Mongolia is ready to seek financing from Japan, South Korea and Norway for a key hydropower project on Eg River should a deal with China fail, the project’s director Odkhuu Durzee told Bloomberg in an interview on July 11.

China is withholding a $1bn loan to Mongolia reportedly over Russia’s concerns the project threatens water supply to Lake Baikal, according to Mongolian government documents seen by Bloomberg. The project, envisaging the construction of a 103 meter high dam and a 315MW hydropower plant on the Eg River in northern Mongolia, will help the landlocked central Asian country ensure independent supplies of energy and lower reliance on electricity from Russia and dependence on coal-fired generation.

The Kremlin, however, claims the project poses serious risks to water supply to Russia’s Lake Baikal, located some 580km north of the planned dam. Eg River, one the biggest tributaries flowing into the Selegne River, which eventually discharges into Lake Baikal. A Unesco report from 2014 is supporting Russia’s claim saying the dam would impact endangered species of fish and birds.

According to Durzee, Russia and Unesco environmental concerns are unfounded and politically motivated. “Russia wants to see energy control of Mongolia,” Durzee said. “It becomes a political issue. The power lever is in Russian hands. Anytime we stop listening, we have a fear they will shut off the power, especially in winter.’’

Durzee further suggested that China’s political ties with Russia might be the cause for withholding the funding. Mongolia’s foreign ministry has argued that the project is an internal matter for Mongolia, since the Eg River does not cross an international border and Russia should not have influence on the issue. Russia, in turn, is proposing to increase its energy supplies to Mongolia, which cost the central Asian country more than $25mn a year.

Mongolian government already announced it has put on halt the project citing concerns over transboundary issues. Construction works were originally planned to start in the second half of 2016. Mongolia has said it will invest $828mn in the project using the bulk of a $1bn loan from China.

Mongolia’s current annual 700MW power production capacity falls 200MW short of the country’s demand for electricity during winters. While Soviet-era coal-fired plants provide most of the country’s power, the government is seeking to diversify its power sources and reduce pollution by developing renewable energy.