Inside Mongolia’s Mining Royalty Reform: How a Tax Change Nearly Unseated the Prime Minister

A fight over how to tax Mongolia’s mineral riches nearly cost the prime minister his job. What began as a technical debate on royalty reform erupted into a proxy war over the country’s economic model and the balance of power behind it.

(energyresources.mn)

Last week, President Ukhnaagiin Khurelsukh and the Constitutional Court stepped in to block an attempt to unseat Prime Minister Gombojavyn Zandanshatar. The court ruled on October 22 that Parliament’s no-confidence motion was unconstitutional in the procedure, leaving Zandanshatar in office amid deepening party infighting and public unease.

Critics, led by MP Sainzorig, accused the prime minister of rewriting Mongolia’s mining royalty rules to benefit a politically connected conglomerate. The government countered that it merely fixed a system that punished private miners while shielding state firms.

At the center stands Government Resolution 55, introduced in August 2025 to overhaul how royalties are calculated. Exporters must now pay based on prices set through the Mongolian Stock Exchange rather than foreign benchmarks used since 2021.

The government framed the temporary change until December 31 as a transparency measure tying taxes to verifiable domestic trades. Opponents aligned with ex-Speaker Amarbayasgalan denounced it as fiscal sabotage that could drain billions from the budget amid record public spending.

The fiercest charge alleges that the reform handed an illegal windfall to Energy Resource, the mining arm of MCS Group, by basing royalties on lower domestic prices at Gashuun Sukhait instead of inflated international indices. Anti-PM lawmakers claimed the state lost 200 billion tugriks (~$57m). But industry data and audited filings point to exaggeration.

For example, Mongolian Mining Corporation (MMC) alone paid roughly 300 billion tugriks annually in previous years. A 200 billion loss over a single quarter since adoption of the resolution 55, as alleged, would defy basic arithmetic.

The deeper problem lies in Mongolia’s old “reference price” regime. Until recently, royalties were levied not on actual sales but on an administrative benchmark pegged to Chinese import prices.

For instance, when coal sold for 100 dollars a ton but the reference price stood at 180, a nominal 10 percent royalty became an 18 percent effective rate. Add progressive surcharges and other fees, and total tax burdens often topped 20 percent.

Private companies bore the brunt. State-owned firms could declare their real transaction prices, but private exporters were stuck with inflated benchmarks. MMC’s filings show how severe the distortions became. Its effective royalty rate reached 21.7 percent in the first half of 2022 before dropping to 13.8 percent in the second. In 2023, the rate averaged 11.1 percent, then fell further to 7.2 percent in 2024, when the company paid about 75 million dollars in royalties, down from 113 million the previous year. The pattern underscores how inconsistent and burdensome the old system was, taxing revenue that miners never actually earned.

Resolution 55 sought to fix that by tying royalties to verified trades on the domestic exchange. By requiring that a quarter of exports be sold through the platform, the rule also nudged private miners into auctions once dominated by state firms. MMC, among the few to welcome the reform, argued it would curb manipulation and underreporting while fostering price discovery in a market long opaque.

Critics countered that the shift would cut short-term revenue and expose the budget to volatile local prices. Royalty receipts indeed fell 47 percent year-on-year, though that drop coincided with weaker global demand and lower export volumes.

Economically, the reform is defensible. Coal faces substantial transport costs in Mongolia, often comprising a significant share of the sale price, making border congestion or logistics delays a major factor in domestic pricing compared with international benchmarks

Pegging Mongolia's mining royalties to international indices may look tidy but penalizes producers for structural disadvantages they cannot control.

Whether Resolution 55 endures will depend on whether the exchange evolves into a credible market rather than a political showcase. For now, the policy reveals more than it resolves: a deeper contest over who captures Mongolia’s resource rents.

With the prime minister’s status still unsettled, the contest over royalties now shapes Mongolia’s broader political future.