Courtesy of The Financial Times, a detailed look at how Mongolia is making sweeping reforms to win over western investors and become less reliant on China and Russia:

Thirteen hundred metres beneath the vast Gobi Desert, the heat, dust and a sense of claustrophobia are unshakeable after a rapid trip down a mine shaft in a freight elevator known as “the cage”.

Yet Ganbat Tuvshinbat, a local mining engineer, grins broadly. “This is the warmest place in Mongolia,” he says of a country where the average temperature is below zero. “Here you can experience summer all year round.”

Tuvshinbat and his employer Rio Tinto, the Anglo-Australian multinational, have reason to smile. Towards the end of this decade, the company plans to produce about half a million tonnes of copper from the Oyu Tolgoi mine each year, enough of the metal to help build 6mn electric vehicles. When the underground mine is fully operational, it will be the fourth biggest copper project in the world — a boon for the Mongolian government, which holds a 34 per cent stake.

Despite setbacks and delays, Oyu Tolgoi — already the biggest foreign investment in the Asian country’s history — is emblematic of what the Mongolian People’s party government sees as its path to prosperity. Luvsannamsrain Oyun-Erdene, Mongolia’s Harvard-educated, reformist prime minister, wants western mining groups to tap the country’s vast deposits of copper, uranium and other critical minerals essential to the world’s fight against climate change.

Much is at stake for the country of 3.4mn people which only emerged from single-party socialist control in the 1990s. If Oyun-Erdene is successful, the developing country will enjoy a years-long resources boom. The government hopes to more than triple gross domestic product from $15bn last year to nearly $50bn by 2030 and halve Mongolia’s poverty rate to 15 per cent in the process.

There is another goal, too. A wave of investment from the west holds the promise of giving Ulaanbaatar a much-wanted buffer against Beijing and Moscow. The landlocked nation is highly dependent on its only two neighbours: China accounts for 84 per cent of Mongolian exports, such as copper and coal, and Russia provides about 30 per cent of its imports, including all its petroleum products.

“Mongolia is still trying to safeguard its democracy because we have a very difficult geographical and geopolitical situation,” Oyun-Erdene tells the Financial Times, urging foreign investors?to “pay close attention” and understand his country’s particular challenges.

Oyun-Erdene is cognisant of the rare opportunity at hand. Climate commitments are fuelling a historic transition to clean technologies, sparking an intense global race among companies and governments to secure long-term access to minerals. Locations once considered too remote or too risky are now in play.

To win over investors, however, he must convince them that the days of convoluted policymaking and deeply entrenched corruption are over. He also needs to combat fears over mining clashing with the country’s nomadic tradition and criticism from environmentalists. Finally, he must overcome a discouraging lack of modern geological data.

Oyun-Erdene has swiftly set about cleaning house in order to present his country to the western mining industry as a secure investment destination: sweeping constitutional and judicial reforms, a crackdown on graft and an overhaul of the policies and regulations governing the resources industry. “At the moment our main goal is to improve transparency,” he says. “After that, we can discuss investments from abroad and which countries to co-operate with.”

The prime minister is not the first Mongolian leader to have had this vision. The question is: can he be the one to realise it?

Cleaning house

Oyun-Erdene was halfway through his first term in office when he faced his biggest test.

In December 2022, he left the state palace and stepped into sub-zero temperatures to face Mongolia’s biggest public demonstration since the country’s democratic revolution three decades ago. The protest was sparked by the release of official records that confirmed what many citizens gathered at the capital’s Sükhbaatar Square had long suspected: corruption was rife among the country’s state-owned coal industry. Billions of dollars had been stolen, including by members of parliament.

The fury revealed not only the degree of public alarm over endemic graft and abuse of power — it was also a bitter reminder of the broken promises of earlier mining booms. A month later, speaking in Ulaanbaatar, Richard Buangan, the newly arrived US ambassador, was unsparing when he summed up Mongolia’s prospects: “Capricious, non-transparent, unpredictable and corrupt application of laws and regulations make Mongolia unattractive for investors and challenging for importers and exporters.”

In response to the criticism at home and abroad, and driven by a resolve to avoid taking on international finance loans, Oyun-Erdene has prioritised making Mongolia investable at the heart of his economic agenda.

The prime minister has tapped his right-hand man, justice minister Khishgee Nyambaatar, to spearhead an aggressive anti-corruption campaign. Seventeen people have been extradited to Mongolia to face investigation and the government has asked Interpol to issue red notices for a further 92 individuals.

Oyun-Erdene has also changed the way politicians are elected. Constitutional reforms passed last May increased the number of legislators from 76 to 126 and established a mixed-member proportional system, with 78 constituent members and the remaining elected from party votes.

The new system, which is akin to those in Germany and New Zealand, is intended to increase oversight of the cabinet and provide greater civil society representation. 

New rules are also being established for the appointment and dismissal of judges, requirements for public information disclosure and protection for whistleblowers as well as changes to the governance of state-owned enterprises and controls over the financing of political parties.

All of this shows Mongolia is “moving in the right direction”, insists Nyambaatar. “The revelation of previously hidden details, such as licensing procedures, land allocations and concessional loans incited anger and frustration among citizens,” he says. “We have come to the belief that the government should reduce its involvement in numerous business sectors.”

Oyun-Erdene’s plan also hinges on the country’s ability to forge new connections to the outside world. At its closest point, Mongolia is nearly 700km from the ocean. The prime minister points out that transporting goods by air is at least one hundred times more expensive than by sea. Mongolia, he says, is working to secure routes for its exports through China.

Amid concerns that tapping the country’s mineral wealth will leave its finances exposed to commodity price fluctuations, there is also a push to move higher up the value chain: from mining to processing and refining minerals, as well as building solar and wind projects in the Gobi to export power to China.

As he works to make Mongolia attractive to foreign investors, Oyun-Erdene, who faces parliamentary elections in 2024, must also keep the public onside. Equal wealth distribution, he says, is the most crucial part of that equation. To that end, the government is drawing up plans for a sovereign wealth fund to ensure resource revenues are channelled towards health, education and future economic growth.

“We believe that as the revenue coming from the mining sector increases, then the people’s support will also increase,” he adds.

Critical minerals

While many say it is too soon to judge the stickability of the prime minister’s reforms, there are signs that Oyun-Erdene’s message is cutting through.

Hundreds of investors, miners, diplomats and politicians joined in celebrations at Mongolia’s annual Naadam festival on July 10 at the lavish Shangri-La hotel in downtown Ulaanbaatar. Their presence was taken as proof positive of renewed interest in Mongolia’s resources. 

Underpinning their attention is the looming global shortage of the resources needed for the world’s transition to cleaner energy systems, including electric vehicles, and the infrastructure needed to harvest wind and solar energy. 

The International Energy Agency says that over the past five years, the market size for minerals vital to the energy transition has doubled to $320bn. Yet demand for critical minerals including rare earth elements, lithium and cobalt are expected to surge by as much as 600 per cent over the coming decade. Demand for copper is forecast to double to about 50mn tonnes annually by 2035. And if the world is to reach net zero emissions by 2050, annual investment in nuclear energy will also have to triple to about $125bn over the coming five years, according to the IEA.

Megan Clark, a minerals expert and advisory board chair for the Australian Space Agency, says Mongolia is “extremely well placed” in terms of its mineral endowment. She points to strong copper, uranium and rare earths potential as well as the possibility for “new niche industries” to emerge in high-tech materials processing.

Supporters of nuclear energy are equally bullish about the country’s potential as a long-term supplier to the nuclear power industry. Olivier Thoumyre, a representative for the French group Orana which is developing Mongolia’s first uranium mine, says: “I believe that it is a big source of diversification for Mongolia?.?.?.?The global warming situation has triggered, clearly, a new start for nuclear power.”

In presentations to investors about the potential in Mongolia, Rio executives tout a “vast mineral wealth predominantly untouched by modern exploration and extraction methods”, and that only 4 per cent of Mongolia’s landmass — an area similar in size to Alaska — is held under exploration licenses.

In reality, mineral explorers coming to Mongolia are quick to discover reams of Soviet-era land surveys which targeted coal and gold but only at relatively shallow depths. So, while Mongolia is marketed as a rare greenfield opportunity, the lack of exploration data remains a major problem for the industry. Without it, companies have to start from scratch.

To help address this, the European Bank for Reconstruction and Development, with backing from Australia, has in recent years helped establish a national geoscience database for Mongolia. However, that database needs to be filled with new geological surveys. Local industry leaders are quietly lobbying Oyun-Erdene’s administration to spend about $200mn to pay for the modern surveys which they believe are needed to reduce risk and attract private-sector explorers. 

Clark, of the Australian Space Agency who also sits on the Rio board, says that Mongolia is not alone in trying to attract investors as countries around the world respond to the increased demand for minerals. Mongolia must ensure its mining-focused officials are properly resourced, she says, adding that agencies responsible for controlling exploration and mining permits should be considered a “vital” national capability.

Mongolia’s potential has been likened to South Korea’s evolution into a technology manufacturing powerhouse. Dominic Barton, the chair of Rio Tinto, notes that in the 1970s South Korea had “very little energy supply?.?.?.?no industrial market whatsoever, and very little access to capital.”

“There is every reason and more to believe Mongolia can go through the same transformational change in the next 30 years,” argues Barton, a former senior McKinsey executive and Canadian diplomat in China.

Barton adds that companies, including Rio, also have a responsibility to help Mongolia with that transition from resource extraction to higher-value processing. But there is a wariness about committing to investing in processing in Mongolia. Rio’s investors, he says, want the company to “be careful” about overextending itself beyond its core mining business.

Squeezed by superpowers Yet as Mongolia reaches out to the west to boost growth, it must also avoid flaring rising geopolitical tensions.

This careful navigation was apparent on June 27, when Oyun-Erdene strode into the Great Hall of the People in Beijing and shook hands with Xi Jinping, China’s president. His visit resulted in agreements to triple the capacity of an increased number of China-Mongolia border crossings and negotiations over access to the port at Tianjin, south-east of the Chinese capital. On the same day, Jose Fernandez, the US under secretary of state for the environment, signed a memorandum of understanding with Mongolia to jointly work on securing a supply chain for critical minerals.  

The simultaneous deals with the US and China highlighted the Mongolian leader’s pragmatic approach, diplomats say. This strategy has also included abstaining from voting on UN resolutions on Ukraine.

Leif-Eric Easley, a professor of international studies at Ewha Womans University in Seoul, says that Mongolia’s “best bet” to hedge against Moscow and Beijing is to attract investment. “The key variable for Ulaanbaatar is credible democratic leadership that signals to diplomatic partners and international organisations the genuineness of domestic reforms,” he says.

In Ulaanbaatar, there is a palpable sense of urgency. Three years of trade restrictions along the 4,630km border with China during the pandemic battered the already-fragile Mongolian economy. Then the Russian invasion of Ukraine dashed any hopes of a strong recovery with headline inflation soaring to an average of 15 per cent last year.

The start of underground mining at Oyu Tolgoi in March is expected to help boost Mongolia’s economy to growth of 5.2 per cent this year, up from 4.7 per cent in 2022.

The World Bank has warned Mongolia that fiscal discipline remains essential in the short term. In years to come, however, sustainable growth and resilience to future external shocks will hinge on the results of the government’s reforms. “They need foreign investment,” says one foreign diplomat. “They would prefer it was western.”

Yet Oyu Tolgoi’s own chequered past highlights the rocky road ahead. The copper deposit was considered one of the world’s most exciting minerals discoveries in 2001, but its development has been marred by billions of dollars in cost overruns, years of delays and, at times, a toxic relationship between Ulaanbaatar and Rio, especially under Jean-Sébastien Jacques, the chief executive from 2016 to 2020.

His replacement, Jakob Stausholm, has worked to smooth over tensions, brokering a deal to write off debts of $2.3bn owed by the Mongolian government. Rio took greater control over the operation from Canadian miner Turquoise Hill.

Rio points out that for the past decade, about 10 per cent of the Mongolian government’s revenue has come from Oyu Tolgoi. However, an acute point of tension remains around the timing of a dividend payment from the project, which could still be years away and depends, in part, on the price of copper.

Sukhgerel Dugersuren, director of environmental group Oyu Tolgoi Watch, says that for decades she and others have raised concerns about the mine’s management of toxic waste, the lack of transparent and independent environmental monitoring and the consequences for the local nomadic herders. 

“Experts will tell you it is just a dot on the globe. The fact is when you have thousands of dots there are cumulative impacts,” she says of the potential influx of new mines.

Most of the Oyu Tolgoi saga predated Oyun-Erdene’s time in office, but the prime minister says the mine’s problems have underscored the critical importance of transparency and accuracy when it comes to feasibility studies and financing plans. He wants to ensure history does not repeat. “We’ve learnt our lessons,” he says.