bne IntelliNews – COMMENTARY: Russia set to exploit Mongolia on Soyuz-Vostok gas pipeline
When Volodymyr Zelenskiy, while still a candidate for the Ukrainian presidency, was asked about his childhood years in the Mongolian mining town of Erdenet, he said he remembered one word very clearly – “baïhgui”. It’s a phrase that means ‘we don’t have it’, and it exemplified the deprivation of the time, when Mongolia’s independence from the Soviet Union was nominal at best and the rays empty grocery stores. Now, as Zelenskiy leads his country against Russian aggression, Moscow is scrambling to secure Mongolia as a junior partner for a strategically important new gas pipeline to China.
The idea of a trans-Mongolian gas pipeline is not new and was revived by the pro-Russian president of Mongolia, Battulga Khaltmaa, during the Eastern Economic Forum in 2018. In 2019, with the tacit approval of Beijing and Gazprom , the Mongolian state company Erdenes Mongol has launched a feasibility study for the construction of a Mongolian branch of the Power of Siberia 2 gas pipeline – known as the “Soyuz-Vostok” gas pipeline.
Like bne IntelliNews reported, most of Russia’s oil and gas pipeline infrastructure runs west to deliver 60% of Russia’s oil and 70% of its gas to Europe. But with energy sanctions looming over Russia, it is pushing to develop more gas and oil pipelines to Asia, where Moscow has more willing friends and customers. So far, only the Power of Siberia 1 gas pipeline and the Eastern Pacific-Siberian Ocean (ESPO) oil pipelines are heading east to Asian markets, both built in the last decade.
In early 2022, the Mongolian authorities and Gazprom approved the feasibility study, despite the fact that the Power of Siberia 2 feasibility study is still ongoing. Days after the start of the Russian invasion of Ukraine, Erdenes Mongol and Gazprom quickly signed an agreement for engineering and design work on the pipeline with the aim of starting construction in 2024.
During Putin’s recent visit to China for the Winter Olympics, an agreement linking the power of Siberia 1 to the Sakhalin-Vladivostok Far Eastern pipeline was signed, and the parties further coordinated their efforts on the progress of Soyuz-Vostok.
The Power of Siberia 2, and by extension the Soyuz-Vostok gas pipeline, has a capacity comparable to the suspended Nord Stream 2 projects of around 50 billion cubic meters per year and is well positioned to bring production from the Yamal Peninsula , which was originally destined for European markets, to China, thus completing the unification of the Russian gas transmission network.
Although it has no expertise in developing gas pipelines, Ulaanbaatar has so far not engaged any third-party advisors to assess the technical and financial feasibility of the Soyuz-Vostok project. At the same time, Mongolian political leaders and Gazprom do not seem interested in involving a third party in the project, which could arguably increase transparency, provide additional capital and allow for more scrutiny of financial, technical and environmental aspects.
As a result, Gazprom appears to have locked Erdenes Mongol for a predetermined set of technical and financial parameters, which will allow it to transfer the unwarranted amount of the total project cost to the Soyuz-Vostok while leaving itself, or the power of Pipeline Siberia 2, the lion’s share of net profits.
Without proper project assessment and third-party involvement, Mongolia is likely to take out a large loan from Russia, perhaps on predatory terms, to fund its share of the costs, while agreeing to repay it out of gas transit. In this scenario, ironically similar to the development of the Erdenet copper mine in Soviet times, Mongolia would bear heavy, perhaps unjustified, costs, but would earn just enough to bring the project to break even, without being able to ensure long-term benefits. such as scalable gas supplies at reduced prices. As a result, negotiating transit fees, gas prices and project financing in an information asymmetry will be detrimental to Ulaanbaatar’s interests.
Moreover, there is little reason to believe that Mongolia will be able to protect itself from the political and geotechnical risks of Soyuz-Vostok, where a suspension of gas transport could delay cash flows, devalue the investment of Ulaanbaatar and put it further into debt. In this case, political risks exist, not only from the Russian side, which continues to block Mongolia’s attempts to build indigenous hydroelectric generation capacity, but also from China, which has a history of closing borders and d exert diplomatic pressure on Mongolia whenever the Dalai Lama visits at the invitation of Mongolian Buddhists.
As energy exports to Western countries are set to decline, Putin’s insistence on speeding up infrastructure connections to Eastern markets is giving China a bargaining chip for a gas supply deal by discounted pipeline. This new geopolitical reality will put pressure on Gazprom to make the most of the Soyuz-Vostok pipeline and leave Mongolia at a disadvantage.
Under the current circumstances, the risks of agreeing to a deal with Gazprom lead to Mongolia’s increased dependence on Russia and China without significant economic benefits, while exposing itself to greater political risks and potential pressure on the domestic sovereign issues of its neighbours.