Businesspeople and policymakers in Ulaanbaatar dream of a speedy end to the Russian-Ukrainian war, which significantly disrupted Mongolia’s imports of necessities.
The mineral-rich nation suffered a debt crisis after the Russian invasion of Ukraine last year, forcing authorities to undertake fiscal and monetary measures to avoid a default amid depleted foreign reserves.
Now, Mongolia urgently needs to boost coal and copper exports to China to replenish the national coffers and repay its sovereign debts in 2023 and 2024. It has started building more logistic facilities to meet the recovering demand from China.
“We are a landlocked country,” one that buys “60 to 70% of our consumption” from two giant neighbors – Russia and China – and other foreign countries, Mongolia’s Finance Minister Boldyn Javkhlan told Asia Times in an exclusive interview. “Because of the war and China’s border restrictions, it’s difficult for us.”
“We do not want” the Ukraine war, Javkhlan said. “We are a peaceful nation. We’d like, even today, to end the war.” That may be taken in some quarters as a clarification, of sorts, of a United Nations vote that left Mongolia’s stance on the war a bit up in the air.
It was among 32 countries that abstained from the vote when the United Nations General Assembly on February 23 called for ending the war in Ukraine and demanded Russia’s immediate withdrawal from the country. A total of 141 countries voted for the motion while seven voted against it.
Since the collapse of the Soviet Union in 1991, Mongolia has gradually reduced its reliance on Russian products but they still account for more than 90% of its total imports.
They include oil products, electricity, grain, nitrogen fertilizers (for explosives used for mining), cyanide (for gold mining) and spare parts for Russian-made machinery. Any rising product prices or transaction costs could fuel inflation in Mongolia.
Javkhlan said that, while it remains uncertain when the war will end, the border reopening with China is currently the most important thing for Mongolia to revive its economy.
Many Chinese cities were locked down in the second and third quarters of last year due to Covid-19 outbreaks. Although border restrictions were lifted in the fourth quarter of last year, not all borders were reopened until this year.
Last week, China resumed normal operations at Erenhot, the largest land port on the China-Mongolia border, after having eased its Covid rules last December.
Default risk cut
The World Bank had expected Mongolia’s GDP to reach 5.2% in 2022, compared with 1.4% in 2021. But it later lowered the forecast to 2.5% due to the Ukraine war.
Due to a widening current account deficit, Mongolia’s foreign exchange reserves, which had peaked at US$4.9 billion in April 2021, fell to US$2.6 billion last August – the lowest since 2017. The Economist Intelligence Unit (EIU) said last July that Mongolia was at risk of default in the next four years.
Mongolia faced high budget deficits and debt issues in the second half of last year, Javkhlan said, but all these have been resolved thanks to a significant recovery of Mongolia’s exports to China in late 2022.
“Our economic growth forecast for 2022 was less than 3%, but the execution came in at 4.6%,” he said. “We forecast that our forex reserves would be lower than US$2.5 billion for the year-end but they rebounded to US$3.4 billion.”
“Amid the United States’ high interest rates, Mongolia’s bond issuance has been very successful among all the Asian countries,” he added. “We are able to repay our debt this year.”
The Mongolian government successfully issued a US$650 million sovereign bond at a coupon rate of 8.65% on January 9 after cutting its deficit.
Fitch Ratings affirmed Mongolia’s long-term foreign-currency issuer default rating (IDR) at “B” last May. Meanwhile, by comparison, Sri Lanka, which declared bankruptcy last July, has its IDR at “RD” (restricted default), meaning that it can only get a bailout from the International Monetary Fund.
Chinese coal buyers
Mongolia replaced Australia as China’s largest supplier of coking coal in 2021. On November 28 last year, Chinese President Xi Jinping and Mongolian President Ukhnaagiin Khürelsükh agreed to strengthen the two countries’ coal partnership.
But on December 6, thousands of protesters rallied in Ulaanbaatar calling for the dismissal of dozens of legislators and officials who were accused of stealing the receivables of Erdenes-Tavantolgoi JSC, the country’s largest state-owned coal miner.
The government ordered Erdenes-Tavantolgoi to cease signing direct sales contracts with buyers in China and only sell its coal through auctions on the Mongolian Stock Exchange from February. It also said coal miners had to sell their products at border prices, instead of pithead prices.
However, Chinese coal buyers are upset by the changes, saying that they are now paying more just to cover Mongolia’s anti-corruption costs.
“In the last 15 years, even though Mongolia has become one of the biggest exporters within the region for coal and copper, our poverty rate, corruption and inequality among our population are still very high,” Minister of Border Ports Khürelbaataryn Bulgantuya told Asia Times. “This is creating discontent towards our foreign investments and economic sectors.”
“In the last four or five years, the transportation from coal mines to the border has become almost more expensive than the coal prices themselves,” said Bulgantuya.
She added that Mongolia is now accelerating the construction of its logistics and border facilities as a lack of investment in infrastructure has provided room for middlemen and corruption. She said she and other ministers will visit China to explain this.
New Revival Policy
In May 2020, the Mongolian government introduced a long-term plan called Policy Vision 2050 to fight poverty and build a greener economy. In December 2021, it unveiled its New Revival Policy to achieve port, energy, industrial, urban and rural, green growth and state productivity recovery.
To deliver all of that, Mongolia plans to export more copper to China in the coming decade. On Monday, the underground production from the Oyu Tolgoi copper mine in the Gobi Desert commenced operations.
Jointly owned by the Mongolian government (34%) and Rio Tinto (66%), Oyu Tolgoi is expected to become the fourth-largest copper mine in the world by 2030. It will produce around 500,000 tons of copper per year on average from 2028 to 2036, enough to produce the copper components of around 6 million electric vehicles annually.
“The start of underground production at Oyu Tolgoi demonstrates our ability to work together with investors in a sustainable manner and become a trusted partner,” Prime Minister of Mongolia Oyun-Erdene Luvsannamsrai said in a ceremony. “Mongolia stands ready to work actively and mutually beneficially with global investors and partners.”
“The copper produced in this truly world-class, high-technology mine will help deliver the electrification needed for a net-zero future and grow Rio Tinto’s copper business,” said Rio Tinto Chief Executive Jakob Stausholm.
The project had faced some financial disputes before the two owners agreed early last year to move forward.
Read: China gets burned as Mongolia breaks coal link
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