The Mongolian tughrik has since late January been steadily losing value against the dollar, while inflation has been mounting. There are several reasons for this, including increases in the prices of Russian gas, energy and wheat due to effects of the war in Ukraine.

Furthermore, Mongolia’s dollar income is down, as a result of a decline in exports caused by China’s “zero-Covid” policy and consequent border closures. These have also interfered with imports from China, driving up the prices of most finished goods and value-added products in Mongolia, affecting everything from toothpaste to cleaning supplies. Additionally, the lack of foreign tourists and the decrease in exports over the past two years has caused fewer dollars to be available.

Dollars enter Mongolia via imports, loans, remittances, tourism and aid. Most of these dollars wind up in the central bank, the Bank of Mongolia (BOM). The BOM determines how many dollars they wish to add to their foreign currency reserves. The remainder are auctioned off to commercial banks, twice a week. The commercial banks bid on the dollars based on demand and expected demand from their clients.

Several money changers in Ulaanbaatar have reported that, just before Russia’s invasion of Ukraine in late February, a number of Russians came to Mongolia, buying up dollars, further driving down supply. When asked why money changers and bankers would have sold off all their dollars, knowing what was happening in Ukraine, a data scientist who tracks economic phenomena in Mongolia said that the bankers and money changers sell at the market rate, according to supply and demand. “They aren’t concerned with macroeconomic factors.” he explained.

A commercial banker provided a very similar answer, saying that the BOM is concerned with regulating the price of the tughrik, or MNT, but bankers and money changers are just businesspeople who perform services for their clients. Additionally, they are effectively bound to sell at the market rate, irrespective of their personal prognoses. Bankers and money changers generally wait for geopolitical events to reflect in prices, rather than altering prices or ceasing trading in a particular currency of their own accord.

The current shortage of dollars in Mongolia results from both decreased supply and increased demand. As citizens see their MNT accounts decreasing in value, they wish to convert their cash to dollars. Although the tughrik price of dollars has been increasing steadily, demand continues to grow. In March and April, commercial banks and the Naiman Sharga currency exchange market imposed limits on the volume of exchanges. The BOM assured the public that there would be no problem transferring larger amounts of money in an emergency, such as for medical expenses or paying tuition to foreign universities. The central bank also stated that they did not impose restrictions on currency conversions, but that these were imposed by the commercial banks. In March, the banks’s daily conversion limit was MNT 50mn (around $16,550). By mid-April, however, the limit had been reduced to MNT 300,000 (around $99.30).

In Ulaanbaatar, there are three primary markets for foreign currency: banks, money changers and Facebook. Private citizens actually sell hard currency through Facebook at a premium, in a Facebook group called ВАЛЮТ АРИЛЖАА ТОХИРОЛЦОО (“Currency Trading Negotiations”). The difference between the bank rate, that of money changers and the offers on Facebook can be hundreds of MNT.

On Facebook on April 15, one person offered to buy dollars for MNT 3,140 while another was offering MNT 3,150. They were selling for MNT 3,150 and MNT 3,160, respectively. On the same day, banks were buying for MNT 3,470 and selling for MNT 3,530. Money changers advertised various prices: One was buying at MNT 3,420, while another was buying at MNT 3,460. Their respective selling prices were MNT 3,510 and MNT 3,550. On the same day and at the same time, the BOM official rate was buy MNT 3,250 and sell MNT 3,551. In theory, one could buy via Facebook at MNT 3,150 and sell to the bank for MNT 3,470. Consequently, Mongolia has strict rules on commercial banks engaging in currency arbitrage, to avoid distortions in the currency market.

Apart from dollars, other foreign currencies are also in short supply. Many mining companies and international companies need a certain amount of Australian dollars, Canadian dollars or British pounds sterling to pay suppliers back home or repatriate profits. These currencies do not appear to be available in the Facebook market place, which relegates buyers to using the banks and money changers, where supply is low and rates are high.

Apart from dollars, yuan were readily available in large quantities on Facebook. Unlike dollars, however, the sellers did not make their exchange rates public, instead just leaving their contact information. Ostensibly, a buyer could call them and ask the rate, or possibly negotiate a better rate. A commercial banker, speaking on condition of anonymity, said he believed that other hard currencies might be mispriced because of their scarcity in Mongolia. Consequently, there could be arbitrage opportunities moving between three currencies and three markets.

Because of the shortage of dollars, foreign businesses are having trouble making international payments. Turbold, an employee at Oortsogiin Hondii, a non-bank financial institution, reported: “It’s getting difficult, not only for business owners but also for normal citizens. I tried to make a payment with my Visa card from the Trade and Development Bank, but wasn’t able to because I’d reached the daily limit of $330. Companies are probably using different currencies to make purchases.”

Naraa, a loan manager at State Bank, confirmed the shortage of dollars. When asked about other currencies, Naraa said: “If people want to convert, it seems like they can’t. The only currencies that may still be available are the dollar and yuan.” The fact that the yuan is still in large supply across banks, money changers and Facebook suggests that it is not particularly important for international payments and will not provide a viable alternative solution.

Many Mongolians expect the situation to worsen. Turbold, the Oortsogiin Hondii employee, said: “I’m sure, in the next three months, the dollar will reach its all-time high against the Mongolian tughrik.”

This article was written with research assistance from Khangal Odbayar, Tengis Enkh-Amgalan, Suldbayar Nasanbat and Nomintuul Batsaikhan.