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UNCLAS SECTION 01 OF 03 ULAANBAATAR 000728 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR H AND EAP/CM 
 
E.O. 12958: N/A 
TAGS: PREL OREP EAID MARR MG
SUBJECT: Mongolia Scenesetter for Codel Hagel 
 
¶1.  We look forward to hosting you October 7 to 9.  Your visit here 
will continue a stellar year for high-level bilateral engagement. 
Over the last year, visitors have included: Speaker Hastert and 
delegation, then Rep. Leach (both in August 2005); Secretary of 
Defense Rumsfeld (October); the President, First Lady and Secretary 
of State (November); Secretary of Agriculture Johanns (in July, 
leading a Presidential Delegation for the 800th anniversary of 
Mongolia's establishment as a state); and Codel Kolbe in early 
September.  DCM Brian Goldbeck will be the Charge during your visit; 
Ambassador Minton will not yet have returned from the East Asia and 
Pacific Chiefs of Mission conference which will be held in 
Washington next week. 
 
A New Friend 
------------ 
 
¶2.  Next January 27th, we will celebrate the 20th anniversary of the 
establishment of diplomatic relations.  As the recent plethora of 
visits demonstrates, in the last 16 years Mongolia has become a 
friend for the U.S. in Northeast Asia.  Once the world's second 
Communist country, Mongolia now looks to us (and, to a lesser 
extent, Japan, South Korea, Turkey, Germany and others) as "third 
neighbors."  Mongolia sees good relations with us and other third 
neighbors as a partial antidote to dependency on, or pressure from, 
its two immediate neighbors, Russia and China.  There is a 
historical antipathy toward China, which ruled Mongolia for two 
centuries until 1921, and a concern about being economically 
overwhelmed by the nearby colossus.  Feelings about Russia are 
warmer, with gratitude for Russia's aid in escaping China's clutches 
and for assistance (they built schools, hospitals, roads, etc.) 
during the socialist era, but also some bitterness about the sudden 
withdrawal of Russian aid, which caused tremendous economic hardship 
in Mongolia in the early 1990s.  Both China and Russia are eager to 
participate in the development of Mongolia's mineral resources.  In 
July, Russian PM Fradkov visited at the head of a 300-plus person 
business delegation and sought special access to those resources; he 
was soundly rebuffed.  China, as the logical market for Mongolia's 
coal and other minerals, may be harder to keep completely at arm's 
length. 
 
¶3. The July 2004 Joint U.S.-Mongolia Presidential statement 
describes U.S. relations with Mongolia as a "comprehensive 
partnership" based on common values and shared interests. 
Mongolia's "strategic" value for the United States is not in the 
classic security/military sense.  Rather, Mongolia serves as an 
example - and role model - of a relatively smooth and successful 
transition from authoritarian communism to democracy and a market 
economy.  The fact that Mongolia is undertaking simultaneous 
political and economic reform and has, over the past 15 years made 
many of the right choices, made it eligible for MCA funding in 2004. 
Mongolia became a member of the Communities of Democracies convening 
group in the last year. 
 
¶4. Our military-military relations with Mongolia are very good, and 
based on assisting Mongolia's defense reform and enhanced capacity 
to provide elite peacekeeping forces.  U.S. mil-mil aid has been and 
will be a key part of that effort.  The Global Peace Support 
Operations Initiative (GPOI)-supported "Khaan Quest-06" multilateral 
peacekeeping training exercise took place in August, and spotlighted 
Mongolia's increasing peacekeeping efforts.  Mongolia has been a 
stalwart supporter in the Global War on Terrorism, and has had 
troops on the ground in Iraq and Afghanistan since 2003.  In early 
October, it will send its 7th rotation of troops (about 100) to 
Iraq, where Mongolian soldiers provide force protection for the 
Polish troops in the Multinational Force at Camp Echo.  Mongolian 
soldiers also are guarding the UN war crimes tribunal in Sierra 
Leone, and Mongolia sent a detachment to the NATO mission in Kosovo 
last December. 
 
¶5.  Mongolia has placed a Free Trade Agreement (FTA) high on its 
bilateral wish list.  Its argument for this is exclusively 
political, as a public sign of good bilateral relations and U.S. 
support.  There is minimal two-way trade (bilateral trade is about 
$150 million a year), and it is unclear that there would be any 
significant economic advantages to Mongolia from an FTA.  Our 
response has been to stress that the necessary required groundwork 
for any FTA is already being worked on through the Trade and 
Investment Framework Agreement (TIFA) process.   The TIFA was signed 
in July 2004, and we will have the third round of annual talks in 
Ulaanbaatar early next year.  We are far from working through the 
TIFA checklist, and doing so will require concerted, sustained 
Mongolian actions.  Mongolian officials appear to believe that we 
should forget such bothersome details, and would just do a political 
agreement for an FTA.  Faster Mongolian action on TIFA items will 
not only benefit their trade and investment from the United States, 
but also from all other economic partners.  Meanwhile, there is U.S. 
investment in two leading Mongolian banks and Caterpillar has a 
flourishing distributor supplying the mining sector.  A U.S. firm, 
 
ULAANBAATA 00000728  002 OF 003 
 
 
Peabody, the world's largest coal only mining company, is very 
interested in coming in as part of a consortium to develop a large 
coal deposit near the Chinese border.  The Mongolians who own the 
exploration rights to the deposit need to settle on the consortium 
details, then begin discussions with the government. 
 
Still In Transition 
------------------- 
 
¶6.  While Mongolia has come a long way since 1990, its political and 
economic transitions remain incomplete. Elections have been largely 
free and fair, and three of the four parliamentary elections since 
1992 have resulted in changes of power.   But Mongolia has yet to 
institutionalize democracy and rule of law.  Lack of transparency 
and corruption (particularly conflict of interest) are major 
problems.  Mongolia's National Human Rights Commission, and the UN 
Special Rapporteur on Torture, have criticized frequent police abuse 
of suspects and poor prison conditions.  The Mongolian People's 
Revolutionary Party (MPRP), the self-described social democratic 
successor to the Communist Party, retains major advantages in 
cohesion and organization over its rivals.  That can lead to 
lopsided results, as in the 2000 parliamentary elections, when the 
MPRP parlayed 53% of the popular vote against divided opponents into 
72 out of 76 seats. 
 
¶7.  Economically, Mongolia faces daunting disadvantages due to its 
landlocked status, severe continental climate, and a population of 
2.8 million sparsely scattered over a territory the size of Alaska. 
Some 40% of the population now lives in the capital, the result of 
an influx of poor herders deciding to try their luck in Ulaanbaatar. 
 Another 40% of the population still relies on semi-nomadic herding. 
 Unemployment is high, and there is a high rate of male alcoholism. 
Economic growth was 10% in 2004, 6% in 2005, and likely will be 6% 
again this year.  However, this growth is largely based on high 
world mineral prices and increased mining production, and economic 
gains are ill-distributed.  There is a very large shadow economy -- 
about half the size of the official one.  While most of the economy 
is in private hands, some key industries remain government-owned. 
Not only are these industries poorly operated and bankrupt, they 
also distort the market. In practice, early privatization often most 
benefited members of the political elite.  Privatization efforts 
have stalled since 2004.  Corruption is the biggest business problem 
mentioned by foreign and domestic businessmen, and public 
perceptions of rising corruption help fuel resentments caused by 
growing wealth disparities. 
 
Current Government: Unpopular, Rumors 
------------------------------------- 
 
¶8.  The current government is an often dysfunctional coalition of 
the MPRP and several tiny political parties.  The government was 
formed in January, after the MPRP withdrew its ministers from the 
"grand coalition" government with the Democratic Party formed in 
September 2004, three months after elections had given no single 
party a majority of seats.  The current government's poll numbers 
are dismal (in the 25% approval range), and Prime Minister Enkhbold 
did not even make the list of the country's ten most prominent 
politicians in an April survey.  The government's ability to show 
leadership amid an atmosphere of populism and nationalism (centered 
on expensive social welfare promises and sentiment over foreigners 
profiting from Mongolia's mineral resources) is still in doubt.  The 
government is MPRP-led, but includes four of the other six political 
parties with seats in the State Great Hural (parliament).  That 
inclusiveness is part of its problem, since there is some Cabinet 
indiscipline attendant to the various ministers positioning their 
parties with the public for the June 2008 elections.  As with its 
predecessor, rumors about government stability are recurrent, but it 
seems a sure bet that some form of an MPRP-led government will be in 
place until 2008. 
 
U.S. and Other Foreign Aid 
-------------------------- 
 
¶9.  On a per capita basis, Mongolia has received relatively high 
levels of aid.  From 1990-2004, official development assistance to 
Mongolia from bilateral and multilateral donors was $2.7 billion, or 
nearly $1000 per person.  Since 1991, Japan has been the largest 
bilateral donor.  Total USAID assistance to Mongolia from 1991 
through 2005 has been about $150 million, all in grant form.  In the 
early 1990s, USAID assistance was instrumental in staving off 
collapse of the energy sector following the Russian withdrawal.  The 
current USAID program emphasizes two main themes: sustainable, 
private sector-led economic growth; and more effective and 
accountable governance. About two-thirds of the current (2006) USAID 
budget of $7.5 million a year promotes economic growth, and focuses 
on macroeconomic policy reform, energy sector commercialization, 
financial sector reform, strengthening the cashmere and tourism 
industries, and providing business development services to small and 
 
ULAANBAATA 00000728  003 OF 003 
 
 
medium enterprises in both rural and urban areas. USAID has had a 
number of resounding successes in promoting private sector-led 
economic growth, as most recently evidenced by Parliamentary passage 
of the most dramatic overhaul of the Mongolian tax system since the 
Russians left.  The other third focuses on judicial sector reform, 
electoral reform, parliamentary reform, and anti-corruption work. 
Through USAID support in democracy and governance, every court in 
the country has been automated, poll watchers in elections have been 
trained, and the parliament convinced to strengthen its committee 
system. 
 
¶10.  In most years since 1993, the United States Department of 
Agriculture has provided food aid to Mongolia under the Food for 
Progress and 416(b) programs. The monetized proceeds of the food aid 
($3.7 million in 2005) are currently used to support programs 
bolstering entrepreneurship, herder diversification, better 
veterinary services, and disaster relief.  The Peace Corps 
celebrates its 15th anniversary in Mongolia this year and it 
currently has 104 volunteers in country.  They are engaged primarily 
in English teaching and teacher training activities.  At the request 
of the Government of Mongolia, the Peace Corps also has developed 
programs in the areas of public health and the environment. 
 
Millennium Challenge Account Process 
------------------------------------ 
 
¶11.  In a letter dated July 31, 2006, Millennium Challenge 
Corporation (MCC) CEO Danilovich officially informed the Mongolians 
that, based on the complexity of the Mongolian proposal and the slow 
pace of work on the Mongolian side, MCC is "looking at late spring, 
2007, as the target date" for a Compact.  Danilovich's letter was in 
response to a July 21 letter from Ambassador Bold complaining about 
the delay in reaching a Compact.  The GOM, which hoped to sign a 
Compact during 2006 (the 800th anniversary) is disappointed and 
frustrated at what it perceives as unnecessary delay in reaching a 
Compact. 
 
¶12.  Mongolia was one of the original 16 MCC eligible countries in 
¶2004.  From the outset, Mongolian officials had unrealistic 
expectations that hundreds of millions of dollars would soon be 
disbursed on the basis of sketchy proposals.  Many Mongolians also 
made the unfortunate and mistaken assumption that MCA was a reward 
for joining the Coalition in Iraq.  We have consistently denied this 
linkage in public and private, but the perception persists. 
 
¶13. On the Mongolian side, progress and process have been hampered 
by a serious shortage of Western-educated, trained professional and 
technical capacity, and a propensity by decision makers to seek 
consensus rather than set priorities and make hard choices.  These 
factors combined to delay submission of a proposal by Mongolia -- 
until October 2005.  These factors continue to slow the process. The 
proposal submitted was not only complex, but also not well justified 
or fully fleshed out.  MCC began its due diligence in November 2005 
and will continue this phase through the end of 2006. 
 
In Closing 
---------- 
 
¶14.  Eight hundred years after Genghis Khan (or "Chinggis Khaan" to 
Mongolians), Mongolia is a land justly famous for its hospitality 
and its beauty.  We and the Mongolian Government are pleased that 
you found time in your schedule for a brief visit, and look forward 
to your visit. 
 
Minton