Rio Tinto’s Very Simple Leverage Against the Mongolian Government

Over this tweet by MiningMongolia, I found one of the best articles I ever read on the situation in Oyu Tolgoi, written by Jon Springer at Seeking Alpha.

There are also a lot of very insightful observations in the comment section of that article, including several extensive comments by the author.

From that article and the comments I learn that Rio Tinto has a very simple method of assuring that the Mongolian government does not get too unreasonable in its demands.

That is, just do nothing. If the mine does not produce anything, there is nothing the Mongolian government can raise taxes on. With the importance of this project for the Mongolian budget, that is a rather strong trump card. As Springer points out, under the headline “Speculating what Rio Tinto may do next”:

Rio Tinto/Turquoise Hill will completely stop all operations until the Mongolian government relents and upholds the Investment Agreement. This seems extreme but definitely a good conversation starter at a party in Mongolia.

Basically the same is true for China, which has a strategic interest in getting the Oyu Tolgoi project up to speed fast. They can decide to slow down buying resources from Mongolia, which needs to export most of them to China and is therefore heavily dependent on their good will.

Having this leverage is good for Rio Tinto. But it is also good for Mongolia, since it makes sure that both parties of the Stability Agreement have a continuing interest in making the project work smoothly.

From the point of view of this blog (energy from the Gobi desert) I might add that international investors will not bring billions of dollars to the Gobi desert if the Mongolian government is unable to keep basic promises. There are deserts elsewhere. Saudi Arabia is much better positioned to win in this market to begin with. Australia also has excellent desert resources.

Mongolia is interesting because it is located right next to China, where the most important battle for the climate is going on. But the Chinese can build renewable energy projects on their side of the Gobi, and they are doing so already at quite an impressive pace.

Oyu Tolgoi is not only very important for the Mongolian development on its own. It is also a clear test case if Mongolians can be trusted or not. Without that basic trust, there is not much point in discussing a large scale renewable energy project in the Mongolian Gobi desert.

Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

3 thoughts on “Rio Tinto’s Very Simple Leverage Against the Mongolian Government

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