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UNCLAS SECTION 01 OF 06 ULAANBAATAR 000525 
 
SIPDIS 
 
SIPDIS 
 
From Ambassador for Secretary Johanns 
 
E.O. 12958: N/A 
TAGS: OVIP PREL PGOV EAID ETRD MG
SUBJECT: Scenesetter for Presidential Delegation 
 
 
¶1.  We and the Mongolian Government very much look 
forward to your visit.  The presence of a presidential 
delegation at the 800th anniversary celebrations 
continues a stellar 2005-6 year for high-level USG 
visits to Mongolia -- starting off with Peace Corps 
Director Vasquez last July, Speaker Hastert and 
delegation in August, Secretary of Defense Rumsfeld in 
October, and the visit by the President, First Lady, 
and Secretary Rice in November. 
 
What's Being Celebrated This Week 
--------------------------------- 
 
¶2.  Mongolia's national holiday -- "Naadam" -- is 
celebrated each year from July 11-13, and is a 
combination of national day and traditional Mongolian 
summer sporting competition.  The Naadam games comprise 
the "three manly sports": archery, wrestling, and horse 
racing (in actuality, women also compete in archery, 
and the horse riders are 10-12 year old boys and 
girls).  This is serious business for Mongolians: the 
nine horsetail banners which are the symbolic seat of 
state are physically moved from Government House to the 
national stadium for the duration of the games.  The 
"national day" aspect of the celebration marks the 1921 
victory in the independence struggle from China, led by 
General Sukhbaatar (whose statue astride a horse graces 
Sukhbaatar square in central Ulaanbaatar). 
 
¶3.  This year, Naadam will also be the high point of 
celebrations for the 800th anniversary of the 
acclamation of a tribal chief, Temujin, as the first 
king (khan) of the unified Mongol tribes.  Temujin took 
the reign name of Genghis Khan ("Chinggis Khaan" to 
Mongolians).  Naadam opens on July 11 and closes on 
July 13.  This year, ceremonies in connection with the 
800th anniversary will be held on July 10.  At least a 
dozen other nations will have delegations attending the 
events, including the Russian Prime Minister, the 
German Bundestag President, and Prince Andrew.  While 
you will miss these opening events, any Mongolians will 
tell you that Naadam is all about the games, and those 
will be going full force on July 12 and July 13. 
 
A Transforming Friend in Northeast Asia 
--------------------------------------- 
 
¶4.  As declared in the July 15, 2004 joint presidential 
statement, the U.S.-Mongolia relationship is a 
"comprehensive partnership," based on "shared values 
and common strategic interests" (e.g., democracy, 
market economy, the global war against terrorism, and 
the denuclearization of the Korean Peninsula).  Our 
relationship with Mongolia is positive and valuable, 
but we do not consider it of "strategic" importance to 
U.S. national interests.  Once the world's second 
Communist state, Mongolia has made great strides since 
1990 in its democratic and economic transformation. 
Mongolia is a land-locked country; it has only two 
neighbors, Russia and China.  Mongolia has sought to 
mitigate its geo-political and geo-economic 
disadvantages and to balance its relations on Russia 
and China by cultivating "third neighbors" -- Japan, 
South Korea, Germany and, especially, the United 
States.  Thus, Mongolians are extremely pleased with 
President Bush's declaration last November that the 
United States is proud to be Mongolia's "third 
neighbor," and with the House of Representatives 
affirmation of that same sentiment in a resolution 
passed on June 7, 2006. 
 
¶5.  An important boost to Mongolia's image in the 
United States has come from Mongolia's participation in 
Operation Iraqi Freedom and Operation Enduring Freedom 
since 2003.  At present, 100 Mongolians, representing 
the country's sixth troop rotation in Iraq.  These 
deployments are the direct result of continuing 
assistance from the U.S. (since 2000) to help Mongolia 
meet its goals of developing an international 
peacekeeping capability. Mongolia is already making 
strides toward this goal; in December 2005, Mongolia 
deployed 250 peacekeepers under UN authority to Sierra 
Leone and earlier this year completed participation in 
the NATO mission in Kosovo.  In August, Mongolia will 
host the annual (since 2003) US-sponsored "Khaan Quest" 
 
ULAANBAATA 00000525  002 OF 006 
 
 
PKO exercise; for the first time this year it will be a 
multinational exercise with over 20 countries invited 
to observe or participate. 
 
¶6.  Mongolia's economic and political transformation 
remain incomplete.  Economically, Mongolia faces 
daunting challenges:  It is landlocked, with a severe 
continental climate, and sparsely populated.  The size 
of Alaska with a population of 2.8 million (about the 
size of Denver City), nearly 40% of the population (one 
million) lives in the capital city, Ulaanbaatar (Red 
Hero).  The next largest city has 100,000 people. 
About 40% of the country's population still makes a 
living from nomadic livestock (sheep, goats, 
cattle/yak, camels, and horses).  Over the last decade, 
another 20% or so abandoned herding and migrated to the 
capital where they live in "ger" (yurt in Russian) 
suburbs surrounding Ulaanbaatar.  Mongolia's primary 
economic drivers are mining (copper, coal, gold), 
cashmere, tourism and small retail trade and services. 
High world commodity prices and increased production 
spurred 10% growth in 2004 and 6% in 2005.  However, 
mining does not directly create many jobs and many of 
the locally developed, non-foreign invested mines are 
operated in an environmentally destructive manner.  The 
largest of these mines -- the joint Mongolian-Russian 
(51%/49%) Erdenet Copper Mine and the Canadian-owned 
Boroo Gold Mine -- have been the target of a 
nationalistic backlash centering on the theme, "Why are 
so many Mongolians poor while foreign companies are 
profiting from our mineral resources?"  That (and the 
desire to find money to fund budget-busting populist 
campaign promises for monthly child stipends and a 30% 
pay hike for civil servants) helped spur a hastily 
enacted a windfall or "excess profits" tax on copper 
and gold in May.  This tax, plus higher royalties and 
provisions for government equity in some mining 
companies, has dampened enthusiasm among the "junior" 
Western mining companies for operations in Mongolia. 
Large multinationals, such as Rio Tinto and BHP 
Billiton, will try to stay the course and to land 
contracts to mine coking-quality coal for the Chinese 
market. 
 
¶7.  Politically, Mongolia's transition is also 
incomplete.  Government decision making is often 
opaque, with the State Secrets Act the most restrictive 
among the former Communist countries.  Some serious 
human rights issues remain, including weak protection 
for freedom of the press, and abusive conditions for 
prisoners.  Nevertheless, elections are generally free 
and fair, and three of the four parliamentary elections 
under the 1992 constitution have led to changes in 
governing party.  The Mongolian People's Revolutionary 
Party (MPRP), the former Communist party now restyled 
as a "social democratic" party, retains outsized 
advantages in organization and discipline.  The non- 
MPRP parties are fractured and the largest, the 
Democratic Party, is itself a fractious coalition of 
rival personalities.  That creates the opportunity for 
lopsided election results, such as in 2000, when the 
MPRP ran against an array of opposition parties and won 
72 out of 76 parliamentary seats (95%) with only 53% of 
the popular vote.  The June 2004 election was contested 
by a unified opposition which won nearly 50% of the 
seats.  With no party able to form a government on its 
own, a "Grand Coalition" government was formed in 
September 2004.  The two main political parties -- the 
MPRP and the DP -- proved unable to work together and a 
new coalition government was formed in January, 2006, 
without the participation of the Democratic Party. 
 
¶8.  The current government is an unstable and 
dysfunctional coalition of the MPRP and four small 
parties (two of them with a single MP).  The MPRP Prime 
Minister's approval rating is at an all-time low of 
under 25%.  Growing income disparities and endemic 
corruption in the political elite and bureaucracy are 
undermining the credibility of the parliament and the 
government in the public's eyes.  It has become 
commonplace to hear weekly rumors of one disgruntled 
faction or another planning to topple the PM and form 
yet another coalition.  While the spring session of 
parliament passed some significant legislation, 
including tax reform, anti-money laundering and anti- 
 
ULAANBAATA 00000525  003 OF 006 
 
 
corruption legislation, there is still much 
implementation and enforcement work to be done. 
 
U.S. Aid to Mongolia 
-------------------- 
 
¶9.  On a per capita basis, Mongolia has been and 
continues to be one of the best-endowed recipients of 
foreign assistance in the world.  Over $2 billion has 
flowed to Mongolia since the early 1990s, initially as 
humanitarian assistance and, since the early 2000s, as 
development assistance.  The World Bank and Asian 
Development Bank are the largest donors.  Japan is the 
largest bilateral donor, followed by Germany and the 
U.S. aid -- USAID grants and USDA Food for Progress -- 
has been significant in shaping and influencing change, 
and was of major importance during the economic 
collapse in the early 1990s.  Until 2003, the USAID 
budget for Mongolia was in the $10-12 million range; it 
dropped to $7.5 million in FY 06 and FY 07.  The 
current five-year program (2004-8) focuses on private 
sector-led development (macro-economic policy reform, 
energy sector reform, and micro-business in rural and 
peri-urban areas) and good governance (judicial reform, 
parliamentary reform, and anti-corruption).  No USG 
assistance (grants) flows directly to the Government of 
Mongolia.  Past experiences with waste, fraud and 
malfeasance on the part of the Government have resulted 
in all USG assistance projects being implemented by 
international NGOs or consulting companies under 
contract. 
 
¶10.  Since 1993, Mongolia has participated in USDA's 
Agriculture Commodity Program, which includes both 416(b) 
and Food for Progress resources.  To date, the total value 
of this program is over $70 million, which includes proceeds 
from the sale of the wheat and transportation costs from the 
U.S.  The current Food for Progress program serves to 
alleviate the annual wheat deficit in Mongolia, which is a 
net food importing country.  In 2005 Mongolia produced only 
77,000 of the 240,000 tons of wheat consumed annually here. 
The Food and Agriculture Organization notes in its report of 
October 2005 that commercial imports cover only part of the 
75% - 80% of consumption which must be imported into 
Mongolia.  When USDA donated 50,000 tons of wheat in FY 2004 
this was easily absorbed and Mongolia still required 
additional aid from Russia and France to meet its needs. 
Mongolia is very supportive of the U.S. government position 
in the World Trade Organization that commodities should 
remain as part of food aid options.  Mongolia has presented 
this position repeatedly at WTO meetings. 
 
¶11. With few exceptions, until FY 2004 the Government 
of Mongolia signed agreements directly with USDA on a 
yearly basis to ship wheat (and on a few occasions 
butter or butter oil), sell it at market prices, use 
the proceeds for development or humanitarian purposes, 
and report semi-annually on the results.  Mongolia had 
free rein to develop its own projects and agreed to be 
fully accountable for results and reporting. 
Mongolia's record on the program, however, proved 
abysmal.  Over the years, the U.S. Embassy witnessed 
four different ministries competing to control the 
wheat proceeds and determine the projects.  The GOM's 
ability and willingness to report on how the proceeds 
were used and on what results were achieved was 
extraordinarily weak.  In the past eleven years, 
Mongolia has produced only one two-page document giving 
a brief description of how the money was spent - and 
the Embassy received this document only after it 
threatened to terminate the program if Mongolia did not 
start reporting.  Mongolian theft, fraud, 
mismanagement, and other malfeasance have led to more 
than $22 million in unaccounted funds.  If the shipping 
cost of the $22 million of wheat is added, the loss is 
approximately $44 million, or 63 percent of the 
program's total value to Mongolia. 
 
¶12. As a result of this misuse, since 2000 the proceeds 
of wheat sales have been provided to international NGOs 
to carry out projects.  However, the Ministry of 
Agriculture remains unrealistically hopeful we will 
again agree to government-managed programs.  Currently 
funded projects through CHF, Mercy Corps and World 
Vision include programs to: bolster entrepreneurship; 
 
ULAANBAATA 00000525  004 OF 006 
 
 
boost agribusiness, agricultural technology and 
veterinary services; fund Peace Corps community 
development projects; and provide natural disaster 
relief.  Their programs are bringing much needed 
assistance to rural and peri-urban areas of Mongolia. 
 
¶13.  This year, Peace Corps is celebrating its 15th 
anniversary in Mongolia.  Over 600 volunteers have 
served here; there are currently 97 volunteers in- 
country, the largest number in the history of the 
program.  PCVs are primarily teaching English (to help 
Mongolia meet its goal of making English the second 
official national language), but also involved in 
heath, community/youth development, and rural business 
development. 
 
¶14. Mongolia became eligible for Millennium Challenge 
Account (MCA) funding in FY04 and re-qualified in FY05 
and FY06.  Invited by the Millennium Challenge 
Corporation (MCC) in May 2004 to submit a proposal for 
consideration, Mongolia did not submit a proposal until 
October 2005.  In November 2005, MCC began its due 
diligence on the proposal -- among the most complex and 
poorly prepared received by MCC.  Progress is slow and 
frustrations exist on both sides.  Mongolia has yet to 
demonstrate the economic feasibility and poverty 
reduction effects of its various proposed projects and 
has been reluctant to invest the manpower and resources 
necessary to accomplish the task. 
 
¶15. Moreover, Mongolia must re-qualify each year for 
MCA eligibility.  Declining scores on the "control of 
corruption" test could result in Mongolia being 
declared by MCC as ineligible, which would suspend all 
further due diligence until Mongolia improved its 
performance.  Mongolia signed and ratified the UN 
Convention Against Corruption (UNCAC) in 2005.  The 
recent passage of anti-corruption legislation, a draft 
of which had languished for lack of political will 
since 1999, will begin to lay the legal framework 
necessary for Mongolia to comply with its UNCAC 
obligations.  But an additional 20 or more pieces of 
legislation and amendments -- and strong enforcement 
mechanisms -- will be needed in order for Mongolia to 
bring itself into full compliance. 
 
¶16. MCC recently informed the Government of Mongolia 
that, given the pace of work, there will be no Compact 
until early 2007 at the earliest.  MCC also laid a 
marker that there will be NO Compact until Mongolia 
passes the legislation necessary to bring itself into 
compliance with its UNCAC obligations.  The Mongolian 
Government, which hoped to sign a Compact during 2006 
(the 800th anniversary) to bolster its political 
standing with the public, is disappointed and has begun 
to make some veiled -- and not so veiled -- comments 
expressing cynicism about MCA and U.S. willingness to 
keep its "promises."  Our response has been to remind 
Mongolia that MCA is a "merit- and performance-based" 
assistance program for which Mongolia must continue to 
qualify, and that the we fully expect to continue to 
work with Mongolia to finalize a Compact, but the pace 
of progress will depend largely on Mongolia's 
commitment to do the due diligence work. 
 
Your Interlocutors 
------------------ 
 
¶17.  Naadam is a hectic time for Mongolian officials, 
and this year's flood of delegations adds to the 
demands on their time.  Nevertheless, senior officials 
quickly rearranged their schedules to meet with you in 
the brief time slots they could make free. 
 
¶18.  Your interlocutors will include: 
 
President N. Enkhbayar 
---------------------- 
 
The 48-year old Enkhbayar, who speaks English well, 
became President in June 2005.  Enkhbayar became the 
reformist head of the MPRP in 1997, after its stunning 
electoral defeat the year before.  As Prime Minister 
from 2000-2004, he continued the economic reform and 
privatization policies initiated during the 1996-2000 
 
ULAANBAATA 00000525  005 OF 006 
 
 
Democratic Coalition government.  He became Speaker in 
2004 under the "Grand Coalition" government, prior to 
winning the presidency.  The President is supposed to 
be above politics, and Enkhbayar resigned his MPRP 
membership upon taking the job; while he retains behind- 
the-scenes influence in the MPRP, this is likely to 
diminish over time.  As Head of State, he is also 
Commander in Chief, but his constitutional powers are 
modest. 
 
We suggest you: 
 
-- Convey the congratulations of President Bush on 
Mongolia's 800th anniversary; 
 
-- Reaffirm the "comprehensive partnership" between 
Mongolia and the United States, and our desire to 
continue developing ties as Mongolia's "third 
neighbor"; 
 
-- Express the support of the United States for 
Mongolia as it continues its democratic and economic 
transformation; 
 
-- Note our intent to continue longstanding economic 
assistance, and to work with Mongolia to sign an MCA 
Compact next year. 
 
-- Express our appreciation for Mongolia's support in 
the Global War on Terror, including its continued 
deployment of soldiers to Iraq and Afghanistan, and its 
contribution to international peacekeeping elsewhere in 
the world.  (Note:  The USG has requested that Mongolia 
send a seventh rotation of peacekeepers to Iraq, in 
August.  The Government has yet to reply formally, but 
informally has indicated a willingness to sustain its 
commitment. End note.) 
 
Prime Minister M. Enkhbold 
-------------------------- 
 
The 42-year old Enkhbold, who does not speak English, 
was the Mayor of Ulaanbaatar from 1999-2005.  Enkhbayar 
supported him to replace him as head of the MPRP, and a 
party congress narrowly voted to endorse that 
selection.  After the MPRP pressured the Democratic 
Party to withdraw its candidate or face the end of the 
coalition government, he won the August 2005 by- 
election in Enkhbayar's vacated Ulaanbaatar 
constituency.  Enkhbold's government has struggled 
since its formation in January.  In an April poll, 
Enkhbold (often cited as one of the more corrupt 
politicians) did not even make the list of the 
country's ten most influential politicians.  There are 
two years to go before the 2008 parliamentary 
elections, and these numbers may change.  However, 
Enkhbold will have to contend with internal divisions 
within the MPRP and minor party members of the Cabinet 
whose discipline may be weak as they seek to boost 
their own poll numbers prior to the elections. 
 
As well as the above points used with the President, we 
suggest you: 
 
-- Congratulate Enkhbold on parliament's passage of 
anti-money laundering and anti-corruption legislation, 
while noting that US will continue to work with 
Mongolia to assist it to implement its international 
commitments to fight corruption and other forms of 
transnational crime.  Much remains to be done before 
Mongolia will be fully compliant with the UN Convention 
Against Corruption, the UN-approved Financial Action 
Task Force guidelines, and the UN Convention on the 
Suppression of Terrorist Finance. 
 
 
Foreign Minister N. Enkhbold 
---------------------------- 
 
The 49-year old Enkhbold, who speaks English well, 
became Foreign Minister in January.  He was the head of 
the Mongolian-American parliamentary friendship caucus 
until he recently gave up that role because of his 
ministerial position.  An MPRP MP, he represents a 
constituency near Ulaanbaatar. 
 
ULAANBAATA 00000525  006 OF 006 
 
 
 
At the dinner, we suggest you supplement the above 
points by seeking Enkhbold's views on Mongolia's 
foreign policy, especially its complex relationship 
with its big neighbors, Russia and China. 
 
¶G. Zandanshatar 
--------------- 
 
This MPRP MP will be at all your meetings, since he has 
been designated the government's MP in charge of the 
U.S. presidential delegation.  The 36-year old 
Zandanshatar speaks English well.  He is the head of 
the MPRP's youth wing, which espouses internal party 
reform and a Western-leaning economic agenda.  An 
economist by training, Zandanshatar was the Deputy 
Minister for Agriculture from 2003-2004.  Prior to 
that, he was an executive in the Agricultural Bank 
(Khan Bank).  The bankrupt institution was successfully 
reorganized, then privatized, under an American 
management team brought in with USAID assistance.  He 
served as Deputy Director of Khan Bank prior to leaving 
to enter politics in 2003. 
 
Terbidshdagva, Minister of Food and Agriculture 
--------------------------------------------- -- 
 
We specifically requested GOM to NOT set up a meeting 
for you with Terbishdagvaa and he does not appear on 
any of preliminary meeting lists.  It is nevertheless 
possible you will encounter him. The 51-year old 
Terbishdagva has been Minister of Food and Agriculture 
since 2004.  Prior to that he was Ambassador to Germany 
(2002-4) and Vice Minister of agriculture (2000-2002). 
As vice minister, he was allegedly involved in the 
theft of U.S.-donated wheat, which resulted in the 
suspension by the USG of the Food for Progress program 
for nearly 18 months.  Terbishdagva is one of the 
largest wheat and meat producers in the country; given 
the lack of conflict of interest laws in Mongolia, this 
has enabled him to profit privately from his government 
position.  You should be aware that Terbishdagva has 
attempted to regain control of the Food for Progress 
program by submitting a proposal to USDA in 2005, under 
the name of a proxy organization.  In a formal letter 
notifying the Minister of the USG decision not to 
consider his project, the Ambassador emphasized that 
because of past malfeasance on the part of the Ministry 
the USG has implemented a new approach that precludes 
any wheat or proceeds of monetization flowing to or 
through the Ministry or other GOM entity. 
 
¶19. If the subject of the Wheat Fund arises in any of 
your meetings, we suggest you: 
 
-- Reaffirm our commitment to continue to provide wheat 
to Mongolia to meet its needs (25,000 tons is due to 
arrive in FY 2007, under a tender awarded to World 
Vision, usually in the winter months to avoid competing 
with local production). 
 
-- Our complete satisfaction with the current 
arrangements, under which USDA contracts with reputable 
international NGOs (such as Mercy Corps, World Vision, 
CHF) to monetize the wheat and use the proceeds to 
diversify and raise the incomes of rural and peri-urban 
dwellers. 
 
¶20.  Other events will introduce you to a herder who 
has benefited from a USDA-funded program, give you a 
glimpse of the Naadam games, and show you some of 
Mongolia's long history and culture.  My staff and I 
very much look forward to welcoming you and Mrs. 
Johanns to Mongolia and appreciate your willingness to 
travel so far to represent the President and the United 
States at this week's events. 
 
Slutz