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RR RUEHLMC RUEHVC RUEHVK
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R 210545Z MAY 07
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RUCNDT/USMISSION USUN NEW YORK 0483
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UNCLAS ULAANBAATAR 000294 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PREL ELTN EINV ETRD EAID MG RU
SUBJECT: Impasse with Russia Over Joint Venture Railroad Head Leaves 
Mongolian In Charge 
 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION 
 
¶1. (U) On April 11-13, a meeting of the joint Russian-Mongolian 
Railroad Authority board failed to select a new Chairman.  The post 
has been vacant since early October 2006, when Russian Chairman 
Vasile Magdei and his Mongolian deputy (both reportedly inebriated) 
accidentally died of carbon monoxide poisoning while on a fishing 
trip.  Over the last six months, the board has made eight attempts 
to appoint a new chairman, but the decision has foundered over 
Mongolian-Russian disputes about who should fill the post each 
attempt. In the interim, a Mongolian serves as acting chairman. 
Sources state the board will next meet again in July. 
 
¶2.  (SBU) A 1949 agreement that created the railroad set up a 50-50 
joint venture between the Mongolian and Russian governments.  Under 
the terms that agreement, the board has an equal number of members 
from each government, and the chairmanship is supposed to rotate 
between the two sides every three years.  However, a Russian held 
the position from 1949-1991.  A Mongolian was chairman from 
1991-2004, after which Magdei was appointed to the position in 
December 2004, presumably restoring the three-year rotation, which 
would theoretically put a Mongolian in as the chairman in December 
of 2007. 
 
¶3.  (SBU) According to Mongolian sources, if Russian officials 
refuse to name a Mongolian as the new chairman immediately, Mongolia 
will simply continue to defer the issue until the three year Russian 
term expires.  Mongolian officials are visibly frustrated with the 
Russian role in the railroad, a legacy from the semi-colonial 
Socialist era -- and especially frustrating in view of the 
railroad's vital transport role for exports and imports in this 
landlocked country.  Mongolian officials emphasize that, 1949 
agreement notwithstanding, Mongolia is the de facto manager and 
operator of the railroad.  (Note: Last week, Mongolia's parliament 
began discussing a new draft railway law. While details are still 
vague, the law apparently allows privatization of certain aspects of 
the railway and introduces competition and different types of 
ownership (private, state etc). Mongolian sources say the law does 
not yet affect the 1949 agreement, but they believe this could be 
the first step in Mongolia's efforts to renegotiate the 1949 
agreement, since the legislation will state that the new Mongolian 
law trumps all.) 
 
¶4.  (SBU) While Mongolia favors changes in the railroad agreement, 
Russia reportedly seeks to use the railroad as leverage in its bid 
to gain preferential access to Mongolian minerals.  During the July 
2004 visit of Russian Prime Minister Fradkov to Ulaanbaatar, 
reliable sources report Fradkov indicated that a major upgrading of 
the railroad would be possible if such rights were granted.  While 
that offer was rebuffed, Russian railroad experts subsequently have 
mooted plans for $2 billion of upgrades, including double tracking 
and electrification.  Given the railroad's current financial 
difficulties, the financing for such expenditures is uncertain, 
failing large Russian investments. 
 
¶5. (SBU) In early March, the railroad apparently took a loan from 
Gazprom to deal with a sharp fall in income after Russian oil 
transiting Mongolia to China plummeted last year following the Yukos 
bankruptcy. Another loan seems to be in the offing as the railroad 
continues to requiring funding.  Rather than the Russian upgrading 
plans and minerals quid pro quo, Mongolian railroad officials 
strongly favor a proposed Millennium Challenge Account compact 
project which would improve efficiency and increase railroad 
capacity, with the Compact-financed assets held in a new leasing 
company which would be wholly Mongolian-owned. 
 
Goldbeck