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Opinion

Mongolia's economy is stuck between China, Russia and US

Reelected prime minister must navigate geopolitical tensions

| Mongolia
Ulaanbaatar's residential area, the district where the poorer part of the population lives: nearly a third of the nation's 3.2 million people live below the poverty line.   © Giulia Marchi/Getty Images

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

Mongolia is famed for producing many of the globe's top contortionists, able to bend and twist their bodies into unbelievable shapes. You can count Prime Minister Ukhnaagiin Khurelsukh among them after his landslide reelection last week.

Khurelsukh's Mongolian People's Party retained a supermajority, grabbing 62 of 76 parliamentary seats. He now faces an even tougher feat: bending and twisting government policies into the impossible positions needed for Mongolia to thrive in the years ahead, as the coronavirus hits its economy and the country negotiates its uncomfortable position between three powers -- China, Russia and the U.S.

To the south, China buys roughly 90% of the iron ore, copper and gold that drives Mongolia's $13.5 billion economy. To the north, Russia, a patron since the Soviet era, is the source of virtually all Mongolia's energy. Far geographically, but close geopolitically, sits the U.S., a mentor for a nation often called an "oasis of democracy" in a decidedly autocratic neighborhood.

Donald Trump's reign has of course complicated this dynamic. The U.S. president's odd affection for Russia's President Vladimir Putin, his ambivalence toward China's President Xi Jinping and his trade war now extending to Europe have Mongolia on edge. Suddenly, this "third neighbor" -- as locals call major powers beyond China and Russia -- is just as erratic as the two directly on its border.

Khurelsukh's government must contend with yet another external force: mining giants agitating for bigger profits from Mongolia's underground treasure. The immediate flashpoint is arriving at a truce with Rio Tinto concerning Oyu Tolgoi, a joint gold and copper project in the Gobi Desert. How Ulaanbaatar handles the taxation of minerals and the terms of mining agreements will send a loud signal to foreign investors.

Oyu Tolgoi mine in the South Gobi region: how Ulaanbaatar handles the taxation of minerals and the terms of mining agreements will send a loud signal to foreign investors.   © Reuters

Were that not balancing act enough, Khurelsukh must contend with Mongolian President Khaltmaagiin Battulga, a rival Democratic Party populist who has been called the "Trump of the Steppe." Since 2017, when both men came to power, they have engaged in an unlikely truce that worries international watchdog groups.

Legislative maneuvers in 2019 weakened the independence of the judiciary and anti-corruption officials. In the weeks before Thursday's election, at least five parliamentary candidates were arrested, fueling the biggest concerns in 30 years about Mongolia's democracy.

The decisions of the next several months will say much about Mongolia's trajectory. The key challenge is stabilizing a sputtering economy. The International Monetary Fund thinks Mongolia's gross domestic product will contract 1% in 2020. Though it has done a remarkable job managing COVID-19 risks -- zero deaths, officially -- Mongolia faces a "collapse in external demand," the IMF says. That is a far cry from the 6.7% growth in trade in 2019.

The reversal complicates Mongolia's situation. The government's $30 billion debt load is more than double its GDP. Nearly a third of the nation's 3.2 million people live below the poverty line. Corruption remains endemic. And government efforts in recent years to diversify the economy toward, say, garments are hitting a coronavirus wall.

Tourism is flatlining, too. In August 2019, Mongolia's nomadic culture and vast, rugged landscaped even lured one Donald Trump Jr. for a headline-grabbing sheep-hunting junket. Arrivals are now negligible in the COVID-19 era.

On May 28, Fitch Ratings warned of "significant downside risks." The good news, as Fitch put is, was that "Mongolia's strong structural factors combined with expected access to financing from multilateral and bilateral creditors provide support." It also may be a plus that Khurelsukh now has a mandate to choose a new -- and hopefully reform-minded -- cabinet.

The bad news: the rapid erosion in external growth engines. As China grows the slowest in 30 years, Mongolia's modern-day caravan of tanker trucks, exporting its natural resources, is putting in fewer miles. China risks a second COVID-19 wave, necessitating even broader lockdowns. Mainland construction sites, factories and shopping centers shutting down anew would add to Mongolia's risks heading into 2021.

Russia is hardly booming as oil prices fall either. Over the last year, Moscow's efforts to counter China's regional influence have increasingly run through Ulaanbaatar. These competing interests can work in Mongolia's favor, playing Xi's geopolitical reach off against Putin's desire for a big eastward pivot. In 2020, though, it is a precarious place for a fragile economy to be.

The November 3 U.S. election only adds to the drama. With Trump trailing in the polls and desperate to excite his base, China -- and Mongolia by extension -- has every reason to brace for new tariffs. Moscow, meantime, is in Capitol Hill's crosshairs for meddling in U.S. politics. Congress is almost sure to pounce with additional Russia sanctions.

Nor is U.S. stability assured. COVID-19 cases are flaring up around a nation that has already lost tens of millions of jobs to the pandemic.

Mongolia could be excused for not knowing where to turn. It will be fascinating indeed to see how Ulaanbaatar contorts itself -- just as long as it does not turn away from the democratic system that made Mongolia such a standout.

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