Identifier
Created
Classification
Origin
06ULAANBAATAR134
2006-02-24 07:32:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Ulaanbaatar
Cable title:  

UPDATE ON COMMERCIAL DISPUTES AFFECTING US

Tags:  KIPR ETRD ECON PGOV MG 
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R 240732Z FEB 06
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 9496
INFO RUEHBJ/AMEMBASSY BEIJING 4758
RUEHUL/AMEMBASSY SEOUL 2030
RUCPODC/USDOC WASHDC 0899
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0137
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 03 ULAANBAATAR 000134 

SIPDIS

STATE PASS TO USTR
DOC PASS TO ITA ZHEN GONG CROSS
STATE FOR EAP/CM, EB/IFD/OIA AND EB/CIP

SENSITIVE
SIPDIS


E.O. 12958: N/A
TAGS: KIPR ETRD ECON PGOV MG
SUBJECT: UPDATE ON COMMERCIAL DISPUTES AFFECTING US
TELECOMMUNICATION FIRM IN MONGOLIA

Ref: A) ULAANBAATAR 00564, B) ULAANBAATAR 00572

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET
DISTRIBUTION.

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000134

SIPDIS

STATE PASS TO USTR
DOC PASS TO ITA ZHEN GONG CROSS
STATE FOR EAP/CM, EB/IFD/OIA AND EB/CIP

SENSITIVE
SIPDIS


E.O. 12958: N/A
TAGS: KIPR ETRD ECON PGOV MG
SUBJECT: UPDATE ON COMMERCIAL DISPUTES AFFECTING US
TELECOMMUNICATION FIRM IN MONGOLIA

Ref: A) ULAANBAATAR 00564, B) ULAANBAATAR 00572

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET
DISTRIBUTION.


1. (SBU) SUMMARY:. Summary. Potential American
investment into the wireless telephony business in
Mongolia, based on a recent case, turned soursouth,
when the Mongolian government agency responsible for
regulating telecommunications unilaterally cancelled an
operating license in apparent violation of Mongolian
regulations, laws, and international treaty
obligations. The Mongolians have failed to justify
their actions, and further review into the affair
reveals conflicts of interest among state-owned
operations, private monopolies and new American
entrants into the wireless field. However, the
American investors in this case are not without blame,
giving the appearance that they are willing to use
political connections to circumvent transparent rules
and regulations. American lapses aside, the apparent
failure of the Mongolian government to conduct itself
transparently, according to its own current regulatory
and legal environment, points to weaknesses in the
administrative system that should encourage investment
and innovation but has only discouraged it. Post
recommends that tThese problems and remedies for them
should bbe discussed at the March 2006 Trade Investment
Framework Agreement (TIFA) discussions and be
considered as road blocks to any ffree trade talks down
the pike. END SUMMARYEnd Summary.

BACKGROUND OF DISPUTE BETWEEN AMERICAN FIRM
AND MONGOLIAN REGULATORS
-------------- --------------
--------------

2.(SBU) In winter 2004, the American wireless telephony
provider UTStarcom (UTS) came to Mongolia with US$30
million to invest in a wireless network that would go
head-to-head with existing cellular-phone services
providers. To this end, UTS created a joint venture
company (JVC),Citiphone, with a Mongolian firm, LOMAX.
Citiphone's primary competition was not the state-owned
telephone company, which has limited investments in
wireless networks; but the two privately owned and

operated cellular providers. Over 2005 Citiphone
obtained an operating license from the Mongolian
Communications Regulatory Commission (CRC) for
US$50,000, prepared software, and began shipping in the
handsets and transmitting equipment into Mongolia for a
fall startup. However, just as Citiphone was set to
provide service in autumnFall 2005, it learned that its
license had been revoked by the MCRCat Mongolian
Communication Regulatory Commission (CRC),at the order
of the Chairman of the Mongolian Information and
Communication Technology Agency (ICTA). We advised
Citiphone to obtain the services of legal counsel to
advise it on the Mongolian laws that might be relevant
to the issue.

3.(SBU) Post's Commercial Specialist then met with the
ICTA Chair to discuss his motives for, and process
used, to force the CRC to cancel a license(Note: The
Chair is a member of the Democratic Party of Mongolia
and was educated in Texas). He claimed that Citiphone
found a loophole in the licensing regime that might
give them an advantage over existing service providers.
We then asked him to explain how his action was
consistent with current law and regulation, as well as
Mongolia's WTO obligations to not use non-tariff
barriers to restrict market access. He assured us that
this was all done openly and transparently. But we
raised two objections then and these still remain
unanswered.

-- (1) Motives aside, does not the Government of
Mongolia have an obligation to honor licenses it
issues?;
-- (2)Contradicting the Chair, we noted that no one
among Citiphone, post, our contacts in Parliament or
the Mongolian Ministry of Industry and Trade, knew that

ULAANBAATA 00000134 002 OF 003


a revision of the licensing regime was in the offing,
had a chance to comment upon it, or were allowed the
opportunity to contest administratively.

4.(SBU) The Chair refused to answer these questions,
claiming that revision of the licensing regulations was
done internally without outside comment or review,
because only ICTA would understand the complexity of
the issues.

CURRENT STATUS OF THE CITIPHONE DISPUTE
--------------

5.(SBU) In December 2005, Ambassador Slutz met with
thethis ICTA Chair to discuss this dispute. The
Ambassador pressed the Chair to explain his motives and
answer the questions posed by the Commercial
Specialist. The ICTA Chair stated that technical
concerns of law and regulation had nothing to do with
his decision to cancel the valid license. Intense
political pressure from the telecommunications duopoly
that currently controls the wireless market and a
desire to save cellular service in Mongolia from cheap
competition drove him to cancel the license
unilaterally. Explicitly disdaining markets and the
rights of consumers to choose the sort of services they
want, he said that he had no plans to reconsider his
decision, leaving it to Citiphone to pursue the matter
through the Mongolian courts.

ICTA'S NON-MARKET APPROACH TO TELECOMMUNICATIONS
REGULATION
-------------- --------------
--------------

6.(SBU) During the same meeting, the Chair amplified on
his views about free market provision of
telecommunication and Internet services. Basically,
consumers are ignorant about the needs of the state and
would always choose cheaper technologies over higher-
end expensive services that offer neat things like
streaming video over the cell-phone. Hence the state
must step into to prevent thoughtless consumers from
voting with their pocket books. In this light, he
proposeds a floor price for internet access charges,
forcing all Internet Service Providers (ISP) to charge
the same price, thus avoiding the pernicious affects of
competition on the private and state-owned ISPs.

7.(SBU) In addition, he would force all private ISPs
and voice over phone (VOIP) service providers to use
the state-owned telecom as the portal for international
and domestic both originating or terminating in
Mongolia. The stated aim here is to plump up the value
of the state-owned telecom prior to privatization by
giving it a monopoly franchise over its rivals. He
argued that this would make both pricing and service
cheaper, efficient, clear, and stable but was not able
to offer an example where this sort of policy actually
produced those results. Given that Mongolians pay
pennies now for reliable international phone
connectivity and relatively low cost for Internet
access, it is hard to see how placing access rights and
charges under state control could improve the situation
for the consumers. More obvious is that the state as
both regulator and service provider has a conflict of
interest that is affecting policy formation and
regulation.

WEAKNESSES IN THE AMERICAN CASE
--------------


8. (SBU) The American firms that financed and provided
technical expertise to Citiphone are not blameless in
this dispute. The Mongolian partner firm has extensive
political ties that reach into Parliament. The brother
of one of Citiphone's Mongolian investors is a Member
of Parliament, a member of the current MPRP government,
and man whose business interests may involve Citiphone,
although all current owners of Citiphone deny any such
involvement. While the American investors deny that
they ever used these connections to their advantage,

ULAANBAATA 00000134 003 OF 003


they have often pointed them out to us as positive
assets. ICTA has complained about the apparent double
standard of Americans demanding to receive open and
consistent treatment under the current legal
environment, and then turning to political connections
to grease the wheels. These complaints culminated in
the ICTA Chair claiming to the Ambassador that an agent
of Citiphone attempted to bribe him to reverse his
license cancellation (Note: Details of this charge were
submitted to the Department of Justice on January 27,
2006). Accusations of bribery aside, the Americans
appear somewhat hypocritical in how they have pursued
Citiphone's interests, an appearance which has weakened
their hand with Mongolian government.

COMMENT
--------------


9. (SBU) We would prefer, and have advised all parties,
that a settlement reached transparently following all
relevant regulations and statutes would be the ideal
goal, but not one of the players has taken any steps to
such an end. Putting aside the merits or weaknesses of
each side's respective positions, the GOM appears to
have acted in an extremely high-handed and arbitrary
manner that prejudices consumer interests in favor of
state-owned and private monopoly interest, without
reference to its own laws, regulations and treaty
obligations. Post recommends eExploring why this system
failed, why that failure harms both investors and
consumers, and how to correct it, should be topics
discussed at the 2006 March 2006 TIFA meeting and
highlighted as kept in mind as we consider roadblocks
to any free trade agreement talks.

SLUTZ