Thursday, September 22, 2011

Mongolia resource sales hit headwind, and Russia heads for slowdown...

Mongolia resource sales hit headwind, and Russia heads for slowdown...
By Steven Borowiec

ULAN BATOR - As Mongolia is cashing in on its enormous resource wealth, tensions are building between the Mongolian government and foreign investors. Strain is also growing in Mongolian society in general, as citizens push their government to closely regulate foreign businesses and more widely distribute revenue from resource deals.

The Mongolian government is moving forward on a number of projects to turn its minerals into money. None of its endeavors are bigger than the privatization of Erdenes Tavan Tolgoi, the state-owned firm that controls one of the world's largest deposits of coal, which is expected to raise US$300 billion. Tavan Tolgoi's initial public offering has been delayed until at least the first quarter of 2012 and will likely be made on three different exchanges: Ulan Bator, London and Hong Kong. Mongolia seems to be looking to put its eggs in a number of baskets.

The first proposals for the development rights to Tavan Tolgoi, submitted by consortiums from China, Russia, and the United States, were rejected by Mongolia's National Security Council.

Thailand's biggest coal producer, Banpu, hasn't been deterred by the challenges of working in Mongolia. It recently committed to buying all remaining shares of Hunnu Coal, of which it currently owns 12%. In order for Banpu to gain full control of Hunnu, the bid must be approved by Mongolia's regulatory council. Hunnu has 11 coking and thermal coal projects in Mongolia, which will be fully controlled by Banpu if the acquisition is approved.

How to split the spoils of Mongolia's extractive industries is a sore point between foreign firms and the Mongolian administration, and there are signs that the Mongolian government might be getting more selective about what terms it is willing to accept. A group of 20 members of Mongolia's parliament are petitioning for changes to an agreement with Australian firm Rio Tinto over the Oyu Tolgoi mine. The members of parliament hope to get the Mongolian government a larger share of the revenue from Oyu Tolgoi.

The toughening government stance is believed to be inspired by displeasure among the public who see their country's resources being carted off without tangible improvements to their quality of life.

Relations between the government and foreign investors could worsen significantly if a ban on mining in Mongolia's river and forest areas, which is set to expire at the end of 2011, is extended in October when the Mongolian parliament convenes for its autumn session. The ban went into effect in 2009 and interrupted the workings of firms whose licenses were suspended. Intended to protect forests, rivers and lakes from harmful mining projects, the deal has been roundly criticized by investors who called it unfair and claimed it cast unhelpful doubt on their ability to do business in the country.

The Mongolian government appears to be making an earnest effort to help citizens who aren't directly benefiting from the current influx of revenue. Resource-rich countries have always grappled with the question of how to build a broadly successful society from a source of wealth that doesn't employ many people and is controlled by a small group. In Mongolia, the extent of inequality and challenges of distribution are severe.

In an attempt to boost domestic, non-mining businesses the Mongolian government has raised 108 billion tughrik (US$85.5 million) in bonds as part of a 300 billion tughrik bond issue. The bond sale began on August 9. The bonds are being sold on the Mongolian Stock Exchange.

The 300 billion tughrik will be distributed as assistance to small and medium-sized enterprises, producers of wool and cashmere products, and herders who provide unrefined camel and sheep wool to domestic factories.

In July, government revenues were $199.8 million more than had been projected. While the coffers are swelling, many Mongolians are living in poverty. Mongolian officials have allotted a portion of the country's new riches to programs intended to address poverty and unemployment. Many of Mongolia's poor live off government benefits and are driven to alcoholism by boredom and purposelessness.

From July's budget surplus, $74.4 million will be used for initiatives to boost employment and health programs. About $2 million will be used to develop small communities in the hinterland and therefore discourage rural to urban migration.

The Mongolian government is sponsoring job fairs in the capital and has declared 2011 the "year of employment". The recent Job Fair 2011 targeted a certain kind of job seeker: well-educated, fluent in English, and recently returned from studying abroad. Few Mongolians fit this description.

Mongolian officials are in the midst of a difficult balancing act. They are trying to maintain good relations with its foreign business community while assisting citizens and protecting the country's environment as they seek to profit from it. With business and government digging in their heels as a series of high-profile agreement are pending and citizens discontent apparently on the rise, it remains to be seen if they can make everyone happy....
Russia heads for slowdown...
By Robert M Cutler

MONTREAL - Near-term economic growth in Russia will be consumer-driven, as government spending and transfer payments, together with an unwillingness to raise taxes, will lift disposable income and real wages in the run-up to parliamentary and presidential elections.

That is the consensus of three authoritative public policy studies by different Moscow research centers, according to the Russia newspaper Nezavisimaya gazeta. Also, economic growth is not foreseeable, and a new crisis is increasingly likely.

According to the newspaper, political uncertainty over the presidential elections next year, in addition to a general mistrust of the investment climate, is responsible for a decline in investment. The privatization plan announced with great fanfare in 2010 was expanded this year, but the full plan has still not been authorized and may undergo further modification before approval.

Newly released economic statistics from Russia point to a stall in the economy, and there is a consensus inside and outside the country among independent experts that things will likely get worse before they get better. Paradoxically, business confidence inside the country is higher than a year ago. The Purchasing Managers Index (PMI) in manufacturing dipped below the neutral level of 50 in August but remained expansionary at 52 in the service sector.

Gross domestic product (GDP) during the second quarter of the year grew only 3.4% over the same period in 2010, compared with a 4.1% growth rate in the first quarter. Russia is the slowest-growing of the BRIC (Brazil, Russia, India, China) countries. A major reason why is that that oil and gas make up about one-sixth of its GDP (the figure for Brazil, for example, is one-tenth) and two-fifths of government revenue; and world prices for these energy resources have been falling.

The price of Urals blend, Russia's benchmark export product, has been oscillating lately around $110/barrel after hitting a high near $123/barrel in April. Commerzbank has estimated that a $10 decline in the price of oil increases the government budget deficit by 1.5% of GDP, while a separate study last year estimated that such a decline also slows overall economic expansion by 0.5%.

Thus last week the economic ministry warned that a hypothetical negative world economic scenario next year, with an oil price decline to US$60, could stymie economic expansion and lead to a "substantial" devaluation of the rouble. Finance Minister Alexei Kudrin affirmed the estimate publicly in St Petersburg.

Nevertheless, President Vladimir Putin earlier this month projected GDP growth at 4.2% to 4.3% for calendar year 2011. This is slightly higher than the independent international consensus. The World Bank expects the Russian economy to grow by only 4% this year, with the rate falling to 3.7% in 2012.

The rouble-denominated MICEX stock index in Moscow closed at 1,507 yesterday, down from a high of 1,860 in early April after breaking to the downside through a combined medium- and long-term support at 1,525 (short-term support still at 1,430), while the dollar-denominated RTS was at 1,503, down from 2,124. The fact that they are at nearly the same nominal level yet with radically different highs for the year reflects the rouble's weakness. Indeed, the rouble has closed down against the central bank's dollar-euro basket for nine consecutive trading days, falling 5% in two weeks.
The central bank's current target "corridor" for the rouble between 32.15 and 37.15 to the dollar in a "managed float", where the market is in general allowed to determine its value while the central bank, rather than trying to influence it on a day-to-day basis, intervenes so as to alter overall patterns in the fluctuation or to reduce the effects of external economic shocks.

The Customs Union with Kazakhstan and Belarus has so far had little effect on the Russian economy. Ukraine's new orientation towards negotiating a free trade agreement with the European Union will draw away an important potential anchor. Only smaller, further-flung economies such as Kyrgyzstan and Tajikistan have expressed an interest in joining the Customs Union, which remains mainly a multilateral fig-leaf for managing Russia-Kazakhstan economic relations. This is, in fact, more a political than an economic union.

According to the World Bank, a series of simulation exercises showed that the implementation of the union would put brakes on trade with third countries, weakening the international position of its participants. Moreover, their membership in the Customs Union will only complicate their individual attempts to join the World Trade Organization, while the prospect of their adhesion en bloc lacks a well-defined organizational mechanism.

The fact that Russian industry is generally uncompetitive on world markets and the dependence of the country's trade turnover on natural resources are disincentives for Moscow to embrace a global trading regime. And Georgia, where Russian troops in South Ossetia and Abkhazia have only cemented the Kremlin's grip on these regions, continues to block Russia's bid for World Trade Organization membership....

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