Mongolia’s geography lends itself to cliches – the proverbial rock and a hard place fits aptly with Russia to the north and China to its south. Following the collapse of the Soviet Union, and with it the tight grip Moscow once held over the country, Mongolia has, however, flourished. This unique success story is built on the back of Mongolians’ commitment to developing democratic institutions and the country’s openness to foreign investment.

But Mongolia’s position is at risk, from without and within.

Vladimir Putin with Mongolian President Ukhnaagiin Khurelsukh during the Russian leader's September visit to Mongolia (Credit: Russian Presidency, cc-by-sa 4.0).

Externally, Mongolia faces severe pressure from both its neighbours. Vladimir Putin has sought to re-assert Russia’s dominance, epitomised by his September visit to the Mongolian capital of Ulaanbaatar, a visit engineered to demonstrate Putin’s ability to escape an International Criminal Court (ICC) arrest warrant for crimes against Ukraine.

Beijing, for its part, has repeatedly threatened Mongolia’s commodity markets over the last decade. Mongolia, where over half of the population practices Tibetan Buddhism, faces more risks from China as a spat looms over the youthful heir to the Bogd Khan, one of the faith’s most significant lamas.

The lineage once served as Mongolia’s traditional rulers. The Dalai Lama announced the 10th reincarnation last March – the boy is notably a Mongolian-American dual citizen.

More than 80% of Mongolia’s exports go through China, a figure only set to increase given the sanctions on Russia. The last time Beijing shuttered the borders, in 2016, the Mongolian government was plunged into a debt crisis, forced to run a deficit of nearly 18% of GDP to mitigate the impact.

While Mongolia’s geography preordains having to manage two incredibly difficult neighbours, it has counted on sustained foreign support. In addition to its flagship gold and copper exports, the country holds the second largest reserves of rare earth minerals, something that has attracted strong interest from Western partners. Britain has even sought to negotiate an “air bridge” to facilitate Mongolia’s exports thereof in the face of Beijing’s rare earths bans.

But Western investors have been even more important in supporting Mongolia’s development than Western politicians. Although it was by no means an easy ride to get there, Anglo-Australian miner Rio Tinto led the development of the country’s flagship Oyu Tolgoi copper-gold deposit. Underground operations finally opened last March. The fourth largest such mine in the world, it is expected to ultimately produce 500,000 tonnes of copper per year, double Britain’s annual consumption. Gold production may exceed 330,000 ounces – worth over £660mn ($855.6mn) at current market prices.

However, getting the mine to full production and harnessing Mongolia’s rare earth potential face domestic political risks. This April the Mongolian legislature passed an amended Minerals Law. It was supposed to support a new sovereign wealth fund, aimed at diversifying Mongolia’s economy. While that aim is both honourable and advisable for the diversification of the economy, the new law appears highly unlikely to achieve this. Prime Minister Oyun-Erdene Luvsannamsrai stated that the fund should be supported by a rebalancing of the wealth of mining firms in the country. The amendment authorises the government to seize up to 50% of their shares in mining projects without compensation and authorises forced sales of minority stakes.

It is not the first time the government has threatened foreign investors, including Rio Tinto, over the terms of investment agreements. Meanwhile its state corporations have a track record of gross mismanagement of their own commodity resources. In 2022, large-scale protests broke out after local media revealed that as much as $11bn had been siphoned off of coal exports to China by corrupt officials.

The law and threatened nationalisations put at risk the financing of projects such as Oyu Tolgoi as well as the development of the country’s rare earth sector. The move was in part a populist ploy by Luvsannamsrai and President Ukhnaagiin Khurelsukh, leaders of the Mongolian People’s Party (MPP), successor to the country’s once-dominant Communist party, ahead of elections held this June. Seeking to deflect anger over the coal theft, foreign investors made an easy target.

That strategy – and the MPP’s re-jigging of the Constitution and electoral system in 2023 – paid off for the government. After the vote Luvsannamsrai took charge of a new “grand coalition” government, the MPP’s latest success in neutering the opposition following its moves to bar former president Khaltmaagiin Battulga as well as other popular candidates from standing in the 2021 presidential election.

The erosion of democracy and threats against investors risk undermining Mongolia’s support from both the Western investment community as well as supporters of its democracy. The government’s decision to host Putin should raise alarm bells about the government’s intentions going forward. Russia and China would happily take a greater role in Mongolia’s mineral wealth as geo-economic competition with the West appears set to dominate both country’s foreign policies in the years to come.

One has to travel nearly 2,000 kilometres (1,240 miles) east from Mongolia to find another democracy, South Korea, and it is nearly 4,500 kilometres  to the west before the next democracy, Georgia, where democracy is under threat. Further, democratic backsliding in Mongolia risks creating a democratic desert across the entirety of the Eurasian steppe.

Mongolia deserves Western support in protecting its democracy and diversifying its economy. But if its government seeks to engineer short-term wealth by snatching assets away from the foreign investors who are key to enabling its growth and development, such backing is sure to fall by the wayside. Mongolians did not choose their geography, but it need not define their destiny. 

Maximilian Hess is a political risk and foreign policy analyst based in London. He also serves as a fellow at the Foreign Policy Research Institute in Philadelphia, Pennsylvania. Follow him on twitter at @zakavkaza