Limits to Mongolia’s ‘Promising’ Investment Law

Mongolian Yurt

Sitting on a vast amount of mineral reserves, Mongolia is likely to be the world’s fastest-growing economy this year. Forecasters say growth could top 20 percent. Mongolia is also being likened to the ‘new Kazakhstan’, “with its vast land mass and impressive natural endowment.”

The potential for economic growth and modernization is undoubtedly there. The question remains, however, whether foreign investment, a vital source of growth for growing economies, is welcomed in Mongolia. There are promising signs. Only recently, Mongolia’s parliament approved changes to the deeply unpopular Strategic Entities Foreign Investment law (SSEFIL) passed in May 2012. Under the SSEFIL, foreign investors were required to obtain parliamentary approval before they can acquire more than 49% of, or invest 100 billion tugrik (approximately US$70 million) in, ‘strategic sectors’ (mining and finance).

This law, passed shortly after Chinese Chalco made a bid to buy a majority stake in the Mongolia-focused coal mining firm SouthGobi Resources, was heavily criticised by investors who were increasingly worried about the growth of Mongolian ‘resource nationalism.’ This has had clear repercussions for the in-flow of foreign capital into Mongolia. Foreign investment was down 17 percent last year and was down 58 percent in the first months of this year.

Mongolian economic freedom

Economic freedom increases with an amendment to the SSEFIL improving the investment environment. Political control remains in place, however.

The recent amendments to the SSEFIL have somewhat eased some restrictions on overseas private companies, whilst keeping a lid on foreign state-owned companies. Firstly, it exempts foreign private companies from parliamentary approval. Secondly, the Amendment removes investments by foreign private investors from the scope of Parliamentary approval and deletes the MNT 100 billion threshold entirely.

However, there are serious reservations regarding whether these amendments actually represent a genuine change in the Mongolian investment culture. Firstly, getting rid of Parliamentary approval for foreign private investors is somewhat superficial. It is worth noting that private companies will not be exempted from a state-run approval process altogether. They now must obtain permission not from parliament but from the Cabinet or the Ministry of Economic Development. Considering the culture of patronage and corruption within the Mongolian political system, this supposed ‘change’ is simply a repackaged form of government control on foreign investments.

Secondly, state control over foreign state-owned enterprises (SOE’s) has strengthened under this law. The amendment removes a 100-billion tugrik ($70 million) threshold triggering government intervention into the practices of foreign SOE’s. All foreign SOE’s must now gain approval of Mongolia’s cabinet in order to buy into a Mongolian firm, “regardless of the size of the stake.” For purchases of stakes of more than 49 percent, the approval of parliament will also be required. This tightening grip on SOE’s reflects a deeper nationalist trend ensuing within the Mongolian parliament, largely driven by anxieties over the economic hegemony of its southern neighbour, China. With Chinese state-owned firms enjoying large profits in Mongolia’s ‘strategic sectors’, especially mining, Mongolia have made sure through these amendments that the balance of economic power doesn’t tip even further China’s way. Or so is the intention.

It is fair to say that significant steps have been taken to improve the investment climate of Mongolia. Yet it is equally fair to conclude that the culture of patronage, government intervention, and counter-productive nationalism will not be swept away by one piece of legislation. Foreign companies and investors, proceed with caution.

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Categories: Central Asia, Economics

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