Mining's Final Frontier

The Promise -- and Peril -- of Mongolia's Mineral Resources

Mongolia is mining’s last frontier. The country is one of a small handful of places left in the world with major untouched mineral deposits. Its best -- and perhaps its only -- hope for broad-based economic development lies in recruiting foreign miners to help develop these resources. The problem is that it has been so difficult for Mongolia’s leadership to get along with foreign mining companies that the country’s whole development strategy is at risk.

The Oyu Tolgoi mine, the largest investment in Mongolia’s history, has become a test case for all foreign investment in the country. It is a mixed deposit of copper and gold being developed by Rio Tinto, the world’s second-largest mining company. Production will not start for another month or so, but even in the preparatory stages, Oyu Tolgoi was almost entirely responsible for Mongolia’s world-leading 17.3 percent GDP growth in 2011, as suppliers and contractors arrived and spread benefits across the wider economy. When fully operational, the mine will account for a third of Mongolia’s GDP. After more than a decade of exploration and preparation, however, Ulaanbaatar wants to renegotiate its share of the profits, and Rio Tinto has threatened to shut down the mine. 

Mongolia is not the only country demanding a greater share of profits from mining within its territory. The trend is prevalent enough to have earned a nickname: resource nationalism. But foreign investors in Mongolia are more likely to succeed if they pay attention not to what makes the country similar to others but rather to what makes it different: geography.

Mongolia is landlocked between Russia and China, both of which exploit their neighbor’s vulnerable position. Rosneft, Russia’s state-owned energy company, is Mongolia’s only significant supplier of fuels, and Moscow has a history of using energy exports as a political tool. Rosneft charges above-market rates to Mongolian importers and often supplies less than demand, periodically sending prices skyrocketing throughout Mongolia’s economy. Moreover, because there are so few transportation routes from Mongolia to the rest of the world, China is essentially Mongolia’s only foreign customer for its existing mining output. Consequently, in negotiations over prices, China always has the upper hand. 

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