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FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 9496
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RUEHUL/AMEMBASSY SEOUL 2030
RUCPODC/USDOC WASHDC 0899
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0137
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000134 
 
SIPDIS 
 
STATE PASS TO USTR 
DOC PASS TO ITA ZHEN GONG CROSS 
STATE FOR EAP/CM, EB/IFD/OIA AND EB/CIP 
 
SENSITIVE 
SIPDIS 
 
 
E.O. 12958: N/A 
TAGS: KIPR ETRD ECON PGOV MG
SUBJECT: UPDATE ON COMMERCIAL DISPUTES AFFECTING US 
TELECOMMUNICATION FIRM IN MONGOLIA 
 
Ref: A) ULAANBAATAR 00564, B) ULAANBAATAR 00572 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET 
DISTRIBUTION. 
 
¶1. (SBU)  SUMMARY:. Summary.  Potential American 
investment into the wireless telephony business in 
Mongolia, based on a recent case, turned soursouth, 
when the Mongolian government agency responsible for 
regulating telecommunications unilaterally cancelled an 
operating license in apparent violation of Mongolian 
regulations, laws, and international treaty 
obligations.  The Mongolians have failed to justify 
their actions, and further review into the affair 
reveals conflicts of interest among state-owned 
operations, private monopolies and new American 
entrants into the wireless field.  However, the 
American investors in this case are not without blame, 
giving the appearance that they are willing to use 
political connections to circumvent transparent rules 
and regulations.  American lapses aside, the apparent 
failure of the Mongolian government to conduct itself 
transparently, according to its own current regulatory 
and legal environment, points to weaknesses in the 
administrative system that should encourage investment 
and innovation but has only discouraged it.  Post 
recommends that tThese problems and remedies for them 
should bbe discussed at the March 2006 Trade Investment 
Framework Agreement (TIFA) discussions and be 
considered as road blocks to any ffree trade talks down 
the pike.  END SUMMARYEnd Summary. 
 
BACKGROUND OF DISPUTE BETWEEN AMERICAN FIRM 
 AND MONGOLIAN REGULATORS 
--------------------------------------------- ---------- 
------------- 
 
2.(SBU) In winter 2004, the American wireless telephony 
provider UTStarcom (UTS) came to Mongolia with US$30 
million to invest in a wireless network that would go 
head-to-head with existing cellular-phone services 
providers.  To this end, UTS created a joint venture 
company (JVC), Citiphone, with a Mongolian firm, LOMAX. 
Citiphone's primary competition was not the state-owned 
telephone company, which has limited investments in 
wireless networks; but the two privately owned and 
operated cellular providers. Over 2005 Citiphone 
obtained an operating license from the Mongolian 
Communications Regulatory Commission (CRC) for 
US$50,000, prepared software, and began shipping in the 
handsets and transmitting equipment into Mongolia for a 
fall startup. However, just as Citiphone was set to 
provide service in autumnFall 2005, it learned that its 
license had been revoked by the MCRCat Mongolian 
Communication Regulatory Commission (CRC), at the order 
of the Chairman of the Mongolian Information and 
Communication Technology Agency (ICTA).  We advised 
Citiphone to obtain the services of legal counsel to 
advise it on the Mongolian laws that might be relevant 
to the issue. 
 
3.(SBU) Post's Commercial Specialist then met with the 
ICTA Chair to discuss his motives for, and process 
used, to force the CRC to cancel a license(Note: The 
Chair is a member of the Democratic Party of Mongolia 
and was educated in Texas). He claimed that Citiphone 
found a loophole in the licensing regime that might 
give them an advantage over existing service providers. 
We then asked him to explain how his action was 
consistent with current law and regulation, as well as 
Mongolia's WTO obligations to not use non-tariff 
barriers to restrict market access. He assured us that 
this was all done openly and transparently. But we 
raised two objections then and these still remain 
unanswered. 
 
-- (1) Motives aside, does not the Government of 
Mongolia have an obligation to honor licenses it 
issues?; 
-- (2)Contradicting the Chair, we noted that no one 
among Citiphone, post, our contacts in Parliament or 
the Mongolian Ministry of Industry and Trade, knew that 
 
ULAANBAATA 00000134  002 OF 003 
 
 
a revision of the licensing regime was in the offing, 
had a chance to comment upon it, or were allowed the 
opportunity to contest administratively. 
 
4.(SBU) The Chair refused to answer these questions, 
claiming that revision of the licensing regulations was 
done internally without outside comment or review, 
because only ICTA would understand the complexity of 
the issues. 
 
CURRENT STATUS OF THE CITIPHONE DISPUTE 
--------------------------------------- 
 
5.(SBU) In December 2005, Ambassador Slutz met with 
thethis ICTA Chair to discuss this dispute.  The 
Ambassador pressed the Chair to explain his motives and 
answer the questions posed by the Commercial 
Specialist.  The ICTA Chair stated that technical 
concerns of law and regulation had nothing to do with 
his decision to cancel the valid license.  Intense 
political pressure from the telecommunications duopoly 
that currently controls the wireless market and a 
desire to save cellular service in Mongolia from cheap 
competition drove him to cancel the license 
unilaterally.  Explicitly disdaining markets and the 
rights of consumers to choose the sort of services they 
want, he said that he had no plans to reconsider his 
decision, leaving it to Citiphone to pursue the matter 
through the Mongolian courts. 
 
ICTA'S NON-MARKET APPROACH TO TELECOMMUNICATIONS 
REGULATION 
--------------------------------------------- ---------- 
---- 
 
6.(SBU) During the same meeting, the Chair amplified on 
his views about free market provision of 
telecommunication and Internet services.  Basically, 
consumers are ignorant about the needs of the state and 
would always choose cheaper technologies over higher- 
end expensive services that offer neat things like 
streaming video over the cell-phone.  Hence the state 
must step into to prevent thoughtless consumers from 
voting with their pocket books.  In this light, he 
proposeds a floor price for internet access charges, 
forcing all Internet Service Providers (ISP) to charge 
the same price, thus avoiding the pernicious affects of 
competition on the private and state-owned ISPs. 
 
7.(SBU) In addition, he would force all private ISPs 
and voice over phone (VOIP) service providers to use 
the state-owned telecom as the portal for international 
and domestic both originating or terminating in 
Mongolia. The stated aim here is to plump up the value 
of the state-owned telecom prior to privatization by 
giving it a monopoly franchise over its rivals.  He 
argued that this would make both pricing and service 
cheaper, efficient, clear, and stable but was not able 
to offer an example where this sort of policy actually 
produced those results.  Given that Mongolians pay 
pennies now for reliable international phone 
connectivity and relatively low cost for Internet 
access, it is hard to see how placing access rights and 
charges under state control could improve the situation 
for the consumers.  More obvious is that the state as 
both regulator and service provider has a conflict of 
interest that is affecting policy formation and 
regulation. 
 
WEAKNESSES IN THE AMERICAN CASE 
------------------------------- 
 
¶8. (SBU) The American firms that financed and provided 
technical expertise to Citiphone are not blameless in 
this dispute.  The Mongolian partner firm has extensive 
political ties that reach into Parliament.  The brother 
of one of Citiphone's Mongolian investors is a Member 
of Parliament, a member of the current MPRP government, 
and man whose business interests may involve Citiphone, 
although all current owners of Citiphone deny any such 
involvement.  While the American investors deny that 
they ever used these connections to their advantage, 
 
ULAANBAATA 00000134  003 OF 003 
 
 
they have often pointed them out to us as positive 
assets.  ICTA has complained about the apparent double 
standard of Americans demanding to receive open and 
consistent treatment under the current legal 
environment, and then turning to political connections 
to grease the wheels.  These complaints culminated in 
the ICTA Chair claiming to the Ambassador that an agent 
of Citiphone attempted to bribe him to reverse his 
license cancellation (Note: Details of this charge were 
submitted to the Department of Justice on January 27, 
2006).  Accusations of bribery aside, the Americans 
appear somewhat hypocritical in how they have pursued 
Citiphone's interests, an appearance which has weakened 
their hand with Mongolian government. 
 
COMMENT 
------- 
 
¶9. (SBU) We would prefer, and have advised all parties, 
that a settlement reached transparently following all 
relevant regulations and statutes would be the ideal 
goal, but not one of the players has taken any steps to 
such an end. Putting aside the merits or weaknesses of 
each side's respective positions, the GOM appears to 
have acted in an extremely high-handed and arbitrary 
manner that prejudices consumer interests in favor of 
state-owned and private monopoly interest, without 
reference to its own laws, regulations and treaty 
obligations. Post recommends eExploring why this system 
failed, why that failure harms both investors and 
consumers, and how to correct it, should be topics 
discussed at  the 2006 March 2006 TIFA meeting and 
highlighted as kept in mind as we consider roadblocks 
to any free trade agreement talks. 
 
SLUTZ