Both countries are wrangling with miners on how to share benefits and costs
Two poor, fragile, post-Soviet democracies, two spectacular holes in the ground. Mongolia’s Oyu Tolgoi, or “Turquoise Hill”, is a vast mine in the southern Gobi desert, just 80km from the Chinese border. Kumtor in the Tian Shan mountains of Kyrgyzstan, operating since 1997, is if anything even more remote. Located beside a series of glaciers at 13,000 feet above sea level, it is the world’s second-highest gold mine.
It is hard to exaggerate the importance of these two mines to their respective economies. Open-pit extraction began at Oyu Tolgoi in 2013. The second phase, a $6.75bn expansion in which 200km of tunnels will reach 1.3km deep, is expected to treble the output of concentrate, to over 500,000 tonnes a year. Once completed, Oyu Tolgoi will be the world’s fourth-biggest copper mine.
When the contract with Rio Tinto, an Anglo-Australian mining giant, was first signed in 2009, Oyu Tolgoi was predicted to add five percentage points to Mongolia’s annual economic growth, which, for a while, it did. The mine has created 15,000 jobs directly and another 45,000 indirectly, for a Mongolian population of 3.3m. As for Kumtor, its owner, Centerra, a Canadian exploration company, is the country’s largest private investor. In a good year the mine generates a tenth of Kyrgyzstan’s gdp and is the biggest contributor to the state budget.
Both mines loom large in national life. Both foreign operators won sweet, initial deals when naive young states opened their doors to foreign investment. Controversy surrounding the mines was thus inevitable.
Oyu Tolgoi has long been controversial. Politicians often accuse Rio Tinto of fleecing the country. The language grew sharper six years ago, after a balance-of-payments bust. A renegotiation of the terms in 2015 is now being challenged by the ruling party. It claims the deal is unfavourable to Mongolia, which has a 34% stake in Oyu Tolgoi, and was even negotiated illegally. Meanwhile, costs for underground development at Oyu Tolgoi have overrun by more than $1.5bn, and the estimated date for shipping the first underground concentrate has receded by over two years. All the while, the government must service debt incurred when it borrowed from Rio Tinto to fund expansion. The prospect is dawning of no dividend for years, if ever (though taxes and royalties pour in). The government has threatened to halt development if Rio does not renegotiate.
The stand-off over Kumtor is starker. In May the president, Sadyr Japarov, who came to power a year ago in an obscure struggle that involved his being sprung from jail, seized control of Kumtor. His new prime minister, Akylbek Japarov (no relation), accuses Centerra of corruption, enriching politicians instead of the national budget. (Centerra has dismissed the allegations as false.)
Accusations of being cheated are common in poor, resource-rich countries. With Oyu Tolgoi, the stand-off is more easily resolved. First, Rio Tinto is not widely suspected of corruption (even though in Mongolia it is endemic). Power in Mongolia is too fragmented to make bribery at scale an attractive option to foreign investors, says Julian Dierkes of the University of British Columbia—though what happens to revenues once they reach government coffers is another matter. Moreover, a recent independent review makes it hard for Rio to deny it bears some blame for delays and cost overruns. It says it is ready to “explore” cutting its fees and loan interest rates.
In Kyrgyzstan the situation is bleaker. There, bribery and corruption are not incidental to business but central to it. For all that Centerra boasts of its investments, politicians and gangsters have long looked to take a cut. Once the new government has access to the mine’s cashflow, ask many in Bishkek, the capital, what is to stop officials pocketing it for private gain?
Foreign investors too often blame “resource nationalism” for their woes in host countries. That is self-serving. After all, the resources usually belong to the state. It is reasonable for citizens to ask how best to benefit from them. Neither Centerra nor Rio Tinto sufficiently engaged with the host countries on this question. Complicating matters in Mongolia, Mr Dierkes asserts, is the common belief that there is a “perfect Oyu Tolgoi agreement out there in the Platonic heaven”. In Kyrgyzstan, the stakes are higher yet: not just foreign investors’ trust in a turbulent country, but Kyrgyz people’s dwindling trust in the ruling classes.
Nov. 6, 2021