Mongolians Rebuff Russian Commercial Bear Hug

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SUBJECT: Mongolians Rebuff Russian Commercial Bear Hug

Ref: Ulaanbaatar 163

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1. (SBU) SUMMARY: Mongolia apparently completely rebuffed Russian
Premier Fradkov's demands in early July for priority access for
Russian firms to Mongolia's natural assets, based on details that
have emerged over the last month. In return for preferential
treatment, the Russians had promised to build a second rail line or
some other big project. Even the tone of the visit lacked political
niceties. During the gala opening dinner, Mongolia's Minister for
Industry and Trade B. Jargalsaikhan publicly harangued the Russians
for thinking they could dictate to the Mongolians, their former
colony, to do their bidding, and told them to get in line and
compete with the rest. Jargalsaikhan drew scattered applause from
the Mongolian audience (and no apparent disclaimers from GOM
officials). END SUMMARY.

Comment
--------------


2. (SBU) The GOM seems bent on getting the most out of its natural
resources -- and Fradkov's demands appear to have touched off a
visceral Mongolian nationalist rebellion. Grateful as Mongolians
are for Russia's help in escaping the Chinese clutch in 1921 and
development help thereafter (in education, medicine, infrastructure,
etc.),they also remember the degradations of 70 years of Communism,
followed by a devastating economic collapse in 1990-94 as the
Russians abruptly withdrew economic aid reportedly amounting to US$1
billion per year (then presented a $12 billion bill for "loans").
The Russians may have few good tools to redress Fradkov's
embarrassment and gain leverage, given that Mongolians already pay
higher fuel and electricity prices (Mongolia imports 90% of its oil
needs from Russia). Perhaps, as Jargalsaikhan said, Russian firms
had better stop making demands, get in line and start competing with
firms from other countries (e.g., U.S., Canadian, South Korean,
Japanese). Chinese firms -- and, indeed, Western ones, too --
should bear in mind the cautionary example of Russia's attempt to do
an end run thru posturing, and the sharp reaction which ensued. End
Comment.

The Russians March In
--------------


3. (SBU) Russian Premier Fradkov, joined by nearly 300 businessmen,
arrived in Mongolia for a bilateral economic-oriented visit just
prior to the July 10-13 Mongolian national day. This year's events
included celebration of the 800th anniversary of the founding of the
Mongolian state. Fradkov brought with him representatives from
Russia's Ministries of Transport, Agricultural, Construction, and
Energy -- along with the CEOs and directors of construction and
mining companies. According to Mongolian Ministry of Industry and
Trade (MoIT) sources, the cavalcade ranged from wealthy oligarchs,
such as Oleg Deripaska, to metal companies like Severstal.

Less Than Promising Start
--------------


4. (SBU) According to attendees, during the opening dinner, which
was co-hosted by the two nations' Prime Ministers, Fradkov exhorted
the Mongolians to do deals with the many businessmen he had brought
along. The Russian PM lamented that Mongolia was "holding onto its
mining licenses like a dog," an example of language that some
Mongolian attendees found patronizing.


5. (SBU) Minister for Industry and Trade Jargalsaikhan (a
self-promoting populist as much respected as reviled; see reftel)

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then stood up and, in fluent Russian, berated the Russian Prime
Minister and businessmen for thinking they could push Mongolia
around with politically and economically unattractive offers.
"Mongolia is a sovereign, independent nation. Where were the
Russians for the past 15 years, when Mongolia was really suffering
and needed help? Russian investors cannot expect any preferential
treatment; they will have to compete with American, Canadian,
Japanese, Chinese and South Korean companies. And you cannot. The
only reason you are here is that you cannot compete in the
international market place with these other countries. Well, we
don't need your sub-standard technologies and your corrupt business
practices." Jargalsaikahn went on for some 10 minutes before PM
Enkhbold finally silenced him by noting that they had run out of
time. According to our sources, there was limited applause from
Mongolians for Jargalsaikhan's presentation. (Note: While
unreported in the Mongolian press, Jargalsaikhan's harangue is
widely known among the public and, anecdotal evidence suggests, was
appreciated. One eyewitness claimed that PM Enkhbold was very
uncomfortable during the harangue, literally looking at his shoes
and trying to slide under the table.)


6. (SBU) One source reported that, during a subsequent meeting
between Jargalsaikhan and the Russian business delegation, a
director of an Irkutsk mining firm stood up and chastised the
Minister and the GOM for not supporting Russian efforts to enter the
big projects. Jargalsaikhan angrily responded, "I don't know you.
We're tired of you no-name, small-time Russians marching down here
and demanding all our treasures for nothing. Sit down!" Our
informant stated the room hushed, and the mortified Russian
collapsed into his seat.


7. (SBU) (Note: The erratic Jargalsaikhan, the sole MP for his
party, was educated and got his commercial start in Russia, doing
low-level suitcase trading between Mongolia and Russia. Former
Russian Ambassador Derkovsky once told the Ambassador that
Jargalsaikhan loved Russia and Russia loved Jargalsaikhan, although
he noted that Jargalsaikhan did not have any current business
dealings with Russia.)

For All the Vodka, the Russians Leave with Small Beer
-------------- --------------


8. (SBU) As widely suggested in the Mongolian press, and confirmed
by MoIT contacts, during the visit Fradkov continued to urge
Mongolia to give Russian firms priority access to its market, and
especially to Mongolia's mineral resources. As well as mines, the
Russians wanted deals on power plants, agriculture, and railroad
construction. The main Russian demand was for Mongolia's
substantial, high-quality metallurgical and thermal coal deposit in
the south Gobi site of Tavan Tolgoi. According to MoIT sources, the
Russians proposed to the GOM a deal for Tavan Tolgoi: Seize the
asset from its private holders; give it to a Russian-company chosen
by the Russian government; and Russia would build Mongolia another
north-south rail line or a power plant in return. The Mongolians
reportedly responded that such proposals violated local mining and
property rights laws and Mongolian national interests.


9. (SBU) The first deal to hit the presses was a 40,000 metric ton
wheat contract with the Mongolian Ministry of Agriculture. The
Russians would provide a very soft loan for the Mongolians to pay
for the wheat purchase. Then came announcements of private, smallish
deals made by Russian miners for rights to placer gold holdings
scattered throughout Mongolia; and then silence. By the time the
Russians departed, it had become clear from the very lack of public
announcement that nothing major had been accomplished. One MoIT
participant in the Fradkov visit events stated that, although the
Russians were never particularly a jolly people in his experience,
he had never seen them so stiff -- no smiles or laughs, just sullen
grimaces.

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