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Bilateral ties through Russian envoy’s eyes

11th of 5, 2018



The Mongolian Mining Journal /004.2018/

The Russia-Mongolia intergovernmental commission recently held its 21st meeting, where important issues were raised, as between two old friends, and important decisions taken, as would take the partnership forward in challenging times. E.Odjargal talks to long-time Russian Ambassador to Mongolia. I.K.Azizov, about the present state of bilateral cooperation, particularly in trade and mining, and the potential and pitfalls on its way to scale new heights.

You have been ambassador here for five years. Where does bilateral economic and trade cooperation stand now?
Some figures will tell the story. Trade turnover between our two countries was less than $1 billion  in 2015-2016, but in 2017, it rose to $1.368 billion, showing a 46.9 percent rise. Export from Russia to Mongolia increased by 48.1 percent while Mongolian export to Russia increased by 15 percent. Data for the first two months of this year indicate that the growth is continuing.

What were the major results of the last – and the 21st -- meeting of the Russia-Mongolia intergovernmental commission?
The meeting reviewed key issues in bilateral relations, and stressed the need to keep the trade turnover growing. Mongolia would like to increase its exports to Russia, and also suggested liberalisation of its trade relations with the Eurasian Economic Union (EAEU), of which Russia is a member. Russia is working on how to make this possible.     
      
Cooperation in a number of areas in the agricultural sector was discussed. Last year VTB Bank lent $10 million to Mongolia to buy Russian agricultural equipment and the money is still being utilised, with more shipments due this year. As an old and good friend, Russia is supporting Mongolia to improve livestock health, so that more meat can be exported to the global markets, and particularly to Russia.

A joint collaboration, The Mongolia Livestock Health Improvement Program, is successully running. Under this, Russia supplied over 4 million doses of vaccine in 2017. Mongolia wanted the 1.6 million doses due this year to be supplied before March, but this could not be done because of unavoidable procedural delays, such as quality tests. We have to be extra careful as Mongolia’s recent purchase of vaccines from a third country proved to be unsatisfactory.

An important part of the Program is supply of seeds, including of forage. These will be from Siberia, as weather and soil conditions there are similar to Mongolia’s. The meeting covered all areas of bilateral collaboration, including issues of electricity, transport, restructuring the Ulaanbaatar Railway Member Society (UBTZ), and cooperation in border areas.  

I believe the Eg hydropower plant was discussed at the meeting. What is the present Russian stand on the issue?
It remains unchanged from what we said at the previous meeting. The 20th meeting led to the establishment of a working team with experts from both countries, which would make a thorough study of the impact of building hydro-technical facilities in the waters of the Selenge, a main tributary of Lake Baikal. This is a matter not just of our two countries, but is an issue of UNESCO’s natural resources conservation. Mongolia has said it will start looking for other energy sources, if the present project is found to be ecologically harmful.  It does have the means and the resources to produce electricity elsewhere.

What means and resources do you see?
Nuclear power is certainly an option.
At the last meeting, Rosatom of Russia and Mongolia’s Mon-Atom, both state-owned entities, signed a memorandum of understanding on jointly establishing a nuclear science and technological centre in Mongolia. Though this is not about building a nuclear power plant, but to help instal and use nuclear technology in the pharmaceutical industry and agricultural sectors, its work will help expand awareness of and expertise in nuclear science in Mongolia. Some Mongolians still work at the nuclear research centre of Dubna in Russia, and, given the chance, they and their predecessors there can use their knowledge and experience to work for their own country.  

What other areas are covered by the MoU?
We have made certain proposals but since the Mongolian response is yet to be received, it would be inappropriate for me to discuss them.

Do they relate to the mining sector?
Yes. At the moment, we do not collaborate in any large-scale mining project but I think there is enough scope to help Mongolian experts develop nuclear technology for the mining sector.

Keeping to the energy sector, I would like to know more about possible bilateral cooperation there.
Russia supplies 5-7 percent of Mongolia’s electricity needs, which will rise as Mongolian consumption is set to double from the present 1 GW per year. Mega mining projects must get cheaper electricity to keep costs low.
Russia is ready to have a long term agreement to supply electricity at a price favourable to Mongolia, to meet the market demands including development of mining projects.  There can be other areas of collaboration, such as renovation of Power Plants III and IV.

We also recommend that Mongolia becomes part of Asia super grid, which would give it an  important role in Green energy supply. We also hope that Mongolia will accept the proposal of Rosseti to build a “bridge” for energy, by connecting Russian regions with excess energy to  Mongolian territory, and to set up an integrated energy system in Mongolia.
This will be of great benefit to a vast country like yours, with three different time zones, to transmit electricity throughout the country. Being connected to the Asia super grid through the Russian energy system, Mongolia will be able to export electricity, when it is in a position to do so in the future, not just to Europe, but also to East Asian countries.

I believe the issue of a 100-billion-rouble concessional loan was raised at the meeting. Where do things stand?
The loan has been discussed for quite a period of time. As a result Mongolia expressed willingness to spend money on upgrading railway infrastructure and on renovation of power plants. Now that there are certain projects Russian and Mongolian Ministries of finance started talks on how to facilitate the loan.   

What are the Russian requirements for giving the loan?
There is no requirement as such. The two Ministries of Finance are studying how to coordinate their respective rules and regulations on granting such a loan for the specific purposes that Mongolia now favours. The mechanism can change from project to project, depending on their nature.

How is upgrading the infrastructure of Ulaanbaatar Railway being planned?
Ulaanbaatar Railway (UBTZ) is a joint venture and is the most important example of our bilateral cooperation. Russian Railway (RJD) manages the 50% stake that Russia holds in UBTZ. In 2017, UBTZ transporated a record volume of goods.

In early February this year, RJD President O.Belozerov and First Deputy Director A.Misharin visited Ulaanbaatar to hold comprehensive talks, where both parties agreed that the work of modernisation must start in 2018. Not wishing to lose any time, the UBTZ management has not waited for the  loan money, and recently started the work with the help of commercial loans.  
It is clear that the present infrastructure carries load much in excess of capacity. The Erdenet-Ovoot railway of Aspire Mining will carry large volumes of coal and other freight, but it will also make extensive use of UBTZ sub-stations. The traffic in transit transport between China and Russia and between the Asia-Pacific region and Europe is also rapidly increasing.

With its economy recovering, domestic cargo traffic is and will continue to be on the rise, necessitating more tracks and lines. A joint team of experts must start preparing plans for upgrading the UBTZ infrastructure, increasing the number of locomotives and movable components, raising capacity to 34 million tonnes per year before long. It must also make long-term follow-up plans.  

Is it likely that Mongolian railroads would be the best connection between Asia and Europe, particularly the China-Russia segment?    
They will not be the only railroad that connects the Asia-Pacific region  with Europe, but will  certainly be the quickest link between Russia and China, shorter by 550 km-730 km than other routes. That makes it all the more important to start the reconstruction work without delay.

Your mention of the Erdenet-Ovoot railroad reminds me of the Kyzyl-Kuragino railroad in Russia. How is that project going?
All clearances have been received from the Government and funding approved. The Erdenet-Ovoot railroad, will go up to Artssuuri at the border, and then be connected to Kyzyl. Aspire Mining plans to start construction in 2019, and Russia would be carefully following its progress. It should also interest China and other coal importing countries.

Does Russia have plans to send coal from its Elegest mine to China by using this route? Are there other plans to export Russian mining products to China by transporting them through Mongolian territory?
Once the Erdenet-Ovoot railway becomes operational, it will require the carrying capacity of UBTZ to be raised by 10 million tonnes. Upgrading UBTZ infrastructure needs to be started as soon as possible as it will be the central railway corridor to connect Russia and China. Current problems have to be resolved before we talk about future gains. The Erdenet-Ovoot project is obviously of great economic importance, for both Russia and China are keen on using the west- bound railroad.

How does Russia see the proposed Tavantolgoi-Sainshand-Choibalsan railroad?
It is Mongolia’s internal decision. The traffic would be heavy, but it is still unclear if you should first build the narrow-gauge Tavantolgoi-Gashuunsukhait-Gantsmod railroad that connects you to only one country’s market, or the broad-gauge Tavantolgoi-Sainshand-Choibalsan railway, or if you want to build both at the same time. Besides, even now there is no clarity on whether your mineral products would go to only one market or to other East Asian countries. We are waiting for Mongolia’s decision. Russia will participate in the construction of the Tavantolgoi-Sainshand-Choibalsan railroad as UBTZ shareholder if a broad-gauge road is to be built.

We read in the media that the Trans-Siberian railway cannot even fully meet the needs of domestic coal transportation. In that case, will it have the capacity to transport Mongolian coal to the Far Eastern sea ports?
When President Battulga was in Vladivostok for the Eastern Economic Forum in September, 2017, he visited the seaports as he was interested in using them to export Mongolian coal to Asia-Pacific countries. The authorities at Vostochny port told him they could handle 5 million tonnes of Mongolian coal per year.

Domestic rail transport has been growing in Russia. In 2017, 21.6 million tonnes of transit transport took place along the country’s railways network, showing a rise of 16 percent over the previous year. A comprehensive project was taken up in 2014 to add 180 million tonnes to the existing capacity of the Trans-Siberian railroad to carry freight to the Far Eastern seaports by 2023.

Apart from government funding, there is private funding for transportation projects. For instance, the Muchka terminal, built near Vanino port by SUEK’s daughter company Dalitransugoli to supply coal to Asia-Pacific countries, started operations in 2017. It can handle up to 30 million tonnes per year, but there are plans to raise the capacity of the railway to Vanino so that it can carry 80 million tonnes of coal. As Prymorie 1 and Prymorie 2 are working closely with China to improve the railroad facilities, there is not need to worry about transporting Mongolian coal to the ports in the Far East. As of today we can transport around 10,000 tonnes of coal per day. Mongolia first has  to negotiate with Russia the volume of coal it wants to be transported and then to identify the preferred route.

What discounts will Russia offer on such transit transport?
There is a draft agreement on this between the Governments of Russia and Mongolia, and as far as I know, both sides are ready to sign it as a final document, which may happen in the very near future. Mongolia already has all information on the discount, but I cannot reveal anything more. 

I can say this, though. The proposed discounts will offer significant economic benefits to Mongolian exporters sending coal to the Russian ports directly from the mine or from any UBTZ station.

Russia, China, and Mongolia have joined hands and adopted the Economic Corridor programme, one of whose 32 projects is the Ulan Ud-Naushk-Sukhbaatar-Ulaanbaatar-Zamyn Uud-Erlian central railway corridor. What does Russia feel about developing it?

The railway is important, but at the moment our priority should be the modernisation of UBTZ infrastructure and increasing its capacity. As I have explained before, this is essential to cope with the rising demand for transit, and to meet domestic traffic growth, as also to be ready to bear the increased load that is certain to follow the completion of the Erdenet-Ovoot rail project. The importance of the central railway corridor will be examined once Mongolia decides where it wants to send coal from the Tavan Tolgoi deposit and the South Gobi region, and whether it should be broad gauge or narrow.

When will the Investment Research Centre be set up to help implement the Economic Corridors programme?
The three nations agreed that the proposed work of the Investment Research Centre (IRC) would be done by the Secretariats in the capitals of the three countries until the first project is completed. Once that landmark is reached, work will begin on appointment of experts and on installing the operational and organizational structure required by the IRC. Leaders of the three countries are likely to discuss this issue when they attend the SCO summit in June in Qingdao, China.

I now ask my last railway-related question. Is Russia interested in participating in the Khangi-Mandal railway project that Mongolia plans to take up?

It is still not clear how the Mongolian Government plans to move on this project. The broad-gauge line from Sainshand to Zuunbayan now in use belongs to the UBTZ. According to the State Policy on Railway Transportation adopted by Mongolia in 2010, the line you talk about should have a broad gauge. In that case, Russia will be a party as a UBTZ shareholder. u

Russia recently handed over part of the reports prepared after geological studies made by Russian experts in Mongolian territory between 1950 and 1990. When will all such reports be given to Mongolia?

The present handover was the result of a memorandum of understanding signed between the Russian Geological Fund and the MRPAM. The next phase of such transfer will now have to be decided by experts.

How can bilateral cooperation in the mining sector be expanded?
Russia places much importance on starting afresh in this area, coming out of the shadow of the past models of cooperation, exemplified by joint ventures such as Erdenet and Mongolrostsvetmet. As Mongolia’s economy grows, our cooperation in mining could also rise to a higher level. We can start with an easy-to-instal assembly plant and then go for heavier industry.

The very interesting Russian project, which is the factory of AN 2 or the so-called “green grasshopper”, is well known in Mongolia. Based on the MIAT Maintenance Centre and with the support of the Mongolian government, we are keen to set up an AN 2 assembly plant for the Mongolian market. This would be a very useful aircraft for Mongolia, not requiring any aerodrome infrastructure, and capable of landing on any type of terrain. It will thus be ideal for  providing emergency evacuation and fire fighting services in the local areas. The aircraft can be exported as demand is still high in Russia and Asia-Pacific markets.

What was the main reason to sell the 49 percent of the share you held in Erdenet Mining Corporation (EMC)?
I would like to make it clear that the Russian Federation never questioned the economic benefits of EMC and its corporate social responsibility.

Those who worked at EMC in the early years say that the understanding between the Soviet and the Mongolian governments was that Mongolia should become the majority shareholder after 25 years of operation. Agreements to this effect were signed in 1991 and in 2003. Thus the decision to transfer to Mongolia some shares owned by Russia was made during the Soviet period to some extent.

In 2009, the 49% share Russia still owned was transferred to a Russian state owned enterprise Rostec. The new management wanted to enhance the company’s financial efficiency, but even after seven years, Rostec was not satisfied with the results.
In recent years, different issues related to the management of EMC have made news in Mongolia. All I can say is that even when Russia held shares, many management decisions had surprised the Russian side and some had even shocked it. The Mongolian leaders at the time never discussed some of the issues with the Russian shareholder, who finally decided to sell the shares, which it did in 2016.
 
Before that, however, we had carefully evaluated the capacity of the EMC management and concluded that EMC would run smoothly under competent national control, even without Russia’s participation. Currently, about 100 experts from Russia work at Erdenet, and the process of getting Mongolians to replace them, we believe, will soon begin.

EMC will celebrate its 40th anniversary on December 6, and with regular upgrading of technology and equipment in recent years, there is no doubt that the factory will continue to be run profitably.

Is it likely that the Russian side would ask for its 49% shares back if the dispute over them is not resolved?
The decision was made. I don’t see any reason for the Russian side to change it or demand its shares back.

Why was Russia not so interested in Mongolrostsvetmet?
Mongolrostsvetmet products have high demand on the world market. One of them, fluorspar, is the essential raw material of chemical and metallurgical production. Another of its important mining assets is the Asgat deposit in Bayan-Ulgii aimag, which is rich in silver resources. The deposit is geographically divided between Russia and Mongolia. One disadvantage of the deposit is that it is located in a natural environment where any human activity is almost impossible.

In December 2006, the then President of Mongolia, N.Enkhbayar, and President Putin signed an MoU in Moscow, under which later the two countries agreed to establish a joint venture, Asgat Polymetal. However, in January 2007, the State Great Khural approved a list of strategically important deposits which included Asgat and that could be used only under special conditions. If exploration work on the deposit had been done with private funds, 34% of the project would be owned by the Mongolian state and 66% by the company. If, however, the exploration had been carried out with state funding, the Mongolian government would own 51% of the project. Russia has no problems with this law, but the joint venture was not founded duly. Russia is ready to consider all proposals for the Asgat deposit once all the conditions are met.
 
How is bilateral cooperation in the petroleum sector?
Mongolia imports 90 percent of its petroleum product needs from Russia. State-owned Rosneft, Russia’s largest supplier of raw materials, supplies 73%-76% of this and the trade is carried on in accordance with an agreement with the Mongolian government in 2015, which provides for stable and reliable supply over the long term, in line with the oil price on the Singapore Commodity Exchange. Rosneft has two large oil facilities in Angarski and Achinski, both near Mongolia. There are well established supply lines to Mongolia.

As the main supplier of petroleum products here, how does Russia see the Mongolian decision to build an oil refinery?
I cannot speak for Rosneft. Russia’s official position is that the economic viability of the refinery should be thoroughly examined. From information I have got from Mongolian media, I am afraid that the price of the refinery products, to be available from 2021, will be higher than that of the imports. Mongolia will not be able protect its domestic market, as World Trade Organization rules would not allow it to impose import tariffs. I hope that Mongolia will not find itself in such a situation.For that, our Mongolian friends need conduct some thorough research and review all  aspects before it starts building the refinery. We are told that the project will be financed by a concessional loan from the Government of India and that experts from India have certified that the project is economically viable. Russian experts are ready to assist in making fresh estimates and calculations and in conducting fresh studies, of course if Mongolia finds these necessary.

Can you identify the possible industries for bilateral cooperation in future?
Our priority areas would be energy, railway, and agriculture. There is also a possibility of increasing food trade between our two countries. There is a limit on import of milk and flour from Russia, but this year we have not been given any such figures for flour. Maybe Mongolia  believes that the local technology is adequate to supply high grade flour products to the domestic market. However, my experience is that the quality of the bread sold in Ulaanbaatar has been deteriorating. It is not about totally replacing Mongolian flour with Russian flour but maybe better quality bread can be made by mixing the two. As for milk, the Mongolian market has been closed to us for the second consecutive year.


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