EXERCISE #2
Doing Business with Mongolia
Pulvera, Michael V.
ECONOMIC ENVIRONMENT
Over the past 20 years, Mongolia has transformed into a vibrant multiparty democracy with a booming economy. Mongolia is at the threshold of a major transformation driven by the exploitation of its vast mineral resources and the share of mining in GDP today stands at 20 percent, twice the ratio of a decade ago.
The Mongolian economy is facing challenges from persistent economic imbalances.
Economic growth slowed to 3.0 percent in the first half of 2015 amid declining exports from a continued weakening of the commodity market and slower growth in the key export market of China. Mongolia’s annual GDP growth is expected to slow to 2.3 percent for all of 2015.
Poverty has been on a downward trend over the past decade. Most recently, Mongolia’s poverty rate declined from 27.4 percent in 2012 to 21.6 percent in 2014, although many remain near the poverty line. Substantial progress has also been made in regard to several Millennium Development Goals (MDGs) at the national level, though significant regional disparities prevail.
To ensure sustainable and inclusive growth, Mongolia will need to strengthen institutional capacity to manage public revenues efficiently and limit the effects of Dutch
Disease; allocate its resources effectively among spending, investing, and saving; reduce poverty; and offer equal opportunities to all its citizens in urban and rural areas. It needs to do this in a manner which protects the environment and intergenerational equity.
Mongolia became a member of the World Bank Group in February 1991. Since then, the
World Bank has provided US$808.17 million to Mongolia.
As of March 25, 2015, the Bank's portfolio in Mongolia has total commitments of
$207.92 million, composed of 9 operations financed by IDA credits totalling $172.75 million and 14 trust funds totalling $35.17 million spread over 12 operations.

The majority of the projects support infrastructure development, economic governance and institutional strengthening of the mining sector.
In addition to the lending and grant operations, the Bank also provides analytical and advisory work to Mongolia to support its medium and long term development objectives and capacity building for government’s reform strategy in key strategic directions.
In 2008, Parliament of Mongolia approved the Comprehensive National Development
Strategy. The document sets a 14-year development path: the first phase (2007-2015) will focus on achieving the Millennium Development Goals and actively developing the country’s economy; the second phase (2016-2021) will be dedicated to transitioning to a knowledge-based economy.
The World Bank Group’s Country Partnership Strategy (CPS) for Mongolia is aligned with this Strategy and thus identifies three areas which the World Bank Group will support over the next five years (FY13-FY17):


Enhance Mongolia’s capacity to manage the mining economy sustainably and transparently.
1. support the country in developing a regulatory environment, institutional capacity, and infrastructure for world-class mining;
2. support the Government in designing and implementing policies and systems for a more robust, equitable, and transparent management of public revenues and expenditures.



Build a sustained and diversified basis for economic growth and employment in urban and rural areas.
1. enhance the investment climate and financial intermediation;
2. create more opportunities in the rural economy for enhanced livelihoods.



Address vulnerabilities through improved access to services and better service delivery, safety net provision, and improved disaster risk management. 1. work with the Government on the design, adaptation, and implementation of a comprehensive social protection system that supports the poor;
2. support better delivery of basic services (education, health, justice, and infrastructure); 3. reduce vulnerability of households exposed to natural hazards and pollution. Since 1991, IDA has supported rural development, education, improving the livability of
Ulaanbaatar, ensuring sound management within the mining sector, sustainable infrastructure development in southern Mongolia, environmental protection, policy development and air pollution abatement measures.
The overall goal of the rural program has been to reduce the vulnerability of herders to pastoral risk as well as to protect and extend gains made to provide relief in cases of climate emergencies, micro-finance, telecommunications and social services to rural residents. Between 2007 and 2013, the Rural Education and Development (READ) Project made learning materials available in rural Mongolia by establishing 3,560 classroom libraries in all 383 rural primary schools. Each school received over 160 books, benefiting a total of 130,000 students. 4,144 rural primary teachers and 383 school directors were trained. A local professional development network has been set up consisting of 95 core schools and 178 mentor teachers.
The Renewable Energy and Rural Electricity Access Project (REAP)helped the
Government of Mongolia complete its National 100,000 Solar Ger Electrification
Program, which provided over half a million nomadic herders with access to electricity through portable solar home systems. The project also helped fund improvements in soum (district) electrification, including rehabilitating mini-grids and installing renewable energy technology hybrid systems to power them.
In 2006, the Index-Based Livestock Insurance Project was launched initially in four aimags (provinces). In 2010, when another dzud hit Mongolia, it was expanded to cover all 21 aimags. This was the first time such a system was implemented in the world.

The project introduced a new insurance scheme where payments are based on the total number of livestock lost by species and soum (district) rather than on households’ actual, individual losses.
Since the program started, insurance policies have become more and more popular among herders. Every year there is an increase in the number of policies bought.
About 19,500 herders purchased the insurance during the 2013-2014 cycle, an increase of 21% over the past cycle. All herders eligible for compensation got indemnity payments. From 2005 to 2013, thanks to the Information Communications Infrastructure
Development Project (ICIDP) Project:
·

All 360 soum centers (villages) in Mongolia have access to modern phone and

Internet services.
·

34 soum centers have access to high speed Internet.

·

Telephony minutes originated in soum centers increased from 1.2 million per year

in 2006 to 56.5 million in 2013.
·

Telephony minutes originated in rural areas outside of soum centers increased

from almost zero in 2006 to 530,000 a year in 2013.
·

The number of Internet users in soum centers increased from 300 in 2006 to

12,000 in 2013.
·

The government improved the policy and regulatory environment and promoted

investments in ICT in rural areas, which ensured the continued additional annual investment in the ICT sector of the country – annual investment increased from $37.6 million in 2005 to $395 million in 2013.
·

A mechanism has been established to collect resources into a fund to finance

universal access to telecommunication and Internet services.
The

Avian

and

Human

Influenza

Control,

Preparedness

and

Response

Project strengthened the capacity of Mongolia’s emergency agencies, hospitals and

veterinary services to detect and respond to potential outbreaks of infectious diseases, such as an avian and human pandemic influenza (AHI). The project helped set up 22 joint response teams, integrating these organizations across the country. For the first time, the concept of “One Health” --an initiative to forge collaboration between physicians, veterinarians and other scientific and health-related disciplines-- was put into practice in the country.
Mongolia experienced drastic changes in its macroeconomic environment in 2014.
The economy is expected to grow by 7 per cent in 2014. This is a healthy pace. But the majority of this growth has come from the mining sector, which experienced a significant boost from the production ramp up in the first phase of the OyuTolgoi project. Mongolia faced several challenges on the economic front in 2014. The country needed to address these issues in order to avoid falling into another recession similar to that of
2008–09. Since the beginning of the year, unfortunately, the economic environment has not improved. Some might even argue it worsened.
Developments in the general economic environment can be described by looking at the three interrelated major macroeconomic variables: the balance of payments, inflation and the fiscal balance.
Currently, perhaps the most significant difficulty is related to the sharp deterioration in
Mongolia’s balance of payments. There are two factors to this sharp deterioration: the unfavourable terms of trade and the government’s harsh policies towards foreign investment. According to the Bank of Mongolia, the terms of trade have fluctuated but remained weak for the last two years. Prices of the country’s major export commodities — such as copper and coal — declined significantly during this period and are expected to remain at these deflated levels for the foreseeable future.
More importantly, the impact of falling export prices was exacerbated by some critical policy decisions taken by the government on foreign direct investment (FDI). For instance, there is a continued struggle to push forward with the second phase of the giant OyuTolgoi project, as well as prolonged discussions and delays surrounding the

construction of a railway, which is expected to significantly decrease the cost of selling coal to China.
At the same time, the unfriendly treatment of some expatriates in regard to tax issues as well as uncertainty as to policy decisions — whether general macroeconomic decisions or specific project-oriented decisions — all led foreign investors to downsize their exposure to the Mongolian economy. As a result, the country suffered a staggering 81 per cent deterioration in its financial account as of October 2014. In particular, annual inward FDI fell from US$1.8 billion in 2013 to US$0.8 billion in 2014. This is a significant fall. By comparison, in 2012 Mongolia attracted over US$4.4 billion dollars of inward
FDI.
As can be expected, the sharp decrease in the financial account put tremendous pressure on the Mongolian currency, the togrog, to depreciate. In 2014 alone, the togrog depreciated by 13 per cent. This depreciation is related not only to the decrease in FDI and the deterioration in the financial account, but also to the central bank’s increasingly expansionary monetary policy during this period. In the first three months of 2014, the annual growth rate of reserve money was on average 33.7 per cent.
Specifically, the increase in the monetary base can be attributed to two programs carried out by the central bank. First is the so-called price stabilisation program, whereby the central bank provides subsidised loans to some sectors of the economy for the purpose of stabilising prices in these sectors. Second is the initiation of the subsidised mortgage program, whereby the central bank provides highly subsidised mortgages to qualified households through commercial banks. This increase in the highly liquid money supply eventually led to an increase in the inflation rate. As of the end of November 2014, the annual inflation rate stood at 11.5 per cent, well above the target rate of 8 per cent.
Mongolia’s

economic

vulnerabilities

were

aggravated

further

by

increasinglyexpansionary fiscal policies. By the end of 2014, it is expected that the fiscal deficit will be around 15 per cent of GDP, including investment activities by the
Development Bank of Mongolia.
This significant imbalance in the fiscal condition was not isolated to 2014 alone. In the last 15 years, spending has doubled every three years. The Fiscal Stability Law, enacted in 2010, puts restrictions on the growth rate of government expenditures and the fiscal

deficit. But these restrictions led to overly optimistic budget revenue projections, making expenditure expansions appear affordable. As a result, since 2012, the country consistently and widely missed the budget revenue target. In 2014, fiscal revenue is expected to have fallen short of projections by some 16.2 per cent, leading to increased government borrowing from the domestic market to finance the resulting budget deficit.
Expansionary monetary and fiscal policies combined with a weak terms of trade mean
Mongolia finds itself in an unstable economic environment with limited room for policy manoeuvre. It remains to be seen what policies the government will undertake to stabilise the economy, but it is obvious that promoting foreign investment will go a long way to addressing these issues.
TuvshintugsBatdelger is an associate professor at the National University of Mongolia and
Director of the Economic Research Institute based at the university.
This article is part of an EAF special feature series on 2014 in review and the year ahead.
CULTURAL-SOCIAL ENVIRONMENT
Environmental problems facing Mongolia include desertification, inadequate water supply, and air and water pollution. Areas affected by deforestation and excessive grazing are eventually overtaken by the desert. After a winter of little snow, wildfires spread across northern Mongolia from March until June of 1996. The fires were the most extensive since records were first compiled in 1978, resulting in 26 deaths and nearly
800 people injured or rendered homeless. An estimated 20% of Mongolia's coniferous forest was damaged in the blaze. In 2000, only about 6.8% of the total land area was forested. Water pollution is a particularly significant problem in Mongolia because the water supply is so limited. The country has only 35 cu km of renewable water resources. In
2002, only 87% of city dwellers and 30% of the people living in rural areas had access to improved water sources.
The country's air pollution problems are due to increased industrial activity within the country, including the burning of soft coal, and airborne industrial pollution from the

former Soviet Union and the People's Republic of China. The heavy concentration of factories in Ulaanbaatar has polluted the environment in that area.
In 2003, about 11.5% of the total land area was protected, including six Ramsar wetland sites. According to a 2006 report issued by the International Union for Conservation of
Nature and Natural Resources (IUCN), threatened species included 13 types of mammals, 22 species of birds, 1 species of fish, and 3 species of invertebrates.
Przewalski's horse (also called takh) is considered to be the last existing ancestor of the modern domesticated horse. The species was extinct in the wild of Mongolia by 1970, but a special government project of breeding the remaining animals in captivity has resulted in more than 1,500 horses reintroduced to a nature reserve at HustainNuruu.
Threatened species included the Bactrian camel, the snow leopard, and the saiga.
Classes and Castes. Like many nomadic pastoral cultures, the Mongols had a segmentary society, originally organized into a hierarchy of families, clans, tribes, and confederations. While social classes including nobility, herders, artisans, and slaves existed, the social structure was not completely rigid and social mobility was possible.
Under socialism, economic and social equality increased as variation in herd size and wealth levels was reduced. Economic expansion and rapid industrialization also contributed to increasing social mobility. The post-socialist period has been marked by increasing wealth differentiation. While certain segments of the population, such as new entrepreneurs, have prospered in the 1990s, others have become rapidly impoverished.
Symbols of Social Stratification. In ancient times, material cultural objects including headdresses, clothing, horse-blankets and saddles, jewelry, and other personal objects were visual symbols of tribal affiliation and social status. Today emerging wealth is often shown by purchasing and displaying expensive imported goods from Western countries.
POLITICAL-LEGAL ENVIRONMENT
Government. As a socialist nation, Mongolia modeled its political and economic systems on those of the U.S.S.R. For seven decades, the Mongolian People's Revolutionary Party
(MPRP) governed, working closely with the Soviet Union. A major transition in governmental structure and political institutions began in the late 1980s in response to the collapse of the U.S.S.R. Free elections in 1990 resulted in a multiparty government

that was still mostly Communist. A new constitution was adopted in 1992. In 1996, the
Communist MPRP was defeated for the first time since 1921 by an electoral coalition called the Democratic Alliance. However, after four turbulent years and a series of prime ministers, the MPRP regained control of the government in 2000.
The highest legislative body is a unicameral parliament called the State Great Hural with
76 elected members. A president serves as the head of state and a prime minister is the head of government. After legislative elections, the leader of the majority party is typically elected prime minister by the parliament. The president is elected to a four year term by popular vote. Local government leaders are elected at the aimag
(provincial) and soum (district) levels.
Social Problems and Control. The original Mongolian legal code was the yasa , a body of laws created after Genghis Khan's death but greatly influenced by his system of state administration. This legal code dealt with military discipline, criminal law and societal customs and regulation. The modern legal system is closely related to that of the Soviet
Union. Under socialism, crimes committed against the state and/or socialist owned property were treated particularly harshly. In the post socialist era, emerging poverty has resulted in an increase in crimes such as property theft and robbery, especially in the major cities.
Military Activity. Situated in the geographically strategic location between Russia and
China, the country is deeply concerned with national security issues. Mongolian and
Soviet troops have generally been closely allied throughout the 20th century. These armies fought together in the 1921 Mongolian Revolution and in the 1930s against
Japanese border incursions. Under socialism, both Soviet and Mongolian military bases existed in the Gobi region where the Mongolian border with China was heavily guarded.
Mongolia’s legal system is a multiparty parliamentary democracy. Its legal code is based on Continental and Russian law, though ongoing justice sector reforms draw heavily from the American legal system. Most jurists have received their legal education at
Mongolian State University and private universities. The 1992 constitution empowered a General Judicial Council to select all judges and protect their rights. The Supreme Court is the highest judicial body. Supreme Court justices are nominated by the GCC and

confirmed by the president; the State Great Hural (Parliament) must be made aware of the nominations but cannot block them. Specialized civil and criminal courts exist at all levels and are subject to Supreme Court supervision. Administrative courts exist at the province and city levels only and are also subject to Supreme Court supervision. The
Supreme Court is constitutionally empowered to examine all lower court decisions upon appeal and provide official interpretations on all laws except the constitution. Local authorities--district and city governors--ensure that these courts abide by presidential decrees and State Great Hural decisions. At the apex of the judicial system is the Tsets or
Constitutional Court, which consists of nine members, including a chairman, appointed for 6-year terms, whose jurisdiction extends solely over the interpretation of the constitution. Trial Procedures in Mongolia. The law provides for the right to a fair public trial by a judge, although human rights groups and NGOs alleged that this right has been undermined by frequent bribery and large caseloads. Juries are not used. Defendants are innocent until proven guilty and can question witnesses, present evidence, and appeal decisions. Defendants have the right to be informed of the charges against Department of State: 2014 Investment Climate Statement June 2014 4 them (with interpretation as necessary); to a fair, public trial without undue delay; to communicate with an attorney of their choice (or one provided at public expense); to adequate time to prepare a defense; to access government-held evidence; and to appeal. Defendants cannot be compelled to testify or confess guilt. These rights were generally observed in practice, although Amnesty International and other NGOs reported evidence that authorities, at times, used physical coercion to obtain confessions from suspects
The 2013 Investment Law of Mongolia In October 2013, Parliament passed the
Investment Law of Mongolia (IL). Entering into effect on November 1, the IL replaced the
1993 Foreign Investment Law of Mongolia (FILM), and the controversial 2012 Strategic
Entities Foreign Investment Law (SEFIL), which most investors saw as being antiforeign investment and one of the prime causes of the over 50% drop of FDI in the time between its passage and its revocation. Overall, the law sets down the legal rights and obligations of investors in Mongolia, stabilizes the tax environment, establishes the powers and responsibilities of the agency that will regulate investment, and provides

incentives to encourage investment. Foreign investors are given the same protections as domestic investors.
Investment Sweeteners Include Tax and Non-Tax Incentives A central feature of the law promoted by the GOM is the tax incentives in the form of tax stabilization certificates.
New projects and some older projects that meet requirements may qualify for favorable tax treatment for periods up to 27 years. Affected taxes may include corporate income tax; customs duties; value-added tax; and mineral resource royalties. The most important criterion for tax stabilization is the amount of investment, determined by reference to specific sectors and the geographical area within which the investment is made. The Invest Mongolia Agency IL creates a new investment promotion agency, the
Invest Mongolia Agency (IMA), under the Ministry of Economic Development to replace the Foreign Investment Regulation and Registration Department (FIRRD). Mandated to promote and regulate investment activities, the agency will issue tax stabilization certificates and monitor the activities of certificate holders but will have no role in registering companies or investors, a responsibility IL vests with the State Registration
Office exclusively (SRO).
Investor Concerns over Travel Bans Investors and local legal experts have regularly reported that Mongolian public and private entities can use administratively imposed travel bans to pressure foreign investors to settle civil disputes. Immigration officials may impose a travel ban for a variety of reasons, including an individual’s involvement in civil disputes, pending criminal investigations, or for immigration violations. If banned for either a civil or criminal dispute, exit will not be allowed until either the dispute is resolved administratively or a court renders a decision. Neither current law nor regulation establishes a transparent process or clear time-table for settlement of such issues. Resolution of criminal and civil commercial cases has taken up to 2.5 years during which time the foreign citizen has remained in Mongolia. The GOM does not impose similar travel bans for Mongolian citizens with pending civil disputes. Mongolian nationals are only denied exit from Mongolia if an actual arrest warrant has been issued.
Two Mongolian laws, the Criminal Procedure Law of Mongolia (CPL) and the Law on the
Legal Status of Foreign Citizens (FCL), regulate the administrative imposition of travel bans on foreign citizens seeking to leave Mongolia. Under the CPL, if the State decides

that that the suspect will flee, then a measure of restraint, such as a travel ban, may be imposed, but even with a travel ban the State may allow temporary travel. The competent authorities, usually but not exclusively law enforcement authorities, inform
Mongolian Immigration that an individual is a suspect and therefore banned from departing Mongolia.
The Law on the Legal Status of Foreign Citizens (FCL) applies to any foreign citizen in
Mongolia, and bans foreign citizens from exiting Mongolia if anyone (Mongolian or foreign) files a claim or complaint against the foreign citizen for violation of rights, freedoms or lawful interests, and the State authority considers the claim or complaint to have merit. To our knowledge, the competent authority in these cases has been primarily individual investigating police officers and prosecutors to whom the complainant applies. These investigators then apply to Immigration to impose a travel ban on the foreigner. To our knowledge, there is no formal requirement for independent or higher level review of such detainments. Foreign travel is banned until the claim or complaint is resolved; and, in this case, the burden of proof seems to fall squarely on the foreigner. In many of these cases, the complainant and the investigating officer are known to each other. There does not appear to be a mechanism to regulate apparent conflicts of interest.

BIBLIOGRAPHY
Batdelger, T. (2015, January 10). Mongolia's economic prospects turn sour from external pressures. Retrieved December 16, 2015, from http://www.eastasiaforum.org/2015/01/10/mongolias-economic-prospects-turn-sourfrom-external-pressures/ Department of State: 2014 Investment Climate Statement. (2014, June 1). Retrieved
December 16, 2015, from http://www.state.gov/documents/organization/231251.pdf
Mongolia Overview. (2015, November 16). Retrieved December 16, 2015, from http://www.worldbank.org/en/country/mongolia/overview Mongolia Overview. (2015, March 25). Retrieved December 16, 2015, from http://www.worldbank.org/en/country/mongolia/overview#2 Mongolia Overview. (2015, March 25). Retrieved December 16, 2015, from http://www.worldbank.org/en/country/mongolia/overview#3 "Mongolia." Worldmark Encyclopedia of Nations. 2007. Retrieved December 16, 2015 from Encyclopedia.com: http://www.encyclopedia.com/doc/1G2-2586700218.html
Mongolia. (n.d.). Retrieved December 16, 2015, from http://www.everyculture.com/MaNi/Mongolia.html