Эрдсийг эрдэнэст
Ирээдүйг өндөр хөгжилд
Mining The Resources
Minding the future

“New laws on use of state property according to the amended Constitution is the priority”

Known to speak his mind, B. Lkhagvajav trained as a lawyer and holds a doctorate in business administration. He was President of the Mongolian National Chamber of Commerce and Industry and has been a member of the Supervisory Board of the Bank of Mongolia. In a long-ranging interview with G. Iderkhangai, he peppers his views on the present with snippets from the past, all to express some concern about what the future holds.

At one time you used to regularly speak out when something significant happened in the mining sector, but for several years now, we have missed your strongly held and bluntly expressed views. What has kept you silent?         
You are right. I have refrained from speaking on mining matters since, say, 2010, after expressing my views regularly between 2006 and 2010 when the OT agreements were being discussed. You remember that when M.Enkhbold was Prime Minister in 2007, the agreement was rejected. A revised version was presented by S. Bayar when he was Prime Minister. I am on record as demanding changes in it to make it more beneficial to Mongolia. Nothing happened and the agreement was signed on October 7, 2009, followed by the signing of the investment agreement on April 3 of the next year. Since then I have been silent. 


This is because I think that when an agreement is signed, business principles demand that it is not challenged. Both sides should observe its terms without obstruction. That is the way to achieve success in business. An agreement has sanctity and it is not fair business practice for either party to deceive the other. My silence does not mean that I found the agreement perfect. Even in 2010, I said it was flawed but at long last it seems that with the amendment to the Constitution, the issue of state ownership of mineral resources is going to be corrected. 

I have been silent but I am alert to developments and events, and have admired the way your journal has been recording these, especially in the mining and economic sectors. Simply speaking, the Mongolian economy is all about mining. You will recall that when N. Enkhbayar was Prime Minister, our debt of $9 billion to Russia, as successor of the former Soviet Union, was written off. Actually, 2004 saw the start of the new era for the investment which came to the country under market economy rules. Since then, our GDP has grown 11 times in its digital meaning, reaching almost $11.5 billion. This is mainly because of the investments that came into the mining sector. Of course, I appreciate the good work done by those who led the country, the steps they took to overcome the crisis of 2013-2016, and how they achieved 7 percent economic growth. Then, whatever the way it was done, Mongolians themselves brought 49 percent of Erdenet, as a result of which some $800 million on an average per year that would have gone to the Russian Federaion has remained in Mongolia. The economy of Mongolia has survived in the last three years thanks to the agreement on Oyu Tolgoi financing or what is called the Dubai Investment Plan of 2015. Oyu Tolgoi has annually paid an average of MNT 600 billion in taxes, working out to MNT2.4 trillion in four years. Domestically, we now have the value added tax system. We are developing, with some mistakes and some successes. 

Do you agree that though subsoil minerals were termed state property in the Constitution adopted in 1992, there has not yet been a law protecting them as such? 
It is true that while the right to own and enjoy both private and public property is protected by law, neither our Civil Law nor our Criminal Law provides any safeguard for state property. Generally speaking, outside private property, such protection is restricted to buildings, facilities and equipment. Apart from the Law on State and Local Community Property of 1996, which has limited scope, there has been no law to regulate the use of state property. 

So who have been acting as “the owners of state property” in the last 30 years? 
Holders of the three highest positions in government -- the President, the Prime Minister and the Parliament Speaker -- have been playing political games with state property belonging to the public. The people who have been elected to represent the people are not interested in such issues and just wish to enjoy themselves for four years. The recent crisis is the result of a conflict between those who claim to represent the state and those who want to assert the rights of the people as owners. This playing around with state public property has been clearly seen in how things are run in Erdenet Copper and MongolRosTsvetMet, both state-owned enterprises. These three in the highest positions see themselves as owners and every new set of “owners” negate what was done by the previous one. Foreign and domestic investors watch and get scared. An odd norm has come up of coming to the three state heads with khadag on the hands. This is against the fundamental basis of our political, social and economic life and has led to a crisis. 

The recent amendment to the Constitution has made natural resources “state public property”. Is this a step on the right path?  
From now on most of the returns from exploiting deposits of strategic importance should be divided among citizens. The amendments come into force on May 25, so the most urgent and important job for the new MPs would be to enact laws on use of state property that ensures this. After that, we shall need amendments to the Criminal Law, the Civil Law and to all other laws with a bearing on property ownership and disposal. We shall have to see how all this is done. Will all present investments be frozen, or cancelled, or redirected to the “right” path? And we have to ensure that those who distribute to citizens profits from the public do so competently, and transparently. Can this be done? 

Am I right that it will mainly be part of the tax revenue that would in some way be distributed among the people? 
So far redistribution of tax money has been a main source of corruption. The use of natural resources is also not transparent. Half of the 100 top companies are from the mining sector, and a lot of companies provide them with energy, combustible and lubrication material, equipment etc. All this will now have to be regulated under a careful policy and with good planning.   

How do you see the recent trend of asserting the authority of the state in the mining sector, sometimes in a questionable manner? 
We have seen in Oyu Tolgoi, Erdenet and Mongolyn Alt how state mechanism has been used with impunity. The new laws must mandate transparency in each step in the process of owning and utilizing.  Parliament must exercise its right to allow the people to own state property and undo the practices and wrongs over the last 27 years. Articles 29 and 30 of the Minerals Law which governed sustainability agreements and investment agreements have been annulled, and any investment over $300 million is now for Parliament to approve in compliance with Central and Local Property Law. This is a very important development. 


It is likely that the mining sector will be facing a lot of uncertainty as it is not clear how the amended provisions are going to be implemented. The new laws must be specific and unambiguous about how the wealth created from a state property belonging to the public would be used by the Government, private companies and local communities. The concerns go beyond mining as pasture lands, forests and water are all state public property and 70 percent of our territory is in the effective possession of herders. That way, a herder and a mining investor are in the same situation as far as their status as user of resources is concerned. 

How do we put a realistic value on our subsoil resources? 
This was indeed the main issue when the Oyu Tolgoi agreement was being negotiated before 2010. What was the actual value of our wealth in the deposit? If we knew it, we could sell it outright, but if could not estimate the value, some suggested a sharing of the output. In general, accepting payment for resources before selling them is not wise and could be seen as a government’s admission that it was not capable of imposing and collecting taxes and royalty.  It is often tricky when valuing resources for what lies under the soil is without worth until they are extracted, often after a large investment. However, if the resource is a state property belonging to the people, a government cannot enter the picture on its own; it can do so only with the owners’ permission, granted through whatever mechanism is adopted.  

What you are saying is that the new laws must be competently and carefully framed, or else the whole purpose of the amendments could be defeated and the whole idea of equitable and universal distribution of national wealth would fail, right? 
Absolutely. If mining specialists, experts in property law and politicians cannot come up with a clear and unambiguous law, even the boldest investor would not come. An entrepreneur must be prepared to take risks but what can he do with a government that cannot see beyond its 4-year term? The amended Constitution gives new powers to the Prime Minister. He is free to choose his cabinet and if he chooses well, the Government will have a smooth sailing for four years.    
The exploration sector is basically at a standstill. How do you see the coming days? 
Foreigners who keep watch on how things move in Mongolia must have noted a pattern behind several arrests and imprisonments. First, those who brought 49 percent of Erdenet from Russian hands to Mongolia have been imprisoned. Second, almost all who were involved in establishing the Oyu Tolgoi Agreement in 2009 have been imprisoned.  Those who have not been jailed have become social garbage. For example, D.Zorigt was given various nicknames and L.Gansukh was imprisoned in a cola case. All this gives the impression that Mongolians imprison those who help bring in foreign investment. Then again, all who were involved in the Oyu Tolgoi agreement signed in Dubai have been imprisoned, barring B. Byambasaikhan, but this is only because he is close to the President. I think his luck will not hold if the President for some reason is not in power. Any foreign investor will seriously wonder if those who amended the Constitution are ready to step back to communism.  

Do you think the conflict will now move to Tavantolgoi?   
There are doubts if the election would be held as scheduled, but even if the Coronavirus manages to delay Mongolians from deciding which plans and policies they favour, to me it is clear that in this situation, the Tavantolgoi Project will not be developed further.     

Over the years, how has politicization hindered Tavantolgoi from becoming the mega project of our dreams?  
In 1957, a local mine started extraction at the Tavantolgoi deposit. Those were socialist days, so it was not a private property but later its licence was held by BHP Billiton  for almost two years. Then in 2000, mineral prices slumped. An ounce of gold was $212 and, coking coal, if you can imagine it, was much cheaper. BHP Billiton considered the project unprofitable and gave back the licence. Then it was granted to someone and then to Su.Batbold, who kept it for some years before deciding that he would not be able to operate this large deposit with reserves of 6 to 7 billion tonnes. He surrendered the licence in 2007, when S. Bayar was Prime Minister and which was the time a powerful wave of civil movements had started rising.  There was the Soyombo Movement in which the current President was very active. Until 1996, Mongolians saw subsoil resources as things that had to be mined to meet society’s needs, and as some source of revenue for the government, and not something for personal ownership. Things changed when the Minerals Law was adopted in 1997, which many found to be too liberal in that it granted licences to individuals. It was not widely understood that various persons stood behind these licence-holding citizens. With Su. Batbold returning his licence, 4 percent of the total reserves or Ukhaa Khudag was left and 96 percent was back in the hands of the state.  Today, there are three managements: state, private and local one. 

Yes, and then came the crisis of 2013, when investment dropped to $100 million from $4 billion. Everyone looked to Tavantolgoi as the lever to lift the economy…  
The authorities were desperately looking for ways to get out of the crisis and on October 27, 2013, the Law on Investment was approved. This transferred some of Parliament’s rights and responsibilities to the Cabinet. Articles 29 and 30 in the Minerals Law were annulled, and the right to establish any sustanability or investment agreement was vested in the Government. 

Not just the Ministries but also the agencies… 
Right. M. Enkhsaikhan worked out the Tavantolgoi Deposit Project and later. B. Byambasaikhan signed the Dubai agreement with OT as head of an agency. 

So, people who worked within the authority granted to them by laws passed by Parliament now find themselves in prison. 
See what happened to M. Enkhsaikhan. He had worked hard to attract investment to derive as many products as possible from the coal and sell them at the highest price possible! Frankly speaking, now the fight is between political groups on who gets control of mega projects by becoming a party to agreements. This was there at the time of the two Oyu Tolgoi agreements also, but thanks to the principled stand of S. Bayar, things did not go out of hand and the agreements were not scuttled. In fact, his predecessors did not have the principled commitment of Bayar to getting these agreements done. The same failure on the part of the Prime Minister to adhere to principles is affecting development of Tavantolgoi. But politics is changing, and a new breed of politicians is emerging. We have to wait and see how strong their belief is in following free market principles, professional business practices, and also in being fair to the national interests.   

Will ETT be justified in paying dividend to citizens on the eve of the election?
It is ironic that Su.Batbold, who returned the licence of Tavantolgoi, should then as Prime Minister grant citizens shares in the deposit. But his hands were forced by civil society, more particularly Mongol 999. There is confusion about these 1072 shares as even now there is no legal mechanism to regulate their ownership and disposal. Who represents the citizens in their capacity as holders of equity -- the President or the local parliament speaker? Maybe individual ownership would be vested en bloc in some centralized fund. As head of state, the President can represent all citizens at any shareholders’ meeting. 

Or the Head of the President’s Office and speakers of the 21 aimag parliaments? 
Of course, it is possible. Some sort of flexibility is useful for those in authority. Holding and spending public money is a complicated process. Besides, as I have said before, the ramifications of ownership of property and of shares in a mining company are still not clear. This fluidity creates problems for the economy but political groups find it advantageous. 

What can the government do to resolve this uncertainty, particularly in the mining sector? 
A law on implementation of some tax laws and the social insurance law -- very similar to the Law on Economic Transparency -- was adopted at a secret session on December 17, 2007 and was in force between January 1 and June 30, 2008. Two amnesty laws were passed on January 21 of the year, and these are still in force. Oligarchs who got rich before 2008 have been allowed to whitewash everything in their chest, but the measures do not apply to ordinary citizens or small and medium businesses. There has been no effort to redress the anomaly favouring the richer sections. When I was an advisor to the Prime Minister in 2012, I found that the income of the 2,000 companies covered by the two amnesty laws had gone up by 3-5 times and the average income of 40,000 businesses had doubled. Companies enjoying state “protection” had thrived while many of those fending for themselves had gone out of business. The Law on Transparency was adopted in 2015 following demands to review the need for and purpose of the amnesty laws. This law led to some tax reforms and introduced the value added tax. 


However, this did not enthuse entrepreneurs to recalibrate their financial system or to seriously sort out their property issues. Why did things not go as I had wished and expected? The first reason was that those in mining preferred being closely connected to the state mechanism and under familiar regulations, continuing with practices they were used to. Second, they had learnt to use arms of the state mechanism -- courts, the police, and intelligence organizations – to further their own interests and against a competitor. A nexus was established between businesses and government institutions, guaranteeing their mutual benefit. It was all cosy and comfortable and nobody wanted to come out of it into the open. I had believed that gold and coal producers would unite and demand better regulations and fairer implementation, but they did not. Everybody finds that survival and thriving become easier after a visit to right people in the government with khadag on their hands. 

This is borne out by how gold producers get away with selling the gold they mined in the name of their employees, to avoid paying tax. When large scale corruption was revealed in the fuel business, everything was soon forgotten after authorities were visited with khadag on hands. It is also standard practice for coal producers to come to the three top leaders with khadags and more to mediate in their fights. The only reason why all these visits are necessary is that there is no regulation on state property.  I have to repeat myself but if this situation is not corrected under the amended Constitution, we might very well find ourselves back in the kind of society in which we had lived for 70 years.        
But why is it that independent professionals do not speak out? Their silence leaves the stage free for populists and some we-know-it-alls. 
I agree with you.  Two institutions which have been allowed to be destroyed since the inception of the market economy are the Institute of Geology and the Institute of Mining. The first is in Bayankhoshuu and was privatized by Z. Enkhbold and the other is in Belkh. During the socialist time, they were both centres of intellect with over 200 specialists working in each. Nothing is left. Many who worked there went on to own placer gold deposits after the Gold Program. That is how independent intellect has disappeared from the mining sector and the vacuum has been filled by some vendors. Seeing how things were going, many were scared to continue with their independent research and abandoned their previous world altogether. That world is now occupied by completely different people who have sold out and joined the pursuit of profit. The present situation is one where specialists face oppression and their voices are stifled. There are instances where people perished untimely. The mining sector has become a gathering of the stupid, the greedy and the impatient. 

What should Mongolia do in this time of the Coronavirus? Do you think the Government has been taking the right steps?
I have said this before to the Government and I say it again, “Please revise the budget immediately.” It seems that as the election gets closer, those in power are unwilling to forgo their ceremonial ribbon-cutting appearances. A real leader would drastically reduce expenditure to offset the fall in revenue. Gold prices have recovered a little after a nine-percent fall. There was no coal export for quite some time, and though it has resumed, Chinese demand would not return to normal levels very soon. In 2013, then Prime Minister N. Altankhuyag stopped the export of coal from Tavantolgoi for a three-month period. It was such a stupid decision. Mining production should never be stopped as restoring it requires much money. And time. It will need 2-3 months to get back to the leevl of normal operations. All in all, the total budget deficit will reach MNT5 trillion. There is pressure on the Bank of Mongolia to print notes. It is simple logic that you can spend money only after you have earned some. With mineral prices so low, how can our companies recover their costs? The budget estimated copper prices $6,000/t but now it is likely to fall to $4000/t. What alternative source of income do we have? 

Printing money will not reduce our external debt… 
Yes, that debt is there. The new Government would immediately have to pay out $1.8 billion to China in June, as per the swap agreement. Redemption of $500 million of Chinggis Bonds will start in the autumn. Another large repayment is due in the beginning of next year. These are just Government debts, but private companies have total debts of $18 billion. They are also suffering losses because of the Coronavirus crisis and the fall in minerals prices.


All this means that in the coming two-three years we shall go through severe economic hardship at the macro level. We have to be prepared for this. Again, the first thing is to pare budget expenses. Who knows if the virus disruption would have subsided when the next government takes over? We may very well end up with an economy that exists only on paper. There is a real risk that all our reserves will be exhausted.  As for the mining sector, it will almost certainly have to obtain subsidies from the government. 

The Bank of Mongolia has reduced its policy interest rate by one percent. Can this be a real support for the economy?  
Reducing the policy interest rate by one percent to take it to 10 percent cannot be of any real help. Mandatory reserves of commercial banks have also been reduced by two points. Theoretically this helps borrowers but with no economic activity there is no demand from companies for loans. It might stimulate demand if there is a 5% reduction in the policy interest rate. The Bank of Mongolia also has to strictly oversee commercial banks in this emergency times.  

What about reducing the interest rate in savings accounts? 
It is possible to reduce it from the present 11% to 5 percent, but those who depend on this interest would be in difficulties at a time when throughout the country there is very little economic activity. During the 2008 crisis, commercial banks were allowed certain special permissions and they bought the Darkhan Metallurgical Plant and 49 percent of Erdenet Copper. Even a bond was raised on the foreign market and $500 million was given to the central bank. Today, the central bank owes $500 million to the Trade and Development Bank. These permissions were not withdrawn when the crisis eased, and commercial banks were in a position to control all businesses in Mongolia.  The International Monetary Fund has tried to make changes in the banking system. That is the reason why the Government has not issued a bond in the last three years. But the central bank has. For example, in 2018, it issued bonds worth MNT3.2 trillion, and in 2019, bonds worth MNT5 trillion. When interest rate is reduced, need for dollar falls. Our imports have dropped by 30 percent, so dollars are not needed, but the exchange rate is not reflecting this. The Prime Minister should invite all his predecessors to exchange opinions on how to overcome the present crisis. This is a time for consensus political decisions.   

There is a shortage of money in the market. When will commercial banks start to lend the MNT 8 trillion that they have? 
Even when they do, 70-80 percent of this will go to mining companies and citizens could borrow only very small amounts. Their demand is met by non-banking financial organizations and pawnshops, at much higher rates of interest. This is what pushes citizens and small and medium enterprises to poverty. If the Bank of Mongolia reduces its policy interest to 5 percent, savings interest rates will be reduced but cheaper loans will be available to SMEs and citizens. No economy can move without money, and that is why central banks around the word are reducing their rates. Many who take Government loans at very low interest rate just put the money in a savings account with commercial banks, instead of using it for the avowed purpose of creating workplaces. There are comrades who are lying in wait for issuance of such loans again.      

Are the stimulus measures recently taken by the Cabinet enough to move the economy? 
They are only a drop of water in the ocean. If the crisis continues for two or three months more, the mining industry might not be able to pay salaries to 70,000 people employed in it, and these people, in turn, will not be able to replay their mortgage and salary-backed loans. This is a real possibility. 

What should the Government do to support economic entities? 
We do not know what the Government’s thoughts are. If economic entities have no income, how can they pay taxes? With less revenue than expected, all planned expenditure has to be reviewed and low-prioity items have to be deferred. It is then up to the parliament to take long-term decisions and it should hold a special session before long.  When companies cannot work, they would claim unemployment insurance to pay employees. The funds of all these insurance companies should be used in this special time.   

Can you tell us something about the recent Development Bank bonds that banks have had to buy for MNT730 billion at an undisclosed rate of interest? 
The Government needed MNT730 billion to reimburse banks for the pension-backed loans that it had written off. The Development Bank issued bonds of that amount and all commercial banks bought them to the amount each had lost. This is in a way similar to printing money and releasing it in the market. The interest rate is a well-kept secret but I guess it is between 17 and 20 percent. That is why commercial banks agreed to the deal. Actually, they stand to earn more from this than from the repayment of the pension-backed loans. The government used a questionable method to satisfy commercial banks, who are ready to lend again, maybe to the same pensioners.