Likelihood of further delays over Oyu Tolgoi dispute highlights risk of policy instability during Mongolia's current government

Prime Minister Chimed Saikhanbileg of Mongolia claimed on 5 April to have reached an agreement with Rio Tinto in their negotiations over the delayed USD6-billion second-phase expansion of the Oyu Tolgoi copper and gold mine. Saikhanbileg stated that the "two sides have reached agreement, in principle, on the main points of dispute", although he did note that the official announcement would come "after bureaucratic levels finalise relevant steps".

This claim has not been officially corroborated by Rio Tinto. This silence may be a positive sign, indicating that the company is seeking to avoid jeopardising an agreement before it is final. However, it appears increasingly likely that Saikhanbileg may have made the announcement while significant issues remain unresolved, including a USD30-million tax bill that Rio disputes. A report in the Mongolian media on 16 April suggested that this dispute was to be "invalidated" by the government as a way of reaching a broader resolution, but this report cannot be independently corroborated.

Policy aimed at attracting investment at risk of reversal

The Mongolian government is publicly committed to resolving the dispute, and has made a series of legislative changes aimed at attracting foreign investment in the mining sector. For example, on 6 April, cabinet approved draft amendments that will increase the percentage of mining revenues that are directly transferred to local governments' budgets from 10% to 30%. Official statements indicate that the change is aimed at gaining the support of local populations and administrations for the expansion of the mining industry.

However, changes like this are highly likely to be reviewed by future governments. On 13 February, Mongolia's Constitutional Court issued a ruling nullifying several clauses in laws passed by the previous government. The ruling removes requirements in the Investment and Fiscal Stability laws, among others, requiring a two-thirds majority of parliament to amend these laws. These clauses were included in an attempt to reduce the risk of investor-friendly laws being revised by future governments. As such, their removal indicates increased policy instability risk in Mongolia.

Parliamentary approval required for Tavan Tolgoi

This comes amid signs of a power struggle between the government and parliament over another major mining project. A draft agreement to develop Tavan Tolgoi, one of the world's largest coking coal deposits, has been reached through negotiations between the government and the international consortium that won the tender process to develop it.

On 6 April, speaker of parliament Zandakhuugiin Enkhbold told the house that "the [draft Tavan Tolgoi] agreement needs to be changed". The cabinet subsequently delayed a scheduled discussion of the agreement and agreed to submit the draft agreement to parliament for approval. This was not previously the case and introduces a potential stumbling block for the draft agreement.

Enkhbold is the leader of the Shonkor (Falcon) faction of the Democratic Party (Ardchilsan Nam: AN), while Saikhanbileg is a member of the Altan Gadas (Polar Star) faction of his predecessor, Norovyn Altankhuyag. The Falcon faction was instrumental in Altankhyuag's removal in November 2014 and Enkhbold's opposition to the agreement negotiated under Saikhanbileg's watch may be motivated as much by factional politics as by his tough stance on foreign participation in the resources sector (he was also one of the loudest voices calling for the renegotiation of the Oyu Tolgoi Investment Agreement prior to the 2012 elections).

The Mongolian People's Party (Mongol Ardyn Nam: MAN), meanwhile, is now part of the government coalition. However, until November 2014, it was the main opposition party to the AN and on present trends it is likely to win the June 2016 general election. As such, the party may view its interests as best being served by delaying the resolution of the Tavan Tolgoi and Oyu Tolgoi agreements until after the election, when it will be in a stronger position to claim the credit for any resolution for itself.

Outlook and implications

A successful resolution of the Oyu Tolgoi dispute would be strongly risk positive for Mongolia's economic outlook and its attractiveness to foreign investment (see Mongolia: 26 June 2014: Failure to resolve Oyu Tolgoi dispute highlights increased downside risk for Mongolia's economy and investment environment). Saikhanbileg's 5 April statement is the strongest public statement so far suggesting that a resolution has been achieved in these closed-door negotiations. Nevertheless, the lack of official confirmation since then suggests that Saikhanbileg's announcement may have been premature.

Moreover, the dispute over the draft Tavan Tolgoi agreement underlines the risk that any potential agreement with Rio Tinto over Oyu Tolgoi could also be subject to parliamentary approval. Adding the requirement of parliamentary approval for an agreement with Rio Tinto would reduce the likelihood of this timeline being met. Moreover, there is a significant risk that a combination of factional rivalries within the AN, along with opposition to a proposed agreement from resource nationalist MPs, and political manoeuvring from the MAN will lead to a situation in which the agreement faced long delays or failed to receive parliamentary approval altogether. With the incumbent government coalition highly likely to break up months ahead of the June 2016 parliamentary elections, this makes it likely that a resolution to the Oyu Tolgoi dispute will not be reached by the current government.