cent to 51 per cent. Rio Tinto and its partners refused to consider this change.
No party obtained a clear majority in the June election, but the centre-left Democratic Party was able to form a minority government with the Justice Coalition and the Civil Will Green Party. The new government put a number of key “resource nationalists" into power.
The new Minister for Mining, Davajav Ganhuyag, is a worrying choice as he was one of the group of 20 dissident MPs. The Justice Coalition, consisting of supporters of the now-imprisoned former prime minister Enkhbayar, is singularly focused on changing the agreement.
Nothing will spook the international investment community and stop the nascent mining boom like the spectre of sovereign risk. Honouring contracts like the Oyu Tolgoi agreement will be a litmus test of the government’s performance in the eyes of the international investment community. It must improve the regulatory framework for mining and build a better relationship with China.
Mongolia has enormous potential to become the world’s next miracle economy based on its rich mineral endowment. However, at this point its success is not assured.