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Putting the Wolf to Work. Reform in the Mongolian Economy

The average Mongolian to become U.S. dollar millionaire by 2014

Op-Ed Commentary: Chris Devonshire-Ellis

ULAAN BAATAR, Mar. 8 – As we have seen over the last few days, the Mongolian economy is about to take off in a very big way. Massive mineral reserves are about to transform the wealth of this landlocked country and the implications both for the Mongolians and for foreign investors are huge.

Such new found massive wealth is not without its drawbacks. As I have discussed in my previous articles, “Governance Key to Unlocking Mongolia’s Wealth” and “What if the Wolf Snarls? Mongolia’s Macro-Economic Risks,” the potential pitfalls in Mongolia are also very real.

However, reform is happening at a frantic pace, and this is already having a major impact on the wealth of the Mongolians and the opportunities now presenting themselves in terms of selling to this market. Getting the wealth from the nation’s mineral reserves is not going to be an easy task. At least 50 percent of Mongolians are nomads, essentially involved in agriculture through the raising of herds of goats, sheep and other animals. Byproducts such as cashmere and other meat and dairy produce are still a major industry in Mongolia, albeit one that is largely fragmented. Within a territory the size of Western Europe, some 1.3 million Mongolians retain their nomadic culture and use the land to raise livestock. Uniting them is no easy task.

The other 50 percent live in Ulaan Baatar, the capital city, and are slowly adapting to the developing service economy the city provides. Yet making sure all share in the national wealth is not going to be easy. As was pointed out by the head of Barclays Capital at the recent Mongolian Economic Forum: “Mongolia’s wealth belongs to all of the Mongolian people and it is important that this is used for the benefit of future generations.”

This then requires an enormous restructuring of the national finance system. As I pointed out last week, Mongolia’s Stock Exchange is being restructured with the assistance of the London Stock Exchange, and new dynamics are coming into play. The creation of the Mongolian Investment Bank and a sovereign wealth fund are also taking place. The government also wants to radically restructure many of its state-owned enterprises, and especially those in its energy sector. Many of Mongolia’s SOEs are ineffectively run, and getting private enterprise into them is paramount.

The government indicated that it intends, once the Mongolian Stock Exchange is reformed and the Investment Bank readied, to sell off over 100 SOEs, mainly through IPOs. The link with the London Stock Exchange provides access to finance both from Europe and North America, and some operations may also be listed not just in Mongolia, but also in Hong Kong, London and on New York’s Nasdaq. A timeline of three years was given for this sell-off to commence.

Brand new BMW 7 series on sale in the State Department Store in Ulaan Baatar

Putting that money to good use, though, will be a multi-tiered approach. While most of the businesses to be listed will remain at least partly government owned, the proceeds from the sale will be divided. About 50 percent is earmarked directly to the government coffers, and a further 30 percent to be divided between the Mongolian Investment Bank and the sovereign wealth fund. Of the remaining 20 percent, it is mooted that half will be given gratis to Mongolian nationals, with the remainder to be sold at preferential rates. Quite how this is to be accomplished has still to be worked out, however it will have an immediate impact. Assuming the stocks sold raise the expected amount of value, Mongolia will suddenly become a country where every citizen is a U.S. dollar millionaire.

In this regard, the country is already studying the models of nations such as Qatar and the UAE, and some 16 global banks are now advising the government on this repositioning of national wealth.

Concerning the regulatory aspects of mining, much of the nation’s reserves will be operational for between 50 to 100 years, meaning that getting political and economic stability into managing the nation is key. However, the government also wishes to develop industries away from the core mining sector. To this end, at present most foreign direct investment incentives are targeted at the mining sector. The government then needs to address the discriminatory aspects of investment incentives in other industries and encourage secondary markets to flourish.

In my speech to the government, I stressed the importance of getting added value into Mongolia’s natural resources and not to rely purely on the sale of raw materials. I quoted the example of Manzhouli, a Chinese city situated near Mongolia’s eastern border which is additionally close to Russia. Although the land there is predominantly steppe with very few trees, the city possesses a huge lumber processing industry. The reason being that while the Russians are content to just sell their raw materials, the Chinese are adding value and have invested in the processing industry the lumber requires. I wrote about this is the article China’s New City of the Steppes.

The development of secondary industries is therefore key in Mongolia. Not only to add value to their own raw materials, but also to do the same to those from Russia. While Russia’s policy focus remains that of exporting raw materials, Mongolia can position itself to be a major regional hub for minerals and related processing.

This is also likely to impact upon the development of new and high-tech industries in Mongolia. For example, a concrete enterprise has been developed in the country in conjunction between a Mongolian SOE and BASF that permits the concrete to be delivered, fast, several kilometers underground. It is then able to set quickly and with great strength at certain temperatures only, meaning it can be efficiently managed and placed into position under extreme conditions. The development of such high-tech products and new industries is not new. When Chile’s mining industry began, the country had very little technical expertise. Now the country exports technologies to Australia – a fact that would have been unheard of 20 years ago. Mongolia’s vast array of minerals and the sometimes difficult conditions under which they have to be extracted will also spur-on new innovations.

In short, Mongolia is about to become very wealthy, very fast. With its capital city just a one hour and thirty minute flight north from Beijing, the opportunities for foreign investors as concerns the creation of this new wealth are well worth exploring.

Chris Devonshire-Ellis is the principal of Dezan Shira & Associates, Asia’s largest independent foreign direct consultancy practice with 17 offices throughout Asia. The firm specializes in foreign direct investment due diligence, investment law, tax and related matters. He is also the vice chairman of the business advisory council for the Greater Tumen Initiative, a UNDP body responsible for North China, Mongolia, Eastern Russia, North Korea, and South Korea with Japan as an observer nation. Chris may be contacted at [email protected] for advice about investing in Mongolia and the region.

Chris will be hosting a Mongolia Investment Forum at the Capital Club in Beijing on Wednesday, March 23, 2011. This will detail investment opportunities and the legal/tax regulatory environment in Mongolia. For further information and to RSVP please click here.

Sukhbaatar, the man who brought democracy to the nation, points the way forward to a modern future for Mongolia

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Our guide to the economic, trade relations and demographics of all 14 of China’s neighboring countries including Mongolia, in addition to Afghanistan, Bhutan, India, Kazakhstan, Kyrgyzstan, Laos, Myanmar, Nepal, North Korea, Pakistan, Russia, Tajikistan and Vietnam.

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16 Responses to Putting the Wolf to Work. Reform in the Mongolian Economy

  1. Chris Devonshire-Ellis says:

    One point I omitted to mention is the property sector in UB. That’s also booming. As an example, I purchased an apartment block just off the main Sukhbaatar Square twelve months ago. With renovations largely now completed, the property has more than doubled in value during that time. See also my earlier comments about the Real Estate agent.

    More news here from Bloomberg:

    Mongolia Seeks Balanced Growth to Avoid ‘Dutch Disease’ from Mining Boom

    Thanks – Chris

  2. Otto says:

    Dear Chris,

    As rational readers, we must look at the statistics correctly.
    According to preliminary census of 2010, that 50% of Mongolia residing outside Ulaanbaatar includes 200,000 or more in Erdenet mining town and Darkhan industrial town. There’re 18 other provincial center towns, not the least, where the residents are tending something but livestocks.

    According to Mongolia’s statistics office (as it was cited in CIA world facts webpage), actually 36% of Mongolia’s 1.1 million labor force is engaged in tending animals. Not 50%.
    In addition, from a couple of years ago, Mongolia started to provide 100% of her demand for wheat and potato, while about 60% of other vegetables commonly consumed in Mongolia. There must be some people doing that: They would not be tending livestock. And all those in the medium-small size mines. Obviously tending stones, if anything.

  3. Chris Devonshire-Ellis says:

    @Otto – thanks for the clarifications. One of the issues that cropped up often at the forum was the lack of reliable data – such a huge country, and so few people and reliable research. I appreciate your educating us. Thanks – Chris

  4. Craig Portell says:

    Being a foreigner that lives in Mongolia presently and has lived there for seven years, it’s VERY hard for me to beleive that every citizen in Mongolia could ever be a US $ millionaire. Seems like money rarely trickles down to the common person…..that’s why all the government workers are driving Range Rovers, BMW’s and Lexus!!!!!!!

  5. Craig Portell says:

    Something else…..you stated that 50 percent of Mongolians are nomads and the other 50 percent lives in Ulaanbaatar. I agree that maybe 50 percent of the population lives in UB, but I definitely wouldn’t say that 50 percent are nomads. That would mean that everyone that lives outside of UB is a nomad. Have you ever been outside of UB? Because I lived in an aimag center for 6 years and I knew A LOT of people that aren’t nomads……..

  6. Otto says:

    Dear Chris,

    Please do not rely on your data on your interpreter’s knowledge regarding numbers. They are not the ones whose trade is statistics or any analysis. Having worked as interpreter myself, I recall how my colleagues were illiterate in basic economics and statistics. Not to blame them: They studied language in school, not social sciences.

    In such matters, if I were you, I would bypass them and reach out the respective sources engaged in the very matter: statistics or demographics. Mongolia has a huge territory, but the population is pretty neatly enrolled in statistics as a matter of fact.

  7. David says:


    Can you please elaborate further on your calculations for the US$1 million per Mongolian by 2014? If you are assuming 100 SOEs are privatized within 3 years, I would argue that is highly unlikely. It took 6 years for OT IA to be reached, and apparently will be at least 2 years from that point for the TT development to be reached. The Mongolian government is averaging 1 major privatization every 4 years.

  8. Otto says:

    By the way, I myself wouldn’t use the term ‘nomad’ in serious articles as yours. The term is wrongly used in Mongolia to refer to the herders who are tending livestocks as an economic activity and existence. These herders are not really ‘nomads’, if we are serious. We all know that the term ‘nomadism’ implies a primitive form of social structure: Mongolian herders are not living such a primitive existence, save the poor/mobile dwelling.

  9. Chris Devonshire-Ellis says:

    @Craig – I’ve travelled extensively around Mongolia and also published a guide book to the country. Maybe some debate over the economic definition of “nomad”?
    @David – a loose calculation, based on the the provision of stock. Details on implementing as I mentioned have still to be worked out, but the percentages (10% gratis, 10% at preferential rates) are correct. As regards the numbers of IPO’s that will pick up as I stated when the Mongolian Investment Bank and the Stock Exchange are revamped, while the timeframe was indicated by the Chairman of the Bank of Mongolia. It’s “watch this space” at the moment, but change is coming;
    @Otto – I’ve met plenty of nomads including some just outside UB. Definition is they move their livestocks from pastures to pastures. I don’t believe the Mongolians regard the termn as derogatory, it’s a lifestyle very much in tune with the land and the seasons. And how would you make a distinction between a “herder” in a permanent site and one who moves from place to place? Nomad is fine.
    Thanks for your comments – Chris

  10. Jason P. says:


    I agree that Mongolia as a whole will get wealthier. (don’t know if I agree with every Mongolian being US millionaires though) However, I don’t think this is a good thing for the country at all.

    I take it from your previous responses that you’ve spent your fair share of time in Mongolia, so you must know of the alarmingly high rate of alcoholism and the rather poor work ethic of Mongolian men. Given this background, if all of them suddenly get cash in their pockets, and especially with the rate of inflation that will occur, what do you think will happen to all the money? In addition, the money will be a disincentive to work, which further exacerbates the difficulty of educating workers, and we know workers in most industries will require extensive education.

    So should the government keep all of the proceeds of the privatisation and mining bonanza to create a safety net and investment fund for now and posterity a la MidEast/Norway? I don’t think the Mongolian people will accept this unless they’re seeing the cash themselves because 1) it will be perceived as a piggy bank for gov. officials 2) people already feel ripped off that the common Mongolian has not benefitted from what is seen as communal land/resources.

    That being said, there are some things the Mongolian government is doing right. For example, making huge investments into infrastructure that will lay the foundation for other industries to flourish. However, they need to take this a step further and not only invest in “hard” infrastructure such as roads and railways, but in other infrastructure that will be the basis of Mongolia’s future. Education comes to mind; education for adults who have no marketable skill in the new economy, and education for children who will lead the creation of new industries in Mongolia.

    All in all, Mongolia has an amazing opportunity at its feet to use the resources from beneath to leapfrog the whole country and economy into modernization within a generation or two. With the right investments, they can make this gain sustainable as well, even without the nat. resources. However, as you said Chris, the question is whether they can handle the temptations that will stretch the limits of the self-discipline and foresight.

    Jason P.

  11. Gan says:

    Chris, good job in promoting Mongolia and MEF. Thank you. Investment Bank? You mean the Development Bank which was founded recently? On the SOEs: the Cabinet approved today the National Code on Corporate Governance.

  12. Chris Devonshire-Ellis says:

    Thanks Gan – yes, I was referring to the Development Bank which was recently founded and will soon commence investment work. For our readers: Gan is the Deputy Finance Minister of Mongolia.
    Gan – thanks for clarifying this. Good news on the National Code for Corporate Governance. I appreciate you taking the time to update us here. – Chris

  13. Mungunzezeg says:

    Hi Chris,
    I read your articles regularly, I find it very interesting to us appreciate your work. Keep it up Chris.

  14. Chris Devonshire-Ellis says:

    Thanks Mungunzezeg; I’ve always enjoyed working in emerging Asia (I started in China 20 years ago) and find it fascinating to watch and be a small part of what is happening elsewhere. We’re doing well in India and Vietnam now, and I’m interested in other markets. Sustainable operational cash flow is always an issue in the service industry, but I can see that may be a solvable thing for Mongolia, and I’m looking at our own business plans for the country right now. Watch this space! – Chris

  15. Susan Fox says:

    I’d like to offer a correction to the photo caption. Damdin Sukhbaatar did not bring democracy to Mongolia. Quite the opposite. While he was one of the fighters who helped free Mongolia from Baron Ungern-Sternberg and the Chinese, he worked with the Soviet Union to set up the Mongolian communist government, which came to power in 1921. He is still certainly a national hero, however. Zorig is the hero/martyr of the democracy movement.

    I found your articles via a “Mongolian Business and Economy News” Facebook page link. I’m actually an American oil painter who specializes in Mongolian subjects- takhi, argali, the herders and their horses, etc.

    Since I first went to Mongolia in 2005 as an Earthwatch volunteer (sixth trip coming up), I’ve seen how fast things are changing. I’ve come to care greatly about the country and am involved at Ikh Nartiin Chuluu Nature Reserve with supporting a herder women’s crafts collective and have recently been appointed by the Aimag governor to the reserve’s working team, which also includes researchers from both the Denver Zoological Foundation and the Mongolian Academy of Sciences.

    I’m finding your articles to be very helpful in giving me a bigger picture of what is going on economically in the country. It feels a little like a crash course in the mining industry, international finance and economic development. I think they are well-written and very interesting reading.

    Personally, I’ve found that being an artist has made it pretty easy to connect with the Mongols and their culture, one in which art and artists are respected and valued.

  16. Chris Devonshire-Ellis says:

    @Susan, thanks for that, I appreciate your comments about the economic development pieces we’ve run, and good luck with your painting. It’s certainly an extremely picturesque country. We have our own photos and other articles about Mongolia and culture at http://www.mongoliaexpat.com – all free and downloadable.
    Keep up your valuable work there. – Chris

Comments are closed.

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