What are the key social and environmental challenges in Mongolia?
Illegal mining, particularly in the gold sector, and environmental issues could present important challenges to companies operating in Mongolia.
The country has an extensive illegal mining sector, with individuals and entire communities looking for residue in the tailings of local enterprises or by operating small illegal mines. While the World Bank estimates that 24,000 people work in “informal” mining, the true figure could be as high as 100,000 (in a country of roughly 2.3 million), according to Mongolian politicians and industry observers.
As always, illegal mining presents several challenges for mining companies. Aside from the obvious property rights issues, any environmental damage caused by illegal miners or accidents that occur on the property of foreign companies will be blamed on the legal owners of the property.
While illegal mining is the primary social issue facing mining companies in Mongolia, there are a number of others. Mongolian mining communities tend to be poor and require the provision of basic social services such as hospitals and schools. Likewise, with revenue transparency essentially non-existent, the inevitable claims of local authorities that they are not seeing benefits from the presence of a mine in their area will be a challenge. Finally, the country is becoming more prominent on the radar screen of international environmental groups and NGOs. The Asia Foundation, a San Francisco-based NGO with extensive projects in Mongolia, has criticized the country for becoming “too mining-friendly.” Earthworks and Oxfam, two other influential NGOs involved in the “No Dirty Gold” campaign, are increasingly interested in mining activity in Mongolia. While no major campaign has as yet developed, the entrance of a major international mining company into Mongolia as the primary operator of a large mine could tip the balance and create new pressures for all companies doing business in the country.
How will the increasing influence of Chinese companies affect business?
Chinese companies, spurred both by a national policy of actively securing sources of raw materials and the proximity of the Mongolian market, are actively seeking to make investments in Mongolia, and not just in border areas. Recently, for example, a subsidiary of China Nonferrous Metals International said it was investing in a zinc mine at Suhbataar, a city on the Russo-Mongolian border.
China accounts for 38% of total foreign direct investment (FDI) in Mongolia, and about 30% of FDI in the mining sector. It has also provided Mongolia with soft loans to fund the building of infrastructure necessary to deliver the mineral wealth of Mongolia to China’s fast-growing economy.
As Chinese companies continue investing in Mongolia’s mineral sector, there will be inevitable competition for attractive properties. The influence of the Chinese government, its view of Mongolia as an important hinterland with substantial resources for China’s growth, and the economic dependence of Mongolia on China in all spheres of the economy suggest that disputes with Chinese companies could result in judgments unfavourable to Western firms.
Opportunity or risk?
Mongolia presents a unique opportunity for the mining sector. While talk of Mongolia becoming the “next Peru” may be premature, the country has substantial mineral wealth, a historically mining-friendly and stable government, and easy access to the all-important Chinese market.
Nevertheless, as senior executives evaluate investments in the country, they need to consider the risks. And as those who made investments in Peru and Indonesia under those countries’ previous regimes would attest, making assumptions about political and social continuity can prove exceedingly risky. As the proposed changes in mining law clearly show, companies should not assume that the status quo will prevail in Mongolia. Significant development of the mining industry will create new wealth and affect the political and social fabric of the country — and with it the operating environment for firms.
There is no question that Mongolia will be transformed if a significant boom in mining development takes place. The only question is the nature and direction of the transformation.
— The authors are managing directors at the NGO Research Group, a research and advisory firm based in Cambridge, Mass., focused on the geopolitics of the natural resources industries. Questions or comments may be sent to:
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