The Legal Environment for Foreign Direct Investment in Mongolia: Analysis on Investment Climate and Problems of the Mining Sector

Abstract

ABSTRACT

Foreign direct investment plays an important role in development. It can provide a host country with access to technology transfer, product, development skills and financing and new marketing channels. With the advent of globalization and strong legal policy support, foreign investment has helped the Mongolian economy grow tremendously.

In recent years, the mineral price keeps rising in the world market causing the Mongolian mining sector to develop rapidly so that it attracts foreign and domestic investments significantly contributing to the national economic growth. Minerals have become the main source of the state budget and an opportunity to improve living standards of the people and to increase economic growth. Over the past 20 years, Mongolia has transformed itself from a socialist country to 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. Due to the mining boom, Mongolia is in the group of countries with the highest growth potential over the next decades. Mongolia has rich natural resources that rank tenth in the world, has the ninth largest territory in the world and is a rapidly developing country that has more than 10 percent economic growth for the past 15 years on average. But Mongolia only has a population of 3 million people and is landlocked, bordering just two countries: Russia and China.

Compared to highly populated countries it has a very small market, has an economy based on mineral resources, agriculture and energy. The rich natural resources will be a guarantee for the future of Mongolian economic development. According to the statistics from 2014, per capita GDP has grown by 12 times from 683 USD(in 2004) to 8773 USD in 2014. Additionally it attracts a lot of foreign investment, bordering country China and Russia that have big markets in the world, and has a democratic system.

Mining is a key sector for the Mongolian economy. Foreign direct investment in mining supports poverty reduction, environmental protection and sustainable development. Unfortunately, this rapid growth, while extensive, may weaken in the future and the economy may easily decline so it might have no meaningful effect on the ordinary people.

The key topics of this study center around core questions as to what kind of policy Mongolian government has implemented, how they have attracted the foreign investment, and what the future investment policy ought to be. This thesis focuses on the present situation of foreign investment in the mining sector, and attempts to clarify its effects on the Mongolian economy and to seek ways to improve the legal efficiency of foreign investment.

Creation of stable legal and investment regimes for mining industry is a decisive factor for future development of developing countries with rich natural resource. Recent development in the mining sector has created a challenging task for Mongolia in terms of investment legal regimes for mineral exploitation including state equity participation in major mining projects that are expected to have considerable influence to the future development of the national economy. The aim of this thesis is to analyze current structure of the mining sector investment regime in Mongolia by focusing on the issue of state participation, foreign investment influence and to provide possible options to improve the current practice.

This study uses a historical and empirical approach to the issues and examines existing laws and regulations from the legal points of view. Classification of mineral deposits is a decisive factor in determining how the government should participate in mineral extraction mega projects in Mongolia, and the government equity share should be reduced in order to achieve long term benefit to the country and to keep the investment sustainability.

The study also underlines that clear and stable legal investment environment, effects of international investment agreements (bilateral investment treaties (BITs) and regional or plurilateral and multilateral investment treaties (MAI) etc.), investment dispute settlement mechanisms (ISDS), scope of investment rules (Most Favoured Nation (MFN) principle, National Treatment (NT), Fair and Equitable Treatment (FET), Expropriation and Compensation etc.), investment incentives and investment protection, taxation, transparency of decision making process, and information dissemination and availability of national professionals are essential to the development of the mineral resource sector in Mongolia.

This thesis attempts to find answers through legal analysis. The purpose of the study is to highlight how foreign investment in the mining sector plays a role as the accelerator of Mongolian development. Foreign investment as a development accelerator of the mining sector could take many shapes. The result of foreign investment must highly contribute to the development of the country, value added, introduce innovative, high technology, and from the legal point of view the foreign investment must be protected. Finding an opportunity and way to improve Mongolias competitiveness through a detailed legal analysis of Mongolias foreign investment environment was the most important result of the study.

The research attempts to determine factors influencing one of the positions of Mongolia in the eyes of foreign investors. This study investigates the investment climate of Mongolia as seen by foreign investors, their level of satisfaction or dissatisfaction with their investment, and factors influencing their choice of policy as an investment location.

Keywords: Foreign Direct Investment, Mining Policy, Natural Resources, Rule of Law and Legal Transaction, Bilateral Investment Treaties, Regional or Plurilateral and Multilateral Investment Treaties, Non-Discrimination, Most Favoured Nation, National Treatment, Fair and Equitable Treatment, Dutch Disease, Transformation,