Before the gold rush – Banyan (The Economist – February 16, 2013)

Mongolia’s road to riches is paved with shareholders’ tiffs

ONE of the world’s fastest-growing economies, Mongolia finds itself at odds with the sources of its new-found wealth: the foreign miners and financiers dazzled by the unfathomable bounty under its vast terrain. Some foreigners fear that populist politicians, pandering to a belief that the nation is selling its birthright too cheaply, may kill the goose before it has laid any golden eggs. Almost certainly not; but “resource nationalism” will surely make life uncomfortable for geese.

Because of falling commodity prices and a slowdown in China, which takes over 85% of its exports, Mongolia’s roaring economy slowed drastically last year—to a mere 12% or so GDP growth, from over 17% in 2011. But the benefits produced by these giddy numbers remain elusive for many Mongolians. The frozen main streets of Ulaanbaatar, the capital, are gridlocked. In the glitzy mall in Central Tower, it is warm enough to browse the posh shops in a T-shirt.

Yet more than half of Ulaanbaatar’s 1.3m people live in “ger districts” on its fringes, shanty towns of felt tents often with no running water or electricity. According to the IMF, the number of Mongolians living in poverty fell by about ten percentage points in 2011, thanks to government handouts. But that still left some 30% below the poverty line. For them, the most obvious effects of the inflow of foreign money are sharply rising prices, unplanned urbanisation and the presence of rich-looking foreign visitors and residents.

In a vibrant young democracy, plenty of politicians tell Mongolia’s 2.8m people that they should be faring better as the country hurtles towards rich-world average incomes. In parliamentary elections last June, about a quarter of the seats went to “resource nationalists”, advocating local control of the mines. Such nationalists make up about a third of the cabinet of the coalition government led by the Democratic Party.

During the campaign, a scandal blew up when the foreign-controlled owner of Ovoot Tolgoi, a Mongolian coal mine, wanted to sell it to a Chinese state-owned enterprise. Acutely conscious of their commercial dependence on China, Mongolians are sensitive to any hint of its gaining control over them. A “strategic entities foreign-investment law” was pushed through, tightening approval procedures. Mongolia is far from unique in having such a law, but it was taken as a sign of an incipient backlash.

A presidential election is due in May. The incumbent, Tsakhia Elbegdorj, of the Democratic Party, is the favourite, and is closely identified with the opening to foreign investment. But new draft mining legislation from his office has provoked howls of protest from the industry, which claims its restrictions would deter all new investment in mining. And this month the president weighed into the foreigners behind much the biggest project in Mongolia to date, the Oyu Tolgoi (“Turquoise Hill”) or “OT” copper-and-gold mine.

OT is expected to contribute one-third of GDP by 2020, and is the basis of the strategy of rapid growth fuelled by foreign investment in mining. Some 34% of OT is owned by the Mongolian government and 66% by Turquoise Hill Resources (which also controls the firm that owns Ovoot Tolgoi), a subsidiary of Rio Tinto, a British-Australian mining behemoth.

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