Impasse with Russia Over Joint Venture Railroad Head Leaves

UNCLAS ULAANBAATAR 000294

SIPDIS

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SIPDIS

E.O. 12958: N/A
TAGS: PREL ELTN EINV ETRD EAID MG RU
SUBJECT: Impasse with Russia Over Joint Venture Railroad Head Leaves
Mongolian In Charge


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1. (U) On April 11-13, a meeting of the joint Russian-Mongolian
Railroad Authority board failed to select a new Chairman. The post
has been vacant since early October 2006, when Russian Chairman
Vasile Magdei and his Mongolian deputy (both reportedly inebriated)
accidentally died of carbon monoxide poisoning while on a fishing
trip. Over the last six months, the board has made eight attempts
to appoint a new chairman, but the decision has foundered over
Mongolian-Russian disputes about who should fill the post each
attempt. In the interim, a Mongolian serves as acting chairman.
Sources state the board will next meet again in July.


2. (SBU) A 1949 agreement that created the railroad set up a 50-50
joint venture between the Mongolian and Russian governments. Under
the terms that agreement, the board has an equal number of members
from each government, and the chairmanship is supposed to rotate
between the two sides every three years. However, a Russian held
the position from 1949-1991. A Mongolian was chairman from
1991-2004, after which Magdei was appointed to the position in
December 2004, presumably restoring the three-year rotation, which
would theoretically put a Mongolian in as the chairman in December
of 2007.


3. (SBU) According to Mongolian sources, if Russian officials
refuse to name a Mongolian as the new chairman immediately, Mongolia
will simply continue to defer the issue until the three year Russian
term expires. Mongolian officials are visibly frustrated with the
Russian role in the railroad, a legacy from the semi-colonial
Socialist era -- and especially frustrating in view of the
railroad's vital transport role for exports and imports in this
landlocked country. Mongolian officials emphasize that, 1949
agreement notwithstanding, Mongolia is the de facto manager and
operator of the railroad. (Note: Last week, Mongolia's parliament
began discussing a new draft railway law. While details are still
vague, the law apparently allows privatization of certain aspects of
the railway and introduces competition and different types of
ownership (private, state etc). Mongolian sources say the law does
not yet affect the 1949 agreement, but they believe this could be
the first step in Mongolia's efforts to renegotiate the 1949
agreement, since the legislation will state that the new Mongolian
law trumps all.)


4. (SBU) While Mongolia favors changes in the railroad agreement,
Russia reportedly seeks to use the railroad as leverage in its bid
to gain preferential access to Mongolian minerals. During the July
2004 visit of Russian Prime Minister Fradkov to Ulaanbaatar,
reliable sources report Fradkov indicated that a major upgrading of
the railroad would be possible if such rights were granted. While
that offer was rebuffed, Russian railroad experts subsequently have
mooted plans for $2 billion of upgrades, including double tracking
and electrification. Given the railroad's current financial
difficulties, the financing for such expenditures is uncertain,
failing large Russian investments.


5. (SBU) In early March, the railroad apparently took a loan from
Gazprom to deal with a sharp fall in income after Russian oil
transiting Mongolia to China plummeted last year following the Yukos
bankruptcy. Another loan seems to be in the offing as the railroad
continues to requiring funding. Rather than the Russian upgrading
plans and minerals quid pro quo, Mongolian railroad officials
strongly favor a proposed Millennium Challenge Account compact
project which would improve efficiency and increase railroad
capacity, with the Compact-financed assets held in a new leasing
company which would be wholly Mongolian-owned.

Goldbeck