Mongolia is “dependent on our two neighbours for food and other products... But Mongolia is a parliamentary democracy and [our] people’s mindset and society is very different from those countries… Mongolia is landlocked, but we’re not mindlocked."

So said Prime Minister Luvsannamsrai Oyun-Erdene as he visited Washington DC in August 2023. He went on to explain that although Mongolia is economically reliant on Russia and China, it maintains diplomatic and political independence, including when it comes to preserving its relations with Ukraine.

In August, the US State Department imposed another round of sanctions on Russia related to the Ukraine war, adding 400 more Russian companies to the list of targeted entities. Throughout September and October, both the US and the EU continued to expand these sanctions, targeting additional companies and individuals. Although Mongolia has not taken sides in the conflict, it feels the economic strain from the indirect effects of any such sanctions due to its deep economic ties with Russia.

Sanctions aimed at Russia have caused a major loss of airline revenue for Mongolia, as flights on Europe-Asia routes that once passed through Russian and Mongolian airspace paid Ulan Bator valuable "navigation fees." These revenues have declined since Russia's airspace restrictions, imposed in response to EU sanctions, forced many European airlines to reroute over the North Pole or through Central Asia and Turkey.

Russia, meanwhile, supplies around 95% of Mongolia's petroleum products, with its fuel exports indispensable to the country. However, sanctions on Russian energy companies and banks have created payment difficulties for Mongolia. Additionally, war-related shortages in Russia have disrupted supplies of key commodities like diesel fuel, sunflower oil and mining equipment, further impacting essential goods that Mongolians rely on daily.

Landlocked Mongolia, with only two international borders, depends on Russia for access to Europe and on China for trade with Asia. To a significant extent, Mongolia—massively dependent on exporting coal, copper and gold, largely to China—also turns to Russian transportation to export goods to northern Chinese territories and Asia-Pacific.

All of this makes the current situation with sanctions particularly challenging. Sanctions have raised costs and extended lead times for trade, as transporting goods from the EU through Russia is no longer feasible.

PM Oyun-Erdene has emphasised that while Mongolia bears no responsibility for the Ukraine conflict, the sanctions feel like a "double sanction" on the country due to their significant impact.

Unlike in autocratic China and Russia, Mongolia's leaders are democratically elected and held accountable by their constituents. Protests, which are rare in China or Russia, are a regular challenge for Mongolian leaders, particularly over economic issues like reduced living standards. With an average monthly wage of around $400 , even small increases in the cost of fuel or fresh produce imported from Russia have a significant impact on Mongolian families.

Over the past four years, a combination of the pandemic and the Ukraine war has led to severe bouts of inflation, with fuel prices rising by 68% and food costs by as much as 40%. Most recently, the government announced a 30% hike in fuel prices, which will severely affect the 27% of the population living in poverty.

Odbayar Erdenetsogt, foreign policy advisor to Mongolia's president, took a look at how despite Mongolia’s strong relations with Ukraine, the EU, Russia and the US, the wide-reaching impact of Western sanctions on Russia has severely affected Mongolia. He underscored the unfairness of the situation for a developing country like Mongolia, which is striving for prosperity. Erdenetsogt called for dialogue and peace, emphasising Mongolia's independent foreign policy as a key reason why it could help facilitate discussions to resolve international differences.

Mongolia has long struggled to maintain an independent foreign policy, despite pressure from both Beijing and Moscow. A notable example of Mongolia asserting its independence came early in the Ukraine war when thousands of Russians fled to the country to avoid conscription, and Mongolian officials refused to send them back.

However, at the same time, when Vladimir Putin visited Mongolia in September—in what was his first trip to an International Criminal Court (ICC) member country since the ICC issued a warrant for his arrest over alleged war crimes—Mongolia did not comply with calls from Ukraine and the EU to detain him. Putin was welcomed with an honour guard in Ulaanbaatar, and while a small protest was permitted, the government maintained its stance.

Mongolia is thus carefully balancing its diplomatic relations with Russia, China and the West while navigating the challenges posed by indirect sanctions on Russia. To address the economic fallout, Mongolia is diversifying its trade through its "Third Neighbour" policy, strengthening partnerships with the US, Europe and other Asian nations to reduce reliance on Russia and China. The country is also seeking energy alternatives, including domestic production—India is constructing Mongolia’s first oil refinery and, at the same time, looking at a plan to source Mongolian coking coal for its steel mills, which would be shipped from the Russian Sea of Japan port of Vladivostok—and renewable resources, to lessen its dependency on Russian fuel.

Additionally, Mongolia is working with the International Monetary Fund (IMF) to stabilise its economy and manage debt. On the military front, Mongolia maintains a neutral stance, hosting joint exercises like Khaan Quest 2024 with the US and other Western allies, while also engaging in Steppe Partner 2024 with China in May and conducting a military training exercise with Russia in August, shortly after US Secretary of State Antony Blinken's visited.

This neutrality helps Mongolia keep trade routes open and balance relations with all sides amid the ongoing sanctions.

Antonio Graceffo, PhD, China-MBA, is an economist and China analyst. He has spent over 20 years living in Asia, including seven years in China, three in Taiwan and four in Mongolia. He conducted post-doctoral studies in international trade at the School of Economics, Shanghai University, and holds a PhD from Shanghai University of Sport, and a China-MBA from Shanghai Jiaotong University. Antonio has authored seven books on Asia, with a focus on the Chinese economy.