September 2011
Nobody knows about the progress on the Tavan Tolgoi investors’ bid, and nobody is brave enough to hazard a guess. This is because the deadlock on economically transporting the coal through Russian or Chinese territory still persists, with no resolution in sight, making it impossible for any of us to say something new now. The Mongolian Government’s working committee did its best, but obviously their best was not good enough to have any impact on either Russia or China on issues of routes to sea ports and transport costs. The President and The Prime Minister visited the neighbours in June, and hopes were raised, but no concrete result has so far emerged.
We are bewildered that the fate of Tavan Tolgoi, Mongolia’s prize asset continues to be in the hands of Russia and China. The Mongolian Government faces tough obstacles at every stage as it strives to protect national interests over the neighbours’ own economic and political ends. To squeeze us, one cut off petrol supply, and now the other has increased railway tariff for Mongolian coal between Erlian and Tianjin. The whole Tavan Tolgoi issue once again reveals how helpless Mongolia is when confronted with the greed of its two intransigent neighbours.
A year ago, an amendment was made to the guidelines to Mongolia’s national security policy. It said: “Mongolia shall follow the policy that no one foreign country’s investment will exceed one third of the total foreign investment in the nation. When Mongolia seeks investment in the strategically important deposits, it will similarly restrict investment by foreign state-controlled companies and ensure equal investment from neighbouring countries and from other developed countries.”
Consortiums led by the Russian Railways and Shinhua must be treated as state owned business entities. It’s simple logic that selecting them violates the above mentioned guideline. They now hold all the aces. Will Tavan Tolgoi coal be transported by Russian Railway or shall we have to join Shenhua’s railway network? We have to do either to be able to sell the coal in markets beyond the seas. Our neighbours have a stranglehold on transit freight rates. Even if we succeed in reaching an agreement on these, we have to beg them to give us a terminal at the port of export. Otherwise we shall be left to defreeze our coal in Vanino or jostle for space in the heavy congestion at Tianjin. Finding markets and negotiating for the proper price are easier than this.
No progress has been made in this essential issue since last year’s Russian proposal, shown as a promise, of a tariff discount. This is what the letter on 9 April, 2010 from Vladimir Yakunin, President of Russian Railways, to our infrastructure minister said. Please note that it is not a literal translation.
Dear Minister Battulga,
RJD discussed your request for reduced freight rates for Mongolian goods to be exported from Vanino, Vladivostok and Solovyovsk.
Russian Railways and Mongolian Railway are committed to fixing a transit rate after mutual discussion, taking into account factors such as related logistic costs, wagon load and others.
The Russian and Mongolian Governments concluded an agreement in Moscow on 19 October, 1992, on sending Mongolian freight through Russian territory to sea ports. This agreement allows RJD to fix reasonable rates for Mongolian freight transported by Russian Railways to Far Eastern terminals.
A meeting between RJD and Ulaanbaatar Railway on 10-11March, 2010, discussed the possibilities of transporting Mongolian coal to Russian terminals in the Far East. I now inform you that coal transportation cost via Naushki and Solovyovsk to the Far Eastern ports by 68-ton wagons will be 26.3 Swiss franc per ton. This is 65 per cent lower than the present rate.
Regards,
Vladimir Yakunin, President of Russian Railways.
Another meeting some months later produced the following. Here, too, the translation is not literal.
Protocol on exporting freight from Mongolia through Russia
Irkutsk city
2010, September, 8
The meeting was held during the international forum of Baikal and the participants are listed below.
• A.Nedosekov, Russian Deputy Transport Ministry.
• A.Gansukh, deputy Minister of Mongolian road, transportation, construction and urban development.
During the meeting the sides discussed how rates could be reduced for transit freight.
• The sides noted how a proposal to reduce the rates was made in a letter of V.Yakunin, president of Russian Railways, written on 9 April, 2010 and how this would help make it easier for Mongolia to transport goods via railways through Russian territory.
• The sides agreed to hold further discussions on transporting Mongolian mineral products via Naushki and Solovyovsk to Russian ports. They will also discuss whether an agreement, when it is reached, will be for 25 yearsor more.
• Mongolia will send information to Russia on how many tons of mineral production would be transported across Naushki and Solovyovsk customs centres.
• Mongolia will establish a working committee to prepare a draft agreement on exporting production from Mongolia via Russian territory
• Russia considers that RZD can contribute in a significant way to the proposed new railway system in Mongolia.
These are the operative documents, and several meetings have been held but no further result has been achieved. However, there has been one new development. Russian Railway has been seeking financial and technical help from Korean and Japanese companies in the construction of Mongolian railways to the north. It has also shown its willingness to form a consortium with them to access such help. This expression of inability by Russian Railway to help Mongolia on its own makes it risky for Mongolia to build its railway to the north. What happens If Russian Railway fails to get funding from Korea and/or Japan?
It has already been announced that the Russian-Mongolian consortium will own 36 per cent of the part of Tavan Tolgoi on offer. The two sides will have equal shares in their 36 per cent. If Mongolia cannot afford to pay its 18 per cent share in building the railway, the project cannot go forward. There is nothing for Russia to lose if our new railway is not built. Their first priority, owning 18 per cent of the Tavan Tolgoi project, has been achieved. Mongolia, however, will face great economic loss if the coal cannot be sold at the most profitable rates.
Mongolia will ask Russian Railway for advance payment for 18 per cent ownership of Tavan Tolgoi project, as it will ask the other investors. What if the Russian parliament does not agree? Russia has been using its 50 per cent ownership of Ulaanbaatar Railway to refuse several urgent demands of Mongolia, and may do so again in everything to do with the Tavan Tolgoi agreement. Similarly the Chinese National People’s Congress may not agree to Shenhua making the advance payment. Both national legislatures have to be involved in Tavan Tolgoi as both RZD and Shinhua are state controlled companies.
The Mongolian National Security Council guideline of limiting the investment of any one foreign state controlled company is being violated. If Shinhua does make an advance payment in proportion to its 40 per cent ownership in Tavan Tolgoi, that would take Chinese investment in the Mongolian economy well over two thirds of the total foreign investment in Mongolia.
Shinhua sent its bid together with a Japanese company but now only Shinhua is mentioned in the selection. China does not want to give rival Japan access to coking coal from Tavan Tolgoi and will also create obstacles to it reaching Japan via Chinese territory. With prospects of carrying the coal through Russia and China equally dim, and both countries stubbornly defending their own economic and political interests, Mongolia’s dreams of establishing strong relations with third neighbours may remain just a dream.
Another important article in the National Security Council guideline reads: “In order to reduce dependence on any of the two neighbours in the matter of transit trade, Mongolia will conclude trilateral or bilateral and mutually beneficial agreements with its two neighbours, to secure its own facilities in their sea ports to handle Mongolian exports to the world market, and to make proper arrangements for their transport to these ports.”
There is demand by some that instead of leasing facilities at foreign ports, Mongolia should build its own terminal with capacity to handle 7-8 million tons of coal. This will cost around $130 million. But before that we have to be allotted space at a free trade zone, which will remain another country’s decision. And the primary problem, of using another country’s railroad to reach the port, will still remain.
The impasse over Tavan Tolgoi is costing the Mongolian economy dear. The development of the South Gobi region is totally dependent on construction of a 600-MW power plant but work on it cannot start until the Tavan Tolgoi issue is resolved. Oyu Tolgoi cannot reach optimum production if it does not get adequate power. The company is trying to arrange for electricity from Inner Mongolia, but indications are that China will not make this easy, putting further pressure on the Mongolian economy. OT plans to start commercial production next year but without assured and adequate electricity supply, its contribution to our economy will be much less than anticipated.
Thus, Mongolia’s development is at the mercy of its two neighbours. It is not a priority for either of them. That is the harsh reality which all our ambitious dreams have to confront.