Mongolia's flip-flop

This is the site of a copper and gold mine located in the southern Gobi Desert region of Mongolia. The former communist state has huge reserves of copper, gold and other metals, attracting multinational firms seeking to develop and use the natural resources. However, Korean and other foreign companies are facing difficulty investing in the resource-rich nation, due to regulatory uncertainty stemming from resource nationalism.

 

  By Kim Bo-eun 

Korean companies doing business in Mongolia increasingly face difficulties due to frequent regulatory changes as a result of political instability in the resource-rich nation north of China.

The former communist country has put a number of Korean firms’ projects on hold, saying foreign businesses need to make more concessions to do business there.

Mongolian government officials say they welcome investments from Korean and other foreign companies. However, they offer no incentives to foreign entities, and are in fact increasing the nationalization of Mongolia’s rich natural resources.

Company officials here say Mongolia does not seem ready to accept outside investments, and is unwilling to put itself on the global economic map.

Last year, Korean powerhouse POSCO Energy, in a consortium with a French and a Japanese company, bid to construct a combined heating and power plant in the Asian country. However, after its general election last June, the Mongolian government scrapped the bidding, citing the relocation of the construction site.

“The government said if we wanted to bid again, we would have to submit a revised proposal,” said a spokesperson for the company. “That’s what we did, and we are now waiting for the government to revise the bidding.”

Similarly, in May last year, Hyundai Heavy Industries bid for a 450 megawatt thermal power plant in Mongolia. However, the $1 billion project has been on hold ever since.

“Nothing is fixed at this point; we are just waiting for the government to take the next step,” said a spokesperson. “The word is that the delay has occurred due to some internal issues within the government.”

He mentioned claims that the political party that took power after the general election is not as enthusiastic about foreign investment as the previous leaders.

Asiana Airlines faces difficulties in opening a route between Incheon and Ulaanbaatar. Due to stalled talks between the two governments, this endeavor does not seem likely to happen in the near future.

“The Mongolian government has said that it would not have state-level talks regarding opening new routes for some time,” said an airline industry watcher familiar with the matter and who declined to be named.

“Each country has a different policy regarding the opening of routes for airlines, but to receive governmental approval, talks between the two countries have to come first,” he said.

In November last year, Korea Electric Power Corp. (KEPCO) submitted a letter of intent to buy shares of a local energy firm in Mongolia, in order to take part in a wind power generation project.

According to an official, KEPCO and Japanese telecommunications firm SoftBank each stated 5 percent of the shares, but there has been no progress since.

 

Resource nationalism 

The resource-rich central Asian nation has captured the attention of investors as a rising economy. With its economy growing at double-digit rates in recent years, foreign entities have been eager to take part in the country’s economic development.

The Mongolian government, however, suggests that it is becoming less keen about foreign investment. Industry watchers say this is due to a growing sense of resource nationalism in the country.

The passage of the controversial Strategic Entities Foreign Investment Law in May last year was seen as a symbolic move. The law requires parliamentary approval for any transaction involving more than 49 percent of an asset within one of the strategic sectors — mining, banking and finance, and communications.

In the general elections in June, the Democratic Party took power, boosted by its pledge that the government would become the main driver of economic development.

Foreign media outlets have interpreted this as a response to voter concerns that Mongolia’s sovereignty was threatened by the acquisition of mining rights by foreign state-owned and private firms.

Reports by the foreign press have reflected the Mongolian public’s beliefs that current statutes and regulations grant foreign and domestic investors most of the benefits of extracting resources, while leaving local communities with little. The government has claimed that it must amend laws related to resource extraction to ensure that Mongolia gets its fair share of revenues.

Korea’s investment in Mongolia fell slightly to $54 million in 2012 from $55 million a year earlier, according to the Mongolian Embassy in Korea.

 

Murky outlook 

Perhaps the only promising development is the Korea Trade Investment Promotion Agency’s opening of a trade center in Ulaanbaatar, scheduled for later this year. The trade center is expected to provide a much-needed boost to business transactions between the two countries.

However, the government has yet to take substantial measures to promote investment. While the Mongolian Embassy in Seoul spoke invitingly of Korean companies’ participation, no incentives or concrete plans were mentioned.

“Mongolia recognizes the importance of Korean companies’ investment, and its government is inviting Korean companies to participate,” said Shishmishig Jugnee, counselor of economy and trade at the Mongolian Embassy.

He flatly denied claims that the disputed law would be an obstacle for foreign firms intending to invest in the country. According to the counselor, withdrawals of investments have not had a notable impact on the country’s economy.

He added that the tendency of a local government to try to protect its resources is not unique to Mongolia.