Some would say the country has delved too greedily, and too deep. With China and its seemingly insatiable demand for resources, Mongolia has been blessed with both the means and opportunity to transform its reserves into hard currency over the past decade, quadrupling the size of its economy. Particularly since the global financial crash of 2007-2008, Mongolia has followed the path of many other commodity-exporters and reoriented itself primarily towards the Chinese manufacturing base, albeit doing so hand-in-hand with Western companies and finance so as to safeguard its coveted political and economic independence. The ruling Democratic Party, which has governed either in coalition or alone since 2004, has prioritized foreign investment and strong ties with the West as a way to profit from Chinese growth while avoiding being a satrapy of Beijing.
Oyu Tolgoi was the gem in the government’s crown, and until 2012 the country posted envious economic growth rates, culminating in nearly 18% growth in 2011. Following this high-water mark, the global commodities markets began their precipitous decline from unprecedented highs. China and other industrial nations across the Global South began to see a slowdown driven by low consumption all over the world. Declining demand for resources, combined with a glut following a decade of ever-larger mega-mines, resulted in the price of nearly every raw commodity plummeting back down to Earth. Rio Tinto, previously flush with cash, found itself hemorrhaging cash and capital, and in 2013 made the decision to halt development on Oyu Tolgoi.
The economic reality of the situation has not been helped by the political turbulence in Mongolia. After a decade of Democratic Party rule and rapid industrialization, the country has seethed and cracked as large swathes of the populace feel underserved by rapid growth. The current Prime Minister came to power after the Democratic Party’s minority in the Parliament was unable to overcome a vote of no-confidence. Popular resentment is fueled by the failure of the government to both secure further investment and to ensure a more equitable distribution of mining profits both into its own coffers and to the people at large.
In spite of the challenging commodities market and China’s worsening economic situation, Oyu Tolgoi remains profitable—its output is so great, and the cost of closing it so high, that to do anything other than produce and expand would be a great expense to the already battered investors. Rio Tinto’s recent financing deal will allow for the mine to expand production and will be, by far and away, the largest single contributor to the country’s overall GDP and the main driver of growth for the foreseeable future.
Two major risks remain for the project. The first is that China’s economic slowdown will manifest as an all-out crash. 2016 started off on a bad foot for Chinese stocks, leading many to think the country might be on the verge of a major economic catastrophe, but in all likelihood these market jitters do not accurately represent the state of the Chinese malaise. While the country is likely to continue to continue its slowdown, traders on the Chinese market are generally smaller and less sophisticated than their Western counterparts—more susceptible to panic and groupthink, resulting in a divergence between reality and stock trading. Thus, while the indicators coming out of China, including its almost certainly government-inflated GDP growth numbers, are not encouraging for the future, it is important to keep Chinese stock jitters separate from concrete economic analysis.
The second, and greater, threat to Oyu Tolgoi comes from the political sphere. The Democratic Party looks likely to lose the upcoming parliamentary elections by a substantial margin to the center-left heirs of the communist past. While largely reconciled to the free market in the 21st century, the opposition has built its campaign around populist demands to renegotiate terms with foreign investors. In this troubling economic environment, Rio Tinto and the current government struggled mightily to secure the necessary financing for the Oyu Tolgoi project. If a new government reneges on its promises and tries to force both Rio Tinto and global financiers back to the table, it could find itself holding the bag with a very empty, very unproductive hole in the ground.
*The views expressed in this article are of the author and do not represent those of The Political Analysis.