Lehman’s wrath is felt in land of Genghis Khan

There’s more than a little irony concerning Mongolia and the date September 15.

That’s when many investors hope an agreement will be reached on the Oyu Tolgoi copper and gold mining project, which could double the size of the economy. It’s also the first anniversary of Lehman Brothers Holdings Inc’s demise.

The aftershocks are still being felt in this remote and economically disconnected nation of 2.9 million people. All it takes is a stroll through the streets of the capital, Ulan Bator. Idle construction projects, a glut of office space, a surplus of day labourers loitering on street corners — all the ingredients of an economy in need of a jolt.

There is still a lot of optimism because we are on the cusp of just that. Economists say riches sure to be unleashed by Mongolia’s first major mining project will make it the world’s fastest-growing economy. Yet the global crisis hit the land of Genghis Khan more than many investors expected. Things may get worse before they get better.

Bankers, miners and government officials I chatted with in Mongolia this week are bullish, and for good reason. It’s sitting on quite the lottery ticket if the government can use the nation’s underground riches productively. That’s a very big “if”, though, and for two reasons.

One, thanks to the “Lehman shock”, much of the capital available to be deployed in risky, frontier markets just a year ago has dried up. Two, Mongolia still must avoid the so-called oil curse that almost always plagues impoverished nations that suddenly begin exporting vast resources.

It has been a year since my last visit to Mongolia, and the change in the global climate is extreme. Major economies are in recession, including neighboring Russia. While China’s 7.9 percent growth helps, Mongolia’s export boom has yet to begin.

One local banker referred to Mongolia’s “BL” and “AL” world. The acronyms refer to ‘Before Lehman’ and ‘After Lehman’. Mongolia’s AL existence is certainly more complicated than its BL one.

The global slump dented prices of everything from wool to agricultural goods to copper and other metals. Government revenue shrank, while the central bank has drawn down its currency reserves to support the tugrik.

Turmoil aside, bankers such as Peter Morrow, chief executive officer at Khan Bank LLC, say Mongolia is lucky. It may be the only economy with an immediate and obvious fix to its problems. Once major mining projects come online, it will quickly begin reaping big economic gains.

Hence the urgency to get things rolling. Ivanhoe Mines Ltd, the developer of the Oyu Tolgoi project, has tried for more than six years to reach a mining agreement and benefit from demand in China, the biggest metals buyer. At less than $5bn, Mongolia’s economy could use the business.

None of this offers assurance that Mongolia’s population is ready for this gold-rush dynamic. In March 2008, Ivanhoe estimated the copper resources in the project at £78.9bn ($131.31bn) and the gold resources at 45.2 million ounces. Will such spoils overwhelm the economy?

History is littered with examples of how a sudden influx of wealth corrupts governments and impoverishes the masses. Leaders have fewer incentives to diversify economies when the real money is in digging resources out of the ground and exporting them.

There’s reason to think Mongolia, a former satellite state of the Soviet Union, will avoid that scenario. It may be the only Asian country that opted to have a fully elected parliament before having a developed economy.

That may provide a level of transparency and accountability lacking in resource-rich nations such as Indonesia. It would be more comforting if Mongolia had stronger institutions such as independent regulators and courts at the early stages of a resources boom.

Mongolia is at a crossroads and faces a delicate balancing act. It must avoid scaring off investors convinced of its economic potential, while also maximising its take of the resources. It must then make sure the benefits are distributed wisely and widely among its people.

An oft-heard criticism is that Mongolia has hurt the economy by being slow to allow miners to get to work. Few investors who have waited for years for the Oyu Tolgoi agreement to be completed are holding their breath. It could come next week, next month or take even longer.

A good argument can be made, though, that Mongolia is right to take its time and get these important decisions right. This is about more than mining; it’s about all the industries that will get a boost from Mongolia’s boom.

Representatives from infrastructure, transport, construction, equipment, banking, telecommunications and retail are keen to tap into Mongolia’s future. All of these so-called supply-chain businesses can create the well-paid jobs the nation lacks. That dynamic is a key reason ever more Mongolians are scrapping their nomadic ways and flocking to Ulan Bator.

It’s more important than ever that the government act prudently in these turbulent times. Few doubt Mongolia’s vast potential. It’s just that in the post-Lehman world, even isolated economies are still assessing the damage.

William Pesek is a Bloomberg News columnist. The opinions expressed are his own.

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