Economy & business

The peril and promise of resource nationalism: A case analysis of Mongolia’s mining development

By Misheelt Ganbold, Integrated Investment Policy Department, National Development Agency of Mongolia

1.    Introduction

Extractive industries have often been defined as national assets in legal and social terms whereby they command ascendancy in political discourse on nationalism. Such “resource nationalism” can certainly have many favorable impacts in terms of its potential for wealth distribution across society. Often such nationalism can be manifest in the form of some state-ownership preference for extractive industry projects that can lead to relative success stories, such as diamonds in Botswana and copper in Chile. While such “positive” resource nationalism deserves to be recognized for its potential, it is usually successful when coupled with some level of foreign engagement.
Due to endogenous factors within rapidly urbanizing and industrializing societies, there are also emerging forms of resource nationalism, which are largely premised on suspicion of all foreign investment. We term This exclusionary and conspiratorial form can be termed as “negative resource nationalism”. Such negative resource nationalism is also a major cause of internal political conflict within countries and can also fuel violent secessionist movement. Although self-determination of communities based on consensus should be a fundamental right, the argumentation and rationalization of such assertions should be premised on positive forces of national identity and governance efficiency rather than visceral fear of foreigners or suspicion.
No doubt, there are many communities in resource rich areas, which are often not realizing the full benefits of foreign corporate investment and have legitimate grievances around resource rents not fulfilling their objective. Such dashed expectations are further fuelling a form of xenophobic nationalism in developing and developed countries alike that deserves attention.
In this paper, we explore both positive and negative forms of resource nationalism and consider how best to modulate their impact in the case of Mongolia, a country that has experienced a massive growth in foreign mining interests over the past two decades.
Attempt is made to address the research question of how resource nationalism could be more effectively configured between public, private, local and foreign investment to ensure most economically and socially efficient outcomes in a developing country, particularly with a small population relative to its very large resource endowments. One would hypothesize that smaller, more ethnically homogenous countries, such as Mongolia, would have less regional resource nationalism. However, the rise of resource nationalism in such a country provides an important test case to study the phenomenon at its core level. The Mongolian case thus suggests the urgency of addressing the challenge of effective resource governance in the wake of nationalist impulses, which could lead to even more complex and intractable conflicts in larger more heterogeneous countries.

2. Shifting approaches to resource nationalism

The governance structures of mineral industries have been experiencing a dramatic shift over the past two decades due to cyclical price volatility of the mineral commodities. Along with the surging values of minerals and metals in the mid-1970s, resource-rich nations tend to take both regulatory and non-regulatory approaches to intervene in the activities of the mining sector in order to maximize the social, political, as well as economic benefits that could be generated from the extractive industries. The incentives for taking such arrangements can be explained by several reasons – from narrowly defined political interests to national development requirements. These incentives could also be implemented through different ways, such as increasing resource rent taxes, controlling prices, restricting outputs, deferring and breaching contractual agreements with investors, and even expropriating all privately-owned mines. As a result of this new wave of state-driven resource sector reforms, “resource nationalism” has emerged as a potent force in determining investment risk.
The fundamental idea of nationalizing mineral resources is established under the assumption that ‘laissez-faire’ market principles cannot create sufficient benefits for the local economy where mining activities occur and thus states should take rather interventionist actions to receive higher levels of pay-offs. This ideology together with individual state’s sovereign rights on exercising its mineral endowments within the territory has paved the way of state participation in exploring and exploiting mineral resources, financing and developing mining projects, either directly or through State-Owned Enterprises (SOEs). In practice however, majority of those enterprises are shaped by common features: lower productivity, lack of account- ability, high corruption, and poor governance practice compared to their private counterparts. Hence, there have been massive shifts from the state-centered bureaucratic model to private sector-led development policy during the last 20 years, according to World Bank. This is largely due to intensifying competition over the global non-renewable resources supply, and more importantly, the mineral industries’ strategic importance to national economic and political stability. As a result, state participation in the mining sector remains relatively high and the ownership model is often dominated by natural resource companies (NRCs) or other government appointed organizations. This is especially the case in developing countries where economies are heavily reliant on mining industries.
Regarding the ways of operationalizing resource nationalism,  R. Gilpin  of Princeton University identified two different policy options: either state-based or market-based governance mechanisms that resource countries face for the management of resources in ground. While J. D. Wilson of Australian National University defined the ways in which these two types of management systems are employed in natural resource sectors: resource nationalism and resource liberalism. According to him, resource nationalism is a state-driven approach to the management of mineral resources.
Similarly, another scholar G. Joffé describes resource nationalism as “the expression, by states, of their determination to gain the maximum national advantages from the exploitation of national resource”. Joffé and his colleagues investigated the cyclical nature of resource nationalism and pointed out the relationship between state and international oil companies, in terms of exploiting crude oil during the boom and bust periods. A researcher P. Stevens stresses two basic characteristics of resource nationalism: limiting the operations of private firms and demanding greater government control over resource development. The author further argues that resource nationalism is not only a growing concern in developing regions, but it has become a major issue in several resource-rich developed countries such as Canada and Australia, where it may be manifest through domestic private ownership, rather than state-ownership or assets.
Researchers P. Domjan and M. Stone define resource nationalism as “a wide range of strategies that domestic elites employ in order to increase their control of natural resource”. They explain resource nationalism from practical perspectives and assert that it encompasses reasserting state control over natural resources before or after most investment has been sunk in mining project and the full exclusion of foreign participation. Building on this notion, in his research on resource nationalism in Latin American countries, Mares states that natural resources are a ‘national patrimony’ and, consequently, should not be used for private gain.
Bridge refers the term “resource-state nexus” to examine the spatiotemporal characteristics of individual states sovereign right over the governance of common resources such as water, land, and minerals. Conceptualizing that binding nature of the territorial dominances of the state to explore and develop mineral wealth in such a way is particularly important as it shed lights on the fundamental relationship between ‘state-resources’ from critical geo-graphical perspectives.
Having said that, he further illustrates the constitutive relationship between volume of minerals and state sovereignty taking into account of vertical as well as horizontal dimensions of the resource exploitations. The state being a legitimate owner of the mineral wealth within its territory, it can tend to transfer such tenure rights to private entities through grants and contracts. As a result, the static form of resources where they are considered underground (subsurface both literally and figuratively) must also be coupled with their horizontal nexus in terms of the state being co-opted by various neoliberal clients. Thus, human geographers offer an important critique of the conventional linear, and often binary notion, of resource nationalism between public and private spheres that political scientists and international relations scholars have espoused.
Researchers L. Bremmer and R. Johnston, categorize resource nationalism into four distinct types depending on their root causes, impact on mining industries, and on investment in resource industries. They first introduce a so called “revolutionary resource nationalism” and take Russia and Venezuela as an example of this category. The aim of the revolutionary resource nationalism is not only to increase government control over the mineral sector but also to achieve certain political goals. This form is often expressed as public unrest that demands the transfer for natural resources from private owners to public coffers. Secondly, “economic resource nationalism” is a more common variant of resource nationalism and it aims to support economic diversification through receiving larger share of resource revenues from international mining companies. Compared to revolutionary resource nationalism, this type of resource nationalism is separate from a political agenda and is focused more on revenue maximization from its minerals. Kazakhstan has been considered as typical example in this category.
“Legacy resource nationalism” is a third form that is featured in persistent historical episodes where nationalist ideology has attached to the political and cultural identity. Mexico and Nigeria’s long-established value on the national oil industry and subsequent changes during the 1938s and 1970s are clear cases.
Finally, “soft resource nationalism” is taking place in OECD countries such as US, Canada, and Australia. These countries exercise a rather ‘soft’ approach – through pre-established norms and agreements to increase economic benefits. Instead of taking more radical policy actions e.g. expropriation of private asset, termination of contract, and nationalization of natural resource companies, which are common in developing countries, they tend to follow a formal rule of laws to govern resource industries.
By considering the matter orthogonally,  H. Ward a UK researcher divides resource nationalism into three types: “producer countries resource nationalism, consumer countries resource nationalism, and investment target countries resource nationalism,” and identifies distinct features of each resource nationalism. Ward argues that compared to other two forms of resource nationalism, so called investment countries resource nationalism is a rather new concept in the mineral sector which is often practiced through the promotion of Sovereign Wealth Funds (SWFs). The establishment of such funds can indeed be a mechanism to promote economic resilience and state control of mineral rents without state ownership of enterprises.
Considering these various forms, researchers V. Vivoda, G. I. Kretzschmar, A. Kirchner and I. Sharifzyanova analyzed the negative impacts of resource nationalism on foreign investments and operating conditions for global mining houses. They found that resurgence of resource nationalism in mineral-producing countries pose significant uncertainties over the resource extraction by Western companies. These adverse impacts are threatening the performance of their operations and destabilizing their future sustainability as commercial entities. Researcher S. Guriev investigated the concept of resource nationalism from an institutional point of view and concluded that despite the apparent inefficiency of nationalization, governments tend to choose such policy – especially in countries where there is a weak institutional capacity and an unstable political environment. Researcher S. Andreasson examined resource nationalism in Sub-Saharan Africa’s context and confirmed that different historical backgrounds and political environments are shaping the patterns of different types of resource nationalism.
While particular policies deployed as part of resource nationalism vary across countries, Wilson, summarizes the following key characteristics of policies which have been fundamental impacts on resource governance:
– Policies restraining the operations of resources firms through regulatory burdens and restricting trade regimes that encourage certain behaviors such as minerals processing or the provision of subsided energy to local consumers;
– Policies seeking the high economic rents for popular purposes, through changes to resource taxation and fiscal regimes that intended to increase the share of the profits from resource production accruing the state;
– Policies targeting the ownership of mineral industries, which mandate some form of local or state ownership, or in some extreme cases, the nationalization of mining and energy firms.
Researcher S. Grimley, based on the Ernst & Young’s report on “Business Risk Radar for Mining and Metals” (2014), introduced that “mandated beneficiation and state ownership” has been the most dramatic pattern of recent resource nationalism. According to Grimley, mandated beneficiation has become very common as governments “seek to extract greater value from their resources by accrediting that minerals are processed in-country prior to export”, while larger state ownership comes from the desire to take direct equity participation to mining development and production activity.
As part of the resource nationalism, the role of state ownership in resources development has become a popular topic among mining practitioners. However, very limited studies have been done on this topic and most of the existing works are designed to address operational performances and growing significance of the global SOEs. These works often neglect the root causes for the emergence of SOEs and do not question the extent to which the role of state ownership in resource development will bring about desired development outcomes.
For this premises, Wilson outlined four different objectives with corresponding regulatory measures that have been taken by states engaged in resource development projects:
Enlarging the returns from resource extraction by mandating increased in the traded prices of mineral products, through utilization of an export ban and/or “participation in international commodity cartels”;
The capture of these earnings by defining minimum levels of domestic ownership, “either through FDI controls or, in extreme cases, nationalization”;
The creation of downstream industries by demanding that firms engage in in-country processing, through negotiating with foreign companies; and
The extraction of non-resource related allowances from buyer states, through the use of numerous forms of resource diplomacy.
E. Perotti of World Bank examined the governance role of state ownership in the resource sector based on several countries cases. He finds that “gradual transfer of operational control and financial claims over state assets remains the most desirable goal, but needs to be paced so as to avoid regulatory capture and the capture of the privatization process itself”. He argued that weak institutional background limits regulatory capacity and accountability. In such condition, maintaining state control hinders resource endowment and therefore, the balance should shift towards less state ownership by the state. Such an institutionalist approach was also supported by Kretzschmar and others by using historical data to show strong correlation between country risk profiles and state ownership of oil and gas industries. They concluded that unstable political and legal environments increase the excess concentration of ownership in resource sector. We concur with this instrumentalist approach as a starting point to consider our primary case research on Mongolia.

3. Theoretical framework

A theoretical premise of our research reinforces two different but highly related bargaining theories: “market cycle” and “obsolescing bargain model.” Introduced by Wilson in 1987, the market cycle model argues that world mineral price cycles determine the position of state-companies in bargaining for resource sector rents. The theory asserts that during the boom period, governments had advantages in bargaining and tended to impose substantial demands to private firms. However, during the bust cycle of resource prices, the power balance would transfer to private corporations, who could then influence the state in various ways to adopt more liberal policies.
Vernon’s obsolescing bargain model implies dynamic changes in bargaining power between resource firms and host governments relative to the “scale and technological complexity of the industry concerned”. This means state participation is limited or no longer exists in the projects which require substantial capital and advanced technologies. The obsolescing bargain theory emphasizes that at the earliest stage of mining projects, firms have the upper hand in bargaining due to uncertainty and substantial amount of financial resources required to carry out a resource project. As a result, states have to offer favorable conditions to attract foreign investment. But, after the allocation of investments, uncertainty would be eliminated and the resource projects would become ‘sunk assets’. Under such circumstances, initially agreed bargaining conditions would change, enabling states to undertake rather onerous regulatory measures. Within this theory the degree of maturities in resource industries are the main explanatory factors.
Another important theory concerned in this research is the “rentier state theory” by Wilson. This theory highlights domestic political authorities’ willingness to control the allocation of mineral resource rents. Adopting such interventionist policy allows state to redistribute revenues derived from mineral extractions to finance widespread social welfare programs, “enabling a ruling bargain between political regimes and their subjects based on appeasement through rent distribution”. From this perspective, resource nationalism – especially in the form of state ownership – serves a key regulatory instrument for rentier states. From this conceptual understanding, resource nationalism could be framed as a conflict between national interests (often designed to achieve specific political goals) and foreign firms’ efforts to maximize profits. Thus, the role of state ownership in resource endowments could be regarded as the host state’s sovereign right of exercising its control over natural resources found within the territory of the state through using both regulatory and non-regulatory approaches. Using such an institutionalist approach to conceptualize ongoing resource nationalism in Mongolia is important since it offers a full picture of organizational dynamics in the Mongolian resource sector within the context of the state ownership model.

4. The state as an agent of resource development: case of Mongolia

Mongolia has over 8000 occurrences and 1000 deposits of more than 80 different minerals within its territory. Over 1494 mines are under operations, the majority of the currently active mining operations are in coal, zinc, copper and molybdenum, gold, iron ore, fluorspar which account for 17.1 percent of the gross domestic products and 79.1 per cent of the total industrial outputs according to the Mineral Resources and Petroleum Authority of Mongolia (MRPAM).
According to MRPAM, approximately 3329 mineral licenses have been granted to both foreign and domestic companies covering 13.9 million hectares or 8.9 percent of the entire territory, of which 1494 are operational and 1835 are exploration licenses as of 2015. Considering that only 8.1 percent of the licensed areas are under exploration, there is great potential of increases in mineral reserves as more exploration will be conducted in remaining areas.
Along with the rapid development of mineral industries in Mongolia, a number of world-scale large mines such as “Oyu Tolgoi” copper and molybdenum mine, “Tavantolgoi” coking coal mine, and “Tsagaan Suvrag” copper mine in southern Gobi region of Mongolia are expected to generate substantial development opportunities. In addition, extremely favorable market conditions for world mineral commodities, especially during the 2010–2013 made Mongolian minerals attractive to foreign investors accelerated economic growth during that period.
As mining become a core economic sector, this new trend led to substantial changes in the existing structures of the economy (Table 1). Macroeconomic indicators improved significantly and GDP growth reached 17.3 percent in 2011, making Mongolia one of the fastest growing economies in the world. In the meantime, shares of mining products in total exports reached to 89.2 percent and foreign investments in the mining sector tripled within just one year, reaching as much as 4.0 billion USD in 2011, according to the Bank of Mongolia (2011).

Table 1. Major changes in economy between 2003 and 2013. Source: Modified from Chuluundorj and Danzanbaljir (2014)

As a result, from a very small economy, based mostly on traditional herding and agriculture, Mongolia has become a mining-based country. This shift has, in turn, affected every aspect of socioeconomic as well as socio-political environments in Mongolia. Due to growing significance of resource industries in national prosperity, the Government of Mongolia (GoM) sees its mineral endowments as a key driving force to achieve better development outcomes. Thus, state participation in resource industries has become ever more apparent.
State ownership in mineral resources development of Mongolia can be dated back to the former socialist era since 1945–1990. During that time, because of the centrally planned economic system, state interventions were relatively high. In order to achieve predetermined socialist agendas and fulfill national five years development plans, “Erdenet” copper and molybdenum complex and Mongolrostsvetmet joint stock company, and the “Mardai” uranium mine were established in cooperation with the former Soviet Union. Mongolczechoslovakmetal was established with assistance from former Czechoslovakia, and “Baganuur” and “Shivee-Ovoo” coal mines were developed and managed by either jointly with the communist bloc countries or individually by the GoM. The main ownership mode during the given period was thus defined as full state ownership with increasing concern on maximizing social welfare, instead of improving the economic performances and ownership efficiencies. As such, the majority of the state-owned mines were operated at considerable losses.
However, during the transition period between 1990 and 2000, dominant ownership structure has changed dramatically. When Mongolia adopted a market-based economy in 1990, more than one hundred SOEs were privatized under the guise of improving productivity and reducing state involvements in economic sectors. Even so, government retained its complete ownership status in few strategic sectors including transport, power, and mining.
As Mongolia underwent tremendous socioeconomic changes since 1990s, the GoM demonstrated a lack of practical understanding about, and approaches to, privatizing those strategic sectors. Therefore, state ownership in resource industries remain unchanged and government maintained its direct control over the major mines to avoid costly (often failed) contract arrangements with private investors. Retention of state ownership could also be attributed to the growing fear that liberalizing such industry would lead to state unable to provide public services at affordable prices.

In the early 2000s, as metal prices plunged considerably, Mongolian government reviewed its ownership policy and started to pay more attention on privatizing state holding assets. Despite the fact, state ownership in mining sector re-surged again in the mid-2000s due to the rising international prices of copper and gold. This has coincided with policy shifts in China, Latin America and South Africa which exposed through growing control over the natural resource supplies.
Responding to this new trend, GoM focused its mineral policy towards more ‘participatory’ approach which encouraged greater state control over the resource industries. This interest was fueled further by the new discovery of Oyu Tolgoi copper and gold deposit, one of the largest untapped mines in the world, by Canadian mining company Ivanhoe Mines in 2001. The exploration of the mine paved the way for growing attention of foreign investors and mining communities to Mongolia which, in turn, resulted in massive inflows of foreign capital to Mongolia. Therefore, in order to increase the level of government involvement in mining sector, ‘State Ikh Khural’ or Parliament of Mongolia, the top legislative body, introduced various laws and regulations, a new taxing system, and other policy measures to capture resource rents.
In short, state-led resource development policies in Mongolia mirrored with a dominant trend in the global mining industry, and occurred in the context of rising mineral prices, “optimism over the scale and value of natural resources in Mongolia and a flood of private investment and interest in the sector”.
As state involved substantially in resource development, institutional functions diverged considerably and become a critical factor to manipulate overall industry. Fig. 1 (a and b, above), depicts an overview of major state organizations and established NRCs in the Mongolian mining sector. While in Table 2, roles of respective organizations and their extent of influences over resource development is provided.

Table 2. Roles of selected state organizations in resource development. Source: Compiled from Minerals Law of Mongolia (2006); National Development Agency (2016); Nuclear Energy Commission (2016); Law on Investment of Mongolia (2013).

It is clear from both figures that the state is, indeed, playing a vital role in the resource sector through administrative and commercial channels.
At the administrative level, the Parliament of Mongolia has substantial rights over the resource industries therefore, significant influence over mining activities. Although the Ministry of Mining and Heavy Industry is the top regulatory authority for the mining sector and has the overall responsibility to develop and propose the mining industry, its functions are hindered by legislative burdens and a lack of coordination across inter-ministries. This flaw has found full reflection in the respective laws and regulations governing mining industries and the political environment shaping mineral sector in Mongolia.
As for commercial perspectives, GoM is involving and controlling greater equities in mining projects through establishing a number of state-owned resource companies. As the largest state-backed mining entity in Mongolia, “Erdenes Mongol” (or Erdenes MGL) company was founded in 2007. The company is not only possessing Mongolia’s world class-mines, but is also entitled to retain an ownership status for a Gashuun-Sukhait coal transporting road, Gashuun-Sukhait port and entry point, nation’s arterial mining infrastructures and a major exporting hub connecting South Gobi region’s coal mines and other adjacent mines to the Chinese border. Table 3 shows the key mining projects undertaken by Erdenes MGL and some of the hybrid ownership stakes that have been followed.

Table 3. Ownership structures and the key mining projects undertaken by Erdenes MGL. Source: Data compiled from the official website of Erdenes MGL.

Apart from Erdenes MGL, other state-owned mining entities such as Mon-Atom LLC,  (  Fully state-owned uranium company holding at least two major uranium deposits: Mardai and Dornod uranium projects in Eastern part of Mongolia.) Mongolrostsvetment LLC  (  51.0 per cent owned by GoM and 49.0 per cent owned by Mongolian Copper Corporation. The company holds 32 licenses as of 2016. Of which, 3 are exploration and 29 are mining licenses. Source: Official website of Mongolrostsvetmet (2016).) (see Fig. 1b) and their subsidy companies are operating on behalf of the GoM and exploiting and processing various minerals such as uranium, fluorite, iron ore, and silver. As such, in Mongolian case, the state is certainly acting as a key agent in mineral industries through controlling and holding direct equities in all major resource projects with the general aim of “efficiently using natural resources, and to enhance the country’s economic performance and encourage diversification” (Erdenes Mongol, 2016). In reality, however, uncontrolled expansion of mining and substantial revenues generated from extractive industries has led GoM to take a series of nationalist policies on resource sector to ensure state-driven resource development initiatives, which have failed to serve as an effective resource governance practice.

(To be continued in the September edition of The Mongolian Observer)

Reprinted with due permission by the author. The article was published inResource Policy academic journal, Edition 53, in 2017. URL –

Leave a Comment