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Mongolia's relationship status with China? Complicated.

Mongolia just rushed a law through parliament to make it harder for China to invest in Mongolia.

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A mine worker sits in a traditional tent at a mining camp southwest of the Mongolian capital city, Ulan Bator.

David Gray/Reuters

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In today's harsh economic climate, most countries are falling over themselves to attract Chinese investment.

Mongolia's government, however, just rushed a law through parliament to make it harder.

The law requires investments by foreign state-owned enterprises in strategic sectors, such as mining, to get special government approval. And it has held up a deal by Canadian mining company Ivanhoe to sell a majority stake in one of its Mongolian coal mines to Chalco, the Chinese state-owned aluminum giant.

"We need a policy to stop all the [mining] licenses ending up in Chinese hands," says Tsolmon, a former deputy foreign minister, who like most Mongolians uses only one name. "Otherwise we could wake up one morning and most of our land would be controlled by the Chinese. That would not be good."

Mongolia, a sparsely populated, mineral-rich country landlocked between Russia and China, is in an awkward geopolitical spot.

For most of the 20th century, it was dominated by the Soviet Union, which installed a puppet regime. Before that, Mongolia was part of the Chinese Empire for two centuries. Today, the country is attempting to steer a more independent path by reaching out to what it calls "third neighbors," such as the United States, Japan, South Korea, and the European Union.

But geography is implacable.

"We cannot change our borders," says Mr. Tsolmon. "We have to find a way to make our location work to our advantage."

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In one sense, "Mongolia is in a particularly good place, both geographically and metaphorically," says Houston Spencer, the spokesman for Oyu Tolgoi, a $7 billion copper and gold mine operated by Rio Tinto that is about to start production.

"To have one of the world's largest copper deposits ready to come on line when the hungriest copper consumer in the world is sitting next door is pretty good timing," Mr. Spencer says. Oyu Tolgoi is planning to sell the vast majority of its production to Chinese customers.

Indeed, says President Elbegdorj, "it is because we share the longest land border with the fastest-growing big economy in the world that foreign investors are interested in Mongolia."

But China is already Mongolia's largest foreign investor, and 85 percent of Mongolia's exports – be they minerals, cashmere, wool, or milk products – go to China. Some Mongolians are worried that Oyu Tolgoi, and massive coal deposits at Tavan Tolgoi that are also destined for China once large-scale mining starts there, will only deepen their country's uncomfortable dependence on their giant southern neighbor.

Mongolia's economy was left in ruins by the collapse of the Soviet Union, recalls Sumati, a well-known Mongolian pollster and political analyst. "If China's economic health suddenly deteriorates … we may really face big troubles," he warns.

And even if China's economy stays on track, its role as Mongolia's indispensable customer gives Beijing unusual power: When the Dalai Lama has visited Ulan Bator in the past, China has expressed its displeasure by closing its border with Mongolia for a few days, just as a reminder.

The Mongolian authorities, while seeking the best possible relations with their neighbor, are also trying to broaden their options. The government plans a new railroad, for example, that would connect to the trans-Siberian track and offer a northern exit route for Mongolia's coal and copper concentrate.

It makes political and strategic sense, but the eastern Russian port of Vladivostok is 3,000 miles from the Tavan Tolgoi coal mine, while the Chinese port of Tianjin is only 1,000 miles away, points out Graeme Hancock, chief operating officer of Erdenes TT, the Mongolian government firm mining at Tavan Tolgoi.

"Digging the coal is the easy bit," Mr. Hancock says. "This game is all about logistics and how to transport the coal to market at the least cost," he adds. That puts China in a powerful position.

China is not popular in Mongolia because of its imperial past, and also because "when violations of labor rights and environmental standards are reported, they seem to happen usually in factories linked to Chinese investors," says Oyungerel, a human rights activist recently elected to parliament. The illegal influx of Chinese laborers is also a source of resentment, she adds.

When Mr. Sumati's polling company asked Mongolians last April "which country is the best partner for Mongolia?" only 1.2 percent of respondents suggested China. The other 98.8 percent may have to get used to the idea, Tsolmon says.

"Policy does not depend on human will but on reality," he argues bluntly. "We cannot fly away. And there is no point in complaining about where we live. All we can do is make the best of it."


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