VZCZCXRO1749
RR RUEHLMC
DE RUEHUM #0165/01 0690614
ZNR UUUUU ZZH
R 100614Z MAR 07
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 0905
INFO RUCPODC/USDOC WASHDC 1221
RUEHBJ/AMEMBASSY BEIJING 5462
RUEHKO/AMEMBASSY TOKYO 2411
RUEHUL/AMEMBASSY SEOUL 2671
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0506

UNCLAS SECTION 01 OF 02 ULAANBAATAR 000165 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR, OPIC, AND EXIMBANK 
STATE FOR EAP/CM, EB/TTP, AND EB/IFD/OIA 
USAID FOR ANE DEIDRA WINSTON 
 
E.O 12958:  N/A 
TAGS: ETRD PREL EINV PGOV MG
SUBJECT:  Scenesetter for TIFA Talks 
 
Sensitive But Unclassified -- Not for Internet. 
 
A Quest for a Political FTA, Skipping the Hard Work 
--------------------------------------------- ------ 
 
¶1.  (SBU) The Trade and Investment Framework Agreement (TIFA) talks 
have become an important part of our overall bilateral relationship 
since 2004.  During the third annual round of talks on March 12, the 
U.S. delegation will need to fend off Mongolia's efforts to get the 
U.S. to agree by the end of 2007 on a "roadmap" toward a bilateral 
Free Trade Agreement (FTA).  Mongolia's argument for an FTA is 
entirely political: agreement on an FTA as a goal would be a public 
symbol of our good bilateral political relations, and serve as 
Mongolia's reward for its political and economic transformation 
since 1990 (AKA, "you did it for Jordan").  The potential economic 
gains to Mongolia of an FTA are dubious, given that Mongolia's 
exports to the U.S. are currently more than 90% textiles, and that 
its overall exports are dominated by minerals.  Economically, 
Mongolia would do far better to tackle the serious barriers to 
increased trade and investment, particularly in the minerals sector, 
which the U.S. side will list during the talks. 
 
A Flourishing Bilateral Relationship 
------------------------------------ 
 
¶2.  (SBU) On January 27, Mongolia and the U.S. celebrated the 20th 
anniversary of the establishment of diplomatic relations.  Mongolia 
has only two real neighbors, China and Russia.  While careful to 
maintain good relations with both of these giants, Mongolia has 
successfully sought to neutralize its geographical handicap by 
building strong "third neighbor" relationships with other nations. 
The United States is the linchpin of this third neighbor policy.  A 
July 2004 joint presidential statement coined the phrase of 
"comprehensive partnership" for the U.S.-Mongolia bilateral 
relationship.  U.S.-Mongolia engagement ranges from the Community of 
Democracies (Mongolia is a Convening Group member) to Mongolia's 
emerging role with U.S. assistance as an international peacekeeping 
contributor, and one with boots on the ground supporting Coalition 
efforts in Iraq and Afghanistan. 
 
¶3.  (SBU) In a March 5 phone call, President Bush invited President 
Enkhbayar to visit the United States this year, reciprocating the 
highly successful visit to Ulaanbaatar by the President, First Lady, 
and Secretary Rice in November 2005.  The dates for Enkhbayar's 
visit are still to be determined, but the Mongolian government 
recently decided Enkhbayar will represent Mongolia at the signing of 
a Millennium Challenge Account (MCA) Compact. 
 
¶4.  (SBU) Eligible for MCA assistance since May 2004, Mongolia has 
been frustrated by the delay in reaching a Compact.  However, 
matters currently look on track for a late 2007 signing.  The 
Compact likely will include projects to enhance railroad capacity, 
boost vocational education, improve property rights registration, 
and bolster preventive medicine efforts.  The $200 million or so of 
projects over five years should give Mongolia a substantial economic 
boost -- and, as the MCA project intends, reward Mongolia for making 
many correct political and economic choices in the last 17 years. 
Amid U.S. budgetary stringencies, other U.S. assistance (through 
USAID and with monetized USDA wheat) has dipped in the last couple 
of years, but still provides important boosts to: economic policy 
reform and competitiveness; entrepreneurial efforts in rural and 
urban areas; judicial reform; anti-corruption efforts; and a more 
effective parliament. 
 
A Weak Government, but Populism Is Popular 
------------------------------------------ 
 
¶5.  (SBU) Mongolia's current coalition government is not 
particularly strong or decisive, but quite likely will stagger along 
until parliamentary elections in June 2008.  A month rarely passes 
without rumors of the government's imminent collapse, and Prime 
Minister Enkhbold is currently busy fighting off government 
reorganization efforts pushed by rivals in the MPRP.  The government 
is dominated by the MPRP, which holds a one-seat majority in 
parliament after picking up a seat in a by-election last September. 
The "Government of National Unity" currently includes two other 
small parties, who have a total of seven MPs as compared to the 
MPRP's 39.  Business leaders, foreign and domestic, are still 
celebrating the January jettisoning from the government of mercurial 
and undisciplined Industry and Trade Minister Jargalsaikhan and 
Health Minister Gundalai; both men are the sole MPs of minor 
parties, and parlayed support for the MPRP bringing down the 
 
ULAANBAATA 00000165  002 OF 002 
 
 
previous MPRP-Democratic Party coalition government into Cabinet 
posts in the replacement. 
 
¶6.  (SBU) The evenly-balanced parliament and coalition governments 
in the last three years have coincided with high world prices for 
the mineral commodities Mongolia produces.  The results have been 
skyrocketing values for mineral exports (leading to Mongolia's first 
trade surplus last year), and booming government revenues (producing 
government surpluses two years in a row).  Another result has been 
flourishing populism.  While most of Mongolia's mineral resources 
remain undeveloped -- development which will need large amounts of 
foreign capital -- Mongolia is experiencing what some observers have 
termed "pre-seller's remorse."  The political argument goes, "Why 
should foreigners profit from the mineral wealth of the Mongolian 
people while 35% of Mongolians remain poor?" 
 
¶7.  (SBU) The results in 2005 were an abruptly-enacted confiscatory 
Windfall Profits Tax on copper and gold, and extensive amendments to 
the Minerals Law which created a much worse regulatory environment 
and -- in a massive step back from progressive privatization since 
1990 -- gave the state the right to take equity stakes in mines on 
"strategic deposits."  Politicians immediately competed to 
distribute revenues raised from the Windfall Profits Tax to voters 
through cash stipends for children and payments to newlyweds, and to 
vote for major increases in non-competitively tendered 
infrastructure projects.  In the first negotiation under the new 
minerals law, meanwhile, the government is demanding a 34% stake 
without any payment or need to contribute to the $1 billion in 
additional investments to produce a working mine.  Negotiations are 
stalled.  To the government and parliament's credit, however, major 
tax reforms passed last year move Mongolia considerably toward world 
norms, and address longstanding tax system complaints of foreign and 
domestic businesses. 
 
Rolling Up Our Sleeves 
---------------------- 
 
¶8.  (SBU) The combination of the above will make for a busy and 
complex day on March 12.  On the one hand, the TIFA talks will 
celebrate the close overall bilateral relations and the 
considerable, growing cooperation on trade and economic issues.  On 
the other hand, the U.S. side will need to explain, to the Mongolian 
side's disappointment, that there won't be any shortcuts in the TIFA 
process, much less a roadmap toward some "FTA Lite" which would skip 
the hard details as a nod to those close relations.  Rather, 
Mongolia and the U.S. will need to roll up our sleeves and 
concentrate on addressing the trade and investment climate problems 
that handicap not just Mongolia's economic relations with the U.S., 
but also domestically and with the rest of the world.  Building the 
road to Mongolia's economic prosperity, much less the road toward 
any future decisions on an FTA, necessarily will require 
considerable hard work to remove such barriers. 
 
Minton