Scenesetter for Presidential Delegation

UNCLAS SECTION 01 OF 06 ULAANBAATAR 000525

SIPDIS

SIPDIS

From Ambassador for Secretary Johanns

E.O. 12958: N/A
TAGS: OVIP PREL PGOV EAID ETRD MG
SUBJECT: Scenesetter for Presidential Delegation



1. We and the Mongolian Government very much look
forward to your visit. The presence of a presidential
delegation at the 800th anniversary celebrations
continues a stellar 2005-6 year for high-level USG
visits to Mongolia -- starting off with Peace Corps
Director Vasquez last July, Speaker Hastert and
delegation in August, Secretary of Defense Rumsfeld in
October, and the visit by the President, First Lady,
and Secretary Rice in November.

What's Being Celebrated This Week
--------------


2. Mongolia's national holiday -- "Naadam" -- is
celebrated each year from July 11-13, and is a
combination of national day and traditional Mongolian
summer sporting competition. The Naadam games comprise
the "three manly sports": archery, wrestling, and horse
racing (in actuality, women also compete in archery,
and the horse riders are 10-12 year old boys and
girls). This is serious business for Mongolians: the
nine horsetail banners which are the symbolic seat of
state are physically moved from Government House to the
national stadium for the duration of the games. The
"national day" aspect of the celebration marks the 1921
victory in the independence struggle from China, led by
General Sukhbaatar (whose statue astride a horse graces
Sukhbaatar square in central Ulaanbaatar).


3. This year, Naadam will also be the high point of
celebrations for the 800th anniversary of the
acclamation of a tribal chief, Temujin, as the first
king (khan) of the unified Mongol tribes. Temujin took
the reign name of Genghis Khan ("Chinggis Khaan" to
Mongolians). Naadam opens on July 11 and closes on
July 13. This year, ceremonies in connection with the
800th anniversary will be held on July 10. At least a
dozen other nations will have delegations attending the
events, including the Russian Prime Minister, the
German Bundestag President, and Prince Andrew. While
you will miss these opening events, any Mongolians will
tell you that Naadam is all about the games, and those
will be going full force on July 12 and July 13.

A Transforming Friend in Northeast Asia
--------------


4. As declared in the July 15, 2004 joint presidential
statement, the U.S.-Mongolia relationship is a
"comprehensive partnership," based on "shared values
and common strategic interests" (e.g., democracy,
market economy, the global war against terrorism, and
the denuclearization of the Korean Peninsula). Our
relationship with Mongolia is positive and valuable,
but we do not consider it of "strategic" importance to
U.S. national interests. Once the world's second
Communist state, Mongolia has made great strides since
1990 in its democratic and economic transformation.
Mongolia is a land-locked country; it has only two
neighbors, Russia and China. Mongolia has sought to
mitigate its geo-political and geo-economic
disadvantages and to balance its relations on Russia
and China by cultivating "third neighbors" -- Japan,
South Korea, Germany and, especially, the United
States. Thus, Mongolians are extremely pleased with
President Bush's declaration last November that the
United States is proud to be Mongolia's "third
neighbor," and with the House of Representatives
affirmation of that same sentiment in a resolution
passed on June 7, 2006.


5. An important boost to Mongolia's image in the
United States has come from Mongolia's participation in
Operation Iraqi Freedom and Operation Enduring Freedom
since 2003. At present, 100 Mongolians, representing
the country's sixth troop rotation in Iraq. These
deployments are the direct result of continuing
assistance from the U.S. (since 2000) to help Mongolia
meet its goals of developing an international
peacekeeping capability. Mongolia is already making
strides toward this goal; in December 2005, Mongolia
deployed 250 peacekeepers under UN authority to Sierra
Leone and earlier this year completed participation in
the NATO mission in Kosovo. In August, Mongolia will
host the annual (since 2003) US-sponsored "Khaan Quest"

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PKO exercise; for the first time this year it will be a
multinational exercise with over 20 countries invited
to observe or participate.


6. Mongolia's economic and political transformation
remain incomplete. Economically, Mongolia faces
daunting challenges: It is landlocked, with a severe
continental climate, and sparsely populated. The size
of Alaska with a population of 2.8 million (about the
size of Denver City),nearly 40% of the population (one
million) lives in the capital city, Ulaanbaatar (Red
Hero). The next largest city has 100,000 people.
About 40% of the country's population still makes a
living from nomadic livestock (sheep, goats,
cattle/yak, camels, and horses). Over the last decade,
another 20% or so abandoned herding and migrated to the
capital where they live in "ger" (yurt in Russian)
suburbs surrounding Ulaanbaatar. Mongolia's primary
economic drivers are mining (copper, coal, gold),
cashmere, tourism and small retail trade and services.
High world commodity prices and increased production
spurred 10% growth in 2004 and 6% in 2005. However,
mining does not directly create many jobs and many of
the locally developed, non-foreign invested mines are
operated in an environmentally destructive manner. The
largest of these mines -- the joint Mongolian-Russian
(51%/49%) Erdenet Copper Mine and the Canadian-owned
Boroo Gold Mine -- have been the target of a
nationalistic backlash centering on the theme, "Why are
so many Mongolians poor while foreign companies are
profiting from our mineral resources?" That (and the
desire to find money to fund budget-busting populist
campaign promises for monthly child stipends and a 30%
pay hike for civil servants) helped spur a hastily
enacted a windfall or "excess profits" tax on copper
and gold in May. This tax, plus higher royalties and
provisions for government equity in some mining
companies, has dampened enthusiasm among the "junior"
Western mining companies for operations in Mongolia.
Large multinationals, such as Rio Tinto and BHP
Billiton, will try to stay the course and to land
contracts to mine coking-quality coal for the Chinese
market.


7. Politically, Mongolia's transition is also
incomplete. Government decision making is often
opaque, with the State Secrets Act the most restrictive
among the former Communist countries. Some serious
human rights issues remain, including weak protection
for freedom of the press, and abusive conditions for
prisoners. Nevertheless, elections are generally free
and fair, and three of the four parliamentary elections
under the 1992 constitution have led to changes in
governing party. The Mongolian People's Revolutionary
Party (MPRP),the former Communist party now restyled
as a "social democratic" party, retains outsized
advantages in organization and discipline. The non-
MPRP parties are fractured and the largest, the
Democratic Party, is itself a fractious coalition of
rival personalities. That creates the opportunity for
lopsided election results, such as in 2000, when the
MPRP ran against an array of opposition parties and won
72 out of 76 parliamentary seats (95%) with only 53% of
the popular vote. The June 2004 election was contested
by a unified opposition which won nearly 50% of the
seats. With no party able to form a government on its
own, a "Grand Coalition" government was formed in
September 2004. The two main political parties -- the
MPRP and the DP -- proved unable to work together and a
new coalition government was formed in January, 2006,
without the participation of the Democratic Party.


8. The current government is an unstable and
dysfunctional coalition of the MPRP and four small
parties (two of them with a single MP). The MPRP Prime
Minister's approval rating is at an all-time low of
under 25%. Growing income disparities and endemic
corruption in the political elite and bureaucracy are
undermining the credibility of the parliament and the
government in the public's eyes. It has become
commonplace to hear weekly rumors of one disgruntled
faction or another planning to topple the PM and form
yet another coalition. While the spring session of
parliament passed some significant legislation,
including tax reform, anti-money laundering and anti-

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corruption legislation, there is still much
implementation and enforcement work to be done.

U.S. Aid to Mongolia
--------------


9. On a per capita basis, Mongolia has been and
continues to be one of the best-endowed recipients of
foreign assistance in the world. Over $2 billion has
flowed to Mongolia since the early 1990s, initially as
humanitarian assistance and, since the early 2000s, as
development assistance. The World Bank and Asian
Development Bank are the largest donors. Japan is the
largest bilateral donor, followed by Germany and the
U.S. aid -- USAID grants and USDA Food for Progress --
has been significant in shaping and influencing change,
and was of major importance during the economic
collapse in the early 1990s. Until 2003, the USAID
budget for Mongolia was in the $10-12 million range; it
dropped to $7.5 million in FY 06 and FY 07. The
current five-year program (2004-8) focuses on private
sector-led development (macro-economic policy reform,
energy sector reform, and micro-business in rural and
peri-urban areas) and good governance (judicial reform,
parliamentary reform, and anti-corruption). No USG
assistance (grants) flows directly to the Government of
Mongolia. Past experiences with waste, fraud and
malfeasance on the part of the Government have resulted
in all USG assistance projects being implemented by
international NGOs or consulting companies under
contract.


10. Since 1993, Mongolia has participated in USDA's
Agriculture Commodity Program, which includes both 416(b)
and Food for Progress resources. To date, the total value
of this program is over $70 million, which includes proceeds
from the sale of the wheat and transportation costs from the
U.S. The current Food for Progress program serves to
alleviate the annual wheat deficit in Mongolia, which is a
net food importing country. In 2005 Mongolia produced only
77,000 of the 240,000 tons of wheat consumed annually here.
The Food and Agriculture Organization notes in its report of
October 2005 that commercial imports cover only part of the
75% - 80% of consumption which must be imported into
Mongolia. When USDA donated 50,000 tons of wheat in FY 2004
this was easily absorbed and Mongolia still required
additional aid from Russia and France to meet its needs.
Mongolia is very supportive of the U.S. government position
in the World Trade Organization that commodities should
remain as part of food aid options. Mongolia has presented
this position repeatedly at WTO meetings.


11. With few exceptions, until FY 2004 the Government
of Mongolia signed agreements directly with USDA on a
yearly basis to ship wheat (and on a few occasions
butter or butter oil),sell it at market prices, use
the proceeds for development or humanitarian purposes,
and report semi-annually on the results. Mongolia had
free rein to develop its own projects and agreed to be
fully accountable for results and reporting.
Mongolia's record on the program, however, proved
abysmal. Over the years, the U.S. Embassy witnessed
four different ministries competing to control the
wheat proceeds and determine the projects. The GOM's
ability and willingness to report on how the proceeds
were used and on what results were achieved was
extraordinarily weak. In the past eleven years,
Mongolia has produced only one two-page document giving
a brief description of how the money was spent - and
the Embassy received this document only after it
threatened to terminate the program if Mongolia did not
start reporting. Mongolian theft, fraud,
mismanagement, and other malfeasance have led to more
than $22 million in unaccounted funds. If the shipping
cost of the $22 million of wheat is added, the loss is
approximately $44 million, or 63 percent of the
program's total value to Mongolia.


12. As a result of this misuse, since 2000 the proceeds
of wheat sales have been provided to international NGOs
to carry out projects. However, the Ministry of
Agriculture remains unrealistically hopeful we will
again agree to government-managed programs. Currently
funded projects through CHF, Mercy Corps and World
Vision include programs to: bolster entrepreneurship;

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boost agribusiness, agricultural technology and
veterinary services; fund Peace Corps community
development projects; and provide natural disaster
relief. Their programs are bringing much needed
assistance to rural and peri-urban areas of Mongolia.


13. This year, Peace Corps is celebrating its 15th
anniversary in Mongolia. Over 600 volunteers have
served here; there are currently 97 volunteers in-
country, the largest number in the history of the
program. PCVs are primarily teaching English (to help
Mongolia meet its goal of making English the second
official national language),but also involved in
heath, community/youth development, and rural business
development.


14. Mongolia became eligible for Millennium Challenge
Account (MCA) funding in FY04 and re-qualified in FY05
and FY06. Invited by the Millennium Challenge
Corporation (MCC) in May 2004 to submit a proposal for
consideration, Mongolia did not submit a proposal until
October 2005. In November 2005, MCC began its due
diligence on the proposal -- among the most complex and
poorly prepared received by MCC. Progress is slow and
frustrations exist on both sides. Mongolia has yet to
demonstrate the economic feasibility and poverty
reduction effects of its various proposed projects and
has been reluctant to invest the manpower and resources
necessary to accomplish the task.


15. Moreover, Mongolia must re-qualify each year for
MCA eligibility. Declining scores on the "control of
corruption" test could result in Mongolia being
declared by MCC as ineligible, which would suspend all
further due diligence until Mongolia improved its
performance. Mongolia signed and ratified the UN
Convention Against Corruption (UNCAC) in 2005. The
recent passage of anti-corruption legislation, a draft
of which had languished for lack of political will
since 1999, will begin to lay the legal framework
necessary for Mongolia to comply with its UNCAC
obligations. But an additional 20 or more pieces of
legislation and amendments -- and strong enforcement
mechanisms -- will be needed in order for Mongolia to
bring itself into full compliance.


16. MCC recently informed the Government of Mongolia
that, given the pace of work, there will be no Compact
until early 2007 at the earliest. MCC also laid a
marker that there will be NO Compact until Mongolia
passes the legislation necessary to bring itself into
compliance with its UNCAC obligations. The Mongolian
Government, which hoped to sign a Compact during 2006
(the 800th anniversary) to bolster its political
standing with the public, is disappointed and has begun
to make some veiled -- and not so veiled -- comments
expressing cynicism about MCA and U.S. willingness to
keep its "promises." Our response has been to remind
Mongolia that MCA is a "merit- and performance-based"
assistance program for which Mongolia must continue to
qualify, and that the we fully expect to continue to
work with Mongolia to finalize a Compact, but the pace
of progress will depend largely on Mongolia's
commitment to do the due diligence work.

Your Interlocutors
--------------


17. Naadam is a hectic time for Mongolian officials,
and this year's flood of delegations adds to the
demands on their time. Nevertheless, senior officials
quickly rearranged their schedules to meet with you in
the brief time slots they could make free.


18. Your interlocutors will include:

President N. Enkhbayar
--------------

The 48-year old Enkhbayar, who speaks English well,
became President in June 2005. Enkhbayar became the
reformist head of the MPRP in 1997, after its stunning
electoral defeat the year before. As Prime Minister
from 2000-2004, he continued the economic reform and
privatization policies initiated during the 1996-2000

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Democratic Coalition government. He became Speaker in
2004 under the "Grand Coalition" government, prior to
winning the presidency. The President is supposed to
be above politics, and Enkhbayar resigned his MPRP
membership upon taking the job; while he retains behind-
the-scenes influence in the MPRP, this is likely to
diminish over time. As Head of State, he is also
Commander in Chief, but his constitutional powers are
modest.

We suggest you:

-- Convey the congratulations of President Bush on
Mongolia's 800th anniversary;

-- Reaffirm the "comprehensive partnership" between
Mongolia and the United States, and our desire to
continue developing ties as Mongolia's "third
neighbor";

-- Express the support of the United States for
Mongolia as it continues its democratic and economic
transformation;

-- Note our intent to continue longstanding economic
assistance, and to work with Mongolia to sign an MCA
Compact next year.

-- Express our appreciation for Mongolia's support in
the Global War on Terror, including its continued
deployment of soldiers to Iraq and Afghanistan, and its
contribution to international peacekeeping elsewhere in
the world. (Note: The USG has requested that Mongolia
send a seventh rotation of peacekeepers to Iraq, in
August. The Government has yet to reply formally, but
informally has indicated a willingness to sustain its
commitment. End note.)

Prime Minister M. Enkhbold
--------------

The 42-year old Enkhbold, who does not speak English,
was the Mayor of Ulaanbaatar from 1999-2005. Enkhbayar
supported him to replace him as head of the MPRP, and a
party congress narrowly voted to endorse that
selection. After the MPRP pressured the Democratic
Party to withdraw its candidate or face the end of the
coalition government, he won the August 2005 by-
election in Enkhbayar's vacated Ulaanbaatar
constituency. Enkhbold's government has struggled
since its formation in January. In an April poll,
Enkhbold (often cited as one of the more corrupt
politicians) did not even make the list of the
country's ten most influential politicians. There are
two years to go before the 2008 parliamentary
elections, and these numbers may change. However,
Enkhbold will have to contend with internal divisions
within the MPRP and minor party members of the Cabinet
whose discipline may be weak as they seek to boost
their own poll numbers prior to the elections.

As well as the above points used with the President, we
suggest you:

-- Congratulate Enkhbold on parliament's passage of
anti-money laundering and anti-corruption legislation,
while noting that US will continue to work with
Mongolia to assist it to implement its international
commitments to fight corruption and other forms of
transnational crime. Much remains to be done before
Mongolia will be fully compliant with the UN Convention
Against Corruption, the UN-approved Financial Action
Task Force guidelines, and the UN Convention on the
Suppression of Terrorist Finance.


Foreign Minister N. Enkhbold
--------------

The 49-year old Enkhbold, who speaks English well,
became Foreign Minister in January. He was the head of
the Mongolian-American parliamentary friendship caucus
until he recently gave up that role because of his
ministerial position. An MPRP MP, he represents a
constituency near Ulaanbaatar.

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At the dinner, we suggest you supplement the above
points by seeking Enkhbold's views on Mongolia's
foreign policy, especially its complex relationship
with its big neighbors, Russia and China.


G. Zandanshatar
--------------

This MPRP MP will be at all your meetings, since he has
been designated the government's MP in charge of the
U.S. presidential delegation. The 36-year old
Zandanshatar speaks English well. He is the head of
the MPRP's youth wing, which espouses internal party
reform and a Western-leaning economic agenda. An
economist by training, Zandanshatar was the Deputy
Minister for Agriculture from 2003-2004. Prior to
that, he was an executive in the Agricultural Bank
(Khan Bank). The bankrupt institution was successfully
reorganized, then privatized, under an American
management team brought in with USAID assistance. He
served as Deputy Director of Khan Bank prior to leaving
to enter politics in 2003.

Terbidshdagva, Minister of Food and Agriculture
-------------- --

We specifically requested GOM to NOT set up a meeting
for you with Terbishdagvaa and he does not appear on
any of preliminary meeting lists. It is nevertheless
possible you will encounter him. The 51-year old
Terbishdagva has been Minister of Food and Agriculture
since 2004. Prior to that he was Ambassador to Germany
(2002-4) and Vice Minister of agriculture (2000-2002).
As vice minister, he was allegedly involved in the
theft of U.S.-donated wheat, which resulted in the
suspension by the USG of the Food for Progress program
for nearly 18 months. Terbishdagva is one of the
largest wheat and meat producers in the country; given
the lack of conflict of interest laws in Mongolia, this
has enabled him to profit privately from his government
position. You should be aware that Terbishdagva has
attempted to regain control of the Food for Progress
program by submitting a proposal to USDA in 2005, under
the name of a proxy organization. In a formal letter
notifying the Minister of the USG decision not to
consider his project, the Ambassador emphasized that
because of past malfeasance on the part of the Ministry
the USG has implemented a new approach that precludes
any wheat or proceeds of monetization flowing to or
through the Ministry or other GOM entity.


19. If the subject of the Wheat Fund arises in any of
your meetings, we suggest you:

-- Reaffirm our commitment to continue to provide wheat
to Mongolia to meet its needs (25,000 tons is due to
arrive in FY 2007, under a tender awarded to World
Vision, usually in the winter months to avoid competing
with local production).

-- Our complete satisfaction with the current
arrangements, under which USDA contracts with reputable
international NGOs (such as Mercy Corps, World Vision,
CHF) to monetize the wheat and use the proceeds to
diversify and raise the incomes of rural and peri-urban
dwellers.


20. Other events will introduce you to a herder who
has benefited from a USDA-funded program, give you a
glimpse of the Naadam games, and show you some of
Mongolia's long history and culture. My staff and I
very much look forward to welcoming you and Mrs.
Johanns to Mongolia and appreciate your willingness to
travel so far to represent the President and the United
States at this week's events.

Slutz