Day 816: Mongolia Prefers Economic Suicide Over Ending SouthGobi Vendetta

February 16 03:25 2015 Print This Article

While former SouthGobi executives American Justin Kapla and Filipinos Cristobal David & Hilarion Cajucom Jr. have been detained in Mongolia for 816 days, Mongolia’s economy has mirrored the despair of their situation in its death spiral. 2012 was the year Mongolia changed laws that would reduce foreign investment more than 80% annually on average for the next two years. 2012 was also the year the country had its last national parliamentary elections and the year the government’s legal team began a stubborn endless pursuit to destroy the coal company SouthGobi Resources and the lives of three former employees.

It is not accidental that Mongolia’s commitment to destroy SouthGobi has coincided with its economy imploding. As a frustrated top executive running his international company’s business in Mongolia vented to me two months ago:

A government determined to build its economy may or may not succeed. A government determined to destroy its economy will always succeed. That should be the opening quote for your next Mongolia article.

The senior executive added that Mongolia’s commitment to failure made a number of current rogue African and communist dictatorships look economically savvy before adding the “good news is that the IMF is getting ready for Mongolia’s bailout now.”

When I first visited Mongolia in 2011, the economy was booming. People were buzzing Mongolia could be the “Saudi Arabia of coal,” its world-class top 5 Oyu Tolgoi copper mine under construction was going to add 50% to GDP alone and exponential GDP growth thanks to the sudden discovery of multiple large mining deposits was certain. The local stock market was coming off a rise of over 100% the prior year. When going in and out of meetings with local businesses – or at popular bars at night – visiting hedge fund managers were everywhere passing out business cards and trying to find an edge to invest themselves in the country.

April 1st, 2012, was the true beginning of trouble for Mongolia’s economy and SouthGobi. It was a true April Fool’s Day that has made many look like fools albeit without humor. Turquoise Hill, the private company (in a government partnership) that owns the Oyu Tolgoi copper mine (which was to boost GDP 50% once at full capacity) also was the majority stake holder in SouthGobi Resources. Turquoise Hill (then doing business under its former name Ivanhoe Mines) announced plans to sell its stake in SouthGobi Resources to the Aluminum Corporation of China (aka Chalco) on that date.

It was a little more than two months before national elections in June 2012. The proposed deal gave every local politician, journalist and pundit a concoction of everything that could agitate the Mongolian voting public:
• Mongolians have a testy relationship with the neighboring Chinese going back to the times when Chinggis Khan (aka Ghengis Khan) conquered the Chinese and subsequent periods in which Mongolians and Chinese went back and forth conquering each other (China won the last round and as a result is the larger nation).
• As an example, some Mongolians have advised me not to eat apples from China because the Chinese put poison in them to kill Mongolian children.
• Ivanhoe/Turquoise Hill, the owner of the copper mine set to radically improve Mongolia’s GDP had made partnership deals with the government in 2009 and 2010. In the run-up to elections, populist appealing politicians and pundits now claimed Ivanhoe/Turquoise Hill had given Mongolia a raw deal that should in all fairness to the people of Mongolia be renegotiated.
• In brief, the story morphed into: a foreign-owned big mining company that is trying to bamboozle the people of Mongolia on our biggest mining asset is now additionally going to try to bamboozle the people of Mongolia by selling a large coal mine – a Mongolian coal mine – to our dastardly southern neighbor. Political fireworks ensued.

This giant 40 metre (131 feet) tall statue of Chinggis Khan was erected in Mongolia in 2008 to be "Mongolia's Eiffel Tower." Symbolically, he faces and rides toward China. (Photo: Genco Tour Bureau)

If Ivanhoe/Turquoise Hill had pursued the same deal two months after the election, there may have been no problems. With elections ahead and public outcry rallied, politicians in Mongolia had no other choice than to respond or risk electoral failure. Questions remain how executives at Ivanhoe/Turquoise Hill, SouthGobi and the Aluminum Corporation of China – and their counsels – could all collectively be so incredibly politically daft to propose this deal when they did at the same time.

By April 16, 2012 – 15 days after the deal was announced – the Mineral Resource Authority of Mongolia announced to the media it had requests to suspend SouthGobi’s mining licenses. It would take until May 18, 2012, for the government to pass a Strategic Entities Foreign Investment Law (SEFIL) to block the transactional sale of SouthGobi to a Chinese company. On November 1, 2013, Mongolia would pass a law to reverse the effects of the Foreign Investment Law after seeing foreign investment drop by 47 percent during the first 8 months of 2013, but the change would be too late as investment declines accelerated into 2014.

Yet, the bitter taste of the April 2012 SouthGobi deal that soured Mongolia’s 2012 elections and pressured politicians into a bad law that crushed Mongolia’s foreign investment remains. At the November 2012 Mongolia Investment Summit in Hong Kong rumors were flying about the early stages of an investigation into SouthGobi that would lead to: 816 days of detention for three men, jail sentences in excess of 5 years for the same three men that began two weeks ago and a potentially bankrupting tax evasion fine of $18 million levied at SouthGobi.

When in 2012 the government began to build a legal case against SouthGobi is not known with certainty. At least four SouthGobi executives were detained in Mongolia under Mongolia’s controversial visa exit ban policy. Sarah Armstrong, an attorney for SouthGobi, was released from her exit ban on Christmas Day 2012 thanks to a barrage of media coverage about her exit ban in Australia and internationally alongside significant pressure from the Australian government. Unfortunately for Messrs. Kapla, Cajucom & David, their local media and governments have only become fully engaged with their cases after their imprisonment, a situation far more difficult to extricate them from.

The case against the SouthGobi three began at a time when populist politics dictated the need for a political scapegoat. The case continued the following two years against the backdrop of a falling economy and thus could be excused as looking for scapegoats to distract citizens from their economy with the local Mongolian Tugrik currency regularly setting new all-time lows.

Yet, the message of sending these men to prison and trying to fine this company into bankruptcy is not encouraging for foreign investors nor international executives considering working in Mongolia. To the contrary, it raises questions that any corporation or international executive could find themselves in Mongolia’s legal system of infinite jeopardy where prosecutors get as many tries as needed to find evidence to convict once a case is initiated.

There is one looming question that only a few people who are not speaking know the answer to. On January 29, 2015, the prosecutor requested the court to sentence the three men to probation, a sentence that would convict the men and allow the government to save face while also not imprisoning them. On January 30, 2015, at a continuation of the court hearing, the same prosecutor changed the request to imprisonment. Thus the question is: Who is behind this vendetta and why is it more important than Mongolia’s rule of law, Mongolia’s economy and Mongolia’s international image?

This is not only about three men in prison and a company facing bankruptcy. The commitment to crush this company and the lives of three men is also holding the economy of Mongolia’s roughly 3 million citizens hostage as foreign investment has ground to a halt. Parties in the government committed to this case may have won in court on January 30 this year. Yet, the vendetta’s victory comes at massive expense. A human rights case against Mongolia for the three men is now pending with the United Nations while an International Monetary Fund bailout seems imminent and necessary to avoid Mongolia’s economic collapse. The people of Mongolia need to ask those behind the case if these consequences were worth the vendetta’s victory.

Also in this article series

Day 818: Mongolia’s Lacking Due Process Versus Families On Social Media

Day 817: Mongolia Has Chance To Shine Or Face Legal Global Image Failure

Day 815: American And Filipinos Wrongfully Detained In Mongolia

Follow Jon Springer on Twitter @FrontierWriter or connect via LinkedIn.

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