Mongolia is home to vast mineral wealth, but the government is taking risks by betting big stakes on a single horse, says Paul French

It’s been a couple of years since we reported about Mongolia. In the meantime a lot has been happening there – new mineral concessions and mine listings, controversial new mining laws and serious competition between companies and government for the commodity wealth that lies beneath Mongolia’s grasslands.

Despite this mineral wealth beneath their feet, more than a third of Mongolians live below the poverty line. Graduate jobs pay barely $350 a month and 90% of the country’s roads remain unpaved.

The capital Ulaanbaatar is growing fast, complete with all the little treats that come with a commodity boom. There is a stock exchange (albeit open only two hours a day), new high-rise apartment buildings, 24-hour bank branches (with a spate of bank robberies), and a Louis Vuitton flagship store.

The suburbs of “Gers” (traditional tents) spread a little further every year. More and more people are leaving their traditional nomadic lifestyles – in fact the Gobi desert is swallowing more than 3,600 square kilometres of grassland a year, while mining takes some more.

The people migrate to the city in the hope that all this fabled mining wealth they’ve been hearing about might lead to some electricity, education and healthcare. A good percentage of these new urbanites have been disappointed so far.

And indeed as the resource boom gets hotter in Mongolia so does inflation, while the currency, the Tug Rug (MNT), has become wildly volatile. The result: renewed impoverishment for many, wage demands by many more and little sign of all the goodies the mineral wealth was supposed to bring.

Steven Barnett of the IMF regional office for Asia-Pacific is now predicting a “hard landing” for Mongolia. This leaves the Ulaanbaatar government in a bind.

Norway of the east?

For the Mongolian People’s Party-led administration of the prime minister, Tsakhiagiin Elbegdorj, it seemed that commodity-derived revenues would be the way out of poverty. Mongolia would take the wealth and reinvest it in infrastructure and social welfare improvement. The country would be a resources success story, like Norway, not a resources curse story.

Over the past couple of years, to be fair, the government has spent like a drunken sailor. Barnett says: “Government spending increased 60% in 2011 and is set to rise a further 30% this year.”

Thanks to mining, Mongolia’s GDP skyrocketed by a whopping 17% in 2011. There are not many prime ministers, presidents or dictators who would not go on a mega shopping spree with that kind of growth. It’s just too tempting.

However, the growth is based on one industry – mining – and global commodity prices are volatile. That double-digit growth can evaporate faster than a puddle in the Gobi on an August day.

And there’s more fallout from mining than just sudden wealth, inflation and variable currency rates. A new report, produced by NGOs, including the Czech Republic’s CEE Bankwatch Network and Oyu Tolgoi Watch in Mongolia, claims that increased dust caused by mining and trucks is exacerbating desertification. And the rash of new mine developments has pushed herders in the south Gobi out of traditional camps, fragmented pasture land and put pressure on water resources.

Miners say the NGOs are exaggerating, despite the fact that trucks laden with coal cross the south Gobi to the Chinese border more than 500 times a day.

Mongolia’s people remain expectant. The government needs to deliver jobs, rising incomes and better social services from its minerals bonus.

And Mongolia’s parliament, the Great Hural, is trying. New laws mandate that 75% of overseas mining company workforces must be local, increasing to more than 90% once a project reaches production.

But the mining companies (including various Chinese firms as well as Rio Tinto, Ivanhoe, Xanadu and others) have fought back. A 34% stake in Oyu Tolgoi for the Ulaanbaatar government was negotiated but Tsakhiagiin Elbegdorj was unable to raise this any further under opposition from the major mining companies.

Resource success or resource curse? For Mongolia it appears the jury is still out.

Paul French has been based in China for more than 20 years and is a partner in the research publisher Access Asia-Mintel.