Identifier
Created
Classification
Origin
08ULAANBAATAR221
2008-05-16 01:26:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Ulaanbaatar
Cable title:  

MONGOLIAN PM'S PLAN TO LOWER GAS PRICES BACKFIRES

Tags:  EMIN EINV PREL ECON EFIN PGOV KPKO MG 
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UNCLAS SECTION 01 OF 03 ULAANBAATAR 000221 

SENSITIVE
SIPDIS

STATE PASS USTR, USTDA, OPIC, USGS, AND EXIMBANK
STATE FOR EAP/CM AND EB/IFD/OIA
USDOC FOR ITA

E.O. 12958: N/A
TAGS: EMIN EINV PREL ECON EFIN PGOV KPKO MG
SUBJECT: MONGOLIAN PM'S PLAN TO LOWER GAS PRICES BACKFIRES

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION.

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000221

SENSITIVE
SIPDIS

STATE PASS USTR, USTDA, OPIC, USGS, AND EXIMBANK
STATE FOR EAP/CM AND EB/IFD/OIA
USDOC FOR ITA

E.O. 12958: N/A
TAGS: EMIN EINV PREL ECON EFIN PGOV KPKO MG
SUBJECT: MONGOLIAN PM'S PLAN TO LOWER GAS PRICES BACKFIRES

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION.


1. (SBU) SUMMARY AND COMMENT: In an effort to bolster his party's
prospects in the run-up to June 29 Parliamentary elections,
Mongolian Prime Minister Bayar embraced a plan to keep gas prices
under control by allowing a Russian oil giant to set up 100 gas
stations throughout Mongolia. The plan has backfired, with
opposition Democratic Party (DP) MPs, petroleum-industry leaders and
many ordinary citizens calling it a sell-out to the Russians. Under
the plan, Russian state-owned oil products producer Rosneft would
have the right to set up a distribution network along key Mongolian
transport corridors, including the east-west Millennium Highway, in
exchange for holding down gasoline and diesel prices at some
unspecified level for an unspecified time. If this proposal were to
be approved, Rosneft, which provides more than 90% of Mongolia's
fuel, would not only retain its near-monopoly on supply to Mongolia,
but also become a leading distributor. Such a proposal would
require Parliament to amend Mongolia's Petroleum Law, which limits
foreign participation in the sector. The DP, eager to deny any
pre-election success to PM Bayar's Government, which is led by the
Mongolian People's Revolutionary Party (MPRP),has adamantly opposed
any such amendment, arguing that other approaches are possible and
that the proposal threatens Mongolian sovereignty and free markets.
Mongolians' fear of Russian domination has trumped the lure of lower
gas prices, at least for the moment. END SUMMARY AND COMMENT.


2. (SBU) On May 2, Mongolian Prime Minster S. Bayar submitted to
Parliament his Government's plan for stabilizing gas prices, which
have skyrocketed in recent months. The plan focused on Russian
state-owned petroleum product exporter Rosneft, which supplies more
than 90% of Mongolia's gasoline and petroleum product needs. At
present, all of these imports come through private distribution

companies owned and operated by Mongolian firms. The PM's stated
concern was that Rosneft would soon be raising prices by US$62-89
per metric ton on three types of gasoline and diesel, respectively.
These increases would raise Mongolian pump prices from the current
US$1-1.30 per liter to US$1.10-1.50 per liter. (Note: Because
diesel prices would see the greatest increase, and because most
transport and shipping methods - including trains and trucks -- use
diesel, these price increases would be amplified in all products
that require diesel-based shipping, especially meat, wheat and
potatoes from the countryside, exacerbating already troublesome
food-related inflation. End Note.)

SOFTENING THE BLOW
--------------


3. (SBU) Our GOM sources have made clear that the Bayar Government -
a three-party coalition, led by Bayar's MPRP -- feared another hefty
price increase for fuel. Such an increase, on top of rising costs
for food and other imports, would present a direct threat to the
re-election prospects of MPRP Members of Parliament. Following the
latest fuel-price hikes by Rosneft, the GOM had attempted to soften
the blow for consumers through a combination of subsidies and
pressure on Mongolian distributors to absorb price increases. (Note:
A source at one of Mongolia's largest fuel-distribution companies
told us it had taken a major financial hit by following the GOM's
"guidance" to keep prices fixed. The promised GOM subsidies never
fully materialized, the source added. End Note.) Eventually, it
became too costly for the GOM to continue subsidies, and too costly
for the private companies to absorb the cut in profit margin.
Consequently, distributors began to pass higher costs on to
consumers. The popular outcry apparently prompted Bayar to direct
his Minister of Industry and Trade, Narankhuu, to reach some sort
deal with Rosneft to bring prices down.


ULAANBAATA 00000221 002 OF 003


QUID PRO QUO: CHEAPER GAS FOR DISTRIBUTION SYSTEM
-------------- --------------


4. (SBU) Rosneft informed the GOM that it would consider lowering
the price of its petroleum products exported to Mongolia by an
unstated amount for an unspecified period, but only if the GOM let
Rosneft build 100 gasoline stations along the North-South road that
runs from the Russian to Chinese borders, and along the east-west
Millennium Road that bisects Mongolia. (Note: Although there is no
firm estimate of the amount of traffic carried on these routes,
these are best maintained and most heavily trafficked highways in
Mongolia. End Note.) PM Bayar accepted this plan and submitted it
to Parliament.

PROPOSAL WOULD REQUIRE AMENDING PETROLEUM LAW
--------------


5. (SBU) The Rosneft proposal has to be approved by Parliament
because Mongolia's Petroleum Law prevents foreign-owned entities
from selling more than 30% of all petroleum products sold in
Mongolia, and no more than 10% of the sales volume for any
particular petroleum product. In addition, the current law bars
petroleum producers, such as Rosneft, from domestic distribution and
sales. In light of these prohibitions, the PM argued that unless
the law was amended immediately, the GOM would be barred from
putting its price reduction plan into immediate effect. (Note:
Finance Minister Ulan put a glossy spin on this telling donor reps
at the UNDP's monthly meeting on May 15 (septel) that the GOM was
thinking about "liberalizing" this and other sectors to encourage
competition, improve service and reduce prices. End Note.)

DEMOCRATS: YOU MUST BE JOKING
--------------


6. (SBU) The response of the opposition Democrats was immediate and
virulently negative. The DP, which has centered its election
campaign on refusing to approve any legislation for which the MPRP
could claim credit, argued that Rosneft's proposal was nothing more
than a campaign trick to lower prices in the run-up to elections.
The opposition predicted that Rosneft would raise prices soon after
the elections, leaving Mongolia with not only higher prices but the
Russians in control of both production and distribution. The DP
argued that by ceding these rights to the Russians, the GOM wanted
to return the petroleum-distribution sector to government control --
Russian Government control. DP members have proposed a return to
subsidies, as well as efforts to build refineries for the relatively
small amounts of oil that Mongolia produces (and/or coal to fuel
facilities). They have made the case that even if this approach
means prices will be high in the short run, Mongolia's independence
and market economy must not be imperiled. (Note: The DP uses a
similar argument to justify its refusal to support MPRP efforts to
amend the Law on Mineral Resources. End Note.)

PUBLIC, INDUSTRY INCREASINGLY UPSET OVER PROPOSAL
-------------- --------------


7. (SBU) The Mongolian public's response to the Bayar proposal was
muted at the beginning but has become increasingly loud and harsh.
Initially, petroleum-product importers and their supporters --
including importers of American-brand lubricants made by Cal-Tex and
Exxon -- remained publicly quiet, fearing some sort of punitive
backlash from the GOM or their Russian fuel suppliers. As our
sources explained, the GOM could ban imports, claiming pricing
irregularities; impose spurious quality tests and ban imports while
testing was done; or simply order customs to delay or stop shipments
at the border, if local distributors refused to play ball.

ULAANBAATA 00000221 003 OF 003


Privately, the distributors were lobbying furiously. They were
joined by several large banks that provided the industry with trade
financing in excess of 10-15% of their annual loan turnover. Adding
to the chorus of boos were the Mongolian National Chamber of
Commerce and Industry, the Employers Federation, and several trade
unions, all of which feared that thousands of Mongolian workers
would lose jobs to the Russian network.


8. (SBU) But the GOM, adamant that the Rosneft deal must be done,
told the distributors to stop complaining and accept what had to
come. In response, the local distributors took to the airwaves in
protest. On May 12, the CEO of Mongolia's largest petroleum
distribution company (an MPRP member) gave a TV interview in which
she accused the GOM of attacking Mongolia's business community and
putting Mongolia's gasoline supply into Russian hands.


9. (SBU) After the plan was announced, media organizations conducted
man-on-the-street interviews to gauge reaction. Many indicated that
although they would like to see fuel prices stabilized, they are
leery of further Russian involvement in Mongolia's petroleum sector.
Some doubted that the Russians would honor any deal, while others
accused the PM of selling out to the Russians.

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


10. (SBU) Bayar and his MPRP have been harmed by their blundering
approach on fuel prices. Clearly, Mongolian fear of Russian
domination has trumped the lure of lower gas prices. It remains
uncertain to what extent the MPRP will pay at the ballot box for
this strategic mistake, but the Democrats will almost surely use
every opportunity to raise the issue between now and June 29.

GOLDBECK