Moscow's Infrastructure Playbook in Mongolia

Russian construction firm NatsProyektStroy (National Project Construction) has set its sights on Mongolia, expressing interest in a wide range of infrastructure projects from railways and highways to hydropower and even a Ulaanbaatar metro. Russia’s active interest in Mongolian infrastructure development, coinciding with Ulaanbaatar’s ambitious infrastructure and industrial downstream push and evolving Russian-US dynamics, merits careful scrutiny

While ostensibly economic in nature, Moscow’s overtures carry significant geopolitical implications for both Mongolia and the regional balance of power. Russia's interest in Mongolia comes as Mongolia begins major infrastructure and energy projects (dubbed as 14-mega projects) worth billions of dollars.

At the same time, a three-year interim free trade agreement with the Russian-dominated Eurasian Economic Union (EAEU) is nearing finalization before President Khurelsukh’s attendance at the Victory Day Parade in Moscow in May, promising reduced tariffs on hundreds of goods.

Easing the rising cost of consumer goods could really benefit Mongolian consumers. This follows a period of historically high tariffs, which, according to some accounts, were as high as 47% and have contributed to a 97% trade deficit for Mongolia. However, skepticism remains among domestic producers who fear being undercut by cheaper Russian imports.

Furthermore, there is an increased engagement from Buryatia, a Russian region bordering Mongolia, with proposals for enhanced transport corridors linking Russia, Mongolia, and China.

These developments unfold against the backdrop of ceasefire talks between Russia and the US regarding the Ukraine war. Should sanctions on Russia ease eventually, Moscow’s financial and technological capacity to pursue its geoeconomic interests in Mongolia could significantly expand, posing both opportunities and risks for Ulaanbaatar.

Moscow’s primary objective is to maintain its traditional sphere of influence in Mongolia, preventing a decisive pivot towards either China or the West. This translates into several specific goals.

First, Mongolia has served as a critical buffer state between Russia and China, and Moscow may seek to preserve its neutrality. Second, Russia prioritizes control over strategic infrastructure, particularly railways (1,520mm rail gauge) and energy grids. Its 50% ownership of Ulaanbaatar Railway (UBTZ) and its position as Mongolia’s dominant fuel supplier exemplify this strategic leverage. Third, Mongolia represents a captive market for Russian energy and goods, a dependency Moscow is keen to maintain. Fourth, Russia values Mongolia’s support, or at least neutrality, in international forums, particularly given its current geopolitical isolation.

Finally, Russia seeks to limit Western influence in Mongolia, particularly in sectors like mining and infrastructure.

For Russia, investing in Mongolian infrastructure could serve several strategic purposes. It reinforces Mongolia’s dependence on Russian systems, hindering diversification towards China or the West. It allows Russia to counterbalance China’s growing economic influence in Mongolia. And, by emphasizing trilateral cooperation between Russia, Mongolia, and China, Moscow ensures its continued relevance in shaping regional infrastructure development.

But of course, given Russia's own economic challenges, there is no guarantee that it would be able to commit financially in the long-term to Mongolia.

However, these developments present significant challenges for Mongolia. Increased reliance on Russian firms could limit Ulaanbaatar’s negotiating power regarding transit fees, energy pricing, and overall logistical sovereignty. It may also deter investment from other sources wary of engaging with Russian entities even if sanctions are lifted.

Furthermore, Russian infrastructure projects in Mongolia could be susceptible to political maneuvering, delays, and opaque financing, potentially undermining Mongolia’s development goals and increasing the likelihood that these projects will become white elephants.

Finally, increased Russian involvement may trigger a countervailing response from China, further complicating Mongolia’s balancing act between its two powerful neighbours.

To mitigate risks and maintain strategic independence, Mongolia should diversify its partnerships, investments, and energy sources, while leveraging the competition between Russia and China to its advantage. Additionally, engaging multilateral institutions will further support Mongolia's autonomy.

In order to effectively manage large projects and complex agreements with major international players, Mongolia should prioritize improving governance and institutional capacity.