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The Mysterious Sale of Mongolia’s Erdenet Mine

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The final decision to sell Erdenet was evidently taken in Tashkent in late June, during the recent session of the Shanghai Cooperation Organization. It remains unclear what promises, if any, Putin received for his agreement to the deal. It is hard to imagine that he simply signed away two of the three pillars of Russian influence in Mongolia without getting something in return. After all, $400 million dollars is really not that much for Russia, even in times of sanctions and austerity.

“I will talk about the good news today. It’s been nothing but good news as of late.” Fiddling with a set of paper pads, Mongolian Prime Minister Chimed Saikhanbileg half-read, half-spoke to a small crowd of journalists. Behind him, Chinggis Khan looked on from the wall, unperturbed. The good news, Saikhanbileg said, was that at last Mongolia would gain full ownership of a sprawling copper mining complex, Erdenet, which it had until then shared with the Russians. Another colonial legacy buried at last. A day to be proud of – a day to remember forever, or at least until the next morning.

In the morning of June 29, Mongolia went to the polls. The electoral contest that pitched the ruling Democratic Party against its main challenger, the Mongolian People’s Party, was resolved by midnight. The democrats faced an astounding rout: 65 of the 76 seats in the Parliament went to the MPP, leaving the demoralized, fractious, tired Democratic Party with only nine. If Saikhanbileg expected to arouse patriotic sentiment, he badly miscalculated. The promise of Erdenet did not help his party. Saikhanbileg, too, was trampled over in the political melee, losing his parliamentary seat and his premiership.

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But even as Saikhanbileg stepped aside, questions remained: what exactly was on that piece of paper that he waved in front of the journalists on the day before the elections? Who bought Erdenet, how and why? And who will benefit as one of Mongolia’s largest mining ventures changes hands? There are also lingering geopolitical questions: why did Vladimir Putin agree to relinquish such a significant asset in a neighboring country where, by all accounts, Russia is striving to preserve and increase its leverage?

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Erdenet is Mongolian for “treasure.” Legend has it that in the old times Chinese prospectors mined the site but they were killed by a bolt of lightning. The Russians fared better. In 1973 the Soviet and Mongolian governments established a joint venture to develop a copper and molybdenum mine at what still is one of the largest deposits of copper ores in the world. Production began in 1978. Erdenet was not just a factory; it became Mongolia’s third largest city – an agglomeration of ugly apartment blocks clustered to the side of a gargantuan Martian-red pit.

Copper was shipped to the USSR at below-market prices, fueling Mongolian frustration with the semi-colonial economic relationship. The collapse of the Soviet bloc changed that. In 1991 the original joint venture agreement was updated, leaving Mongolia with 51 percent of the enterprise to Russia’s 49 percent. This was not a relationship made in heaven. The Russians had little control over the venture. Until 2011, when Mongolia repealed its windfall profits tax, 90 percent of the profits were siphoned off as taxes, leaving little to Russia.

Still, from Moscow’s perspective, Erdenet was an important strategic asset. Having lost ground in the 1990s (mostly to China, now by far Mongolia’s largest trading partner), the Russians took comfort in the clout afforded by their joint ventures in Mongolia: the trans-Mongolian railroad, the company Mongolrostsvetmet (which mines fluorite, gold, and iron ore), and, of course, Erdenet – the three pillars holding up the imposing dome of Russia’s fading economic influence.

Economically, though, these assets are something of a drag. The aging railroad requires investment of capital for repairs and upgrades, something Russian Railways – a 50 percent owner of the railroad – has had to commit to in the hope of leveraging its presence in Mongolia to gain access to important copper and coal deposits in the Gobi desert. Meanwhile, Erdenet and Mongolrostsvetmet, though not losing money as had happened in the past, yield very insignificant profits. In 2015 consolidated profits of both assets are said to have been a paltry $4.6 million.

The tumbling of copper prices since 2011 have hit Erdenet hard, eating into profits. In Moscow, there was mounting frustration with the bureaucratic obstacles of managing the joint venture, and with the unwillingness of the Mongolian-run management to consult with the Russians on key operational questions. The Russian shareholders – at least those with a modicum of economic sense – could not be blamed for wondering: what’s in it for us? So when the Russians were offered a hefty $390 million for their stake in Erdenet and another $10 million for Mongolrostsvetmet, it is perhaps not so surprising that they decided to cash in.

But then, again, the value of these assets for Russia was not in the profits that they consistently failed to deliver. The value was in the leverage they afforded, and in their genealogy, which goes back to the heyday of the unbreakable Russian-Mongolian friendship. The Russian shareholder – the state-owned company Rostec – would have needed the government’s approval to pull out of such an important geopolitical investment. This means, in practice, agreement from Putin. And Putin does not always follow the money.

The final decision to sell Erdenet was evidently taken in Tashkent in late June, during the recent session of the Shanghai Cooperation Organization. It remains unclear what promises, if any, Putin received for his agreement to the deal. It is hard to imagine that he simply signed away two of the three pillars of Russian influence in Mongolia without getting something in return. After all, $400 million dollars is really not that much for Russia, even in times of sanctions and austerity.

But if the Russian side of the story remains murky at best, the Mongolian side is mired in an outright scandal. When Saikhanbileg advertised the agreement on June 28, he made a lot of the fact that Erdenet would now be a 100 percent Mongolian company. But it was not as good as it sounded. It was not the State that was buying the 49 percent Russian stake. It was, rather, a private entity, the Mongolian Copper Corporation, fronting for one of the country’s large private banks, the Trade and Development Bank.

This is where the message backfired. Instead of inspiring voters with the announcement of the imminent return of important economic assets to Mongolia, Saikhanbileg put them off: Putin was simply being replaced by anonymous oligarchs. A key strategic asset was being sold down the river to a private bank, and the Mongolian government, not getting a tugrug­-worth from the deal, did not seem to mind. Ney, the prime minister cheered at the transaction!

The opposition parties screamed bloody murder. Surely, there had to be consultations. The terms of the Erdenet agreement required that the Russians first offer their stake to the Mongolian government and only if the government turned it down could a third party be brought into the deal.

According to our sources, there in fact was consultation between the two governments – but it was all done in secret. On June 13 the Mongolian Foreign Ministry sent a note to Russia approving the transaction. The sale was sealed within days, and the money was promptly wired. The Mongolian Copper Corporation – an entity registered at a private apartment in one of Ulaanbaatar’s rundown middle class neighborhoods – borrowed $200 million from the Trade and Development Bank, and came up with another $200 million from its own, undisclosed, sources. The head of the Corporation, the 28-year old Tsooj Purevtuvshin – known to his friends as “Tush” – was not available for comment.

The only thing known about Purevtuvshin is that he is a young man of modest means and that he studied International Law at Mongolian National University before working, briefly, as a legal adviser to the Trade and Development Bank.

Our effort to locate the phantom corporation led, strangely enough, to the office of Bloomberg TV – Mongolia.

The deal was in the making for two years. “The negotiations were carried out in utmost secrecy,” the CEO of the Trade and Development Bank Onon Orkhon told us. “There were external and internal forces that could hinder the deal. These were not just market forces. There were many interested buyers in Russia, Kazakhstan, and China.” Russian sources have confirmed the picture. The head of Rostec Sergey Chemezov – keen to sell the assets – reportedly spoke to Putin twice before winning him over. At least some officials at the Russian Foreign Ministry, including Deputy Minister Igor Morgulov, are said to have strenuously opposed the sale.

The agreement was signed on June 24, four days before the prime minister announced it to the startled Mongolian public. Within days the old Russian-Mongolian management board was dissolved. On June 27, “Tush,” as the head of the Mongolian Copper Corporation, and the Mongolian Ministry of Finance issued a joint decree, mandating the current Erdenet management to refrain from taking any actions or disposing of any property. The decree also appointed an overseer, Dugree Tserenbadam, who turned up at the factory in the company of four bodyguards. The company’s current 6,000 staff, surprised by these dramatic developments, are pondering their fate.

The Mongolian mining sector is well known for its corruption. The signing and ripping of contracts, the constant political infighting, and the swelling tide of resource nationalism, have marred many a mining deal. Foreign investors, like Rio Tinto, have felt the heat. Many others were spooked by Mongolia’s uncertain political and legal environment, which contributed to the country’s rapid slide from the world’s fastest-growing economy in 2011 to its present miserable and worsening state.

The problem – and here the foreign investors are very much in the same boat or, shall we say, riding the same camel as the Mongolian public – is that the lack of transparency in mining deals hurts everyone: the voters who have the right to know how their country’s key assets are being dealt with; companies denied the right to compete in an open and fair manner; and of course the State itself, misused for private gain, and so ultimately delegitimized.

Saikhanbileg’s announcement on the day before the elections was hardly “good news.” It was, rather, mostly bad news: a surprise that set off a maelstrom of recriminations not just from the clueless public and the civil society but also from the ascendant political forces. The Democratic Party did not expect to be so badly beaten at the polls. Now that it has been, its 11th-hour business deals will be closely scrutinized and possibly challenged by the new power brokers, leading to the sort of prolonged malaise that the country’s mining industry and the struggling Mongolian economy are unfortunately all too familiar with.

source: thediplomat.com

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