Mongolia’s Mining Boom Has Environmental Costs

Sunday 12 October 2014

Date: 3 October 2014

Type: Commentary

Source: Silk Road Reporters

Keywords: Mining, environmental destruction

Mongolia, uncomfortably sandwiched between Russia and China, has seen its economy swing to extremes ever since the 1991 collapse of its closest trading partner and political mentor, the USSR. Attempts to move Mongolia’s economy from a centrally planned one, largely based on agriculture, to capitalist free market principles have been mixed at best. Even nature seemed to conspire against Mongolia at times, as extreme weather in 2000 and 2009 decimated livestock herds.

Mongolia’s economy subsequently would increasingly turn its untouched mineral riches, close to both industrialized Russia and resource hungry China. The nation is essentially empty, with its 2.8 million citizens producing an average population density of just over 1 person per sq. km., one of the lowest rates in the world. Mongolia’s mining sector has some of the world’s richest deposits of gold and copper, uranium, coal, fluorspar as well as rare earth elements (RREs) such as tantalum, niobium, thorium, yttrium and zircon. According to a 2009 estimation by the U.S. Geological Survey, Mongolia has 31 million tons of rare earth reserves, or 16.77 percent of the world’s total, exceeded only by China. In 2006 Mongolia’s Mineral Law was amended to increase government royalties and licensing fees, reduce tax incentives, set duration terms for exploration licenses, and provide for up to 50 percent government ownership of strategically important resources when jointly funded by the state and private investors. On 25 August 2009 the Ulsyn Ikh Khural (State Great Hural, or Parliament) finally repealed the 68 percent windfall profit tax.

As a result, foreign capital came flooding in, and by 2011 Mongolia was feted as having the fastest growing economy in the world with a gross domestic product (GDP) increase of 17.3 percent, roughly $13.38 billion, due to the mining of its mineral assets, primarily coal, copper and gold. Beginning in April 2010, Mongolia’s benchmark MSE Top 20 Index became the world’s best performer and its currency, the tugrik, the fifth-biggest gainer against the dollar. In early 2011 the International Monetary Fund predicted that Mongolia’s economic growth could surge to 23 percent in 2013, more than twice the growth rate forecast for China. Then politics intervened in the form of political disputes over mining laws, with the World Bank downgrading Mongolia’s GDP growth to 11.7 percent in 2012; by Sept. foreign direct investment (FDI) was down 44% compared to the year before, which further shrank Mongolia’s GDP growth to 10 percent in 2013. For better or worse, Mongolia’s mining industry now comprises roughly 30 percent of the country’s GDP, while industrial manufacturing has shrunk to only 5-8 percent from a high of 35 percent in the Communist era.

Ground zero for the mining investment disputes was a fracas over the $7 billion Oyu Tolgoi gold and copper mine, begun in 2009 with foreign FDI. In Oct. 2011 Canada’s Ivanhoe Mines and Rio Tinto formally notified the Mongolian government they were unwilling to renegotiate their investment agreement, under which Ivanhoe Mines, of which Rio Tinto owns 49 percent share, held a 66 percent interest in the project, with the Mongolian government retaining the remaining 34 percent. Oyu Tolgoi is now roughly 50 percent complete, and Rio Tinto, now sole owner, had hoped to begin wide-scale commercial production of copper, gold and silver concentrate in early 2013. Oyu Tolgoi, the world’s biggest untapped copper deposit, is expected to produce 1.2 billion pounds of copper, 3 million ounces of silver and 650,000 ounces of gold per year in its first decade of operation. Rio Tinto and the Mongolian government have clashed in the past over the size of Mongolia’s stake in the giant copper and gold mine, most recently over tax bills.

On Sept. 17 Mongolian Vice Minister of mining Oyun Erdenebulgan confirmed that the government would settle an outstanding $130 million tax bill against Rio Tinto for a $30 million. The dispute had delayed agreement on how to finance the proposed second stage expansion of the mine, how to build it and various mine permits. The overall project is earmarked to generate about a third of Mongolia’s national income by the time it reaches full production in 2021.

A 2012 law aimed at restricting foreign ownership in certain “strategic” sectors of the Mongolian economy, which was later reversed, dramatically impacted foreign investment, which fell 70 percent in the first half of 2014. Government official data showed that for Jan.-June 2014, Mongolia’s economy grew 5.3 percent, compared with 11.7 percent in 2013.

Worse, much of the money brought in by the mining sector was mismanaged. Recently, when asked about a World Bank report criticizing the government’s inept financial policy vice minister of economic development Chuluunbat Ochirbat replied, “These comments and remarks are true. We have learnt a good lesson. We didn’t spend the money in a positive way or properly. Before 2012 we collected money into a human development fund that was designed as a welfare fund, but just prior to the election we spent all the money in the fund.”

The stampede of foreign investors for the exit brought renewed interest from Mongolia’s neighbors. On Sept. 3 Russian President Vladimir Putin’s visited Ulaan Baatar, committing with Mongolian President Tsakhiagiin Elbegdorj to boosting bilateral trade from $1.6 billion in 2013, down 16 percent from 2012, to $10 billion by 2020, primarily by cooperating in railway and transportation development. Although Russia owns 51 percent of Ulaan Baatar Railways and 49 percent of state-owned Erdenet copper mine, bilateral trade with Mongolia has been dropping steadily in recent years.

Enter the Dragon

For more than a decade, China has been Mongolia’s largest trading partner and largest source of foreign investment. For the period 1990-2012, roughly half of the 11,642 foreign enterprises registered in Mongolia were Chinese. For the same period, $3.48 billion of Mongolia’s $9.83 billion in foreign direct investment (FDI) came from Chinese companies. In 2013 trade with accounted for more than half of Mongolia’s total foreign trade, with the two nations also hoping by 2020 to boost bilateral trade to $10 billion annually. During last month’s state visit by Chinese President Xi Jinping, the first by a Chinese head of state since Hu Jintao in 2003, China and Mongolia signed 26 new deals on railroads, mining and power generation. If these projects are implemented, they would represent Mongolia’s most significant economic development since the 2009 Oyu Tolgoi agreements.

But the mining boom and subsequent increased demand for energy have in turn brought additional problems. Mongolia needs new power plants to replace aging and increasingly decrepit Soviet-era power infrastructure that is now reaching peak capacity, as consumption grows in the capital Ulaan Baatar and the electrical grid is extended to communities in remote parts of the country.

And these require water, putting further stress on Mongolia’s fragile ecology. Until several years ago, Mongolia’s agricultural sector was country’s the dominant consumer of water. Four years ago, Mongolia’s agriculture sector consumed 55% aquatic resources, with 31% diverted for irrigation and 24% for livestock, while mining utilized 13% and energy production 11%. Mongolia’s rising mining industry is now a contender for the country’s limited water reserves. A recent Asia Development Bank study noted that last year mining now accounted for 82% of Mongolia’s exports and 18.5% of the nation’s GDP, and the demand for electricity is projected to increase 500% from 2012 to 2030. Utilizing the country’s vast coal reserves, most of the rising demand for electricity is projected to be met by coal-fired thermal power stations, which use water for cooling, while mining operations need vast amounts of water for production. Even worse, the new energy facilities and the new mining operations are to be located in water-scarce areas.

The country’s economic progress is increasing leading the Mongolian government to a stark choice – prosperity or pollution. If the Riot Tinto settlement is anything to go by, the Mongolian government has already chosen the former option.

Dr. John C. K. Daly is a non-resident Fellow at the Johns Hopkins Central Asia Caucasus Institute in Washington DC.

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