October 2008
Needless to say, the prelude lingered on for too long. The conductor of the Mining Symphony was a dignitary in eye-glasses, who, for whole nine months couldn’t advance the symphony any further from its prelude. The composition of the orchestra had become a real pain in the neck to allow the conductor produce a genuine orchestral work. At the time of writing this article, the orchestra had just undergone some changes and convened in a refreshed composition. All the members were tuning their instruments and learning the notes, and were rehearsing the performance at full speed and accord. At this juncture, I am tempted to remind my careful reader of the past events that conceived the prelude.
NOTES SCRATCHED IN WINTER
The central topic in 2008 has been mining. And the developments in the upcoming years are likely to spin around this very same topic – mining. Mining has been the very source of heat in Mongolian politics, the very cause of all the debates and disputes in the public. The society has been waiting for the solution for the mining matters and ardently expecting for a chance to better life. The economists have associated the incentives for Mongolia to become a part of the “flat globe” with mining, and the starting “astrological forecast” has also been linked with mining. At this very important moment, the conductor in eye-glasses chose H. Naranhuu as the lead violinist of the entire orchestra. This was H. Naranhuu who was “ordered” to advance the draft changes and amendments to the Minerals Law. As it became clear that “ordering” him so did not mean what the conductor had in mind, in January 2008 a joint Parliamentary and Government WG was appointed with members from the MPRP and the DP. The draft notes of the symphony were thus penned.
The conductor has started the “performance”, following examples of his international counterparts, where the major projects are led by someone trusted. In China, such a trusted lead person is Xiao Yaqing, President of Chinalco, who by now has become an expert in collecting the stocks of small mining companies. As he gained more experience, he has started focusing on medium to large mining companies. World press widely covered his purchase of 12% of Rio Tinto in February, only then the world realized that this petite man had become a right-hand man for Hu Jintao. In Russia, Premier Putin appointed S. Chemezov as his lead violinist, who started with establishing a world-class mining consortium. The state-owned RosTech, like its China’s match – the state owned Chinalco, quickly advances in buying shares. The company is entrusted to “swallow” small domestic companies and forge Russia’s interest in world markets. Thus, following its neighbours’ suit, the orchestra Conductor chose H. Naranhuu, for a while, and set up a state owned Erdenes MGL, securing for it the licenses for Tavantolgoi and Shivee ovoo deposits of strategic importance. Perhaps, not many would recall today the modest newspaper clippings in corners that D. Zorigt was appointed the Executive Director of Erdenes MGL. This very “modest” company barely mentioned in the Conductor’s winter notes was meant to become the support pole in defining the country’s development at least for the nearest future. It may also be identified with a sack of money in the hands of the ruling party. The fact that D. Zorigt, so largely ignored by press and media people, was a “VIP” is proven by his recent appointment as the Minister for Minerals and Energy of Mongolia. I first saw him in 2000, at the UN historical Millennium Summit, when Zorigt, fluent Russian and English speaker and a specialist in Chinese studies, was interpreting for the then President of Mongolia, Mr. N. Bagabandi. Later he served the Mongolian party to the MCA program. Now he is a Minister. Someone is definitely needed to replace him at Erdenes MGL. In fact, this new replacement will have to tune and play the lead violin for the refreshed orchestra, the right hand, the most trusted one for the Conductor.
The reason why the Government preserved its “bulky” structure is explained by the compelling need for the Ministry of Social Welfare and Labor to sustain its independent functioning. In other words, the Social Welfare Ministry will have much work to do to distribute the millions and billions of tugrog and “ever-greens” provided Erdenes MGL works well and the Minerals Ministry guides shrewdly. Thus, the people to play the same music with different instruments at a tune and accord dictated by the Conductor’s baton are arranging their seats around each other. It’s of utmost importance that these three, “the trio of delicate lead strings” feel and sense the Conductor’s baton move.
In this way, the Conductor has Jealously embarked upon a great cause to develop his winter scratch notes into a complete artwork. The number of instruments with odd sounds may have notably reduced. Yet, it would remain a dream, a hollow hope to expect the amendments to the Minerals Law pass quietly, without a stone to stumble upon, although the street noise, irritatingly loud past winter and spring, may slightly subside this fall.
TUNECACOPHONY IN SPRING
Let’s recall the dissonance created by handicapped instruments. The whole country was affected by the election syndrome. The conductor himself was seeing election-themed night-dreams. He indeed was fervent and aggressive to get re-elected. This was the time when no consensus could be forged on the definition of deposits of strategic importance, no agreement was made about changes and amendments to the Minerals Law, and when any one, just any individual self was inventing a “principle” idea for the Investment Agreement. The step toward an accord was setting up a joint working group. The WG headed by MPs Ts. Damiran and N. Batbayar would convene from time to time. Almost every daily carried interviews with them:”If and once we reach an agreement, we will secure a larger share in the deal when we negotiate the Investment Agreement”. Chairs of parties represented in the Parliament started meeting at the initiative of the President. “We are just about to reach an agreement. The Minerals Law will be amended within April”. Yet, those meetings ended with heated disputes and squabbles. The Republican Party came up with an initiative to do away with the 68% tax. Having realized that their voices were not heard from streets, civic movements secured their representation in the process through establishing a sub-committee under the WG, which made some of the most vocal individuals finally come down. The Conductor, slightly alarmed, looked at the notation and couldn’t see any marking for tune contrast. Instead, the notes were to be played in moderate, mild legatos to produce soft melody.
After the Party chairmen’s meeting ended up in fiasco, the MPRP and DP leaders met separately. Not long after, a principle a decision was made on amendments to the Minerals Law and the party chairmen demonstratively shook hands in front of TV cameras. A general agreement that the Mongolian government would hold no less than 51% in deposits of strategic importance was thus reached. A clarification followed that the owners of the 51% would be Mongolian citizens and companies. The media promptly declared this March 13th event the Event of the Century. At that very juncture, the two party leaders have privately agreed among themselves to abstain from cash promises during election campaign so as to not prop up the inflation. Bitterly, this private agreement later on turned into a fierce competition to promise a million and half-a-million give-aways by the two parties respectively.
The Conductor, convinced that the mining overture was going to finally attain the desired accord, started passionately expressing his feelingsthrough his baton moves. “The agreement between the leaders of the two influential parties on the participation of the Mongolian party in the deposits of strategic importance bears more political rather than economic value” – he spoke on TV. While the audience was fully engaged and captivated by the melody, one of the strings of the prima violin went suddenly broke. L. Gundalai, Chairman of the People’s Party, rushed to claim that the author of the 51% idea was his party. The Leader of the New National Party M. Enhsaihan harshly warned that the term “Mongolian ownership” could be interpreted in many different fashions. Activist of the Republican Party Ts. Davaadorj threw: ”Who should we consider as investors. Let’s clear the definition by indicating that investors are those who trade their shares at Toronto Stock Exchange. A small company like Ivanhoe Mines Mongolia might flee away any time”. Soyombo and Radical Reform movement folks said they would never agree with national companies be included in the party to own 51%. This meant a drastic change in the tempo and pace of the music leading to constant staccato. Because of the too loud brass quartet, the rest of the orchestra became almost non-audible. The concerned prima violinist Naranhuu cast a glance at the Conductor, whose thoughts and feelings were now hardly visible behind his thick eye-glasses, nor could his passion ever be felt through his baton move anymore.
The audience could see Naranhuu, the lead violinist with a single string, loosing his earlier buoyancy and vitality. “Mongolians could attain 51% ownership in a phased manner. The Government does not necessarily need to hold 51% in the first 10-15 years. There are some flexible mechanisms to secure this position after a certain period of time” – he said in an ever-weakening voice.
Whole spring Mongolians spoke about amending the Minerals Law. Some of the proposed seven or eight changes did not encounter any criticism at all. The idea to shorten by half the term of Investment Agreement deposits of strategic importance as was provided in the earlier draft received a popular support. Thus the 30-70 year term Stability Agreement has become to be valid for 15 years. The people were also discussing the weaknesses of the Investment Agreement developed by M. Enkhbold cabinet and submitted to the Parliament in 2007. Some were saying that it was wrong to exempt the investor from 68% tax in the first five years of operation, as was stated in the previous draft. Also, some spoke very harsh about the clause in the draft agreement whereby Mongolian party would claim for its share provided the company runs profits. All these are being recalled because we could expect replay of similar notes during the discussions of amendments to the Law as well as negotiations on the Investment Agreement.
Not so long ago did the new Parliament assume office and began the first session of its 2008-2012 term. Not a single sentence, even a word is mentioned about the changes and amendments to the law in the Agenda of the Fall Session of the Parliament. It might have been meant to be addressed under an agenda item “Other issues”. Perhaps the parties have principle matters to discuss before the amendments are finally passed, and therefore, abstained from mentioning in the agenda. Who knows. Disputes over the identification of the owner of 51% may hang on. The life is not expected to become any easier even after the number of parliamentary parties has shrunken. Although the Mongolian society is largely in agreement about promptly amending the Minerals Law, there are still quite a few civic movements who might march outside the Government house with loud slogans. Let’s just try to foretell what vanguard ideas they might come up with this time.
One of the broken musical instruments played in the orchestra since spring was the talks radically opposing “inheriting” discussions the draft amendments from one Parliament to another. This was the position of the Freedom Realization Party. In June we heard a representative of the United Traditions Party say that no Investment Agreement with investors was needed at all. Motherland Party denoted that the Agreement should provide for a gradual development of Oyu Tolgoi resources within a total span of 100 years. Although it might seem that the party populism so widely expressed before the election has rather abated these days, we still may see revival of these sentiments during the negotiations.
For the sake of plurality of opinions, I would like to present other views as well. In the midst of crazy spring notes one dissenting tone was clearly audible – golden shares. The Chamber of Trade and Industry views that the Mongolian state may participate in the projects with golden shares whereas the 51% ownership could be exercised by open public Mongolian national companies. This position was contested by the Mongolian Democratic Movement partisans who argued that the 51% party would definitely be the Mongolian oligarch. It’s notable that President N. Enkhbayar made a statement in favor of golden share option. In brief, it’s quite likely that fierce debates may take the floor when Mongolians define the 51% of ownership.
It’s even more mysterious how the funding for the 51% of ownership would be secured. As the Conductor once noted that the bi-partisan accord on state participation bore a political value, yet today, after the election, the accord seems meaningful if it bears economic sense.
NEW MELODY
No other name would fit the situation. As the parties finally agreed on numbers and were just to approve the amendments, as of the sudden MP E. Bat-Uul and some two members started playing drums and broke the entire rhythm. Plain drum beats, amplified by April dust storms, angered the Conductor the most. Long-held fermato, not marked on the notation at all, lingered, messing up the whole orchestra. The Conductor who had planned everything so carefully – he would convene an irregular session of the lawmakers, have the draft amendments approved within two days, and off he would leave for Russia with something to tell to Putin – was baffled with a sudden, unexpected turn of events. Product share agreement, a totally unknown term, cut dead his lightning plan.
The drum-players in their turn did argue in favor of their new definition of the three major changes into the Law.
“Our close observation of the aggressive competition between Chinese and Russian companies to invest in Mongolia’s deposits of strategic importance such as Tavantolgoi, Oyutolgoi, Shivee Ovoo and others prompts us to conclude that they do not care at all not only about economic gains, but even about potential investment risks. Behind any investment lacking economic motives, there is always a geopolitical appetite… If any smallest pressure is exerted by the buyer of the minerals products, the seller, especially if and when the Government provides the management for the company, can’t withstand the pressure and eventually the marketing of the minerals produce automatically becomes a tool of political blackmail. Therefore, any risk that can be posed by the buyer, should be borne by a strong and capable investor on the seller’s side” – reads the rationale of MP Bat-Uul.
The proponents of the Product Share Principle urge to amend the Law to provide for advance payment for profit share and environmental reclamation. Furthermore, if the investor is found guilty of corrupt practices, the deposit licenses would be confiscated by the Mongolian state. Obviously, our two neighbors were stunned by this new timbre. Wiping his eye-glasses, the Conductor took a long sign. “Frustrated? Frustration does no good. Instead, patience and resilience must be applied” – he softly said. He then met with Putin in Moscow. The Russian Premier saw the Mongolian delegation off having managed to convey his key message that he would look forward to prompt approval of the amendments. It’s worth to note that the meeting proceeded in a chilly atmosphere. Russian press carried articles with messages that Mongolia was tough and harsh with Russian investors.
The new realities posed a new challenge to introduce two parallel principles into the Law. Is it possible to ensure that the Government and Mongolian citizens hold no less than 51% in deposits of strategic importance while earning the its profit share through a product share principle?
This issue will remain a question during the upcoming discussions of amendments by the new Parliament. The formulation of the issue in the latest version of the draft reads as “In case a deposit of strategic importance is to be developed by the Mongolian government in cooperation with national and foreign investors, the Mongolian government and Mongolian citizens will hold no less than 51% of the shares of the company holding the mining license, or an Investment Agreement may be concluded with the investor based on a product share principle. The share to be held by the Mongolian government and citizens and the product share principle shall be regulated by a special law”. The part in bold is the newly introduced content. Anyhow, in this manner the ideas have been mechanically combined in one. It is not clear as of the moment whether discussions will develop over this definition or a new formulation would be presented to the lawmakers. I recall the politicians say that the new Parliament may even end up in a situation where they would have to enact three accompanying laws.
This is some insights into the complicated nature of what is there behind our simple expectation to have the amendments passed without any distress.
A COUPLET WHILE WAITING
Serene silence without a blow of wind, only leaves change the hue of earth
Peaceful life without a shadow of worry, only time makes my head grey… – such lines may be roaming in the mind of Mr. Friedland somewhere out there in a quiet autumn solitude. He, who has been waiting patiently for the amendments to pass through the Parliament, revealed his hearty mind but naughty tongue to the audience of the London International investors Forum, held on June 3, which journalist Lawrence William put as: ”The Mongolian Premier promised to conclude the Agreement very soon. The Parliament is in session now and will finalize the deal within today-tomorrow. The product share principle will allow for much easier and far more transparent profit sharing than the standard equity ownership and taxation arrangements would provide”. However, June 2 was the official day of the formal start of election campaigning, which of course makes it difficult to find MPs, “stupid enough” to be making laws in the Grey House. Mr. Friedland’s expectations were largely ignored in the Mongolian Parliament, instead, the crafty men managed to pass a law on government cashmere subsidy in case cashmere price plunges for it was more important to support the fate of those running in the rural constituencies. “No problem”- way of passing laws was repeated with the Law on Auto Transport. “Let Mr. Friedland wait, not a big deal”… The amendments to the Minerals Law lost any attractiveness at the very final stage of discussions as all the MPs rushed to run the race for the next term. For his too impish tongue, Mr. Friedland earned another piece of ruthless attack in Mongolia. Civic movements and various press quickly picked up the articles by the Australian journalist Lawrence and cooked in their own kitchens adding too much salt: ”They promised Friedland to pass the law as it stands now”, “Friedland announced Oyu Tolgoi belonged to him”, “The government had made Friedland pay for its election costs”, “The Minerals Law is going to be passed according to Friedland’s will”…In this manner, the Oyu Tolgoi syndrome, seasoned by election mood and effusive language of a Canadian businessman, inhabited Ulaanbaatar for quite some time.
Do you think it’s only Mr. Friedland who waits for the amendments? One of the odd tunes that was agonizing the Conductor throughout the spring and summer has been the pressure exerted by Americans. Peter Pham of the Nelson Institute of International Relations published an article in Washington Times. Four US senators addressed a letter to G. Bush and Condi Rice. Freedom Frontier urged to suspend the MCA aid to Mongolia. The voices of the US business circles opposing Mongolia’s ownership of the 51% and the 68% WPT became clearly audible. Meanwhile the US succeeded establishing its PR agency in Mongolia.
“World Growth” began advising on developing the amendments to the law since past spring. The Asia Foundation voiced concern about the identity and mission of this organization. Soon newspapers announced that the organization was led by the former Secretary General of GATT Mr. Alan Oxley. Mr. Oxley had his advice on the amendments and the Investment Agreement published full page several times in Mongolian dailies, and after the election, this gentleman met with the Conductor. His ideas were similar to MP Bat-Uul’s arguments. The World Growth leader praised the advantages of his proposed principle that the Product share principle allowed for greater transparency. He urged the Conductor to clearly delineate the roles of the Government and of the businesses in their participation in the development of deposits. More specifically, he said:”Lately the Mongolian Government has started showing some signs of reviving some elements of the command-and-control system. The best known method for successful implementation of major projects is concluding a profit sharing agreement and not the Government ownership”. Meanwhile, the Mongolian civic movements were cautiously observing the World Growth activities in Mongolia. Seemingly, their suspicion was greatly aroused. The leaders of Radical Reform movement once noted, angrily:”The World Growth is in Mongolia to undertake lobby of MNCs”.
US-funded Asia Foundation is also becoming increasingly active in Ulaanbaatar. Recently the UB hosted a regular annual meeting of North American businesses in Mongolia. Mrs. Michelle O’Neil, Deputy Under-Secretary of International Trade Administration of the US Department of Commerce, landed in Mongolia on September 15th to deliver a keynote speech at the 11th Forum of North American businesses in Mongolia. Frankly speaking, many Mongolians didn’t know that we have had already 10 such conferences. Mongolians ignored the meetings and gatherings of Americans in UB at all, though, some say that the largest US companies were represented at the meetings. Madame O’Neil did a live advertisement that Mongolia would prosper if it engages the globally recognized US companies in its development efforts.
This fall Mongolia’s capital city has from time to time entertained world’s investors. European investors – bankers and financiers have recently made a sojourn in Ulaanbaatar. In fact, many foreign state dignitaries experienced Mongolian early autumn. All of them shook hands with us flattering us for our minerals and expressing hopes to be friend with us. Ulaanbaatar was enjoying the smooth and soft flow of the autumn melody. The Conductor composed a new pitch: ”Our minerals have attracted the world’s major powers. They may try to influence our foreign policy and try to distract us for their benefits”. These notes carried alarm. The National Security Council is about to define the fundamental principles of the state policies on deposits of strategic importance. At the same time Mongolians might, for the first time in her history, give the definition of the “third economic neighbor”.
This is a brief sketch of twists and turns surrounding the amendments to the Minerals Law. A whole range of tunes and sounds are being played. Yet, the Mongols, living their simple lives, prevail as the most patient of all those who are waiting down the lane. Flute, clarinet, oboe, bassoon, cor anglais….. produce soft but sad tones. The Conductor would now hardly notice them, the woodwind instruments. Before the election the Conductor liked them the most and used to always speak about them, care for them. Should there be one-time cash give-away, so called “the Grace of the Nation”, or should stocks be issued, so called “the Share of Treasure”, or in the worst case, should health and education services be offered equal to the promised cash – these questions will lead to another series of new debates. This debate may even cause “the whole orchestra mess-up with pinch and hits, beats and bites”. The Conductor is definitely not at ease to withstand the money-demanding gazes and glimpses.
According to the Executive Director of Ivanhoe Mines Mongolia Inc, the most optimistic projections show that if the company concludes the agreement with the Mongolian government in the first half of 2009, the first fruits would be reaped only in 2012.
The world has seen another winter, spring and autumn until the symphonic orchestra could tune in the musical instruments and starts the symphony. Here I have cast a very brief look at only what happened this year, without a word about the withered expectations of the past four years. Mining has been the top topic in Mongolian steppes in 2008, a long-long year, when even effusive Friedland learned to observe vigilance.