By Ewen Levick | Melbourne
Russia's aggression and China's turbulence cast shadows over Mongolia, scaring away investors wary of geopolitical risk. But behind the uncertainty lies massive opportunity in minerals, tourism, and beyond. The question is, can Mongolia implement the reforms needed to capitalize on its potential while navigating a complex region?
18 months into Russia’s invasion of Ukraine and the war shows no signs of abating. While the Ukrainian Armed Forces conduct a counteroffensive against Russian defensive lines, Moscow remains embroiled in internal conflict as Putin seeks to reassert his strength following an armed mutiny in June.
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Meanwhile, all is not well in China. Numerous headlines (including here in Mongolia Weekly) speak of an economic downturn and structural malaise. A real estate market crisis, high youth unemployment, high debt levels in local government, and demographic challenges were recently summarised by US President Joe Biden as a ‘ticking time bomb’. In the eyes of China watchers, these challenges have been mounting for a number of years and are now beginning to manifest openly.
When faced with these sorts of challenges, autocrats can tend towards diversionary foreign policy – they engage in external conflicts to distract their populations from internal problems. As Russia weakens, Putin has become more belligerent; as China weakens, Xi Jinping may take the same approach.
This bears great risks for Mongolia. A small nation between two unstable powers is in a precarious position. In the short term, the country’s newly-elevated geopolitical risk profile is lowering foreign direct investment. In the long term, this may make Mongolia poorer as it walks a geopolitical tightrope.
Risk aversion
After Russia invaded Ukraine in 2022, a number of foreign companies (though notably not all) began to divest themselves of their Russian assets. One of the most famous was McDonalds, which had entered Russia to great fanfare in 1990 and made an equally poignant exit in May 2022.
The financial consequences were significant. The Financial Times estimated a loss of 100 billion euros across 600 European multinationals; Renault, as an example, lost 2.2 billion euros. But energy firms were the most affected. BP was estimated to lose 22 billion euros on exiting Russia. Similarly, Shell lost $4.2 billion in assets, including $1.6 billion on its stake in the Sakhalin-2 project after it was nationalised by the Russian government, though it may still receive a payout following Moscow’s sale of the asset.
Geopolitical risk is clearly a major consideration and potentially the source of great losses, even for some of the world’s largest companies. And for foreign investors, Mongolia’s geopolitical risk profile has undoubtedly increased following the Russian invasion of Ukraine.
One business executive told Mongolia Weekly that instability in Russia and China made Mongolia’s position ‘far worse’ for attracting capital: “10 years ago Shell might have entered Mongolia – now there’s no chance. Would Rio Tinto open Oyu Tolgoi if it was discovered now? I think that’s a 50/50.”
These risks are only compounded by the long-standing difficulty of doing business in Mongolia, from an anti-investor tax environment, opaque approval processes and investment laws to coal-smuggling.
Consequently, the Mongolian government faces an up-hill battle to attract foreign capital. Whilst Ulaanbaatar can’t alter the trajectories of Moscow or Beijing, it can (with enough political willpower) alter its own trajectory, which means engaging in meaningful reforms to improve the ease of doing business.
Opportunities investing in Mongolia
Whilst its neighbours undoubtedly present Mongolia with significant challenges, there is also an opportunity to build on the Third Neighbour policy and leverage Mongolia’s unique strategic circumstances.
Mongolian Prime Minister Oyun-Erdene Luvsannamsrai’s recent visit to the United States is a good example of this. A joint statement released after meeting US Vice President Kamala Harris promised greater economic and security cooperation, as well as development assistance. An economic roadmap heralds cooperation across a range of different sectors, including digital literacy, aviation and more, which could diversify Mongolia’s economy (particularly through inbound tourism). Critical minerals have been a key area of focus in recent MOUs between Mongolia and a diverse group of third neighbours, ranging from the US, Korea and European countries.
Security cooperation is also increasingly critical, and is a vital communication avenue for Mongolia into Washington and beyond.
Yet the agreements signed in the US and with others will still require Mongolia to engage in the kind of meaningful reforms necessary to off-set its geopolitical risk, including transparency in approval processes and investment laws. To truly navigate the challenges posed by its neighbours, the country will have to demonstrate that it can strike a different path and learn from the leading mining jurisdictions.
What are top 20 mining jurisdictions in the world?
Nevada (USA)
Western Australia (Australia)
Saskatchewan (Canada)
Newfoundland & Labrador (Canada)
Colorado (USA)
Northern Territory (Australia)
Arizona (USA)
Quebec (Canada)
South Australia (Australia)
Botswana
Alaska (USA)
Ontario (Canada)
Queensland (Australia)
Manitoba (Canada)
British Columbia (Canada)
Morocco
Utah (USA)
Montana (USA)
San Juan (Argentina)
Yukon (Canada)
While Mongolia has a relatively low corporate tax rate of 25%, its mining royalties and value-added tax policies result in a high overall effective tax rate (ETR) for mining projects. Specifically, the ETR reaches approximately 60% for copper and 47% for gold, positioning Mongolia among the highest tax regimes globally for mining. An independent report by Richard Schodde, funded by the Australian government, underlines the importance of an optimal tax structure.
A 100% tax rate stifles mine development, whereas a 0% rate leads to prolific mining but negligible government revenue. Mongolia must find the right balance to attract mining investment without forfeiting fiscal income.
Subscribe to Mongolia Weekly and receive a premium newsletter each week featuring in-depth analysis and commentary on politics and policy in Mongolia. Don't miss out on this valuable insight. Use promo code MW97 to get your first month for just $0.90. Stay informed and empowered with our exclusive insights!