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At first glance Ulan Bator, Mongolia’s gritty capital, doesn’t hold much promise. Pavements are cracked and crumbling. Beaten-up, growling buses jostle with cars from Japan’s scrapyards. Hawkers squat with folded arms waiting to sell a lollipop, shine shoes or dial a telephone call for passersby. Many Soviet-era buildings sorely need a lick of paint, new windows and a spring clean. But something is up.

Shimmering green, blue and silver office towers are taking shape, pointing to a golden future. A trove of minerals stretching across the Periodic Table lies beneath Mongolia. Steve Hanson, the cheerful chief executive of Canada’s Pan-Asian Petroleum, is probing a concession almost the size of Kuwait for oil. “Exploration of oil and petroleum in Mongolia is relatively new, vast regions are unexplored. Most of the work has been done in the last couple of decades. The success has been in recent years.” Hanson, from Vancouver, is cautiously optimistic that PanAsian’s local subsidiary Shaman Resources could be pumping oil by 2010. “There’s been significant discoveries in eastern China and southern Russia, which gives us cause to believe there’s similar potential in Mongolia.”

Tapping oil or unearthing minerals in Mongolia, home to three million people, is particularly attractive because on the doorstep sits the world’s largest customer for raw materials: China. Ulan Bator is a dusty, dry, low-rise city of one million people that sprawls along a gently sloping valley to the broad, shallow threads of the Tuul River. Like many cities in developing Asia, its skyline has been dotted with cranes for the past five years.

Developers utilised the global credit party to build apartments, mostly between the Tuul and the Beijing-Moscow railway, to meet demand for something more comfortable than the no-frills blocks that echo 1970s East Germany. Now there’s speculation about how many developers will go bust or flee leaving half-finished flats and holes in bank balance sheets. The city does have its gems though. Striking examples of Soviet ­Realism in grey concrete, with frescos lauding the proletariat, stand amid dozens of off-white mansions that would look at home along Russia’s Volga River.

The focus today, however, is apartments and offices, which are being erected by Han Chinese engineers and tradesmen who swarm the building sites and man the cranes in the summer construction season (during the long sub-zero winter wet concrete and cement would freeze). However, the city’s Han residents are fewer than might be ­expected, given the proximity of China. And they tend to keep a low profile ­because of a poisoned history that has left many Mongolians with a dim view of their southern neighbours. The Qing Dynasty in Beijing conquered and ruled the Mongolians until its dissolution in 1911 when Mongolia broke free, leaving behind Inner Mongolia as a province of China. Subsequent Soviet ­influence on Mongolia only deepened doubts about China. Mongolians suspect that Beijing harbours thoughts of annexation. It’s clear Beijing worries that an ­independent Mongolia might fire separatist ideas among its ethnic Mongolians.

Mongolia began to wriggle from the Soviet Union’s tight grip two decades ago. Discontent led to peaceful protests in Ulan Bator. The spring of 1990 saw the country aspiring to democracy, embodied in the first open elections. But freedom was costly. Soviet aid evaporated and rationing followed. Today street kiosks, corner shops and lacklustre supermarkets are well-stocked, mostly with products imported from China, Germany, Russia and South Korea.

More shops reflect the influences Mongolians have collected when studying and working overseas, while from around the world come traders, prospectors and miners, plus staff from the UN and development agencies. They mix in congenial bars such as the Grand Khan Irish Pub. Nightclubs range from the dressed-up ­Metropolis – serving cocktails and premium vodkas – to strip clubs. It’s not classy.

Ulan Bator’s population has doubled since 1990 partly because of a baby boom induced by government incentives but largely because herders have been leaving the steppe, attracted by the city’s schools and rumoured riches. Many pitch their nomad’s ger, on the city’s fringe, resulting in tent slums creeping up the hillsides and out along the main highway. These, along with packs of grubby, desperate street children living in the sewers, are ­remind- ers of the government’s failure to tackle poverty. Muggings are common.

But entrenched poverty, and the city’s other problems, have not dissuaded Mandar Jayawant, who quit after five years as the Asian Development Bank’s deputy country director to help found Frontier Investment & Development Partners, which sells Mongolia’s opportunities to private investors.

“I was speaking at a Mongolia investment conference in Hong Kong about a month ago. It was standing-room only, which I think is amazing, given the economic environment at the moment,” says the dapper Jayawant, sitting on a sofa at the Veranda restaurant. Opportunities being offered by Frontier, and in Ulan Bator in general, involve mind-boggling quantities of critical commodities.
South of Ulan Bator, miners will work a lifetime digging out 35.7 million tonnes of copper at Oyu Tolgoi, a prospect owned by Canadian firm Ivanhoe Mines – Marc Faber, a prominent Swiss ­investor, is a director of the company (as well as being an adviser to Frontier). Equally promising is Tavan Tolgoi, which contains 6.5 billion tonnes of high-quality coking coal coveted by steelmakers. Mongolia’s Energy Resources spent €270m on the first modern mine, which in April began producing coal destined for China. Other mines are expected to get going over the next few years.

Trains will come in 2012 to haul the Tavan Tolgoi coal to China along a new European-standard railway, costing Energy Resources €460m to €535m. Deutsche Bahn, Germany’s rail network, stepped aboard in March as project consultant and may manage the railway, which could also transport copper from Oyu Tolgoi. Coal and copper alone could do for Ulan Bator what oil did for Dallas. “Over the last four or five years the GDP per capita has reached over €1,500. After these mines start exporting, GDP is ­expected to rise to €6,000 or €7,000 per capita,” says Randolph Koppa, a native of Wisconsin, who is the president of the Trade & Development Bank of Mongolia.

But there will be no copper from Oyu Tolgoi and no flood of money until parliament approves the investment agreement put forward by the government. Investors, who see Oyu Tolgoi as a litmus test, grumble that politicians in Mongolia’s fractious parliament are playing games and holding out for backhanders.

Such suspicions are not unfounded. Corruption has soared and is generating popular resentment. The government promises a clean-up. Meanwhile, Mongolians wonder when their wait to benefit from the country’s minerals will end. Nevertheless, locals take comfort in the explanation that riots by opposition supporters over election results last July, leaving five dead, were down to money and perhaps alcohol dished out by opposition politicians and did not reflect discontent.

On the other hand, parliament’s ­extended horse-trading might end up ­delivering the right legislation to help this emerging democracy avoid the same fate as the Democratic Republic of Congo, and instead capitalise on minerals to ease poverty and create seed opportunities. At least, that is the hope. “The confirmation of the relationship between Rio Tinto, Ivanhoe and the government is going to be positive for other resource companies and the investment community,” says Hanson, the oil man, over lunch at the Grand Khan.

The opportunities do not end with minerals. Newcom, a leading Mongolian conglomerate, is talking with prospective partners in Japan, including Kyushu Electric Power, to develop an $80m 50-megawatt wind-energy pilot project. It has, however, run into the choppy bureaucratic crosswinds. “From the authorities’ side it’s quite difficult to accept the investors’ side; to fit this new technology to the old system,” says Dagva Gankhuyag, a business development manager at Newcom, who opted to return to Mongolia after ­researching a PhD in Japan.

Newcom now expects the wind turbines to start up in 2011, perhaps kick-starting Mongolia’s renewable energy boom. “It’s easy to build wind parks 10 times bigger in the south Gobi,” says Gankhuyag. The Gobi desert is also one of the world’s sunniest places. Newcom and others eye its potential for generating solar electricity. Wind and solar together could cleanly supply power to Ulan Bator.

That pales to what might happen if China, which in February signed a deal to import electricity from Russia, can reach agreement on importing power from Mongolia. Ulan Bator’s prospects have never been better. The question is, are the government, parliament and investors shaping a new Lagos or Oslo?

Lessons in diplomacy

Can Mongolia keep both neighbouring Russia and China as allies?

Mongolia’s presence on a vast territory between China and Russia is puzzling. How did it not get swallowed up? It has much to thank for the upheaval in those giant countries early in the 20th century and their later animosity that turned Mongolia into a buffer state. Today Mongolia is trying to keep both happy. And it has also been rubbing up against other heavyweights.

“They have attached quite a lot of importance to places such as Korea, Japan, Europe and the US to balance Russia and China,” says Niklas Swanström, director of the Institute for Security & Development Policy in Sweden. This may be crucial for Mongolia’s future.

“Since Mongolia is sandwiched between Russia and China, neither of which is democratic, there may be a tendency for Mongolia to turn away from democracy. If that happens, the blame can only lie with the West for not doing enough,” adds Swanström.

How to make money in Mongolia

Fly: MIAT Mongolian Airlines offers little but charges the earth. Privatisation is on the cards. With vision, cash and panache the airline could break the stranglehold of Aeroflot and Air China.
Sell: Retail is dull. A fresh, fast convenience store such as Japan’s Lawsons or a family mart would make a mint.
Serve: Between the pubs and barebones cafés yawns a huge gap for a comfortable café where you can escape the city.
Host: There’s a desperate need for decent five-star hotels as well as inns.
Heal: When sickness, accidents or muggings strike, those that can head overseas for treatment. As mining expands, drawing more foreigners, and Mongolia’s middle class grows, they will need good medical services.

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