Make Me an Offer

Eyeing Mongolia’s rich uranium deposits, Moscow makes overtures to Ulanbaatar. From EurasiaNet. by Stephen Blank 19 May 2009 Russian Prime Minister Vladimir Putin’s recent visit to Mongolia indicates that the Kremlin is making a push to restore bilateral relations to a level not seen since the Soviet era. But it may not be possible for the Russian leader to get what he seeks.

Wedged between Russia and China, Mongolia, though technically independent since 1921, has always had to tread carefully in the realm of foreign policy. Striving to balance the interests of Moscow and Beijing, Mongolian leaders have been dedicated practitioners of "multivectored" diplomacy since the Soviet collapse of 1991. Not only has Mongolia cultivated ties with Russia and China, but Ulanbaatar has reached out to other powers, in particular the United States and Japan, as well.

For centuries, Mongolia was an object of geopolitical interest, widely seen as a buffer between two rival empires. But these days, given the recent discoveries of strategically important raw materials like uranium, the country is assuming a greater level of global economic importance. At the same time, the global drop in commodity prices has hit Mongolia hard and the country’s economy is struggling.

Budgetary pressure has prompted Mongolian leaders to seek outside funding. The International Monetary Fund announced in early May that it would provide $229 million to Mongolia to help stabilize the country’s finances. But Ulanbaatar’s needs are greater, and that has created an opening for Russia. Moscow has been particularly active of late in trying to reestablish a strong presence in Mongolia. Back in March, Russia announced an agricultural credit of $300 million, which, in reality, was just one element in a larger stabilization effort. That aid can also be seen as a hidden subsidy for the Russian agricultural sector, as much of the money made available to Mongolia was tied to a requirement to purchase Russian products.

Putin’s 13 May visit aimed to cement a new Russian-Mongolian special relationship. The centerpiece of the visit was a deal worth potentially $7 billion, under which the Russian state-controlled railway company agreed to upgrade and expand Mongolia’s rail network. The rail expansion into southern areas of the country would help Mongolia boost exports of uranium, copper, coal, and other minerals. The payoff for the Russian railway company includes mining licenses for the Tavan-Tolgoi coal mine and the Oyu-Tolgoi copper-gold mine.

For the Russian state, the payoff was something much larger: a Mongolian promise of close cooperation in developing uranium deposits. Russia is trying to gain primacy in access to deposits in Mongolia so that it can utilize the uranium mined there for the development of its own nuclear industry. During his visit, Putin expressed a clear desire to move Russia away from an excessive reliance upon gas-fired electricity. In effect, Russia wants to corner Mongolia’s uranium market because it intends to build many new nuclear energy plants between now and 2030.

WEIGHING OPTIONS

Putin also sought to use his mid-May discussions with his Mongolian counterpart, Sanj Bayar, to get Ulanbaatar to agree to a plan under which the two states would settle trade accounts in their respective national currencies. This would have the net effect of creating additional demand for the Russian currency and thus help prop up its value on international currency markets. The creation of a ruble-denominated trade bloc has long been a Kremlin goal.

Ironically, Russian businesses have complained about a lack of protections for their investments, alleging that Mongolia has arbitrary taxation policies and a constantly changing regulatory framework. In this area, Russian firms may be getting a taste of their own government’s medicine, as the Kremlin has long been accused by Western firms of changing the economic rules of the game in Russia in order to suit the Kremlin’s political interests.

While Mongolia is certainly interested in Russian investment, officials in Ulanbaatar know that competition will keep prices at their highest. So expect Ulanbaatar to do its best to keep ties strong with other neighboring states, including China and Kazakhstan. Last summer, for example, Mongolian officials expressed considerable interest in a highway project that would link Mongolia and Kazakhstan. Of course, China’s economic influence in Mongolia is still far larger than that of Russia.

It may well be that officials in Ulanbaatar want to expand economic ties with Moscow in part because they wish to balance China’s already strong economic presence. In this sense, Mongolia may end up serving a traditional role – acting as a proving ground, where the strengths and/or weaknesses of Russia’s relationship with China are put to the test.