Stephen Tricks, Consultant, Clyde & Co, on legal prospects for foreign investment

Following two years of rapid expansion of foreign investment, the political and economic developments in Mongolia during 2012 have provoked much debate. Two topics on which many prospective investors seek guidance are the incoming government’s position on the Oyu Tolgoi investment agreement and the new Law on Foreign Investment in Sectors of Strategic Importance (LFISSI), passed shortly before the general election in May 2012. The political issues surrounding Oyu Tolgoi remained uncertain in 2012, but the law, which regulates foreign investment in businesses operating in strategic sectors, is here to stay for the foreseeable future.

The principal provisions of the LFISSI have been summarised in the legal framework overview of this report so I shall not repeat them here. Although some outsiders were surprised by the law, I believe it was less of a shock for those with a better understanding of Mongolia. Throughout history, Mongolia has strived to preserve its own national and cultural heritage while landlocked between two larger neighbours, China and Russia. Mongolia’s stance is reflected in its “third neighbour” policy, under which it encourages commercial and diplomatic ties with the West. My own experience of being introduced to Mongolian politicians and officials is that Western investors and professional advisers are generally welcome. Indeed the attitude of Mongolians to foreign visitors is remarkably friendly at all levels of society. Although Mongolia has been keen to promote Western investment under its third neighbour policy, China purchases up to 90% of its exports. There is therefore a balance to be struck between working with China and remaining economically independent.

The trigger for the new law was an April 2012 proposal by the state-owned Aluminium Corporation of China (Chalco) to acquire from Canada’s Ivanhoe Mines a 56% shareholding in SouthGobi Sands, which operates the Ovoot Tolgoi coal mine. The Mongolian government understood that the Chalco bid would give China control of both production and off-take at the mine and promptly suspended SouthGobi Sands’ mining licence. In addition, Mongolia was facing a general election in June 2012, and MPs were conscious of the need to show that national resources would remain under Mongolian control. Within a month of the Chalco announcement, the State Great Khural, Mongolia’s parliament, had passed the LFISSI, giving the state greater control over foreign investments in the three strategic sectors of mineral resources, banking and finance, and media and telecommunications. The initial draft law contained much wider controls on foreign investment, but following a brief debate the draft was amended to its final form. The new law led to criticism that Mongolia was moving the goalposts for foreign investment, but it is by no means the first country to protect strategic industries.

The other criticism levelled at the LFISSI is that it is not sufficiently clear. In some ways this is not surprising given the haste with which it was produced. The drafting of new legislation in Mongolia is often criticised for not being precise, but one has to bear in mind the speed at which the full body of Mongolian law has developed in the past 20 years. The pressure on the Ministry of Justice to produce legislation on a wide range of issues is considerable. One week the topic may be a domestic violence, while the following week it may be stock exchange securities.

In summary, LFISSI was passed by a democratically elected parliament and reflects the existing policy of maintaining economic independence. To echo the comments of President Ts. Elbegdorj, it may not be the best law, but it is a balance between the interests of the Mongolian people and the need for investment. As noted in the legal framework overview of this report, the new government has proposed amending the 2006 minerals law in order to give the state and local population greater control over mining developments.

But whether the government can achieve the difficult balance between protecting Mongolian interests and encouraging investment remains to be seen.