T. Dorjbal, Deputy Director, “Mongolrostsvetmet“ JV: The Solvency of Russian Companies is Deteriorating

How is the US dollar exchange rate affecting your activities?

Because our products go for export, we sell in the US dollars, i.e. our income is in the US dollars. Also necessary equipment and machinery we buy using the US dollar. We buy mostly from China. The Russian currency has been also very volatile. Russians offered us to pay in their local rubles and supply their products. We are studying the offer and it is possible that trading in rubles can be still beneficial for us.

Do you think it is right for the government to borrow a lot of money from abroad to overcome the economic difficulties that the country is facing now?

The income that Mongolia was expecting to get from outside the country has been reduced to a large degree. The income from cashmere has dropped, and the lower copper prices also resulted in less income. Yet most of the expenditure is in hard currency. Our country is very largely dependent on imports. Starting from food to clothing and petrol – all is imported. There is a large US dollar expenditure. And for wide a range of products, expenditures are made in yuan.

Currently, many companies’ activities revolve around the Erdenet company. These companies provide supplies to Erdenet, make some profits, and pay taxes to the budget. That includes the railway and other freight companies. Therefore, if Erdenet gets into a financial difficulty, the local companies will have less income and cash. In order for businesses to capitalize, it is necessary to give loans to businesses through commercial banks. This will create business opportunities and can serve as one of the mechanisms to overcome the crisis.

Do you think that borrowing from abroad is the right step to support the local companies?

I think so. Most important thing is for the interests of commercial banks and the interests of business entities should be same. The bank will want to make a profit. So the loans should be given directly to either Erdenet or other businesses directly through commercial banks.

How much actually does the government support local companies? Apart from traditional ways of support, what are the other ways of supporting local companies in the times of the crisis?

What the government should do, for example in the mining, is to abolish the 68% windfall profits tax. This 68% windfall profits tax basically takes away almost 70% of the total revenue. The gold companies basically work on their own income, on the mere 30% leftover. With such income, it is difficult to upgrade your equipment and buy necessary supplies. In other words, the opportunities for the company growth are just cut by this tax. The threshold for imposing this tax was raised last November to 850 USD. In these days of crisis, the most likely metal to keep the high prices is gold. So either getting a loan, or increasing the gold production are similar issues at the end. If the government really will be able to get the liquidity from outside, then in the first place, the government should arrange for concessional loans for gold companies. Then in the second place, the government should give loans to Erdenet, and to our company. If the government is getting low-interest loans, then the interests should be low for the companies, too. Of course, a bit of profit should be there. If the interests will be 2% per month like now, yes, one can do the business.

The government does not seem to be able to reduce their expenditure sufficiently. What would be your friendly advice to the government?

The government should give up some of the investment projects that are not very effective or don’t have much value in the future. Secondly, it should reduce the expenditure of government organizations. During the crisis time, one should give up investing in constructing or repairing cultural centres or other buildings in soums, for example – one can do this once the crisis is over. Also the welfare schemes should target the right people – the poor. The cash transfer scheme of 500 thousand tugriks for newly-wed couples should be abolished now.

There is a concern that the current financial difficulties may lead to the state or social crisis. What are your thoughts in this regard?

If people’s purchasing power goes down and they will not be able to meet daily needs, then one would not exclude instability or unrest in the society. However, during the crisis, Mongolians should be united and close to each other, and especially, there should not be misunderstandings between political parties. We all have to tighten up our belts and combine our efforts to overcome the crisis.

Is deflation present in the economy? What are its signs?

The goods are there, yet there are no buyers – that is the deflation. Our company purchases materials, equipment and spare parts from Russia, China and local companies. Some of the metal and other products we buy from Russia were expensive and sometimes not available. We needed to have contracts and make an effort to secure those, yet today there is no problem with queuing, the storages seem to be full of products. So, things we buy from outside, especially from Russia, are getting cheaper now. In other words, there is a surplus of materials and products. At the same time, if price for fluorspar goes down, however cheap the supplies are, we will not be able to afford them. So far, there is no such an issue.

What are the steps you think should be taken in order for Mongolia to avoid the Dutch disease?

It is for sure that we will overcome the crisis after a certain period of time. During the times of crisis, the most important thing is to take measures to secure the development of the main industries of our economy. First of all, it is mining. The finances and funds that will come from mining should be used to develop other sectors of economy. In order to save and increase the funds, one should, first of all, re-assess the welfare system. Secondly, we need to reform our political system. Politicians promise so many things during the elections and spent unwisely a few tugriks that come to the budget. No savings are accumulated. Yet, the savings will ensure the development in the future. Also, if we are to go the market road, we need to decrease the role and participation of the government in business. If the government knows everything and regulates everything like during the socialist system, we will not develop – that is clear.

I want to touch the 2-3 basic issues. First of all, we need to develop mining. This development is however understood in too simple and abstract way. Once the reserves are proven, it will take at least 3-5 years to develop a mine. Then one waits for the returns from the investment. The real profits may not come until after 7-8 years, on an average. As far as Oyu Tolgoi and Tavan Tolgoi are concerned, only royalties will be collected. The way I understand it, getting dividends from the mines may start only after 6 or 7 years. We need to speed up with amendments to the minerals legislation and discuss and approve it soon in the Parliament. If this uncertain situation continues, the interests of the investors will also be uncertain.

The Russian currency has been also very volatile. Russians offered us to pay in their local rubles and supply their products. We are studying the offer and it is possible that trading in rubles can be still beneficial for us.

If the government is really able to get the liquidity from outside, then in the first place, the government should arrange for concessional loans for gold companies.