“All you need to mine here is a shovel,” said an awe-struck
Indian investment manager as he stood behind a barrier, along with dozens of
international mining industry executives and other eager investors, gazing at
the immense coal pit gouged out of the rust-colored
earth below.

Coal may have lured the foreigners to this stretch of the Gobi, but that is
just part of the buried treasure to be found now that this nation of livestock
herders has started digging in earnest. Mongolia has not only enough coal to
fuel China’s huge demand for the
next 50 years, but also vast troves of copper, gold, uranium and other minerals
the world covets.

While Mongolia may be blessed by geology, it is cursed
by geography. Landlocked between China and Russia,
its three million people face a geopolitical quandary: Every path to prosperity
leads through their mighty neighbors’ territory. And Moscow and Beijing intend
to make Mongolia pay dearly for the privilege.

That reality is abundantly clear here at Tavan Tolgoi.
Beneath the earth lies the world’s largest untapped coal deposit, only 140
miles from the Chinese border. By one measure, the most practical solution
would be to work exclusively with the Chinese, since nearly all the coal will
be hauled there anyway.

Mongolia, however, has other ideas. Fearing that China
may gain undue political influence, the government has spent years in a
diplomatic tap dance over who will get to develop an estimated 900-million-ton
portion of the deposit, much of it prized coking coal essential to making
steel. The two main bidders are Shenhua Energy, a Chinese state-owned
enterprise, and Peabody Energy, a multinational mining giant from St. Louis.
Filling out the mix are a Russian-Mongolian consortium and companies from Japan
and South Korea.

Long a major donor and prime diplomatic ally, the
United States is pushing hard on behalf of Peabody, and observers say the
future of Mongolian-American relations hinges in large part on what happens in
the final deal. China, eyeing the maneuvering by the Obama administration, is
increasing the diplomatic pressure as well.

But even as the scramble for resources underscores the
growing rivalry between Washington and Beijing for influence in Asia,
infighting in Mongolia’s bare-knuckle democracy, expected to reach a boiling
point in parliamentary elections on Thursday, has thrown into turmoil efforts
to forge an international mining agreement over Tavan Tolgoi.

“We’re a small country sandwiched between two
elephants,” said Puntsag Tsagaan, a presidential adviser on mining. “We can’t
go to war and fight, so we have to secure our economic growth through
diplomacy.”

That kind of approach, however, is a tough sell for
Mongolia’s rowdy nationalists, who have grown increasingly powerful in the two
decades since the country broke free from the Soviet orbit. And they have much
to complain about. The taint of corruption clings to every government deal with
a world power or multinational corporation. Horror stories about pastureland
fouled by mining are staples of the Mongolian press, alongside tales of herders
abandoning their flocks to work the mines. Most Mongolians have enjoyed little
of the riches extracted from their land.

Which is why foreign ownership of their country’s
mineral wealth most riles Mongolians. Many are still upset at a 2009 deal
awarding Ivanhoe Mines of Canada a 66 percent share of Oyu Tolgoi, the world’s
largest untapped deposit of copper and gold. Ivanhoe, whose majority owner is
Rio Tinto of Australia, is hoping to open the mine next year after spending
more than $4 billion on its development.

Parliamentary candidates have made it a major campaign
issue, vowing that much more of the profits will stay in Mongolia this time.
Lawmakers have already announced that every Mongolian will receive shares of a
multibillion-dollar initial public offering for the state-owned company that
runs another part of the Tavan Tolgoi coal deposit.

But without more foreign help, the mines will remain
untapped. Mongolian officials say the deal on Oyu Tolgoi — which took six years
of painstaking negotiations with just one company — was simple compared with
handling the hornet’s nest of competing agendas over Tavan Tolgoi’s coal.

Mongolians know they are vulnerable to Beijing’s near
monopoly over the country’s exports, being forced to accept an average of 30
percent less than their commodities are worth on the open market, analysts say.
“If China closed the borders, we would starve to death,” said Zolboo Bataa, 34,
an account manager for a multinational construction equipment company in Ulan
Bator, the Mongolian capital.

Beijing has also wielded its clout to exact political
vengeance. In 2002, China shut its borders with Mongolia during an official
visit by the Dalai Lama, the Tibetan spiritual leader; last year, Beijing
pressed the government to cut short another visit. Such tactics make Mongolians
fear that China might swallow up not just their economy but also their sovereignty.

“Mongolians see what’s happening in Tibet and
Xinjiang,” said a local banking executive, who asked not to be identified
because he does business with China. “They know the Chinese don’t have their
best interest at heart.”

That anxiety turned to panic in April, when news broke
that Ivanhoe planned to sell its majority share of a coal mine to a Chinese
state-owned aluminum manufacturer. Parliament finally passed long-languishing
legislation that prohibits foreign state-owned enterprises from buying up a
majority of Mongolia’s “strategic” industries unless granted prior government
approval.

That law marks the latest step in the complicated
political choreography aimed at appeasing a rising nationalist fervor while
encouraging foreign investment.

To offset its reliance on China, Mongolia has sought to
expand cooperation with the United States, in what the government calls the
“third neighbor” policy. The United States has provided hundreds of millions of
dollars in aid to Mongolia, though the bilateral teamwork goes beyond the
financial. Washington doles out thousands of visas to Mongolian students, and
Mongolia has dutifully sent troops to Iraq, Afghanistan and even Alaska, where
they train with the National Guard.

Last year, the Mongolian president, Tsakhia Elbegdorj,
met with Mr. Obama at the White House and dined with the first lady. Later,
Vice President Joseph R. Biden Jr. visited Mongolia, holding talks with the
prime minister and calling his host country a “shining example” of democracy.

The Obama administration is also focusing on economic
development. “We want to be a part of the balance of trade,” the United States
ambassador, Jonathan Addleton, said in an interview, noting that his country
had significantly increased its exports to Mongolia.

But the United States is also looking for a bigger
return. Those briefed on internal discussions say that Washington recognizes
that Mongolia will dole out its resources among various interests but insists
that Peabody receive the lead role in developing the new portion of the coal
mine.

“Tavan Tolgoi is the only project in Mongolia in which
the U.S. has a dog in the hunt,” said one American executive based in Mongolia.
“What the Americans are saying is, ‘We can’t be your best friend and primary
third neighbor if all the goodies go to China.’ ”

One reason Ulan Bator may be procrastinating is that
any decision will undoubtedly leave some of the players feeling shortchanged.
When information about the negotiations leaked out last year, revealing that Peabody
and China were destined to be the primary winners on Tavan Tolgoi, Russia,
Japan and South Korea were outraged. As the complaints mounted, the Mongolian
government, desperate to control the geopolitical damage, shut down
negotiations until after the elections.

“We’re trying to make a deal with world powers that’s
in line with our national interest,” Mr. Elbegdorj said in an interview.
“Reaching a consensus is complicated.”

To further help break Beijing’s grip, the government
has embraced a $7 billion railroad expansion through Russia that will give
Mongolia direct access to more customers.

“Mongolia is without a doubt getting more respect from
world powers,” said John Johnson, an executive based in Beijing with CRU, a
mining consultancy. “Because it’s got something everybody needs.”

Source: New York Times, June 27, 2012