HIGH commodity prices and rising coal exports are propelling economic growth in Mongolia, allowing the country to develop its robust mineral resources, expand its services sector, and invest in green agriculture and energy.
Mongolia exported 31.7 million tonnes of coal in 2022, an increase in volume of 102 per cent, or 16 million tonnes, from 2021 and an increase in export revenue of 135 per cent, or US$6.5 billion, due to higher coal prices, according to data from the Mongolian Customs General Administration.
These figures undergirded economic growth of 4.7 per cent in 2022, with Mongolia forecast to grow by 5.2 per cent in 2023.
As the world’s largest landlocked country, Mongolia relies on China for roughly 80 per cent of its exports, 60 per cent of its imports and 40 per cent of its GDP. It exported 29.8 million tonnes of coal to China in 2022, which was up 104 per cent from 2021 and accounted for 94 per cent of Mongolia’s total coal exports.
China’s economic recovery in the first quarter of 2023 is enabling Mongolia’s cross-border trade with its southern neighbour to return to pre-pandemic levels. Mongolia exported 13.8 million tonnes of coal – of which 13.5 million tonnes went to China – from January to March, for a total of US$2.2 billion, up 232.2 per cent year-on-year.
In February Mongolia also started conducting coal-trading contracts through auctions on the Mongolian Stock Exchange, ending the practice of direct contracts with foreign buyers. Using so-called border prices that factor in transport fees, the new electronic trading platform brings transparency and ease to the coal export process.
New rail connections
Recovery in coal exports has catalysed the construction of new railway projects to connect the country’s mines to the Chinese border.
Last September Mongolia inaugurated a 233km railway from the Tavan Tolgoi coal field to the Chinese border that will have the capacity to transport 30 million to 50 million tonnes of coal to China per year and lower transport costs from US$32 per tonne using truck delivery to US$8 per tonne.
In November the country commissioned the railway link from Zuunbayan to Khangi to transport coal, iron ore and other bulk commodities, including from multinational mining company Rio Tinto’s Oyu Tolgoi project.
Several other shorter railway projects are also intended to facilitate cross-border trade with China.
For instance, construction began in May on a 7.1-km railway from the Mongolia border point Shivee Khuren to the Chinese border, which is expected to be completed by October and will facilitate coal and copper shipments.
Two other shorter border connections – from Gashuun Sukhait in Mongolia to Ganqimaodu in China and from Khangi to Mandula in China – are also mostly completed and will further facilitate cross-border trade.
The construction of new railways is part of a larger strategy to link Mongolia to the broader region.
In May 2023 China and Mongolia agreed on a series of economic and transport initiatives to bolster Mongolia as a trade route for China-Russia trade. Mongolia accounts for roughly 90 per cent of China-Russia freight, making a tri-nation economic corridor a key segment of Beijing’s Belt and Road Initiative.
Mongolia relies on Russia for electricity, petrol, aviation fuel, liquefied petroleum gas and diesel, about 60 per cent of which comes from its northern neighbour. With the spike in prices since 2021, stronger links with its main energy supplier could improve its deficit.
Diversification efforts
In recent years Mongolia has taken steps to improve its domestic infrastructure to diversify its mining-based economy. Between 2016 and 2020 the government constructed a motorway system that connects all 21 provinces to the capital Ulaanbaatar.
Western sanctions on Russia following its invasion of Ukraine in early 2022 led to difficulty importing key supplies, including food, as well as the loss of valuable airline navigation fees as airlines that formerly flew over Russia and Mongolia between Europe and Asia have been forced to fly over the North Pole or along a more southerly route.
The conflict has caused a substantial rise in food prices, including for basic staples such as rice and flour, which are essential products for the country’s livestock herders.
To address food insecurity and diversify its economy, the government is keen to encourage more foreign investment from China in non-mining sectors.
In May Tuvdendorj Gendendorj, deputy minister of economy and development, called for greater investment in agriculture, including meat processing, dairy farming and raising goats for cashmere, as well as tourism.
The agriculture sector reached a seven-year high of 12 per cent growth in 2022, supported by favourable weather conditions and increased livestock slaughter. The sector is forecast to grow by 0.9 per cent in 2023, 5.5 per cent in 2024 and 5.5 per cent in 2025, according to the World Bank. China may be incentivised to invest in agri-business in Mongolia given its rising demand for meat.
Investment in sustainability
Mongolia is also looking to harness green agri-business initiatives to address long-term food security. The Asian Development Bank (ADB) approved a US$448 million investment programme in March to support green and inclusive development.
The programme seeks to promote a transformative model for green territorial development and green urban-rural linkages, with secondary towns becoming anchors of climate-smart agri-businesses that promote sustainable, resilient and low-carbon rangeland management. Rangelands cover more than 82 per cent of the country and are critical to the livestock industry.
Another pressing concern is the intensification of the sandstorms originating in the Gobi Desert, caused by deforestation and higher regional temperatures. With China and Mongolia both suffering, the two countries have agreed to form a joint research team to study the problem this summer.
Mongolia is also making a push into green energy. In April the country’s largest financial institution, Khan Bank, issued the first-ever green bond to spur the development of renewable energy, energy efficiency, green buildings, green mobility and climate-smart agriculture. The bond is valued at US$60 million, with the Dutch entrepreneurial development bank FMO providing US$35 million, the International Finance Corporation US$15 million and MicroVest Capital Management US$10 million.
Although the country currently depends on coal and oil for more than 99 per cent of its energy needs, it has 12MW of installed hydropower capacity. In April Chinese engineering company PowerChina started construction on the 90MW Erdeneburen hydropower plant, which will provide power to five provinces in the western part of the country, with US$1 billion in financing from China.
Mongolia’s vast tracts of rangeland offer ample space for solar and wind power. The country is estimated to have a combined wind and solar power potential of 2,600GW, more than enough to meet domestic demand.
In 2020 the ADB loaned Mongolia US$100 billion to develop the country’s first utility-scale battery energy storage system, which should be ready in 2024.
