NYT on Oyu Tolgoi

This article at the New York Times by William McNamara gives a fairly good explanation on the recent wishes of the Mongolian government to “renegotiate” the Oyu Tolgoi investment agreement.

As the article explains, part of the motivation for the Mongolian government for destroying the country’s reputation lies in the simple fact that they seem to need the extra money to balance their short term budget.

If so, the simple solution would be to give them some more money, since Oyu Tolgoi of course also has an interest in the Mongolian government not collapsing. It’s only a couple of hundred million dollars, which is not much of an issue in the big picture of this strategic deal. That would not be much of a problem, as long as both sides agree that those extra payments will be reducing tax obligations further down the road.

What the article did not mention is the fact that the Oyu Tolgoi project on the other hand has the power to reduce all tax income from the project next year to zero. All they have to do is wait with starting production.

Oyu Tolgoi has some powerful and very simple leverage here.

If the Mongolians insist that there is no need to follow any agreements, they should always keep in mind that two can play this game. They have no moral right whatsoever on any parts in the agreement favorable to them as long as they refuse to show the basic good faith that is necessary for this kind of strategic project to proceed smoothly.

For example, clause 3.10.2 of the Investment Agreement says:

the Investor shall achieve Commencement of Production within 5 (five) years of the Financing Completion Date; and

That obligation is only worth as much as the Investment Agreement as such. If the Mongolians don’t keep their word, obviously they can’t expect the investor to be bound in any way.

Published by kflenz

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

2 thoughts on “NYT on Oyu Tolgoi

  1. You should also mention that Rio Tinto can’t afford to lose it as well. As the world needs more resources, it will be relatively easy to find a replacement for Rio Tinto. Whether the replacement will be better for Mongolia is another topic for discussion.

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  2. I hope the government of Mongolia does not find itself in a position where it needs to “find a replacement”. If it does, we will see how easy that is done with zero reputation left.

    I agree completely that Rio Tinto will not be interested in having the project fail. That’s why I proposed to pay what the Mongolian government demands, but make clear that it is just an advance on payments due later on, which would be one way to find a compromise.

    Just to be clear, I am not happy with Rio Tinto either. They don’t even consider renewable energy (my most important concern), nor do they provide some of their water for local herders. As things stand now, I am opposed to the World Bank giving Rio Tinto any funds.

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