A third neighbour: Traditionally dependent on Russia and China, the country is actively seeking to broaden its international relations

Foreign relations have traditionally been dominated by the country’s giant neighbours, Russia and China. As a landlocked nation, it is dependent on these two global powers for land access to the global markets beyond them. Furthermore, the Chinese and Russian markets have long accounted for the vast majority of both Mongolia’s imports and exports.

Seeking to bring more advantageous terms to the table in international trade and diplomacy, Mongolia has thus been pursuing a “third neighbour” policy for many years, with this third force historically being Japan and/or Korea, or more recently Western powers, particularly the US. Indeed, a great deal depends on the success of this balancing act, as much of Mongolia’s economic development hinges on good relations with its neighbours, as well as an ability to bargain hard with them to secure its interests.

GOOD NEIGHBOURS: From 1921 until 1990, Mongolia was a close ally of the Soviet Union, with its foreign policy in alignment with Moscow’s. The legacy of this period remains today too, in, for example, the 50:50 Mongolian-Russian ownership of Ulaanbaatar Railways and the Erdenet copper mine, and in a host of trade agreements, such as the agreement enjoyed by Rosneft in supplying petroleum products to Mongolia. The country’s diplomatic relations with North Korea also hark back to this era, giving Mongolia an important role in the current six-party talks.

Many of the older generation in Mongolia today received their education in the Soviet Union, forming personal, and subsequently business, links with those in other former Soviet states, in Central Asia and as far away as Eastern Europe. Meanwhile, post-Cold War Mongolian-Russian relations have not been as close – marred in part for many years by Moscow’s insistence on repayment of what it saw as Soviet-era debts. This manifested itself in a 1993 cooperation treaty, which was renewed in 2000.

Russian language courses and media continue to be popular in Mongolia, while Russian investment remains significant, as does trade. Around 33% of all Mongolia’s imports came from Russia in 2010, although only 2.7% of the country’s exports went the other way.

Relations with China, meanwhile, have historically been challenging. Indeed, with Mongolia gaining its independence after conflict with its giant southern neighbour, border clashes with the People’s Republic in the late 1940s, and Mongolia becoming a frontline state in the Sino-Soviet split of the 1960s, a legacy of some mistrust remains to the present day.

However, following the collapse of the Soviet Union, and rapid Chinese economic growth in more recent times, China has become by far Mongolia’s most important trading partner. Around 85% of all exports go to China, while around a 30% of all imports originate there. Chinese businesses have been key investors in Mongolia since 1990, while many Mongolians now travel to Beijing and other Chinese cities for their education.

FINDING A BALANCE: In 1990, fully aware of the challenges and opportunities brought by having such neighbours, the new democratic Mongolia set out a foreign policy that sought to position the country as a more independent and non-aligned force in world affairs. The Mongolian foreign ministry defines this policy as one which gives priority to friendly relations with both Russia and China, while not adopting the line of either.

The second part of the policy, meanwhile, is more widely known as the third neighbour. This advocates friendly relations with the West and with the free market powers of the East, such Japan, Korea, Singapore, Vietnam and Thailand. Indeed, Ulaanbaatar is keen to develop good ties throughout Asia, seeking membership of the Asia Pacific Economic Cooperation (APEC) while also being an observer at the Association of South -east Asian Nations (ASEAN).

OUTWARD LOOKING: The country also recognises the importance of good links with the rest of Eurasia, seeking to leverage its historic ties with the Central Asian and East European states. It is therefore a partner country of the Organisation for Security and Cooperation in Europe (OSCE), and an observer to the Shanghai Cooperation Organisation (SCO). The third neighbour is thus not a specific nation, or even necessarily a group of nations, but a third alternative to China and Russia that can be employed to prevent Mongolia being obliged to support one or the other.

In recent times, this policy has been employed most strikingly in the award of contracts in the mining sector, Mongolia’s main economic activity. In deciding which companies should get a chance to develop Tavan Tolgoi (TT) – one of the world’s largest unexplored coal reserves – China’s Shenhua, a Russian-led consortium and US firm Peabody were each given a significant stake of the project.

TIES WITH THE US: Relations with the US, one of the most important potential third neighbours given its global standing, if not its actual level of trade with Mongolia, have been good for some time. This has been supported by Mongolia’s willingness to send troops to assist coalition forces in Afghanistan and Iraq, while also being the recipient of US aid through the Millennium Challenge programme and from the US Agency for International Development.

These have provided an important source of funding for a number of programmes over the years, aimed at effecting important structural changes in the country’s legal and institutional framework, in addition to providing aid to some of the poorest Mongolians.

GROWING RECOGNITION: In August 2011, Vice President Joe Biden visited Ulaanbaatar, where he praised the country for achieving a peaceful transition to democracy and political stability (see viewpoint).

This was the highest level visit by the US since President George W Bush visited in 2005, with Secretary of State Madeline Albright visiting earlier in 1998, illustrating the renewed significance of Mongolia in Washington, as well as reflecting growing North American investor interest – a phenomenon also observable with Canada, which has made several significant investments in mining and exploration. Meanwhile, relations with the European Union (EU) and individual European countries have also been greatly strengthened in recent years, with the EU and Mongolia scheduled to sign a cooperation and partnership agreement by the end of 2011. Germany has also been leading the way, with a visit by Chancellor Angela Merkel in October 2011, the first official visit since the two countries established their formal diplomatic relations.

Minerals, and rare earths in particular, were the main items on the agenda, with a framework agreement signed by Merkel and Prime Minister S. Batbold that is likely to see boosted German stakes in the development of TT and other mines. Mongolia is also involved in global multilateral organisations, being a member of the UN, the World Bank and International Monetary Fund, and the World Trade Organisation.

The country is also a member of the Non-Aligned Movement, in keeping with its policy of independence from major global power blocs.

KEEPING A BALANCE: To date, the policy of maintaining good relations with China and Russia, while also cultivating third neighbours has been largely successful. In 2010, Russia wrote off its claims to Soviet-era debts, and since then there has been a resumption of military assistance programmes and plans to jointly develop Mongolian uranium reserves.

A treaty of friendship and cooperation was signed with China in 1994, with frequent high level visits on both sides since. Clearly some tensions do remain, however. The TT share-out between Russia, China and the US was subsequently challenged by Japan, for example, a traditional third neighbour that felt it had been excluded. At times maintaining a balance can be difficult, especially given the sheer volume of business that is represented by China. The Mongolian government’s debate over whether to build a railway from TT and the nearby Oyu Tolgoi mine heading north to Russia or south to China (a much shorter route to market) resulted in a decision to head north, the logic being that this would scale down dependence on the Chinese market. Indeed, when tensions between Mongolia and China have been high, the Chinese authorities have sometimes closed the border, such as during visits of the Dalai Lama to Ulaanbaatar. At the same time, however, Russia is clearly a competitor with Mongolia when it comes to supplying the Chinese market and, naturally, has its own interests to pursue. Thus the search for a third neighbour can be a difficult policy to follow at times, albeit one which can strengthen the Mongolian government’s hand in its international negotiations.

There is clearly an acknowledgement that relations with China and Russia remain paramount, however, and the vast majority of any goods Mongolia sells will likely head south in the years to come, as they do today. The rapid economic growth of China in recent years can be a huge advantage for Mongolia too, given the latter’s strategic position adjacent to many of the engines of that growth, including Manchuria and Inner Mongolia. Meanwhile, Russia’s own development and its prospects in Central Asia make it a still vital partner when it comes to Mongolia’s drive for economic development.