Out of 367 companies
listed on Mongolia”s Stock Exchange since the 1990s (as part of a voucher
privatization program), over half have been suspended and of those left, less
than 20 are liquid enough to be traded on a daily basis. With the vast majority
of shares in the pockets of very few investors, manipulation and insider
trading have become commonplace, says Business News Europe.

Still, Mongolia”s stock
market had the distinction of being the best performer in the world over the
last decade, up 1,600%, and is on course to be the same again this year, with
the leading index rising over 100% in just two months this summer. But with an
average daily turnover of just USD100,000 for the whole exchange, these gains
could just as easily be one of the local oligarchs playing games.

The bourse badly needs
reform, as Mongolia is expecting a wave of cash to hit the economy in the
coming years after Canada”s Ivanhoe Mines brings the massive Oyu Tolgoi
copper/gold mine on stream in 2013, which should increase the size of the
economy by half on its own. The government is well aware of the problems and
has finally turned its mind to fixing them. Earlier this year, it announced the
exchange would be privatized and put the job out for tender. From an original
12 applications, four candidates were short listed and a proud Prime Minister
S. Batbold recently said the London Stock Exchange (LSE) was the
“front-runner”.

The LSE has no doubt
helped its bid by hosting a conference in Ulaanbaatar at the end of September
to discuss the future of the local bourse. With a reputation as strong as
London”s and expected growth as overwhelming as Mongolia”s, it wasn”t difficult
to impress. Emerging markets represent 12% of the LSE, USD635 billion worth of
stocks, and the exchange is keen to expand into the fast growing economies of
the east. With the largest pool of liquidity in the world and over 200 years of
expertise, the LSE has a lot to offer. “Mongolia has huge opportunities
with regards to development of the natural resources, and that growth will
support the economy,” says Ms. Tracey Pierce, director of equity primary
markets. “If they”re to monetize those opportunities, they”re going to
need efficient capital markets, and London truly is the center for global
finance for natural resources companies.”

However, the
opportunities for both parties won”t come without bumps in the road. In
October, a representative of Mongolia”s State Property Committee suddenly
announced that the tender had been cancelled. With that decision almost
instantly overturned, it would appear infighting has broken out over a
strategic decision that will set the course for the development of the
country”s capital markets for decades to come.

Fears of foreign
ownership and flip-flopping on tenders have become something of a norm in
Mongolia. Both the deals to develop Oyu Tolgoi mine and the giant Tavan Tolgoi
coal deposit by foreign investors have followed a similar winding path – the
Oyu Tolgoi deal took six years to sign and Tavan Tolgoi is back on the table
after a first attempt to auction it was cancelled earlier this year,
frustrating international investors. The executive director of the Mongolian
Stock Exchange (MSE), R. Sodkhuu, had to fend off accusations that he was
selling out in a recent interview with the local media. “Mongolians can do
the work,” he said. “We will not permanently hand over the MSE to any
foreign bidder.”

As head of the
Agricultural Association and four years as an MP before helping to draft the
new securities law,  Sodkhuu is a fiery
public speaker and has inflamed the media with Mongol patriotism before.
“If we took back our Oyu Tolgoi,” he said in 2008, “we could
have raised several billion dollars like Ivanhoe [Mines].” Amidst recent
arguments over accusations of corruption, he is now fighting to restore his
reputation with one hand while beckoning London with the other.

Mongolia recognizes the
real need for diversification and a developed domestic capital market to
channel the wall of cash that Oyu Tolgoi will bring. Dwarfed by their two
neighbors, Russia and China, however, they are being very cautious to balance
foreign influence during this pivotal period. They would rather be in charge of
their own development process themselves if they could manage it.

The government”s
Financial Regulatory Committee (FRC) has drafted a new securities law, which is
due to go to a vote in November. With over 100 new articles, the law aims to
introduce international standards by drawing on the experience of other leading
exchanges around the world. Strict investor and company rules as well as harsher
penalties for crimes wield the stick, and new much-anticipated depositary
receipt rules and fund structures offer the carrot.

Despite this step
forward, there were still complaints from the panel at the LSE”s conference.
“What”s the point of over regulating a market that barely has a
heartbeat?” asked Lee Cashell, founder of Asia Pacific Investment
Partners. Finding “complete paralysis” from the FRC, he insists that
more IPOs and tradable floats are required to drive this market forward.

Happily, this is about
to change. Tavan Tolgoi will be listed on the MSE and shares distributed to
citizens, according to the government”s latest announcements. In fact, all
“strategically significant” companies must sell at least 10% to the
public via the MSE, it says, despite the deep-seated problems with the exchange
– though critics argue that demands for local listing can”t be met until the
MSE has had its makeover, and this could take years.

The LSE is plugging
London dual listings to Mongolian companies before relying on the MSE and
offering up London”s Alternative Investment Market (AIM) is no doubt where the
interest in Mongolia stems. “We”re definitely here to win [the management
tender],” says Ms. Pierce with confidence. “We are here for the long
term and would like to use London”s expertise to support the future development
of the Mongolian capital markets.”