March 2009
Second hearing of the budget revision has started. The budget badly needs some 300 million USD. As they say, by cash. If this money can’t be found, no salaries, no pensions will be paid in March. The government had been planning to borrow 300 million USD from Russia and this loan was being earmarked for agriculture, as meeting the population food demand is vital at the times of crisis. Yet, the unexpectedly rapid exhaustion of the treasury may necessitate this loan be disbursed for March needs before it’s allocated to any particular sector.
The joint session of the Budget and Economic Standing Committees on the Feast Day (the Eve of the Lunar New Year) did not support the idea to borrow from Russia. Democrats, Greens and Independents were the majority at the session. Most of the Members were cautious about bilateral loans. Instead, many viewed it would be more worthwhile to double or even triple the discussed 120 million USD loan from the IMF. Loans from international financial organizations have more favorable conditions than tough bilateral ones – IFOs’ loans are concessional and carry virtually no threats for national security concerns, read the rationale of the MPs. Still, the badly needed 300 million USD will have a short-term, fire-extinguishing effect on Mongolia’s economy. The economy needs more money. China has been offering money under concessional terms. Russians are also willing to lend…
The Mongolbank Governor stated at the irregular session of the Parliament that we would desperately need at least the initial bits of the loans as early as of April. The bulk of the loans will be allocated to the Central Bank. As soon as the Central Bank acquires the funds, it will become able to talk about monetary policy at all. Today it keeps its eyes tight on few dollars we have and spends some very small amount from its reserves for pay for imports of fuel, medicines and other daily essentials. It looks just like a poor old woman beside her almost empty, but once full jewel box.
The Prime Minister negotiated the 300 million USD loan from Russia in January when he paid a working visit to Irkutsk. If my dear reader recalls, on January 22-23, 2009, an important meeting took place with economists, businessmen and politicians discussing the ways to overcome the crisis. No one could see the Prime Minister at the meeting for the latter’s visit to Irkutsk bore such a vital significance that the “wordy” scholars and economists were ignored. Interpretation of this act? Well, we badly needed money, especially as the treasury was thinning. On the other hand, this was the time when the “Russian Railways” shareholding company was impatient to obtain its mandate to participate in the international tender bid on Tavan Tolgoi deposit. Thus, the Irkutsk visit was charged with a dual mandate – negotiate a loan and look into the issue of one of the potential bidders for TavanTolgoi.
“Russian Railways” shareholding company has completed all the technical works and compiling all the formal documents to prove that it’s the official owner of the 50% Russian stake in the “Ulaanbaatar Railways shareholding company. The time has come for “warming up” their team to partake in the bid. Russia is coaching a strong team, headed by “Russian Railways” and comprising of some three Russian billionaires. O. Deripaska, V. Vexelberg and A. Mordashov are to start a big business in Mongolia. V. Yakunin is driving the express train.
Is Tavantolgoi operation ever conceivable without a railroad? Then, is the railroad imaginable without Yakunin? For this very reason, the Russian Railways is nourishing an option whereby a new railroad entity is to be established jointly with Mongolia and through which it would own a certain part of the Tavantolgoi deposit. This is the simple story behind the hasty solution of the future of a major mineral deposit of Mongolia in the face of the nasty crisis.
Another reason to tie the future of Tavantolgoi with the crisis is the fact that the mighty names of the Russian billionaires are quickly turning into shallow combination of letters – O. Deripaska is now thinned by 28 billion USD (blame the crisis!). The only hope for increasingly uncompetitive in terms of assets Russian billionaires is Yakunin’s railroad and V. Putin’s political support. The Russian President and Prime Minister have officially declared that they would support their billionaires. Putin did promise a strong support for pushing Russian businessmen to Mongolia’s Tavantolgoi bid. Need a proof? The 300 million USD loan. Mongolia just so badly, so desperately needs this money.
Our Parliament and Government members have worked hard to find gateways to foreign loans. Since mid December they started working to secure a loan from the Chinese Government. Chinese didn’t cite any specific number, but just keep pacifying that they would lend. They will, perhaps, lend us for they wouldn’t measure with money their geopolitical interests and benefits. Under the waves and tides of the crisis, Mongols keep looking for risky money from our neighbors.
“The money we so desperately need is just like a few pocket coins for our neighbors” – uttered the Prime Minister S. Bayar at the irregular session of the Parliament. But a caution is aired – should the national interests and benefits be traded with a few pocket coins? How ever many times the National Security Council meets to discuss this, the treasury is depleting unmanageably.
At this tough moment, the negotiations on Oyu Tolgoi Investment Agreements have ended. Wish to note, the Working Group headed by D. Zorigt made a success. The Mongolian team didn’t have a past experience. The Working Group was not assisted by a strong team of experts. The Working Group didn’t have any specific budget. Briefly, the Working Group worked under tough terms. Minister D. Zorigt had one thing though – a clever tactic. The tactic to “softly land from high horizons”. The Working Group entered the negotiations with an ambitious plan saturated with a multitude of goals. When the Working Group, established on December 11, 2008, was holding initial, “warm-up” meetings with investors, I did nurture a fear about the progress of the talks.
Yet the bold efforts made as if there was no crisis, as if the copper price didn’t plunge, paid off. Anyhow, the negotiations are held, are over. After the National Security Council discusses the draft Investment Agreement, the Gabinet will scrutinize it and finally submit to the Parliament. Worth to note, the investors team – Ivanhoe Mines Mongolia Inc and Rio Tinto – have worked flexibly too under the prevailing circumstances. Rio Tinto has a burden of close to 40 billion USD debts. China “alleviated” the burden by 19 billion USD – by buying a certain portion of the debt, China’s state owned “Chinalco” comes to hold an interest in Rio’s mines in Australia, Chile and the US. The Kennecott mine in Utah, a favorite site for Mongolian journalists’ sojourn, is now 25% China’s.
This is all the crisis to blame for ranting and raving about the deposits in Mongolia. Although the negotiating party is the IMMI and Rio Tinto team, the final say is to come from the one who avails the money to invest in Oyu Tolgoi. Behind any large mining company, there is always a major bank or the thick purse of some country. Still, just can’t keep my eyes closed to see how amazingly quickly China’s influence is growing over Rio.
A year ago, right around the eve of the Lunar New Year, Xiao Yaqing ceremonially announced its purchase of 12% of Rio Tinto. This year the same Mr. Xiao Yaqing is helping with paying off the debt, 19 billion USD! Just like quickly counting a few coins [as our Prime Minister exclaimed], how easily and casually Mr. Yaqing translates his ideas into reality.
The Mongolian Government has started a campaign to advertize, to publicize how successfully it negotiated over Oyu Tolgoi deposit. Public figures appear in front of cameras to appraise the draft agreement and these talks are published in dailies the next morning. The media was bombarded with such paid materials before the Parliamentary election and after the July 1 acts. Yet, the realities are totally different today, and the Government has to realize this.
It’s just so vitally important, and more so at the times of crisis that the public trusts in the rightness of its Government policies. It’s of utmost importance that the information is open and transparent. Countries are now panicking about the crisis. The US CIA annual report named the crisis an evil more dangerous than terrorism. We miss the Government’s open and frank talks to protect our people from panicking. The reality needs to be explained, plans need to be told, and simply people need to be given confidence and hope.
The Oyu Tolgoi draft Investment Agreement contains 16 articles and more than 160 provisions. Of these, the Mongolian public heard of only 11 provisions from media. And the public congratulated. Congratulated forbreaking the ice, for unlocking the deadlock which kept the Oyu Tolgoi deposit still for more than 5 years. People are satisfied and look forward to having the draft discussed at the Parliament. When the soil is so soft, when the public is so positive, paid articles and interviews in newspapers look way too redundant.
Anything fake, phony and appeasing never reaches peoples hearts. Information violence had also been committed last fall – by spreading misleading propaganda that we wouldn’t face a crisis. We could have shortened the crisis if the Government had been doing what it ought to instead of playing with words. The cost for every belated measure by the Government is being borne by companies and regular people on the street. Just try to calculate how much Mongolians are loosing from exchange rate difference. This huge number is the result of false information and a child of clogged, secret, intransparent mentality.
The remaining some 150 provisions in the draft Investment Agreement regulate matters of extreme importance. These are numerous complicated issues pertaining to, for instance, dispute settlement between the contracting parties: what court to use – international arbitration or Mongolian arbitration, if international, who that would be – Moscow or Paris arbitration court. For all these matters, the Mongolians didn’t demand any explanations or commentary. Mongolians are grateful and happy for the general principles agreed, for the frozen project advanced.
There are many issues which have not been covered by media – whether the investor would establish the environmental reclamation fund in the first year of mining, or would it be established before ceasing its activities as was provided in the 2007 draft.
Now these are the MPs who have to clarify, check and discuss the details. Once an agreement is reached for the Government to hold 34%, it will have to bear the commensurate level of responsibility. Well, the Mongolian party had to follow the public order to escalate the Government’s ownership. At any rate, the 34% stake is going to be paid off with the Government’s dividend. The concern, however, is, while Rio Tinto continues to work closely with China, a caution about the gold and copper producer and buyer becoming one single body. If that happens, one day the 34%-owning Mongolian Government may find herself on a hot seat of negotiating the selling price with our southern neighbor. That hot seat could turn into a frying pan if we would have already been indebted to the Chinese Government to wrestle with the crisis.
The crisis in this way threatens the independent, sovereign future of the deposits. Actually, Mongolians do have a lasting dream to acquire a new geo-economic neighbor owing to the strategic deposits. Is this dream to be sacrificed for the basic human needs of the month March? Isn’t it a too shallow solution?
It won’t be something redundant to say “Thank You” to Ivanhoe Mines Mongolia Inc for its more than 5-year-long patience to dot all “I”s and cross all “T”s in the agreement. They have invested 1 billion USD in Mongolia. While they were in Mongolia, our taxation regime has changed for 4 times! Royalties increased, income tax was cut, windfall profits tax was born, and today-tomorrow a decision is going to be made to invalidate the 68% windfall profits tax. Such changes can easily transform the present and future of any business. Yet, IMMI, amidst the harsh turns and twists of life in Mongolia, has demonstrated a genuine patience. Today this company’s finances are in a desperate condition. Rio Tinto is preparing to play the main role in Oyu Tolgoi. But who is the financier? Although we do hear of mining majors winning tenders, these are always banks and financial institutions who back these majors up. In a sense, the Mongolian Government is in double negotiations – with the mining company and with the financiers at the same time. Mongolia’s geo-economic moves depend, therefore, on who is the financier/s. While Peabody Energy carries American interests and benefits when bidding for Tavantolgoi, Chinese keep their fingers crossed for BHP-Billiton not to participate in the tender. The reason why China befriends with Rio Tinto stems from China’s competition with the global mining major BHP-Billiton. Financial advisors to BHP – Goldman Sachs representatives visited Mongolia last fall and met with the Mongolian President. Goldman Sachs lost in the race to select advisors for Tavantolgoi tender bid.
The draft Investment Agreement on Oyu Tolgoi provides for an advance payment of 125 million by the investor. Sounded nice. But this money will be paid to Mongolia is fractions, meaning that this money won’t fill in the huge gap in the budget. Then where to get money? China and Qatar said they would. But bilateral loans bear threats for national security. Well, then can we secure a multilateral loan, a loan from an international financial organization, a loan under soft terms and with no implications for national security concerns? If we manage to negotiate a program with the IMF, not only will we get a loan with favorable conditions, but will also earn international credibility as a safe borrower. Precisely to discuss these matters, an IMF team visited Mongolia in early February this year. Plus, David Dollar from World Bank arrived in Mongolia at the same time. The date for the Donors’ Meeting had already been set as February 11th and the message had been sent across. Unfortunately, by then we hadn’t revised the budget properly and hadn’t had the government expenditures cut. Another consequence of lost time. In fact, instead of deceiving ourselves that the crisis would pass around, we had better fundamentally changed the fiscal plans and projections, we had had an ample time for that. Since we were not ready to negotiate a program with the IMF, it was agreed with the IMF to meet in March. Therefore, the budget revision is, indeed, a matter of utmost importance. If we fail on this task, Mongolia will be left with a single choice to resort to bilateral loans. The IMF is to make its decision whether to negotiate a program in the first week of March.
There were few people who had to ignore the Lunar New Year holidays spirit. Fiscal policy and coordination department officers of the Ministry of Finance didn’t have time for celebrations. The time was of essence. The Finance Ministry officers did come up with a decent budget draft, a healthy draft, a draft that meets the requirements of new realities. The concepts of the draft are hoped to give a kiss of life into the Public Sector Finance and Management Act, which has been “mortally sleepy” for already 7 years. The ministry officers are now working hard to do away with the old approach to budget planning habitually “besieged” by social welfare and infrastructure expenditures. They are working hard to accord greater importance to education and health sectors as is natural about any budget of a market economy. Also efforts are being made to restrict by law the chances for anatomically distorting at the Parliament the fiscal projections, made by specialists, to suit the election needs. The Ministry officers hope that the issue addressed as the draft Law on Fiscal Responsibility, is discussed at the spring session of the Parliament. The intention is to introduce a new practice of planning the state budget through programs. The core, general program will be supported by sub-programs, ordered by the level of prioritization, and this ranking will accommodate most effective revisions and adjustments when necessary. It’s inspiring to see from all this the advent and presence of new generation professionals with new mindset, with new approaches, new principles. Unfortunately, a standard socialist management dies hard especially at times like today, a non-standard time.
Thus, the crisis forces us to keep up with the pace of the new times. The need for a loan forces us to see the life around soberly and healthily. We must thank the nine MPs of the Mongol-Japanese Parliamentary Group. They are actively working to attract investment from Japan, and involving Japanese companies in the development of mineral deposits. They are working to materialize their aspiration to acquire a new geo-economic partner. A group of Japanese companies lead by Marubeni has almost agreed to work with Russians at Dornod uranium basin. The month of March is likely to see the signing of an MOU on cooperation between Russia’s “RosAtom” and our “AtoMon”. Engagement of Japanese in uranium projects would bring in their advanced technologies. Mongolia will benefit from a tri-partite Mongolia-Russia-Japan agreement. If we deal with only “RosAtom” which produces military hardware, Mongolia’s uranium might fall a victim of suspicion that it is used for arms production. Japan is also interested in rare-earth exploration and to participate in TavanTolgoi tender bid. Japan’s coking coal needs are ten times higher than that of China.
Speaking of another geo-economic interest, some 11 South Korean companies have formed a consortium interested to participate in Tavan Tolgoi tender bid. They look forward to catching the Yakunin train – to join the Russian team. Both South Korea and Japan face growing energy needs, therefore, these state-owned companies should be given opportunities to participate in the tender bid. Let the South Koreans build the railroad with Russians to Dornod – Russians have the experience, Koreans have the money, so why not? Mongols have always observed caution about the political implications of the Shanxi railroad, TransMongolian and TransSibirian lines. Imagine our two neighbors frowning eyebrows to tax Mongolia’s coal transportation through their roads – such a scenario is too easily imaginable. Therefore, laying a new railroad in Mongolia leading to a huge market in north-east Asia would open wider geo-economic prospects!
V. Yakunin once spoke in Russian media that “…a railroad connecting Asia and Europe could cross through Mongolia…”. Materialization of his vanguard idea will be beneficial for Mongolia. So what’s wrong in waiting for Yakunin’s dream-train to arrive in Mongolia?
We are living through times with big dreams in our minds but with immediate needs for our day-to-day subsistence. Our vast southern Gobi rests silently awaiting for roars of development in the days to come. They say our future will be determined by the money we raise on these roars. Mongolia has already started making its geo-economic moves against the titanic geo-economic contemplations of our great neighbors. Mongols are visualizing our future, with big ambitions in our broad minds and fit bodies. The jingling of coins in the pockets of our neighbors is seducingly distracting. Just hope we don’t stretch our arms wide in the sight of these coins. These are the people of Mongolia who should talk about the jingling of coins, if a talk is ever needed. The prevailing circumstances necessitate to overt the covert information and communication policies. Although the Government has pledged to guarantee savings, explanation is needed for massive withdrawals from current accounts. They were saying the Risk Fund money would be lent out to banks, yet all major commercial banks avoided these loans. As soon as the Government took the control over Anod bank, the Prime Minister said he intended “to put some order in commercial banks”. Instead of teasing the banking system, he should have put some order in the fiscal expenditures at that very time. Had he done that, the IMF wouldn’t be told a stupid excuse ‘please come back in a month, am busy right now’. A one-month delay at a crisis time is way too lousy a loss. This loss is being borne by Mongolian importers.
The Government house is flooded in the talks about urgent loans. There will be ones willing to lend money to Mongolia. The only job for Mongolia is to compare the conditions and terms. If we fail to secure money by April, the Mongolbank will be unable to pay for imports, and to occasionally try to intervene with few dollars to keep tugrug rate seemingly fluctuating within 5-10 tugrugs.
This is the reality. We can’t feed our people’s minds and stomach with a sweet eloquence how beautifully the sun rose at the dawn of the Lunar New Year day. The only recipe for keeping the people away from panicking is explaining, talking to them about what has been and is to be done. Please try to abandon the standard way of wasting budget money for paid articles and interviews and Lunar New Year greetings in such non-standard times.