OBG talks to Victor V. Samoilenko, Russian Federation Ambassador

Interview: Victor V. Samoilenko

How would you assess the role Russian firms play in the Mongolian economy and its trade relations?

VICTOR V. SAMOILENKO: Russian firms have been present in Mongolia since the Soviet era and include flagships in the economy like Erdenet, which produces copper and Molybdenum concentrate, Ulaanbaatar Railroad (UBRR), and Mongolrostsvetmet. They are the main contributors to local GDP. Erdenet itself is responsible for 20% of GDP and up to 40% to the budget. UBRR has been a huge boost to the economy in past decades, because before 1949 all transport was done by camels.

Mongolia receives great contributions from Oyu Tolgoi through taxes, but not yet through production. The volume of trade between Russia and Mongolia is about $1.6bn, however, the structure of bilateral trade needs improvement. A major share of Russia’s exports is fuel, but exports of mining equipment and machinery have decreased. We have changed our approach and I am confident that Russian technology will be in demand, especially for the energy and mining sectors.

What challenges do Russian firms face when investing in Mongolia? What are the opportunities?

SAMOILENKO: In the Soviet era we invested a lot in Mongolia. In 2003, after long negotiations, Russia wrote off Mongolian debt totalling $11.4bn. The idea was to clear the ground for further investment cooperation. Russia is now operating as a free market economy and we expect offers in return, this has not been the case so we are in standby mode. We are interested in mutually beneficial cooperation; that is our only criteria.

What steps should both governments take to strengthen political and economic relations?

SAMOILENKO: In August 2009 former President Dmitry Medvedev visited President Ts. Elbegdorj in Mongolia and they signed a declaration to develop a strategic partnership, building on agreements made in 2006, implying that Russia is the preferred partner for business. The declaration included specific issues like UBRR, uranium production and Tavan Tolgoi. The new government seems inclined to engage in business with Russia, which we find encouraging.

How important is Russia as a transport gateway for Mongolian mineral products to external markets?

SAMOILENKO: One Russian project here is the UBRR. It needs renovation and we have been talking with the government about the need to modernise it for the market economy. Capital for the railroad has been increased by $250m and renovating the most-utilised sections of the rail will increase capacity.

Once the modernisation within Mongolia is complete, we can start exporting products through Russia to Japan and South Korea. It is a feasible export channel, since the Russian Railroad offers a special tariff for Mongolian exports to East Asian ports – $31.9 per tonne for distances over 4000 km. We did this because we are planning to be a part of the Tavan Tolgoi project and want to provide an efficient delivery route to third markets. This creates alternatives for Mongolian resources, helping the country diversify export markets.

To what extent can Russian firms help Mongolia to move towards more value-added production?

SAMOILENKO: Our well-established industrial base in Mongolia is the foundation for further cooperation. We can upgrade Erdenet, increasing its resource base and lowering digging costs with additional investments, and improving efficiency and production. For the past three years we have been undertaking such efforts, and profits have been increasing continuously, despite fluctuations in the price of minerals. State-owned corporation RosTechnology is a 49 % shareholder of Erdenet and is offering to set up a copper smelting plant in Erdenet and build up a power station to supply the energy. At this time, Mongolia provides most of the power, but some is imported from Russia. Another opportunity is in the production of sulphuric acid, a product that is used by Erdenet and needs to be imported.