(Refiles to clarify situation of SouthGobi Resources in
* Mining investors worry about increasing resource
* Corruption charges against opposition politician
fabricated, family says
* Case could give opposition party an edge in June elections
By David Stanway and Terrence Edwards
ULAN BATOR, May 19 Mongolia's bid to discredit
one of its most popular opposition politicians, a staunch
supporter of resource nationalism, could backfire and strengthen
his party in approaching elections, putting at risk mining
investments in the central Asian nation.
Former president Nambar Enkhbayar, freed on bail this week
over corruption charges his family says were fabricated, is the
most popular figure fighting the June 28 election, opinion polls
showed just before his arrest on April 13.
Conspiracies abound in Mongolia, a former Soviet satellite
that has become one of the world's most attractive investment
destinations with first-quarter GDP growing 16.7 percent, and
some speculate the robustly nationalist stance of Enkhbayar,
president from 2005 to 2009, played a role in his arrest.
He wants to renegotiate a landmark 2009 deal that gave 66
percent of the huge Oyu Tolgoi copper project to Canada's
Ivanhoe Mines, and also says the 7.5-billion
tonne Tavan Tolgoi coal mine - expected to be listed on overseas
stock exchanges next year - should remain in Mongolian hands.
Enkhbayar is likely to emerge stronger as a result of his
arrest, said Luvsandendev Sumati, director of the Sant Maral
Foundation, which polled voters in April.
"I think the aura of victimisation will boost his
popularity," he said, adding that a surge in his support would
make it less likely that a single party could form a government.
Enkhbayar leads the Mongolia People's Revolutionary Party
(MPRP), a breakaway faction of the ruling Mongolia People's
Party (MPP). Before his arrest, he was expected to be a
kingmaker in the new parliament.
"He is the father figure for resource nationalism, and the
MPRP will definitely try to capitalise on this and maximise
their chances to get more MPs in parliament," said Dale Choi, an
analyst with Ulan Bator-based Frontier Securities.
"In parliament they will pursue their resource nationalism
agenda, which will create more trouble for foreign investors."
ANTI-INVESTOR LAWS, DELAYS
More anti-investor legislation would be worrying, but an
extended period of post-election uncertainty could also further
delay action on crucial issues such as new mining laws and the
development of Tavan Tolgoi.
The Tavan Tolgoi pact has been postponed several times, and
its IPO has been delayed as the government struggles to find a
way to satisfy domestic and foreign interests.
"We aren't sure who will win (the election) and I don't
think this uncertainty is very helpful if Mongolia is to pass
the laws it needs to pass," said a foreign mining executive.
Foreign investors have long coveted Mongolia's largely
untapped mineral reserves, which have been valued at about $1.3
trillion, banker Macquarie says, even though just 27 percent of
the country has been geologically mapped.
Its coal and copper deposits are among the biggest in the
world, and southern neighbour China is a guaranteed market.
But while worries about Mongolia's frail legal system and
volatile politics may have been sharpened by the arrest, few
think the country - central Asia's only democracy - faces an
extended period of disruption.
"I genuinely see it as electioneering and jostling by the
candidates," said Eric Zurrin, chief executive of Resource
Investment Capital, a fund with interests in Mongolia.
Foreign investors were already alarmed by a bid by
vote-hungry rebel lawmakers to pass a law to ensure majority
state ownership in strategic sectors such as mining and banking,
but Zurrin said stability would return once votes are
"Naturally foreign investors are cautious but this is
exactly what we saw in Peru last year prior to the election,
which then calmed substantially after a new government was
Experts say Mongolia's courts remain weak and vulnerable to
political pressures, and even Enkhbayar's fiercest critics
concede the case against him has been handled badly.
"The main political troublemaker in this country is
Enkhbayar himself, and there has definitely been an attempt by
our political elite to isolate and neutralise him," said Sumati.
Critics say Mongolia's showboating lawmakers have grown
accustomed to parliamentary democracy, but remain ill-equipped
to tackle tougher issues, preferring instead to draw up laws
designed just to please voters.
The law to limit foreign investment, passed in diluted form
on Thursday, was submitted by a group of rebel backbenchers who
were also behind a much-criticised windfall tax imposed in 2006
and repealed in 2009.
"This law was not submitted because it is important for
Mongolia - it's because election time is coming and they need to
be loved and need to be liked," said Sambuu Demberel, head of
the Mongolian National Chamber of Commerce and a prospective
Mongolia's willingness to put populist politics first was in
evidence recently with SouthGobi Resources. The new
foreign investment laws were prompted by SouthGobi's parent
company Ivanhoe's plans to sell its majority stake to Chinese
aluminium giant Chinalco.
Ulan Bator said last month it would suspend SouthGobi's
mining and exploration licenses, but the company said it has not
received any notification and its operations continued to run
normally. Mongolia is also looking into corruption allegations
involving SouthGobi's wholly-owned subsidiary, SouthGobi Sands,
but the company said the investigation concerned a third party.
Fears about China were central in another case involving a
Canadian miner, Khan Resources, which is suing Mongolia
after being stripped of rights to develop uranium in the
Khan, accused of trying to sell out to the China National
Nuclear Corporation, said it only turned to China after it
became clear Mongolia was trying to kick out the company to
Enkhbayar won bail after a hunger strike and a global
campaign by his family and legal team.
"The current actions of the government have proved Mongolia
is not a democracy, and it clearly shows the rule of law doesn't
work over here," said Batshugar Enkhbayar, a former investment
banker with J P Morgan and the ex-president's son.
"The MPRP has very strong support and therefore, my father's
opponents made these false charges right before the elections."
Though Enkhbayar's family said the government broke its own
laws to defeat him, critics of the former president said his
arrest was proof that Mongolia's legal system had improved and
that no one is above the law - not even elder statesmen.
"For me, and as far as investors are concerned, it is a
positive development because there seems to be some progress in
enforcement of anti-corruption regulations," said Choi.
But the election was unlikely to produce a government
willing to turn against foreign investors, he said.
"Economic realities mean the ordinary Mongolian is more
concerned about getting a job and not about transactions
involving Chinese corporations."
(Editing by Clarence Fernandez)