Mongolia and Kyrgyzstan fight the curse of mineral wealth
JARE POOR, fragile post-Soviet democracies, two spectacular holes in the ground. Oyu Tolgoi, or “Turquoise Hill”, in Mongolia, is a vast mine located in the southern Gobi Desert, just 80 km from the Chinese border. Kumtor in Kyrgyzstan’s Tian Shan Mountains, in operation since 1997, is even further away. Located next to a series of glaciers 13,000 feet above sea level, it is the second highest gold mine in the world.
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It is difficult to overstate the importance of these two mines to their respective economies. Surface mining began at Oyu Tolgoi in 2013. The second phase, a $6.75 billion expansion in which 200 km of tunnels will reach 1.3 km in depth, is expected to triple concentrate production, to over 500,000 tons per year. When completed, Oyu Tolgoi will be the fourth largest copper mine in the world.
When the contract with Rio Tinto, a British-Australian mining giant, was first signed in 2009, Oyu Tolgoi was expected to add five percentage points to Mongolia’s annual economic growth, which it did for some time. time. The mine created 15,000 jobs directly and another 45,000 indirectly, for a Mongolian population of 3.3 million. As for Kumtor, its owner, Centerra, a Canadian exploration company, is the largest private investor in the country. In a good year, the mine generates a tenth of Kyrgyzstan GDP and is the largest contributor to the state budget.
Both mines occupy an important place in national life. The two foreign operators won sweet initial deals as naïve young states opened their doors to foreign investment. Controversy surrounding the mines was therefore inevitable.
Oyu Tolgoi has long been controversial. Politicians often accuse Rio Tinto of robbing the country. The language was refined six years ago, after a collapse in the balance of payments. A renegotiation of terms in 2015 is now being contested by the ruling party. He asserts that the agreement is unfavorable to Mongolia, which holds 34% of the capital of Oyu Tolgoi, and that it was even negotiated illegally. Meanwhile, underground development costs at Oyu Tolgoi have exceeded by more than $1.5 billion and the estimated date of shipment of the first underground concentrate has slipped back by more than two years. All the while, the government must repay the debt incurred when it borrowed from Rio Tinto to finance its expansion. The prospect looms of no dividend for years, if ever (although taxes and royalties are pouring in). The government threatened to halt development if Rio did not renegotiate.
The deadlock over Kumtor is more striking. In May, President Sadyr Japarov, who came to power a year ago after an obscure struggle that led him out of prison, took control of Kumtor. Its new prime minister, Akylbek Japarov (no relation), accuses Centerra of corruption, enriching politicians instead of the national budget. (Centerra dismissed the allegations as false.)
Scam accusations are common in resource-rich poor countries. With Oyu Tolgoi, the impasse is more easily resolved. First, Rio Tinto is not widely suspected of corruption (although in Mongolia it is endemic). Power in Mongolia is too fragmented to make large-scale corruption an attractive option for foreign investors, says Julian Dierkes of the University of British Columbia, but what happens to revenues once they reach government coffers is another matter. Moreover, a recent independent review makes it difficult for Rio to deny that it is partly responsible for the delays and cost overruns. He says he is ready to “explore” reducing his fees and loan interest rates.
In Kyrgyzstan, the situation is grimmer. There, bribery and corruption are not incidental to business, but at the heart of it. Despite all that Centerra brags about its investments, politicians and mobsters have long sought a stake. Once the new government gains access to cash from the mine, ask many in Bishkek, the capital, what will prevent officials from pocketing it for personal gain?
Foreign investors too often blame “resource nationalism” for their woes in host countries. It’s selfish. After all, resources generally belong to the state. It is reasonable for citizens to wonder how to get the most out of it. Neither Centerra nor Rio Tinto has engaged sufficiently with host countries on this issue. To complicate matters in Mongolia, Mr Dierkes claims, there is the common belief that there is a “perfect Oyu Tolgoi match there in the Platonic paradise”. In Kyrgyzstan, the stakes are even higher: not just foreign investor confidence in a turbulent country, but the Kyrgyz people’s waning faith in the ruling classes.
This article appeared in the Asia section of the print edition under the headline “Mine for the taking”