VZCZCXYZ0000
PP RUEHWEB

DE RUEHUM #0610/01 2252251
ZNR UUUUU ZZH
P 132251Z AUG 06
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC PRIORITY 0233
INFO RUEHKT/AMEMBASSY KATHMANDU 0030
RUEHNE/AMEMBASSY NEW DELHI 0126
RUEHBJ/AMEMBASSY BEIJING 5173
RUEHUL/AMEMBASSY SEOUL 2393

UNCLAS ULAANBAATAR 000610 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PREL OREP PGOV MARR EAID MG
SUBJECT: Mongolia Scenesetter for Codel Kolbe 
 
¶1.  We look forward to hosting you in early September, and to 
showing you how U.S. taxpayer dollars are being used here to benefit 
the Mongolian and American people.  Your visit here will continue a 
stellar year for high-level bilateral engagement.  Over the last 
year, visitors have included: Speaker Hastert and delegation and 
Rep. Leach  (both in August 2005); Secretary of Defense Rumsfeld 
(October); the President, First Lady and Secretary of State 
(November); and Secretary of Agriculture Johanns (in July, leading a 
Presidential Delegation for the 800th anniversary of Mongolia's 
establishment as a state). A HIRC staffdel will be here 8/22-26 to 
examine progress toward an MCA Compact with Mongolia. 
 
A New Friend 
------------ 
 
¶2.  Since 1990, Mongolia has become a friend for the U.S. in 
Northeast Asia.  Mongolia has looked 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.  Both China and 
Russia are eager to participate in the development of Mongolia's 
mineral resources.  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 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. 
 
¶3. The July 2004 Joint US-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 
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 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" multilateral 
peacekeeping training exercise will wrap up a few days before your 
visit.  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.  It has confirmed its intent to send a 7th rotation to 
Iraq in September, though we are still discussing important details. 
 Mongolian soldiers are guarding the UN war crimes tribunal in 
Sierra Leone, and Mongolia sent a detachment to the NATO mission in 
Kosovo last December. 
 
Still In Transition 
------------------- 
 
¶5.  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 (conflict of interest) are major problems. 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. 
 
¶6.  In the 2004 elections, the popular vote split was nearly the 
same, but an opposition coalition won nearly half of the seats. 
With no party capable of forming a government on its own, the 
elections produced a coalition government between the MPRP and the 
Democratic Party (DP). The first coalition, led by DP Prime Minister 
Elbegdorj, was voted out in January 2006.  The DP then boycotted the 
formation of a new government.  The current government is a weak and 
dysfunctional coalition of several MPRP factions and several tiny 
political parties (see para X). 
 
¶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 live in the capital, the result of an 
influx of poor herders deciding to try their luck in Ulaanbaatar; 
however, 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 and 6% in 2005, but 
this was largely based on high world mineral prices and increased 
mining production, and ill-distributed.  A recent USAID-financed 
study concluded that the shadow economy is about half again the size 
of the official one.  While most of the economy is in private hands, 
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 was formed in January, after the MPRP 
withdrew its ministers from the "grand coalition" government with 
the Democratic Party formed in September 2004.  Its 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 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) 
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 
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, proportional representation has been 
restored, and a new anti-corruption law is in place. 
 
¶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 United States has also 
supported defense reform and an increased capacity by Mongolia's 
armed forces to participate in international peacekeeping 
operations. Mongolia has contributed small numbers of troops to 
coalition operations in Iraq and Afghanistan since 2003, gaining 
experience which enabled it to deploy armed peacekeepers to both UN 
and NATO peacekeeping missions in 2005. 
 
¶11.  The Peace Corps currently has almost 100 volunteers in 
Mongolia. They are engaged primarily in English teaching and teacher 
training activities. At the request of the Government of Mongolia, 
the Peace Corps has developed programs in the areas of public health 
and the environment. 
 
Millennium Challenge Account Process 
------------------------------------ 
 
¶12.  In a letter dated July 31, 2006, 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 Amb. 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. 
 
¶13.  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. 
 
¶14. 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. 
 
¶15.  Eight hundred years after Genghis Khan (or "Chinggis Khaan" to 
Mongolians), Mongolia is a land justly famous for its hospitality 
and its beauty.  We're glad that your time in Mongolia will allow 
you to sample a bit of both, and look forward to seeing you in three 
weeks. 
 
Slutz