Behind the scenes

As Mongolia undergoes economic restructuring, leaked embassy documents show how behind the scenes large mining companies and the US Embassy force Mongolia into an unfavourable mining deal.

“When the Russians left and they pulled out all their support for the country – it was bad. Food was rationed and children who grew up or [were] born in those years are smaller and underdeveloped compared to other generations. That is how bad it was. Then the ‘IMF, Harvard University and Goldman Sachs type of development gurus’ decided to experiment and introduce a shock therapy by starting simultaneous political and economic transition to a market economy. Just as the economy was beginning to stabilise and grow, the World Bank decided to push the Mongolian economy towards growth based on mineral extraction. All the mining produce goes to China: Mongolia has been made fully dependent on a single industry and a single market. The IMF bailing out Mongolia for the sixth time in 2017 is what mining does to the economy.” – Sukhgerel Dugersuren, Oyu Tolgoi Watch – source

Mongolia and its historically nomadic population have gone through a tremendous economic transformation over the past three decades. Following the disintegration of the Soviet Union and Mongolia’s regained independence in the 1990s, the International Monetary Fund (IMF), World Bank and Asian Development Bank, amongst others, stepped in to provide financial and policy support – but this support came with a lot of strings attached.

Creativa Images via Shutterstock

Economic shock therapy

These strings came in the shape of austerity measures that were implemented in order to transform the centrally planned economy into one that favoured the market and reduced public control over resources by privatising state assets and downsizing and decentralising the public sector. By 1995, 95% of Mongolia’s public assets in livestock, trade and services had been privatised. The ‘shock therapy’ re-regulated the Mongolian economy in order to pave the way for foreign public and private investment – putting in place an institutional framework facilitating foreign direct investment so as to fully capitalise on mining as a central revenue source for the Mongolian economy.

This entailed deregulating the mining sector, allowing for extensive private property rights, and a corporate-friendly fiscal policy including a lowering of tax rates and mining royalties. Less state control and increasing funds made available by the international financial institutions attracted mining firms like BHP and later Rio Tinto to seek access to Mongolia’s substantial mineral wealth. The accompanying market relations and privatisation clashed with Mongolia’s historically communal use of resources, resulting in what even the IMF called a [expand title=”“painful transformational recession””]Reference: Cheng, K.C (2003) Growth and Recovery in Mongolia During Transition. IMF Working Paper, IMF. Available at: https://www.imf.org/external/pubs/ft/wp/2003/wp03217.pdf, (January 20, 2020).[/expand]

These policy reforms resulted in an institutional framework that was strongly conducive to foreign direct investment, including a series of loans from International Financial Institutions (IFIs). Two decades of focus on mining, demanding huge foreign investment, left Mongolia with a crippling debt and an excessive budget deficit.

In 2017, Mongolia received its sixth IMF bailout since 1990 – substantially increasing the country’s external debt and bringing with it a number of challenging conditions, including wage freezes and other austerity measures.

At the mercy of mining companies

The dependence on commodities such as copper, gold and coal has made the Mongolian economy vulnerable to volatile price fluctuations. This left the government politically at the mercy of mining companies’ demands and contributed to reduced public control over resources.

This diminished state control has attracted mining firms seeking access to Mongolia’s mineral wealth. And this backdrop has paved the way for the mining giant Rio Tinto’s arrival on Mongolian soil – the odds were stacked strongly against Mongolia when it came to negotiating a fair agreement right from the outset.

What WikiLeaks revealed

“Having joked privately that ‘we will be lucky if only 80% of the public opposes the plan’, chief GoM[6] [7] [Government of Mongolia] negotiator Ministry of Finance State Secretary Khurelbaatar is anxious to shepherd the [Oyu Tolgoi] deal through to cabinet and parliamentary approval with minimal public agitation before the State Great Hural’s (parliament) summer recess at the end of July. Ivanhoe [the Canadian mining company that originally owned the Oyu Tolgoi mine], silenced by a non-disclosure clause in the agreement, has reacted to perceived missteps and misstatements about the deal ‘with mouths bloodied from biting our tongues so hard,’ according to their reps. Although the deal has not yet produced street demonstrations on the scale of those held in January 2006, a small but vocal groundswell of opposition has begun to congeal…” - US Embassy July 2007 diplomatic cable, Ulaanbaatar, Mongolia

Source: US Embassy July 2007 diplomatic cable, Ulaanbaatar, Mongolia, via Wikileaks

The US Embassy in Mongolia. Image by Chinneeb, via Wikimedia CC0

Compromising diplomatic cables sent from the US Embassy in Ulaanbaatar, Mongolia between 2006 and 2010 and leaked to the website WikiLeaks provide a revealing insight into how the Mongolian government was cornered into signing a deal on the mine at Oyu Tolgoi. SOMO’s researchers uncovered troubling new evidence that reveals which arguments different parties brought to the negotiating table and how economic and geopolitical interests come into play.

While the Mongolian government struggled to manage the overwhelming political and economic weight of the Oyu Tolgoi mine, several ‘Western’ economic interests aligned with the mining companies – and against the interests of China and Russia – to the detriment of Mongolia.

As a result, a number of powerful national and international actors colluded with Rio Tinto and Ivanhoe Resources, the Canadian mining company that originally owned the mine, to pressure Mongolia into an agreement that favours international corporate interests over Mongolian public needs. The cables reveal in damning detail how Mongolian politicians struggled to broker the agreement on Oyu Tolgoi without coming across as if they were selling out to foreign interests.

The US Embassy, in the leaked cables, repeatedly describes itself as a mediator between the government of Mongolia (often referenced as ‘GOM’ or ‘GoM’) and Oyu Tolgoi’s investors. The Embassy – or ‘Post’ – describes its diplomatic efforts as follows:

Source: US Embassy August 2009 diplomatic cable, Ulaanbaatar, Mongolia, via Wikileaks

While positioning itself as an interlocutor between the Mongolian government and Oyu Tolgoi’s investors, the US shows a clear interest in Oyu Tolgoi’s development going through. To quote Embassy personnel, failure to reach a deal on Oyu Tolgoi before 2009 had “cost U.S. export interests an estimated USD 200 million in equipment sales and other contracts” (source).

Mining machines. Image by Alex Banner via Pixabay CC0

Oyu Tolgoi was also seen as the first big mining deal that would show Mongolia was open for business, while US coal mining company Peabody Energy had its eyes on Tavan Tolgoi, a huge coal reserve  that would provide energy to Oyu Tolgoi with the construction of a coal-fired power station.

“For U.S. commercial interests [in Mongolia] such as mining firms Peabody Energy and Rio Tinto and equipment makers Caterpillar, Ingersoll-Rand, Bucyrus, and John Deere, mining is THE industry [in Mongolia] that will provide the income necessary to ensure long-term purchases of U.S. goods and services.” (July 2009)

Source: US Embassy July 2009 diplomatic cable, Ulaanbaatar, Mongolia, via Wikileaks

The Oyu Tolgoi negotiations were a perfect vehicle for the US to strengthen its economic presence and diplomatic standing and lobby for Rio Tinto and Peabody Energy:

“The Department of Commerce, through its Advocacy Center, has granted advocacy support to both Peabody and Rio Tinto, recognizing that their involvement at Tavan Tolgoi and Oyu Tolgoi, respectively, offers substantial, long-term export potential for U.S. manufacturers, as well as promoting U.S. free-market and democratic goals for Mongolia.” (February 2008)

Source: US Embassy February 2008 diplomatic cable, Ulaanbaatar, Mongolia, via Wikileaks

“Woefully amateurish Mongolians”

The US embassy provided this support to Rio Tinto while being aware of the existing disparity in negotiating capacities between the company and the Mongolian government. In diplomatic cables embassy personnel shared opinions that Mongolia had suffered from a lack of world-class expertise at the negotiating table, writing: “past negotiations have pitted woefully amateurish Mongolians against the deeply skilled agents that corporations like RT can bring to the table.” (source) By throwing its political weight behind Rio Tinto, the US embassy increased the existing gap in negotiating power between Rio Tinto and Mongolia, weakening Mongolia’s position.

Image by Tim kwee via Flickr CC2.0

A “success for US diplomacy”

When the Investment Agreement was signed in 2009, Embassy officials called it “a success for U.S. commercial diplomacy [which] has cemented the U.S.’s position among the key players in crafting these sorts of agreements in Mongolia.” – [expand title=”source”]Source: Wikileaks [/expand] Construction of Oyu Tolgoi’s mine and facilities was set to start, and was subcontracted to US contractor Fluor Corporation, employing 2,000 Chinese workers.

Chinese construction worker in nearby Khanbogd. Image by Bankwatch, via Flickr CC2.0

The Embassy’s own analysis concluded that Mongolia’s economic woes in 2008 had pushed the government to agree to a deal that supposedly balanced its own interests and those of the investors. Brief mention was made in Embassy accounts of lingering concerns among some of Mongolia’s donor countries, which were worried that the government had given away too much in the deal.

According to the US Embassy, “The GOM must claim that it stuck it to the foreign investors, or risk being savaged by its political opponents as selling out Mongolia” (February, 2007) – [expand title=”source”]Source: Wikileaks[/expand]

The cables also reveal how the US embassy influenced the negotiating process regarding the Oyu Tolgoi investment agreement, driven by a very clear ideological position: in favour of the market approach and against interference from China:

“Post and mining firms have engaged in quiet efforts to lay the groundwork for a more market-oriented approach following the 2008 Parliamentary/2009 Presidential election cycle.” (March 2008)

Source: US Embassy March 2008 diplomatic cable, Ulaanbaatar, Mongolia, via Wikileaks


“…without western firms (and their Governments) to counter-balance Chinese and Russian influences, Mongolia would essentially have to cede its economic independence to whichever neighbor gained control of the asset and the rights to operate it.” (February 2008)

Source: US Embassy February 2008 diplomatic cable, Ulaanbaatar, Mongolia, via Wikileaks

Under pressure from all sides

Mongolia’s geographical position between Russia and China makes it an important country strategically for the US and other ‘Western’ countries. In order to keep itself from being dominated by one of its two powerful neighbours, Mongolia introduced the so-called ‘Third Neighbour Policy’. This policy entails strengthening diplomatic relations with other countries, in order to balance the influence of its geographical neighbours.

In a meeting between diplomats from several of Mongolia’s donor countries and representatives of ‘Western’ business operating in the country, the British Ambassador to Mongolia characterised the impact of the Third Neighbour Policy as follows:

“[The British Ambassador to Mongolia] noted that Mongolia had not really grasped the implications of its ‘Third-Neighbor’ policy. Her Majesty’s government was reconsidering its level of engagement with Mongolia because Britain had little of substance on the ground. If Mongolia wanted the British relationship to continue or increase, it had to do what was necessary to get British investment. If Mongolia really wants to balance China and Russia with investment and political support from Britain, the U.S., Canada, Japan, etc., then it must create and sustain an environment conducive to investment[17] .” (January 2008)

Source: US Embassy January 2008 diplomatic cable, Ulaanbaatar, Mongolia, via Wikileaks

The US was central but not alone in its diplomatic efforts to encourage Mongolia into the Oyu Tolgoi deal with Turquoise Hill Resources. In January 2008, Canada’s then International Trade Minister David Emerson visited Mongolia and held meetings with Mongolian government representatives, various diplomats, and representatives of corporations active in Mongolia. In one such meeting, organised by the North America-Mongolia Business Council – an interest group for multinationals in Mongolia – a discussion took place on the strategic cooperation these actors could employ to best service their interests in the country:

“During the January 10 breakfast, Minister Emerson and his delegation also heard a range of viewpoints regarding the GOM’s approach to mining. Mining representatives delivered consistent points to the Minister. Firms stated they are able and willing to handle the commercial aspects of their respective businesses, but they want and need foreign governments to project a united front to the GOM to cover their political flank. In short, the mining companies told Canada to join U.S., British, Japanese, Australian and German efforts to encourage (cajole, harangue, etc.) the GOM into staying out of the mining business while creating a transparent, predictable, best practice-based, rule of law approach to regulating and profiting from its resource base. The British Ambassador echoed these sentiments. […]

Source: US Embassy January 2008 diplomatic cable, Ulaanbaatar, Mongolia, via Wikileaks

Source: US Embassy January 2008 diplomatic cable, Ulaanbaatar, Mongolia, via Wikileaks

A done deal

Although some of these talking points – such as transparency and rule of law – are not controversial, the cables show how negotiations were set up to serve multinational corporate interests rather than Mongolian public interests. The collaborative effort by the business community, large corporate mining interests and powerful states to encourage the Mongolian government into a deal on Oyu Tolgoi is likely to have limited the Mongolian government’s negotiating power and ability to safeguard its country’s interests in negotiations with mining giant Rio Tinto.

That states like the US, Canada or Britain would “cajole” and “harangue” the Mongolian government into a laissez faire attitude towards the mining industry exposes how Mongolia’s democratically elected government was approached and influenced by foreign diplomatic services. It also reveals how these states value corporate interests over democratic values.

Peshkova via Shutterstock

The plans to diplomatically pressure Mongolia on Oyu Tolgoi, discussed during the January 2008 breakfast meeting, came to fruition after a turbulent election year that ended with Mongolia facing the impacts of the global financial crisis and falling commodity prices.

As negotiations on Oyu Tolgoi appeared to be breaking down, and Mongolia was researching the option of replacing Rio Tinto and Ivanhoe Resources with Chinese or Russian investors, the US Embassy coordinated with other donor countries to push through a deal. Together, they “sent a clear and credible, message to the GOM that it was in Mongolia’s best interest to work out its disputes with the Western firms, and to the companies that the GOM was committed to reaching a deal” – [expand title=”source”]Source: Wikileaks[/expand]

Mongolian manoeuvre

The stakes were high for all parties concerned, for the US the geopolitical interest in the region as well as advancing its companies, for the miners access to a potential jackpot of copper and gold, and for the Mongolian politicians both political and economic gain. The cables show how Mongolia’s room to manoeuvre in deciding its own development trajectory was curbed by the global political economy where corporate interests are supported and protected by international diplomacy. During the negotiation of the Oyu Tolgoi Investment Agreement, the Mongolian Government struggled to make the deal acceptable to the Mongolian people.

Information panel on civil initiative against uncontrolled mining. Image by Bernd via Wikimedia CC2.5

From the cables, we learn that four issues were central during the negotiations:

  1. The equity stake of Mongolia in the mine ranging from 31% to 51%, and whether this equity would have to be paid for (via a loan from Rio Tinto) or would be Mongolia’s sovereign ownership.
  2. The importance of local energy (Tavan Tolgoi) to supply Oyu Tolgoi rather than importing energy from China.
  3. Retaining value in Mongolia, either through taxation, value added processing (a smelter) or through other national commercial services (such as banking).
  4. Convincing the Mongolian people that the agreement does not undersell Mongolia’s wealth.

Negotiations on the Oyu Tolgoi Investment Agreement were turbulent and controversial. The GoM initially moved from seeking an agreement quickly in 2004 under the leadership of Prime Minister Enkhbayar (MRPR), to being more critical after elections and increasing social unrest in response to mining activities.

Following public outcry over the perceived sale of Mongolia’s mineral assets to foreign investors, the GoM introduced a 68% Windfall Profits Tax in 2006. Continued public resistance to the project appears to have led Mongolian politicians to repeatedly call for what they considered a better deal for Mongolia. In 2007, the same Enkhbayar, now President, called for a 51% Mongolian equity stake in the mine. During the 2008 election cycle both major political parties adopted this demand.
Within the US Embassy, the perception was that Mongolian Government officials, the media and Rio Tinto had oversold Oyu Tolgoi to the Mongolian people.

Both Rio Tinto and US Embassy officials were reportedly aware of the fact that Oyu Tolgoi would not pay dividends to the GoM for many years, as profits would first go to repaying the debt Mongolia took on to finance its 34% share of the project. In order to cover for this discrepancy, Rio Tinto agreed to provide the GoM with a US$ 250 million loan following the signing of the Investment Agreement. Embassy personnel describe the arrangement as follows:

“As a carrot, if some solution could be found, RT has indicated a willingness to deliver advance payments to the GOM... The GOM, Parliament and the various parties have already promised voters rewards from mining, and the advance payments would certainly be needed to honor election commitments (a point not lost on any of those involved in this dispute).”

Source: US Embassy March 2008 diplomatic cable, Ulaanbaatar, Mongolia, via Wikileaks

The Oyu Tolgoi Investment Agreement (OTIA) was signed in August of 2009. In 2015, the financing of the underground phase of Oyu Tolgoi was signed in Dubai. Three of the politicians involved were charged with corruption. It concerns a former Mongolian minister of Finance, Bayartsogt Sangajav, and two (former) Prime Ministers, namely S. Bayar, and Ch. Saikhanbileg (who was prime minister when the 2015 Dubai agreement was signed). The three were included in a criminal investigation into corruption by the Swiss Justice Department. Bayartsogt had been linked to undisclosed Swiss bank accounts by Offshore Leaks in 2010.

All of them were arrested and released soon after, but Bayartsogt was re-arrested in January 2019. Early 2020, Mongolia’s General Police Department put a WANTED ad on its website showing former prime minister Ch. Saikhanbileg – with an announcement offering a substantial reward for information about his whereabouts.

Financial instability: The role of the IMF

With its loan packages acting as lifelines to the Mongolian government, the IMF is a hugely powerful actor in Mongolia. Within the IMF, voting rights are divided between member countries based on the amount they contribute to the fund. With 16.5% of the IMF total voting rights, the US is by far the largest contributor to the IMF, and as such has a de facto veto right. The dependence of Mongolia on the IMF makes it even more susceptible to US influence.

IMF Building. Image by Javier Ignacio Acuña Ditzel via Flickr CC

This dependence was powerfully illustrated in February 2017, when the Mongolian government and the IMF agreed on the latest loan package. At that time, Mongolia’s parliament was working on banking legislation that would require all foreign multinationals to use local commercial banks to transfer funds in and out of the country. The law, announced in April 2017, was meant to increase the country’s foreign currency reserves, while also strengthening the Mongolian banking sector.

Having corporate financial transactions flow through Mongolian banks has been on the political agenda since 2013, when then President Elbegdorj of the Democratic Party stated publicly that – like other companies in Mongolia – Rio Tinto should have all of Oyu Tolgoi’s financial transactions go through Mongolian banks. In 2013, he told an open parliamentary meeting: “Since they operate in Mongolia, they should contribute to the nation’s development.” – [expand title=”source”]See UB Post[/expand]

In response to the new banking law, Rio Tinto reportedly filed a complaint with the IMF voicing its opposition. Rio Tinto uses clause 9.4 of the OTIA to protect its ability to manage its financial transactions without any obstructions. The IMF withheld the lending package shortly afterwards. At the time, a senior member of the ruling Mongolian People’s Party said:

“Without the grant from the IMF Mongolia can’t move forward … Because the economy is in a dire state, Mongolia first needs to be part of the grant, after that we will discuss whether foreign investment should go through a Mongolian bank.” – [expand title=”source”]Reference: Bayartsogt, K. May 2, 2017, https://asia.nikkei.com/Politics/Mongolia-to-revise-new-law-after-IMF-postpones-bailout2 , (April 26 2019).[/expand]

Within three days, Mongolia’s legislature cancelled the law. On 24 May 2017, the IMF approved a three-year loan under the Extended Fund Facility for US$ 425 million. The loan is part of a financing package for a total of US$ 5.5 million provided by the IMF, Asian Development Bank, World Bank, Japan and China.

This power dynamic raises questions over the negotiating space Mongolia has in dealing with Rio Tinto. It underlines the extent to which it is able to defend Mongolian priorities in the face of corporate power backed by powerful international financial institutions like the IMF and the World Bank.

With global financial architecture determined by a very corporate-aligned definition of development, the outcome is seldom positive for resource-rich countries like Mongolia. In fact, a report commissioned by the World Bank in 2003 – the [expand title=”Extractive Industries Review (EIR)”]Reference:
Salim, Emil, 2003, Extractive Industries Review : Striking a better Balance, Vol 1, The World Bank and the Extractive Industries. World Bank. Downloadable via https://somo.nu/2Sgq5gt. Accessed August 7, 2018[/expand] – reveals that the majority of resource-rich states suffer from violent conflict and civil strife, and that a negative correlation exists between extractive industry dependence and economic growth. Contracts signed between governments and corporate parties lock countries into trajectories that do not allow for environmental and social regulation in the future.

In spite of these unsettling findings, however, the World Bank has continued to promote the expansion of large-scale mining and the need for generous investment incentives to attract foreign investment in countries like Mongolia. This translates into policy that deregulates, liberalises and privatises the mining sector – providing it with fiscal ease, stripping state interference and minimising public control. Not a happy combination…

Coal mine of Tavan Tolgoi JSC. Image by Brucke-Osteuropa via Wikimedia CC0

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