Mongolia's new rulers may put world's richest coal deposit beyond reach

The coalition that will rule Mongolia for the next four years – the Democratic Party and a splinter group of the former majority party called the Mongolian People’s Revolutionary Party – is stacked with resource nationalists after an election that placed rising inequality in the nation of fewer than three million people front and centre.

The Democratic Party which campaigned on sharing more of the spoils of mining with Mongolian citizens won the majority of seats while the MPRP – led by a former president Nambaryn Enkhbayar – bases its whole doctrine on taking back foreign-owned mines.

Foreign investment nearly quadrupled to $5 billion last year according to official government data and as "mining money pours in, Ulan Bator has the air of a boom town with cranes and building sites dotting the horizon, a shiny Mercedes dealership and a Louis Vuitton boutique," Euronews reported during Hilary Clinton's visit to the country last week when she called Mongolia a democratic model for Asia.

Enkhbayar, described as a larger-than-life character and the country's most popular politician, is currently facing corruption charges which he says was only brought to keep him out of politics.

According to the Financial Times blog Enkhbayar advocates making Tavan Tolgoi – the world's richest met coal deposit holding some 6 billion tonnes – 100% state-owned.

Enkhbayar told Reuters as votes were counted: "For an initial period of 20 years it can be privately owned, because it was privately discovered. (Foreign companies) can invest in it, get their money back and make a profit but starting from the 21st year they should give it back to the Mongolian side."

The statements for the foreign press are tame compared to what the MPRP told voters on a campaign website. In the vernacular the party called ruling politicians the pawns of “shadow masters” referring to the foreign owners of Oyu Tolgoi,  and scaring to death the "few oligarchs who are getting filthy rich from this [Tavan Tolgoi] deposit.

In March Mongolia put on hold plans to privatize its Erdenes Tavan Tolgoi coal-mining company which controls the bulk of Tavan Tolgoi.

The country was hoping to raise $3 billion putting the valuation for the company at $15 billion through a listing in London, Ulan Bator and Hong Kong by selling a roughly 20% stake to investors.

The state would've held onto 51% and distributed the remaining shares to Mongolians. Rather than wait for an IPO, it put in place a program before the elections whereby citizens could sell allocated shares back to the state for  $750 (a cool million in the local currency, the tugrik) in cash. More than half of the country opted for the cash, handing the government a bill of roughly $1 billion, or 10% of the country’s economy, Globe & Mail reported at the time.

Also in March Mongolia stopped all talks with international miners on developing the western Tsankhi block of Tavan Tolgoi which on its own holds 1.2 billion tonnes after a shambolic bidding process that stretches back as far as 2007.

Mongolia is walking a diplomatic tightrope with Tavan Tolgoi. Aside from closer ties with China it wants to use the project to strengthen its longtime political and cultural links with Russia and at the same time make room for the US as a geopolitical balancer in Asia.

Mongolia’s National Security Council rejected a development deal struck with US giant Peabody Energy, Shenhua and a Russian-Mongolian consortium mid-September 2011, just two months after they were announced as winners. At the time losing bidders from Brazil, India and South Korea raised serious concerns and Japan went so far as to call the bidding process ‘extremely regrettable’.

Read more on Oyu Tolgoi, Rio Tinto and Ivanhoe Mines' $13 billion copper-gold-silver project >>