Election controversy raises questions for Mongolia’s mining sector

2 July 2008

July riots signal the importance of transparency and responsible revenue management for Mongolia’s political stability.

On July 1, 2008, riots broke out in the streets of Ulaanbaatar, Mongolia’s capital city, following allegations of fraudulent elections.  Early results from the parliamentary elections on June 29 indicated the ruling party, the Mongolian People's Revolutionary Party (MPRP), had won the majority of seats. The opposition Democratic Party called the elections corrupt, leading to violence and protests at the MPRP headquarters.  According to government estimates, at least five people have been killed and around 400 people, mostly police officers, injured.  President Nambaryn Enkhbayar declared a four day state of emergency beginning Wednesday, July 2.

The unrest represents a departure from recent political progress in Mongolia.  The country has been a relatively stable nation in a neighborhood where authoritarianism is the norm and signs of the resource curse are easily visible.  Although debates over Mongolia’s resource management have been on-going, the elections reveal the potential problems of resource development.  Debate between Mongolia’s two main political parties centers on the nature of resource wealth distribution and the role of the Mongolian government in future development projects.  Mongolia is in the process of amending its Minerals Law and securing investments in two of its largest mineral deposits, Tavan Tolgoi and Oyu Tolgoi.

The current law allows the government up to a 50% stake in deposits discovered with state funds and a 34% stake in those discovered without state funds.  Like Kazakhstan’s new offshore oil development law, the proposed changes to Mongolia’s Minerals Law would require a minimum 51% stake for Mongolia in all mining projects.  However, the parties are split over who should hold that stake, with the MPRP advocating for the government and the opposition for private Mongolian companies.

Legislative deadlock over the Mineral Law changes and new mining agreements has created frustration for investors.  An expected MPRP victory boosted the stock of Ivanhoe, one of the companies seeking to develop the Oyu Tolgoi copper and gold mine.  Investors anticipated that the MPRP’s clear majority would secure passage of a mining agreement.  Development of the Oyu Tolgoi mine could increase Mongolia’s GDP by as much as a third.

The parties are also divided over revenue distribution.  The MPRP promotes a $1,300 cash reward to each citizen, modeled after the Alaska Permanent Fund, while the Democratic Party supports a “Treasure Share” of $860 to each citizen along with a “Bayan Mongol” mining corporation, of which all Mongolians would be shareholders.  Both proposals are aimed at winning over Mongolian voters.  However, given the experience of other resource-rich nations, including nearby Azerbaijan and Kazakhstan, some form of a natural resource fund is likely to emerge.  Mongolia’s small population offers the possibility for citizens to benefit from such a fund if transparency and good governance are ensured.

These issues reveal the complexity of managing resource wealth.  The international financial institutions (IFIs) are helping to shape policy in Mongolia both through support of specific projects and through technical assistance.  The European Bank for Reconstruction and Development (EBRD) has already agreed to finance the Mongolyn Alt Corporation (MAK) in the expansion of its coal mining operations, as well as a $50 million loan to Centerra Gold, which has operations in both Mongolia and the Kyrgyz Republic.  In addition, the World Bank approved a $9.3 million technical assistance project on June 26, which focuses on strengthening the government’s capacity to manage revenue, state equity, and the regulatory framework.  Parallel funding is expected from the ADB ($1.5 million) and the EBRD ($2.3 million).  This project has the potential to substantially influence the government’s stance on the Minerals Law, resource funds, and new mining contracts.

Mongolia has also made substantial progress in the Extractive Industries Transparency Initiative (EITI), supported by World Bank assistance.  The election riots highlight the importance of transparency at all levels of mining development.  If the public has adequate access to information, voters should be better able to make informed choices about the future of the country’s resource wealth and hold politicians accountable for decisions.  The unrest also evidences the fragility of Mongolia’s political stability and necessitates sound IFI policies that promote transparency and projects in the best interests of the Mongolian people and undertaken in consultation with diverse stakeholders, including civil society and communities impacted by extractive industries.

Media Sources

Inflation and mining are issues in Mongolia election, International Herald Tribune, June 30, 2008 (IHT website)

Mongolia's ruling party wins poll on mineral wealth issue, says election commission, Associate Press, June 30, 2008 (IHT website)

Five dead in Mongolia post-election violence, by Irja Halasz, Reuters, July 2, 2008 (Reuters website)

Mongolians vote in parliamentary elections; sharing mineral wealth a major campaign issue, by Ganbat Namjil, Associated Press, June 29, 2008 (IHT website)

• Mongolia may be closer to mine rules fix, by Andrea Niem, American Metal Market, July 1, 2008 (Factiva)
• IVN NP says rioting in Mongolia not good news for Ivanhoe, Canada Stockwatch, July 2, 2008 (Factiva)

IFI Sources

EITI Project (World Bank website)

MAK Mining Project (EBRD website)

Mongolia Mining Sector Technical Assistance Project, World Bank Report No. AB3749, May 2, 2008 (World Bank website, Acrobat pdf)

Mining Sector TA Project (World Bank website)

Centerra Gold Financing (EBRD website)

Resources

For more information on the mining sector, see BIC's Mongolia Key Issues page.