Identifier
Created
Classification
Origin
08ULAANBAATAR90
2008-02-25 08:33:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Ulaanbaatar
Cable title:  

THEY'RE BA-ACK! RUSSIANS RE-ENGAGE MONGOLIA

Tags:  PREL ECON MARR ETRD EMIN EPET PBTS EAID KIDE KCOR 
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RUEHBJ/AMEMBASSY BEIJING 6009
RUEHUL/AMEMBASSY SEOUL 3201
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RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RHEHNSC/NATIONAL SECURITY COUNCIL WASHINGTON DC
RHHMUNA/HQ USPACOM HONOLULU HI
UNCLAS SECTION 01 OF 04 ULAANBAATAR 000090 

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM, EUR/RUS AND INR/EAP
NSC FOR PAUL HANLE

E.O. 12958: N/A
TAGS: PREL ECON MARR ETRD EMIN EPET PBTS EAID KIDE KCOR
MG, RU
SUBJECT: THEY'RE BA-ACK! RUSSIANS RE-ENGAGE MONGOLIA

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION.

UNCLAS SECTION 01 OF 04 ULAANBAATAR 000090

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM, EUR/RUS AND INR/EAP
NSC FOR PAUL HANLE

E.O. 12958: N/A
TAGS: PREL ECON MARR ETRD EMIN EPET PBTS EAID KIDE KCOR
MG, RU
SUBJECT: THEY'RE BA-ACK! RUSSIANS RE-ENGAGE MONGOLIA

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION.


1. (SBU) SUMMARY: Russia has recently focused renewed attention on
the Russia-Mongolia relationship. Russia recently offered to equip
Mongolia with around $120 million worth of military hardware,
possibly including pushing Mongolia to take two MiG-29 fighter
jets.. Less conspicuous, but no less important, are other actions
that signal an increasing Russian effort to re-establish its
presence in Mongolia. High-level visits are occurring with greater
frequency and at higher levels, governmental agreements are being
signed and efforts are being made to strengthen trade links. Prime
Minister S. Bayar, a former Ambassador to Russia, will make his
first official visit to Russia soon, probably in March. This will
follow a visit to Mongolia by the acting chairman of Russia's NSC.
The No. 2 official of Mongolia's dominant political party recently
visited Moscow at the invitation of Vladimir Putin's party. Russia,
Mongolia's second biggest trading partner, has dispatched several
senior railway officials to Ulaanbaatar and reportedly plans to
invest US$1 billion in Mongolia's railway system. Interaction
between Mongolia and the neighboring Russian Republic of Buryat is
flourishing; an agreement aimed at boosting trade was recently
signed, and ethnic Buryat tourists and businesspeople from Russia
are flocking to Ulaanbaatar. To date, the Russians have made little
headway in securing the Mongolian mineral resources they crave, but
corruption and a reliance on Russian petroleum renders Mongolia
vulnerable. How receptive Mongolia is to Russian attempts to
rekindle their old flame will be guided more by strategic

self-interest than any sense of bilateral affinity. END SUMMARY.


BACKGROUND
--------------


2. (SBU) Ties between the two countries run long and deep. For
nearly 70 years, Mongolia was known as the unofficial 16th republic
of the Soviet Union. But in late 1989 and early 1990, street
demonstrations set Mongolia on a path toward democracy and open
markets. Not long thereafter, Moscow rapidly withdrew its soldiers,
advisors and material support. Years of painful economic and social
adjustment ensued. Because Russians had managed most Mongolian
companies, Mongolians lacked the skills and experience to keep the
firms afloat. As enterprises failed, many city workers went back
into agriculture or herding, but not before food and power
distribution networks collapsed, leading to near-famine conditions.
Over the past few years, with western and Chinese influence in
Mongolia expanding, Russia has taken steps to re-engage Mongolia.
Russia now provides virtually all of the oil (95%) that powers
Mongolian vehicles, and is the largest buyer of Mongolian meat.
Russian officials and industrialists salivate at Mongolia's largely
untapped mineral deposits. Russia watches as Mongolia increasingly
asserts itself on the world stage, contributing troops to the Iraq
coalition and hosting six-party talks (6PT) on North Korea.

HIGH-LEVEL VISITS
--------------


3. (SBU) Prime Minister Bayar will make his first official visit to
Russia soon, probably in March. This will follow a visit to
Ulaanbaatar by the acting chairman of Russia's national security
council, Major General V.A. Sobolev (septel),who met on February 21
with President Enkhbayar to discuss security cooperation. Sobolov
also had meetings scheduled with PM Bayar and Mongolia's Ministers
for Defense, Foreign Affairs, Justice and Agriculture. Separately,
the Secretary General of the ruling Mongolian People's Revolutionary

ULAANBAATA 00000090 002 OF 004


Party (MPRP),Yo.Otgonbayar, along with another high-level MPRP
official, visited Moscow recently at the invitation of Vladimir
Putin's United Russia party. Otgonbayar was to meet with United
Russia leader V. Gryzolv (who is also Speaker of the Duma).

DORMANT DEFENSE COOPERATION GAINING LIFE?
--------------


4. (SBU) Russia's decision to provide to Mongolia around $120
million worth of conventional weapons and other military equipment,
including MI-24 attack helicopters and possibly two MiG-29 fighter
jets, has drawn renewed attention to the bilateral relationship.
(Note: Although the terms of the deal are not yet clear, it would be
a combination of grant aid and low-interest loans.)

WORKIN' ON THE RAILWAY
--------------


5. (SBU) The President of the Russian railway, V.S. Yakunin, is
scheduled to visit Mongolia from February 27 to 29. The Russians
are reportedly planning to invest US$1 billion in Mongolia's railway
system and to offer railway training to 33 Mongolian workers.
(Note: After providing virtually no real investment in the joint
venture railroad for decades, the Russians have recently offered
these improvements in the form of loans, which they say the
Mongolians can pay off by ceding development rights to a variety of
mineral and natural resources. End Note.) Yakunin's visit was
preceded by that of the Russian railway's vice chairman, who held
talks with Transport Minister R.Rash.

RUSSIAN BANK LOANS SOUGHT
--------------


6. (SBU) Rash has courted Russian funding for new buses to replace
the creaking, overcrowded ones that blight the streets of the
Mongolian capital. It was reported on February 7 that Rash's
Transport Ministry is seeking to borrow US$21 million from Russia's
Vostok Bank, to pay for 13 Kamaz buses. If a loan is extended, new
buses could start service in Mongolia by November 2009.

GROWING INTERACTION WITH RUSSIA'S BURYATS
--------------


7. (SBU) In mid-February in Ulaanbaatar, officials of the Mongolian
Government (GOM) and the Russian Buryat Republic signed an
agreement on border cooperation, aimed at facilitating trade. Media
quoted Buryat President Vyacheslav Nagovitsyn as saying that annual
trade between the Buryat Republic and Mongolia should be ramped up
to US$1 billion, up from US$39 million at present. The agreement
identifies specific steps to boost cooperation in industry, the
energy sector, construction, transportation and agriculture.
Meanwhile, there has been a notable increase in the number of ethnic
Buryat Russians making visits to Ulaanbaatar as tourists and
businesspeople. Buryats are now present in many shops and cafes of
Ulaanbaatar. Their appearance is virtually undistinguishable from
Mongolians; it is only when they speak that most are identifiable as
Buryats.

REGIONAL CONTACTS
--------------


8. (SBU) In Russia's Chita region, northeast of Mongolia,
authorities received a delegation in late January led by Ts. Janlav,
the Governor of Mongolia's far eastern province of Dornod. The two

ULAANBAATA 00000090 003 OF 004


sides signed an agreement calling for cooperation in the fields of
agriculture, road construction, and energy/infrastructure. Earlier
that month, business representatives from the Mongolian provinces of
Uvs and Khovd met in Uvs with counterparts from Russia's Tuva
Republic and the Chinese Inner Mongolian province of Altai. Four
agreements and eight business deals were concluded; among the latter
were transactions involving milk, wool processing and pasta
production.

MONGOLIA'S MINING SECTOR EYED
--------------


9. (SBU) In Ulaanbaatar in December 2007, a business forum was
organized by Gazprombank, Russia's biggest non-state-owned bank.
The gathering brought together Mongolian and Russian business
groups, with many of the latter expressing interest in investing in
Mongolia's mining sector. Gazprombank and another major Russian
firm, Polimetal, made clear their interest in uranium extraction and
a poly-metals deposit in Mongolia's far west. (Note: Although
Mongolia has generally resisted Russian efforts to dominate key
Mongolian copper and coal projects, Mongolia has embraced Russian
proposals for involvement in uranium projects. End Note.)
Separately, an industrial group created by President Putin, Russian
Technologies, is reportedly exploring the purchase of the Russian
government's 49% stake in Mongolia's biggest copper mining company,
Erdenet. (Note: Erdenet, 51% owned by the GOM, mines 530,000 tons
of copper annually and 3,000 tons of molybdenum. End Note.)

ADDICTED TO RUSSIAN OIL
--------------


11. (SBU) Russia remains the source of about 95% of the oil used in
Mongolia. (Note: In 2007, Mongolia imported US$533.5 million worth
of oil products. Mongolia has also sought oil deals with Kuwait and
others to reduce its dependency on Russia. ) Petroleum price
increases have led to 15-percent inflation that caused gas prices
and taxi fares to double in the second half of 2007. With
Parliamentary elections scheduled for June 29, Mongolia's Trade and
Industry Minister Kh.Narankhuu indicated on February 20 that the GOM
had reached an agreement with oil importer Rosneft to keep fuel
prices stable -- through June. Some Mongolians are concerned that
Mongolian economic development could be arrested if Russian energy
suppliers hike prices too sharply. Others worry about their
country's food security, with wheat imports, primarily from Russia,
meeting between 60 and 70 percent of domestic demand. (Note:
Russia's Agriculture Minister Gordeyev reportedly said that Russia
is prepared to deliver 250,000 to 300,000 tons of grain to Mongolia.
It has also been reported that Russia will waive export taxes on
wheat and flour products to Mongolia. End Note.)

GEOGRAPHY 101
--------------


11. (SBU) Mongolia is positioned to benefit from its location
smack-dab between Russia, the regional oil supplier, and China, one
of Russia's key oil buyers. Much of the Russian oil bound for
China, to feed that country's seemingly insatiable thirst for fuel,
could be pumped more efficiently through Mongolia. However, the
Chinese have resisted Russian and Mongolian pushes for pipelines and
large-scale, regular petroleum shipments through Mongolia. At
present, most Russian oil is shipped to China via roundabout routes
that add to shipping costs and cut out Mongolia (thus denying it the
ability to charge a tariff). GOM contacts say Mongolia has made
clear to Russia that if it wants to show good faith in re-engaging

ULAANBAATA 00000090 004 OF 004


Mongolia, it should press for oil transshipments through Mongolia.

ALLEGATIONS OF RUSSIAN MOB PRESENCE
--------------


12. (SBU) Mongolian newspapers have increasingly reported on the
alleged presence of Russian Mafiosi in Mongolia, but little evidence
has been presented to bolster such claims. The leading "Onooder"
daily reported that the director of gold-mining firm Altan Dornod
was leaving Mongolia and selling his mining licenses because of the
influx of new Russian gangsters. The truth, however, may be less
sensational. It seems that the firm owes the GOM a considerable
amount of tax money.

WATER A POTENTIAL FLASHPOINT
--------------


13. (SBU) Water is shaping up as a potential flashpoint in
Russia-Mongolia relations. The Selenge River Basin, Mongolia's
largest watershed, provides 51% of the flow into Lake Baikal, whose
waters and rivers confer substantial economic benefits upon Russia's
far east. Mongolia has never significantly tapped the Selenge River
Basin for agricultural purposes or hydroelectric power. But the
Mongolians have started weighing their options. Some have suggested
establishing a dam along the Eg River, a Selenge tributary. GOM
sources say that when Mongolia has raised the issue of Mongolia's
rights to Selenge waters, the Russians have unenthusiastically
responded with vague ideas about "sharing the waters." Because the
development of various minerals and agricultural resources will
require water from the Selenge Basin, Mongolia's long-ignored water
could become a source of bilateral friction.

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


14. (SBU) The Russians are clearly on their way back. Russian
mining firms, largely state-owned monopolies, have made no secret
that they would love to be involved in Mongolian mining projects (or
that they would pay dearly, above the table or elsewhere, for
exclusive rights.) The press and the rumor mill have continued to
spit out allegations that the Russian Government - and oligarchs
such as Oleg Deripashka, owner of Russia's Basic Element group --
routinely offer million-dollar bribes to GOM officials and
Parliamentarians, to secure rights to resources. Yet for all the
talk of bribes and intrigue, the Russians have thus far made little
headway in securing the resources they crave. The GOM has in recent
years proven adroit at keeping Russia interested but at bay, by
balancing promises of cooperation with threats to turn to other
nations. However, Mongolia's reliance on Russian fuel leaves
Mongolia vulnerable, as does Mongolian corruption. How receptive
Mongolia ends up being to Russian attempts to rekindle their old
flame will depend more on strategic self-interest than on any sense
of bilateral affinity. Many Mongolians are fond of the Russians,
and Mongolian culture is still heavily influenced by that of its
northern neighbor. But the painful Russian pullout of 1990 has not
been forgotten.

MINTON