* Nationalist sentiment likely to increase after election
* Legislation to cut mining dependence on the agenda
* Foreign investment still crucial for economy
By David Stanway and Maxim Duncan
ULAN BATOR, June 27 Resurgent nationalism in
mineral-rich Mongolia, which will vote for a new government this
week, will irk foreign investors, but it is unlikely to wreck
sentiment, with politicians still desperate to keep the dollars
Foreign investment in Mongolia's much coveted mines like the
$7 billion Oyu Tolgoi copper project helped expand the economy
at the fastest pace in all of Asia last year. But many of the
country's 3 million voters say the bulk of the nation's nouveau
wealth still lies in the hands of the political elite.
Thursday's parliamentary election will see politicians from
two major parties - the Mongolian Democratic Party (MDP) and the
Mongolian People's Party (MPP) - fight to appease the masses.
Foreign firms such as Rio Tinto can expect a
more turbulent ride in the years to come.
"We believe that (resource nationalism) is broadly
bi-partisan and is to increase whichever party wins," said the
Ulan Bator-based Frontier Securities in a note to clients.
A shift to the left could end up saddling investors with
higher tax bills and make it harder to win approval for new
projects. But the main players in the election remain broadly
supportive of foreign capital, which has turned the dusty former
Soviet outpost of Ulan Bator into a bustling boomtown.
"Even with popular voter support for resource nationalism,
authorities are still realistic and will not push it too far,
because obviously they need high economic growth," said Dale
Choi, an Ulan Bator-based analyst with Frontier.
Mongolia's economy grew 17.3 percent in 2011, outpacing all
in Asia and trailing only Qatar and Ghana globally.
For many voters, the seventh parliamentary election is
another chance to try to redress an imbalance.
The end of Communism in 1990 left the economy devastated as
old Soviet supply lines broke down. Since then, Ulan Bator's
resource policies have been notoriously laissez-faire as it
sought to attract foreign investment on whatever terms possible.
Expectations are rising that policies could swing too far in
the opposite direction, imposing more controls to redistribute
mining wealth in a way that pleases voters.
Mongolia has already imposed restrictions on mining in
forest or river areas, a moratorium on new licenses and a new
law designed to limit foreign ownership of "strategic" sectors.
President Tsakhia Elbegdorj, a former journalist and veteran
campaigner from 1989, insisted Mongolia remains committed to the
free-market approach to development.
"Open countries succeed in exploring for and using their
mineral wealth, but closed societies fail," Elbegdorj, who holds
a master's degree in public administration from Harvard, said in
an interview last week.
But he conceded that the public were dissatisfied with the
way the country's new wealth has been spread, and the emphasis
of Mongolia's politics needed to change.
The government has sought to redistribute wealth by creating
social funds using mining profits much like the way Norway has
done with the money it generated from oil. But that has resulted
in cash handouts that have made very little difference to
SHIFT IN RHETORIC
While Mongolia's course of economic development has been
set, there has been a shift in rhetoric, said Sumati
Luvsandendev, a pollster with the Sant Maral Foundation.
"The social justice issue is now at the top of the agenda,"
he said. "The attitude of Mongolians towards mining is based on
an expectation that it will solve many of Mongolia's problems,
but there is a problem of confidence about decision makers."
The mining boom has not improved conditions in large parts
of the countryside or in Ulan Bator's crowded migrant districts.
"I don't see any benefits (from mining)," said Altantsetseg
Laagansuren, a 29-year old mother of three living in a crowded
ger (tent) in one of the capital's sprawling makeshift suburbs.
"I don't see anything changing. I think the people at the top
are sharing and eating up the wealth," she said.
Amitan Ulam-Undrakh, a camel herder and former township
governor in South Gobi province, is a direct beneficiary of the
Oyu Tolgoi project. He has watched closely as Rio Tinto and
Ivanhoe's billion-dollar investment transforms the region's once
moribund subsistence economy. But even he has reservations.
"Livestock and traditional sectors used to be the biggest
part of the economy, and we should choose a leader who can allow
mining and the traditional ways of life to coexist," he said.
President Elbegdorj, from the nominally free-market MDP, is
promising an end to mining overdependence. He has imposed a
moratorium on new licenses and is preparing to approve a new
mining law ahead of his own re-election campaign next year. He
also hopes to raise taxes on miners to as much as 40 percent.
"We all agree (mining is an important part of the economy)
but profits from mining should be invested in other sectors -
infrastructure, human development and in the diversification of
our economy," he said.
While the 76-member legislature (the Grand Khural) is
sovereign with ultimate powers over laws, the 1992 constitution
also gives equal executive powers to the president, which can
lead to deadlock.
The latest polls suggest the MDP has now sneaked ahead of
the centre-left Mongolian People's Party (MPP). Both parties
formed a grand coalition after the 2008 election and ushered
through the Oyu Tolgoi deal in 2009. The alliance ended in
But by hogging the middle ground, the big parties have left
themselves vulnerable to a populist candidate prepared to
exploit popular unease about income disparities. The biggest
beneficiary has been Nambar Enkhbayar.
After his defeat in presidential elections in 2009,
Enkhbayar fell out with the MPP and formed his own party using
the MPP's old name, the Mongolian People's Revolutionary Party
(MPRP). Many in the MPP's left wing jumped ship with him.
He expected to contest a seat in the parliamentary election
and fight for the presidency in 2013, but he was arrested in
April on corruption charges that he insists were fabricated.
Unbowed by his subsequent exclusion from the vote, the
former president continues to campaign on a largely left-wing
resource nationalist ticket, and his "justice coalition" could
conceivably hold the balance of power in the new parliament.
After addressing a small but appreciative crowd near Ulan
Bator's Russian-era State Department Store, Enkhbayar told
Reuters that he was not opposed to foreign capital in industries
like manufacturing, but resources required a different approach.
Foreign firms should be rewarded for their exploration and
development efforts but given a strict timetable to hand mining
properties back to the people, he said.
"With the foreign investment law coming in and other laws
being threatened, we can't expect an easy ride anymore," said an
executive with a foreign mining firm. "I worry a bit about
Enkhbayar because despite the corruption scandal, he seems to be
stronger than ever."
Pollster Sumati said Enkhbayar has become the
"none-of-the-above" candidate for frustrated voters.
"He has become a protest leader, and he is representing the
rebels in both major parties," he said.
Last year, a group of backbench MPs urged the government to
renegotiate the landmark 2009 Oyu Tolgoi agreement that granted
a 66 percent stake in the project to Canada's Ivanhoe Mines
, now controlled by Rio Tinto. Many of the lawmakers
were also behind a 2007 law to submit miners to a windfall tax.
Foreign investors were relieved when the bid to revise the
Oyu Tolgoi deal failed, but there were more worries to come.
The same backbenchers responded furiously to an attempt by
Ivanhoe to sell its majority stake in the coal miner SouthGobi
Resources, and pushed through a foreign investment law
designed to restrict overseas ownership in "strategic" sectors.
The law was diluted and finally passed in May, but it still
contains worrying ambiguities.
Cameron McRae, country manager for Rio Tinto and chief
executive of Oyu Tolgoi, said that while there were still a
number of "traditional politicians" campaigning against foreign
investment, many more were stressing support.
The Oyu Tolgoi mine is scheduled to start delivering ore to
market by the end of August and will go into full operation next
year. On top of the $7 billion already invested, analysts
estimate there is at least another $6 billion to come.
Sumati said most Mongolians were worried not about foreign
ownership, but by the prospect of being left behind.
Rio Tinto is trying to repel the argument through a process
of "community engagement." In the small town of Khanbogd, it is
constructing gleaming new schools, roads and government
Eyes are also on the massive Tavan Tolgoi coal mine in the
South Gobi region.
Decisions about the mine's development have been repeatedly
delayed, with Mongolia unable to win the consent of all the
parties involved - including Russia, China, Japan, South Korea
and the United States. An investment accord was supposed to have
materialised last year.
The election could have an impact if it increases the
representation of resource nationalists like Enkhbayar who want
to keep it in Mongolian hands and could make the fate of the
project a condition of his party's participation in a coalition.