Given Mongolia’s potential to become a future commodity powerhouse, it does
not seem strange that recent legislation that aims to cap foreign investment
and ownership was a cause for concern among the domestic and global business
community. The Strategic
Foreign Investment Law  aims to confront two major challenges to
Mongolia’s social and economic development. Firstly, the regime has to respond
to domestic demands that resource wealth is used to benefit the wider
population.  Moreover, Mongolia also seeks to reduce its dependence on its
two powerful neighbors and in particular to limit Chinese influence over its
economy. Neither of these dilemmas will be easily resolved.

After intense domestic lobbying, the Mongolian Parliament approved a
watered-down version of the Strategic Foreign Investment Law on 17 May.
Initially, the law stipulated that foreign investors seeking to buy a stake of
more than 49% in Mongolian companies required the approval of Mongolia’s
Foreign Investment and Foreign Trade Agency (Fifta) and Parliament. 
However, following amendments aimed at appeasing foreign investors, the
conditions only apply to companies involved in Mongolia’s ‘strategically important’
mining, financial, and media and telecommunications sectors and when deals are
valued at above $76 million. Yet deals in which the buyer company is even
partially in state ownership will require approval regardless of the sector of
the business.

Significantly, the law comes ahead of parliamentary elections to be held on
28 June. Accordingly, the legislation can be seen as a measure to satisfy
populist elements and resource-nationalist demands. Yet actions that upset the
global investor community could be harmful to Mongolia’s economic aspirations.
The country is dependent on foreign capital, lacks human resources and
technical expertise and, crucially, access to sea ports necessary for
exploiting its mineral wealth. Yet Mongolia also has a history
of quickly introducing legislation and then repealing it after it has
adversely affected the domestic economy. Indeed, given that the country’s
political and economic elites largely overlap this may prove to be another
piece of legislation that disappears after the upcoming elections.

However, for the time being the law can be seen as part of Mongolia’s
efforts to limit foreign – and in particular Chinese – ownership. The legislation
was triggered by Canada’s Ivanhoe Mines’ plan to sell its 58% stake in
SouthGobi Resources to the Aluminum Corporation of China (Chalco). This further
reflects widespread concerns about the growing Chinese influence within
Mongolia. While China has been Mongolia’s largest trading partner since 2005
(not to mention foreign investor), anti-Chinese
sentiment appear to be on the rise as a result of the influx of Chinese
businessmen and migrant workers.

Sandwiched between China and Russia, Mongolia has long faced the dilemma of
which neighbor to look to for economic and political support. However, since
the fall of the Communist regime, Mongolia has pursued a ‘third neighbor’
policy that aims diversify its investment and trade relations beyond China
and Russia. Since then, Mongolia has boosted ties with the United States,
Canada, the European Union (Germany and the UK in particular) as well as South
Korea and Japan.  Beyond the economic realm, Mongolia has also contributed
to UN peacekeeping missions, deployed troops to Iraq, and conducted joint military
exercises with a host of states. In May 2012, Mongolia attended the 2012
NATO summit in Chicago under auspices of the Individual and Cooperation
Program.

Mongolia also participates in regional initiatives such as the ASEAN
Regional Forum. The country also holds observer status within the Shanghai
Cooperation Organization (SCO) and is actively seeking membership of
organizations like the Asia-Pacific Economic Cooperation (APEC). Yet regional
initiatives or cooperation with NATO do not provide Mongolia with any concrete
security guarantees. Regional cooperation across East Asia – which is mainly
focused on the economic realm – does not in its current form alter the balance
of power politics still dominant in the region’s security dynamics. And while
globalization may diminish the significance of physical distance, Northeast
Asia’s economic and security dynamics ensure that Ulan Bator needs to maintain
stable relations with its two powerful neighbors.

Indeed, Mongolia’s geostrategic location between both countries eliminates
the chance to develop ‘third neighbor’ policies in certain instances. In 2010,
for example, Mongolia had only two options in terms of connecting its railway
infrastructure to wider rail networks. And while Mongolia eventually chose
Russia, Sino-Russian competition for the economically important railway link
can be seen more broadly as a geo-economic
contest for influence in Mongolia. Consequently Mongolia can neither fully
escape its regional position nor conduct ‘third neighbor’ policies that risk
relations with China and Russia. Rather, the policy of diversifying relations
can be understood as an attempt to gain additional leverage the relations to
Russia and China.

In an age of diminishing energy and natural resources, Mongolia’s vast
reserves of coal and minerals mean that the country is likely to become a
focus of global economic and security interests. This makes the dilemmas
confronting Mongolia all the more challenging. An abundance of natural
resources are likely to make Mongolia the site for further foreign
investment.  As a result, domestic debate over the control and
distribution of resource wealth is likely to intensify as more foreign
companies seek to invest in the country. So despite a recent upsurge in
anti-Chinese sentiment, Beijing may not be the only ‘outside’ actor that causes
concern regarding foreign ownership of Mongolian enterprises.

By Jenni Muttonen

http://isnblog.ethz.ch