Identifier
Created
Classification
Origin
08ULAANBAATAR521
2008-12-01 03:19:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Ulaanbaatar
Cable title:  

Global Financial Meltdown Dissolves Mongolian Resistance to

Tags:  EINV PREL ETRD EMIN ENRG MG 
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RUEHKO/AMEMBASSY TOKYO 3253
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RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
UNCLAS SECTION 01 OF 05 ULAANBAATAR 000521 

SENSITIVE
SIPDIS

STATE PASS USTR, USTDA, OPIC, AND EXIMBANK
STATE FOR EAP/CM AND EEB/CBA
USAID FOR ANE FOR D. WINSTON
USDOC FOR ZHEN-GONG CROSS

E.O. 12958: N/A
TAGS: EINV PREL ETRD EMIN ENRG MG
SUBJECT: Global Financial Meltdown Dissolves Mongolian Resistance to
Mining Projects

ULAANBAATA 00000521 001.2 OF 005


Sensitive but Unclassified - Not for Internet Distribution. Contains
proprietary and confidential business information

Ref: A) ULAANBAATAR 495, B) ULAANBAATAR 474, C) ULAANBAATAR 382

UNCLAS SECTION 01 OF 05 ULAANBAATAR 000521

SENSITIVE
SIPDIS

STATE PASS USTR, USTDA, OPIC, AND EXIMBANK
STATE FOR EAP/CM AND EEB/CBA
USAID FOR ANE FOR D. WINSTON
USDOC FOR ZHEN-GONG CROSS

E.O. 12958: N/A
TAGS: EINV PREL ETRD EMIN ENRG MG
SUBJECT: Global Financial Meltdown Dissolves Mongolian Resistance to
Mining Projects

ULAANBAATA 00000521 001.2 OF 005


Sensitive but Unclassified - Not for Internet Distribution. Contains
proprietary and confidential business information

Ref: A) ULAANBAATAR 495, B) ULAANBAATAR 474, C) ULAANBAATAR 382


1. (SBU) SUMMARY: The global financial crisis and steep declines in
commodity prices are threatening Mongolia's aspirations to become a
mining power. However, the crisis might be helping the new
government and parliament overcome the crippling inertia that has
afflicted them from 2006 up through the summer 2008 election, and
the parties now appear committed to moving forward with legislation
and with striking deals on mega-mining projects. The President of
Mongolia has publicly backtracked from demands for uncompensated
state equity in major projects and has called for commercially
viable deals to be struck, removing fears of expropriation.
However, as welcome as this response to the new reality is, it has
led Mongolians to an almost panic-driven desperation to strike
deals. Without the proper caution, flawed, unsustainable deals are
likely. Post and other international representatives have advised
government leaders to take a more balanced, reasoned, and
professional approach that avoids negotiating deals from the peaks
and valleys of the boom and bust cycles that routinely afflict
commodity markets. We will report septel on the response of private
western firms to the current situation. END SUMMARY.

Reality Bites Mongolia
--------------


2. (SBU) In the 2008 pre-election environment, Mongolia appeared
just steps away from becoming a global mining giant. Copper prices
were at record highs, Mongolia's premiere Erdenet copper mine could
not sell its product fast enough to China, and the GOM had a surplus
of nearly USD 1 billion. Giant firms such as Rio Tinto, Peabody
Energy, BHP Billiton, Areva, Xstrata, and CVRD, were constantly
knocking at Mongolia's door. But the Mongolian government and
public were just not biting. The standard argument went that
Mongolia was sitting on fabulous, un-tapped copper, gold, coal,

molybdenum, zinc, and uranium deposits, and because prices were high
and likely to stay there because of ever buoyant China, Mongolia
could demand whatever it wanted. Financing of projects, price
fluctuations, and downturns in demand were non-issues because prices
were never coming down. Of course, prices for copper tanked,
Mongolia's available exchange reserves and budget surpluses are
being cannibalized to satisfy prior spending commitments, and
companies once intent on entering the Mongolian market have turned
away for lack of financing. (Note: See ref A for a broader
perspective on the impact of the global financial crisis on
Mongolia's economy, and refs B and C for corporate perspectives on
and approaches to working within Mongolia's business environment.
End note.)


3. (SBU) In response to these reverses, the government -- at all
levels -- and the public seem to have had a dramatic change of heart
regarding mining policy as it affects the mega-projects. Gone is
the open infighting among the PM, Ministries, State Great Hural
(SGH, the parliament),President, and public, replaced by calls for
deals ASAP under apparently reasonable terms, through a properly
authorized process with a clear trail of responsibility and
achievable goals.

PM Punts to Parliament, but Still Works the Issue
-------------- --------------


4. (SBU) After September's successful formation of a coalition
government, Prime Minister Bayar placed mining policy and regulation
firmly under the aegis of the newly minted Ministry of Mining and
Energy (MoME),which then strategically recused itself from public
participation in the formulation and passage of amendments to the

ULAANBAATA 00000521 002.2 OF 005


2006 Minerals Law. More specifically, the SGH is addressing the
mining issue through a Minerals Working group composed of members of
the coalition and one independent MP, former Minister of Foreign
Affairs S. Oyun.


5. (SBU) The Bayar government seemingly punted responsibility for
striking deals in order to avoid risking another embarrassing and
bruising fight with the SGH over legislation and investment
agreements that the SGH has deemed its proper province. Senior
Ministry officials have quietly observed that earlier attempts to
clarify state ownership issues, obtain advance payments on mining
projects, and close investment agreements failed because the GOM had
failed to obtain public and SGH consensus on appropriate tactics.
The 2006 law also specifies that the SGH has final approval on any
contract for a strategic mining project. These officials have
informed us that the ministry will advise the SGH upon request but
will assume no formal role at this point in either the legislative
or deal-making process unless and until the SGH authorizes them to
do so. (Note: As observed by senior officials, if the GOM were
brought back into the legislative process to draft a bill, then the
entire amendment exercise would have to undergo the long and drawn
out ministerial, cabinet, state security review processes, and the
time for that sort of process, given Mongolia's pressing development
and budget needs, is just not available. End Note.)


6. (SBU) However, waiting in the wings does not mean that the PM and
his cabinet have no opinion on how they would like to see these
issues progress. The government wants immediate movement on both
the amendments and the investment agreements on the Rio Tinto
(RT)/Ivanhoe Oyu Tolgoi (OT) copper-gold project and the Tavan
Tolgoi (TT) coal deposit. Claiming that the PM shares and promotes
these views, MoME officials see no reason to halt development just
because legislation has not been completed. They argue that the
standing 2006 Minerals Law allows the state to conduct negotiations,
even if the new amendments are not passed or are delayed. The key
is to get talks going and deals signed ASAP.


7. (SBU) Assuming that SGH will provide direction on the amendments
and authorize negotiations, MoME officials are considering how to
conduct talks with RT/Ivanhoe on OT and with other parties on TT.
In their opinion (and the opinion of longtime observers of the
Mongolian mining scene),Mongolia has suffered from a lack of
world-class expertise at the negotiating table. Past negotiations
have pitted woefully amateurish Mongolians against the deeply
skilled agents that corporations like RT can bring to the table.
(Note: RT, Ivanhoe, Peabody, the World Bank, the Asian Development
Bank, and this post agree with the concerns of these officials and
have urged the GOM to professionalize the process. It is only
within the last three months that we have obtained traction on this
issue. End note.) Realizing this deficit, senior officials have
has quietly sought professional, experienced help to strike
agreements. They have been trying to acquire assistance quietly
because others within and outside of the GOM remain ambivalent about
the need to use professionals to negotiate deals on OT, TT, etc.
The GOM, SGH members, and other sources attribute resistance to:

-- Ignorance among NGOs, politicians, and the public about what such
presumably expensive advisors would do that the Mongolians cannot do
themselves, and an associated fear of having to explain to the
public why the GOM needs to pay so much for expertise. (Note: Even
senior officials, who should know better and who support this
process, are shocked to learn that quality advice will cost at least
USD 2 million and probably more.)

-- Pride in what Mongolians think they can do, and the flipside that
hiring help is a sign of Mongolian weakness.

-- Fear of the transparency that would accompany professionalizing

ULAANBAATA 00000521 003.2 OF 005


the process among corrupt politicians and business people who have
presumably benefited from past opaque Mongolian deal-making
methods.

Parliament Flexes its Muscle
--------------


8. (SBU) Because the PM deferred to the SGH on amending the 2006
Minerals law, the SGH somewhat suddenly found itself responsible for
crafting an acceptable draft. In September, SGH Speaker Demberel
officially sanctioned a new Mining Amendments Working Group (WG),
which in composition reflected the coalition-led government and the
new, younger demographic of the SGH. The old-guard steeped in
socialist tradition was allowed to lead the WG: MP Badamsuren, a
former director of mining policy at the now defunct Ministry of
Trade and Industry and a long-serving director of the
Russian-Mongolian state-owned Mongolrostvetment mining concern,
chairs the group. Joining him on the WG, however, are several new
MPs from the ruling Mongolian People's Revolutionary Party's
(MPRP's) youthful centrist business wing, some old-line Democratic
Party (DP) MPs known for their support of mining in general and
western involvement in particular, and the independent MP Ms. Oyun,
highly respected by the ruling MPRP party as fair and knowledgeable
when it comes to mining issues. The WG was specifically tasked with
drafting amendments and recommending investment agreement strategies
for OT, if not other mega-projects, by November 15.


9. (SBU) By late October, the WG had apparently concluded that
Mongolia needed deals more than it needed amendments, which they
believed had become nothing more than time-wasting, controversial
distractions. Oyun specifically observed that the state could
reasonably and non-controversially acquire substantial equity over
20 to 30 years on mining assets with 100 years or more of reserves
-- more than enough time for private firms to recover costs and make
excellent profits. Given this and the fact that SGH-approved deals
on OT and TT would have the force of law, the WG formally proposed
that the SGH:

-- Issue a formal resolution that the GOM negotiate investment
agreements immediately with RT/Ivanhoe on OT so that projects might
start as early as summer 09. (Note: There is less eagerness to move
quickly on TT, as strong differences on how to proceed linger. End
note.)

-- Issue a formal resolution that the GOM prepare a revised set of
amendments for the 2009 spring SGH session following the normal
amendment/drafting process in which the relevant ministry prepares a
draft that will be vetted through the ministerial and cabinet review
processes. (Note: The idea here is that these amendments would
codify into law the terms set out in separate investment
agreement(s). End note.)


10. (SBU) The WG proposals have garnered substantial support but
some resistance remains. The ruling MPRP seems on board with the
WG, at least publicly, as we have heard no dissent from MPRP MPs or
MPRP-linked officials. As the Bayar Government wants to move ASAP
on projects, this apparent support is to be expected.


11. (SBU) On the surface, the DP accepts the proposals with minimal
dissent. A senior DP parliamentarian told post that only two DP MPs
have rejected the WG proposals for what he describes as "bitterly
personal," non-policy reasons. However, other DP members express
some doubts. A DP member of the WG believes that the resolutions
will pass, but suggests that DP inter- and intra-party politics may
affect the execution of the investment agreement proposals. In the
run-up to the June 08 elections, the DP led the calls for state
equity and participation and those currently silent voices are still
lurking. The DP MP argues that these DP members still do not

ULAANBAATA 00000521 004.2 OF 005


understand why the GOM should not own the mine, and that complaints
to this end may drive other DP MPs back to supporting "stupid,
populist positions" that will cause further costly delays.


12. (SBU) The same DP MP also argues that DP intra-party politics
might erupt. Most DP members agree that getting projects up and
running is essential for the nation and for honoring DP election
promises, but there is a group of the DP that sees accomplishing
these ends through an MPRP-led coalition as diminishing the DP's
role as a viable opposition party. While the individual members
might get credit for solving some problems, the party would look
like nothing more than a junior stooge for the MPRP; and so, DP MPs
may ultimately have to decide between the party and their own
interest in remaining in the SGH. (Note: See ref C for a full
assessment of the how the DP and MPRP intended to respond to mining
issues in the immediate post-election environment. End note.)

Don't Forget the President
--------------


13. (SBU) In the run-up to the June 2008 elections, President
Enkhbayar called for state ownership of strategic deposits such as
OT and TT. The Minerals law of 2006 allowed the state to acquire up
to 34 percent of privately developed deposits, like OT, and 50
percent of those deposits discovered with GOM funds, such as TT.
However, Enkhbayar, in a move widely seen as pandering to populist
impulses among the electorate, called for the state to take at least
51 percent of any deposit it deemed strategic, apparently without
compensation to the legal mining license holder. As the Mongolian
President has the power to veto SGH legislation, including deals on
OT and TT, the President's views impeded progress on reaching
consensus.


14. (SBU) Post-election, Enkhbayar has turned 180 degrees on mining
policy. In a recent address to the SGH, he disavowed the
pre-election positions. Mongolia, he claimed, must quickly move on
the projects, and state ownership desires must not impede that goal.
A deal should be struck with RT and Ivanhoe on Oyu Tolgoi ASAP, and
state interests in gaining equity stakes can be accomplished over
time. What he would like is for RT and Ivanhoe to agree to an
initial 34 percent, which the GOM would pay for out of revenues from
the mine and a commitment from the private owners that the GOM could
acquire an additional 17 percent of the project over 25-30 years,
again using its shares of OT revenues to buy its stake.


15. (SBU) Most industry and some GOM observers appreciate Enkbayar's
conversion because it relieves pressure to pursue policies that can
advance mining in Mongolia. They attribute this change to his
realization that his populist stance was unsupportable in the
current economic environment. That said, they now wish Enkhbayar
would "shut up." In their opinion, he can continue to argue around
the edges, but he has little else to offer other than his
acquiescence to what the SGH puts before him, as long as it achieves
the aims that he has promoted from his bully pulpit.

Public Attitudes: NGOs are Not "The People"
--------------


16. (SBU) At this point it is hard to gauge the public's reaction to
all the chatter. However, it is important to separate the public's
reaction from that of the NGO's. Long time observers of the mining
scene and Mongolian politics sense that the public is ready for
action on projects, and will accept plans and deals that have been
explained to them in an open, transparent way -- even controversial
ones that back away from 51 percent state ownership. The challenge
for the government is to engage the public in this manner, something
that it has resisted doing consistently over the last 20 years of
reform. MP Odkhuu, among others with whom we have spoken, has

ULAANBAATA 00000521 005.2 OF 005


related that his constituents want action on mining, because they
want jobs and the development that comes with mining. Public
reaction to the WG proposals seems muted, with none of the street
protests or "screaming" NGO leaders that have accompanied past
announcements of movement on mining policy.


17. (SBU) Although they did not instigate the riot, some of the more
radical, obstreperous from the NGO community were not shy in
attempting to take advantage of the event, especially those seen on
TV exhorting the crowd to take action against the MPRP. However,
their apparent failure to move the wider public to both their views
and against their subsequent incarceration seems to have dampened
the enthusiasm of other NGO rabble rousers for taking to the street.
Other observers argue that some of these NGOs have signaled that
they would like to join the debate more formally, calmly, and
responsibly than they have in the past.

Comment: Getting off the Pendulum
--------------


18. (SBU) Among our Mongolian interlocutors, the current environment
has led to a near panic to get something done, no matter the cost.
"ASAP, "immediate," and "now" are the words most often heard, and
they often accompany plaintive, worried queries if the western firms
are still interested or can afford to invest. If the Mongolians
make a panic-driven deal based on low commodity prices and capital
shortages, such a deal could well be repudiated several years down
the road when conditions improve, and the country will be right back
to where it was in early 2008, with political gridlock and
development halted mid-stream. We, along with other like-minded
members of the international community, are advising the Mongolians
that deals on mines ought not to be negotiated from the peaks and
valleys of boom and bust cycles that routinely afflict commodity
markets. Finding the sweet spot between the peak and the valley for
mining projects with 30 or more years of life in them will more
likely come from the rational assessment of a properly authorized,
well-funded Mongolian negotiating team, supplemented by world-class
professional advisors, and whose deliberations are open to public
and legislative review.

MINTON