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P 290352Z AUG 06
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UNCLAS SECTION 01 OF 03 ULAANBAATAR 000652 
 
SIPDIS 
 
SENSITIVE 
NOFORN 
SIPDIS 
 
STATE PASS DOC/ITA, USTR, USTDA, OPIC, AND EXIMBANK 
STATE FOR EAP/CM, EB/TPP,EB/IFD/OIA OES/IHA 
USAID FOR ANE CALISTA DOWNEY 
 
E.O. 12958: N/A 
TAGS: PREL EINV ETRD EMIN MG RU
SUBJECT: Mongolians Rebuff Russian Commercial Bear Hug 
 
Ref:  Ulaanbaatar 163 
 
SENSITIVE BUT UNCLASSIFIED - NOFORN - NOT FOR INTERNET 
DISTRIBUTION. 
 
 
¶1.  (SBU) SUMMARY:  Mongolia apparently completely rebuffed Russian 
Premier Fradkov's demands in early July for priority access for 
Russian firms to Mongolia's natural assets, based on details that 
have emerged over the last month.  In return for preferential 
treatment, the Russians had promised to build a second rail line or 
some other big project.  Even the tone of the visit lacked political 
niceties.  During the gala opening dinner, Mongolia's Minister for 
Industry and Trade B. Jargalsaikhan publicly harangued the Russians 
for thinking they could dictate to the Mongolians, their former 
colony, to do their bidding, and told them to get in line and 
compete with the rest.  Jargalsaikhan drew scattered applause from 
the Mongolian audience (and no apparent disclaimers from GOM 
officials).  END SUMMARY. 
 
Comment 
------- 
 
¶2. (SBU) The GOM seems bent on getting the most out of its natural 
resources -- and Fradkov's demands appear to have touched off a 
visceral Mongolian nationalist rebellion.  Grateful as Mongolians 
are for Russia's help in escaping the Chinese clutch in 1921 and 
development help thereafter (in education, medicine, infrastructure, 
etc.), they also remember the degradations of 70 years of Communism, 
followed by a devastating economic collapse in 1990-94 as the 
Russians abruptly withdrew economic aid reportedly amounting to US$1 
billion per year (then presented a $12 billion bill for "loans"). 
The Russians may have few good tools to redress Fradkov's 
embarrassment and gain leverage, given that Mongolians already pay 
higher fuel and electricity prices (Mongolia imports 90% of its oil 
needs from Russia).  Perhaps, as Jargalsaikhan said, Russian firms 
had better stop making demands, get in line and start competing with 
firms from other countries (e.g., U.S., Canadian, South Korean, 
Japanese).  Chinese firms -- and, indeed, Western ones, too -- 
should bear in mind the cautionary example of Russia's attempt to do 
an end run thru posturing, and the sharp reaction which ensued.  End 
Comment. 
 
The Russians March In 
--------------------- 
 
¶3. (SBU) Russian Premier Fradkov, joined by nearly 300 businessmen, 
arrived in Mongolia for a bilateral economic-oriented visit just 
prior to the July 10-13 Mongolian national day.  This year's events 
included celebration of the 800th anniversary of the founding of the 
Mongolian state.  Fradkov brought with him representatives from 
Russia's Ministries of Transport, Agricultural, Construction, and 
Energy -- along with the CEOs and directors of construction and 
mining companies.  According to Mongolian Ministry of Industry and 
Trade (MoIT) sources, the cavalcade ranged from wealthy oligarchs, 
such as Oleg Deripaska, to metal companies like Severstal. 
 
Less Than Promising Start 
------------------------- 
 
¶4.  (SBU) According to attendees, during the opening dinner, which 
was co-hosted by the two nations' Prime Ministers, Fradkov exhorted 
the Mongolians to do deals with the many businessmen he had brought 
along.  The Russian PM lamented that Mongolia was "holding onto its 
mining licenses like a dog," an example of language that some 
Mongolian attendees found patronizing. 
 
¶5.  (SBU) Minister for Industry and Trade Jargalsaikhan (a 
self-promoting populist as much respected as reviled; see reftel) 
 
ULAANBAATA 00000652  002 OF 003 
 
 
then stood up and, in fluent Russian, berated the Russian Prime 
Minister and businessmen for thinking they could push Mongolia 
around with politically and economically unattractive offers. 
"Mongolia is a sovereign, independent nation.  Where were the 
Russians for the past 15 years, when Mongolia was really suffering 
and needed help?  Russian investors cannot expect any preferential 
treatment; they will have to compete with American, Canadian, 
Japanese, Chinese and South Korean companies.  And you cannot.  The 
only reason you are here is that you cannot compete in the 
international market place with these other countries.  Well, we 
don't need your sub-standard technologies and your corrupt business 
practices."  Jargalsaikahn went on for some 10 minutes before PM 
Enkhbold finally silenced him by noting that they had run out of 
time.  According to our sources, there was limited applause from 
Mongolians for Jargalsaikhan's presentation.  (Note: While 
unreported in the Mongolian press, Jargalsaikhan's harangue is 
widely known among the public and, anecdotal evidence suggests, was 
appreciated.  One eyewitness claimed that PM Enkhbold was very 
uncomfortable during the harangue, literally looking at his shoes 
and trying to slide under the table.) 
 
¶6.  (SBU) One source reported that, during a subsequent meeting 
between Jargalsaikhan and the Russian business delegation, a 
director of an Irkutsk mining firm stood up and chastised the 
Minister and the GOM for not supporting Russian efforts to enter the 
big projects.  Jargalsaikhan angrily responded, "I don't know you. 
We're tired of you no-name, small-time Russians marching down here 
and demanding all our treasures for nothing. Sit down!"  Our 
informant stated the room hushed, and the mortified Russian 
collapsed into his seat. 
 
¶7.  (SBU) (Note: The erratic Jargalsaikhan, the sole MP for his 
party, was educated and got his commercial start in Russia, doing 
low-level suitcase trading between Mongolia and Russia.  Former 
Russian Ambassador Derkovsky once told the Ambassador that 
Jargalsaikhan loved Russia and Russia loved Jargalsaikhan, although 
he noted that Jargalsaikhan did not have any current business 
dealings with Russia.) 
 
For All the Vodka, the Russians Leave with Small Beer 
--------------------------------------------- -------- 
 
¶8.  (SBU) As widely suggested in the Mongolian press, and confirmed 
by MoIT contacts, during the visit Fradkov continued to urge 
Mongolia to give Russian firms priority access to its market, and 
especially to Mongolia's mineral resources.  As well as mines, the 
Russians wanted deals on power plants, agriculture, and railroad 
construction.  The main Russian demand was for Mongolia's 
substantial, high-quality metallurgical and thermal coal deposit in 
the south Gobi site of Tavan Tolgoi.  According to MoIT sources, the 
Russians proposed to the GOM a deal for Tavan Tolgoi: Seize the 
asset from its private holders; give it to a Russian-company chosen 
by the Russian government; and Russia would build Mongolia another 
north-south rail line or a power plant in return.  The Mongolians 
reportedly responded that such proposals violated local mining and 
property rights laws and Mongolian national interests. 
 
¶9. (SBU) The first deal to hit the presses was a 40,000 metric ton 
wheat contract with the Mongolian Ministry of Agriculture.  The 
Russians would provide a very soft loan for the Mongolians to pay 
for the wheat purchase. Then came announcements of private, smallish 
deals made by Russian miners for rights to placer gold holdings 
scattered throughout Mongolia; and then silence.  By the time the 
Russians departed, it had become clear from the very lack of public 
announcement that nothing major had been accomplished.  One MoIT 
participant in the Fradkov visit events stated that, although the 
Russians were never particularly a jolly people in his experience, 
he had never seen them so stiff -- no smiles or laughs, just sullen 
grimaces. 
 
ULAANBAATA 00000652  003 OF 003 
 
 
 
SLUTZ