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Mongolia to Reduce Dependence on the Chinese Market

Quadrupling Mongolia’s rail network will send coal, copper and rare earths to Japan and South Korea under a plan to reduce dependence on the Chinese market and boost economic development by lowering transportation costs, local and international media reports.

Sandwiched between Russian and China, Mongolia is about to lay 3,542 miles of track across the country and to Russia’s Far Eastern sea ports.

Mongolia has grown increasingly dependent on commerce with China since the 1991 collapse of the Soviet Union. More than 75 percent of exports went to PRC in 2009, according to European Union figures.

“Using the Russia route, Mongolia will have better access to a global market rather than just dealing with China,” Chris Weafer, Moscow-based chief strategist at UralSib Financial Corp. said to the Bloomberg. “You need that to maximize the commercial value of its goods. Otherwise China dictates prices.”

The massive infrastructure investment stems from the Mongolian government’s desire to diversify trade and reduce dependence on China.

“The missing link in the Mongolian gold rush now is transportation infrastructure,” said Roland Nash, who helps manage about US$150 million of Russian stocks at Moscow-based hedge fund Verno Investment Management Ltd.

“The key for the Mongolians is to attract investments from as many different countries as possible to lessen their dependence on China.”

When the Dalai Lama visited Mongolia in 2002, China expressed its displeasure by closing the border.

“Who knows, they could do that any time,” Dashbaljir Nemekhbayar, head of the Transportation Ministry’s Finance and Investment Department, told EurasiaNet.

In addition to the desire to build up its own industrial capacity, Mongolia finds Russia to be a more comfortable partner to work with than China, said Alicia Campi, president of the U.S.-Mongolia Advisory Group.

“The Russians, partners since 1949 in Mongolia’s north-south border-to-border sole railway, are a known, basically reliable commodity to Mongolian policymakers and they share Mongolian concern over rapidly increasing Chinese penetration and monopolization of north Asian economic trade,” Campi continued.

The rail improvements could also help Mongolia capitalize on new rare earth taxes and regulations instituted in recent years by China, the world’s dominant rare element producer.

“Modernization of the country’s transportation infrastructure will make Mongolian mining ventures even more attractive to foreign investors,” John Shearer, president and CEO of GTSO, which is currently working to secure the mining rights to four mineral-rich properties in Mongolia, said to the Business Wire.

Mongolia this year is to start building a link from the Tavan Tolgoi coal basin with an existing rail line north to Russia.

“Tavan Tolgoi is ready to invest US$1.5 billion into 1000-kilometer railway line connecting Tavan Tolgoi to Choibalsan via Sainshand industrial complex,” Kh. Battulga, Minister for Road, Transportation Construction and Urban Development said on April 21 to business-mongolia.com. Mongolian Choibalsan city is already connected to the Russian rail network.

US$10 billion industrial complex in southern city of Sainshand to include a copper smelter, oil refinery, power plants and chemical coking facilities to process the output from both the coal and copper-gold mines.

Feasibility study of the rail-line project is expected to be completed in July 2011, according to the Tavan Tolgoi web site.

While the government has said the railroad will be constructed within two years, some experts said it is more likely to take three to four years.

According to the International Monetary Fund, economic growth may surge to 23 percent in 2013, more than twice the forecast expansion in China, as large mining projects begin production.

Mongolia’s benchmark MSE Top 20 Index is the world’s best performer in the past 12 months and its currency, the tugrik, the fifth-biggest gainer against the dollar.

Agriculture and mining each account for about 20 percent of gross domestic product. Aside from coal and copper, the country also holds oil, potash, iron ore and uranium, as well as rare earths used in electronics, wind turbines and smart bombs.

World Bank data says Mongolian rail network comprises 1,815 kilometers of broad gauge track, of which 1,110 kilometers are on the main line linking Russia to China, 238 kilometers are on a separate network in Eastern Mongolia that has its own link to the Russian railway, and the remaining 477 kilometers are branches from the main line.

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