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courage is contagious

Viewing cable 07ULAANBAATAR300, Third US-Mongolia TIFA Joint Council, March 12, 2007, Part

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Reference ID Created Released Classification Origin
07ULAANBAATAR300 2007-05-24 07:10 2011-08-26 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Ulaanbaatar
VZCZCXRO5037
RR RUEHLMC RUEHVC
DE RUEHUM #0300/01 1440710
ZNR UUUUU ZZH
R 240710Z MAY 07
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 1126
INFO RUEHBJ/AMEMBASSY BEIJING 5568
RUEHUL/AMEMBASSY SEOUL 2762
RUEHKO/AMEMBASSY TOKYO 2494
RUEHOT/AMEMBASSY OTTAWA 0450
RUEHML/AMEMBASSY MANILA 1385
RUEHLO/AMEMBASSY LONDON 0133
RUEHBY/AMEMBASSY CANBERRA 0134
RUEHVC/AMCONSUL VANCOUVER 0080
RUEHGV/USMISSION GENEVA 0295
RUEATRS/DEPT OF TREASURY WASHDC
RUCPODC/USDOC WASHDC 1279
RUEHRC/USDA FAS WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0584
RHEHNSC/NSC WASHDC
RUEKJCS/SECDEF WASHDC
UNCLAS SECTION 01 OF 05 ULAANBAATAR 000300 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
GENEVA FOR USTR 
STATE PASS USTR, USTDA, OPIC, AND EXIMBANK 
STATE FOR EAP/CM, EB/CBA, AND EB/IFD/OIA 
USAID FOR ANE FOR D. WINSTON 
MANILA AND LONDON FOR ADB, EBRD USEDS 
TREASURY FOR USEDS TO IMF, WORLD BANK 
USDA FAS FOR N. SAKLAH 
 
E.O. 12958: N/A 
TAGS: ETRD PREL EAID ECON EFIN PGOV MG
SUBJECT: Third US-Mongolia TIFA Joint Council, March 12, 2007, Part 
2 of 3: Disputes and Concerns over Mongolia's Business Climate 
 
Ref: (a) Ulaanbaatar 165; (b) Ulaanbaatar 160; (c) Ulaanbaatar 158; 
 
(d) Ulaanbaatar 157; (e) Ulaanbaatar 125; (f) Ulaanbaatar 123; and 
(g) Ulaanbaatar 119; (h) 06 Ulaanbaatar 881 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION. 
 
1. (SBU) SUMMARY: This cable reports the March 12 Trade and 
Investment Framework Agreement (TIFA) talks between the U.S. and 
Mongolia which concentrated on specific U.S. concerns about 
Mongolia's trade and investment climate.  Speaking first with an 
advance outline of the U.S. presentation, the Mongolian side 
preemptively sought to address U.S. concerns about corruption and 
poor banking regulation.  While the U.S. delegation cited some 
positive steps on IPR protection, Mongolia's state procurement 
policies and an alleged abusive tax audit of a U.S. firm were cited 
as problems.  Assistant U.S. Trade Representative Timothy Stratford 
highlighted U.S. concerns about the deteriorating investment climate 
in the mining sector, largely due to legislation passed by Mongolia 
in 2006.  END SUMMARY. 
 
GOM Makes Progress in Fighting IPR Violations 
--------------------------------------------- 
 
2. (SBU) Ms. M. Sarnai, Legal Officer at the International Property 
Organization of Mongolia (IPOM), reported progress in fighting IPR 
violations: a) the 2006 amending of both the Patent and Copyright 
laws of Mongolia; b) the creation of a patent and design disputes 
board under the IPOM administration; c) the identification by IPOM 
of 230 entities and 21 million tugrik (approximately US$18,000) 
worth of goods in violation of IPR; and d)the imposition of 57 
million tugrik (US$50,000) in fines.  They have  investigated all 
the cases of suspected IPR violations brought to its attention by 
the embassy, including a dubious Columbia Sportswear Outlet, a beer 
called "Yahoo!," trademark violation of Johnson and Johnson's Vicryl 
line of sutures, and the broadcasting of recently released Hollywood 
films by Mongolian television stations. 
 
3. (SBU) Ms. Sarnai reported that although the Columbia, "Yahoo!," 
and optical media piracy cases remain open, the Johnson and Johnson 
case had been partially resolved. Faced with serious health 
implications, IPOM successfully stopped the trademark infringer from 
importing substandard medical sutures under the Johnson and Johnson 
brand name.  However, the IPOM could not prevent the company from 
importing these cheap but dangerous knock-offs under a 
non-infringing name. The matter is now one of product safety rather 
than IPR violation. 
 
4. (SBU) Ms. Sarnai then stated that the IPOM wants to exchange 
knowledge and learn more about U.S. laws and government policy that 
support scientific research and seeks USG assistance in 
strengthening its newly established Information and Training Center 
to promote and educate the public on IPR issues. Commoff praised 
IPOM's responsiveness to USG requests and urged Mongolia to more 
effectively utilize the Global Academy on Intellectual Property 
Rights by also sending non-GOM attendees. Ms. Sarnai said that the 
IPOM agreed with USG warning that the growing problem of Internet 
downloading was hurting the domestic music industry and said rights 
holders were aggressive in pursuing violations but lacked the 
know-how to best tackle the problem. 
 
5.  (U) (Update: Post recently nominated an IPOM Trademark and 
Patent Examiner to attend PTO's June 07 Trademark Examination 
Seminar in Alexandria, VA. PTO has accepted and has fully funded the 
nomination, and the Mongolian official will attend the PTO Academy 
in early June.) 
 
Mongolia "Letting Export Possibilities Slip By" 
 
ULAANBAATA 00000300  002 OF 005 
 
 
--------------------------------------------- -- 
 
6. (SBU) S. Otgonbat, Deputy-Chair of the Foreign Investment and 
Foreign Trade Agency (FIFTA), addressed trade barriers that the GOM 
believes hinder Mongolia's growth in U.S.-Mongolia trade volumes. 
He argued that the U.S. and Mongolia should talk "on a micro level" 
to create a strategies for dealing with China and said greater 
promotion of infrastructure projects should be directed at U.S. 
companies. S. Demberel, Co-Chair of the Mongolian National Chamber 
of Commerce and Industry (MNCCI), recommended that the U.S. and 
Mongolia develop a specific list of actions the U.S. and Mongolia 
should take to improve trade.  Mongolian producers needed to learn 
about Rules of Origin, he said, because the country was letting a 
lot of export possibilities slip by. He reported that MNCCI was 
working to compile a list of approximately 50 types of products 
selected from the GSP's list of 3400 eligible products that can be 
exported from Mongolia. Ms. Battsetseg from the National Employers' 
Federation pushed for increased direct contacts between U.S. and 
Mongolian private entities, professional organizations and hoped to 
see more U.S. assistance in improving the legal environment for 
small and medium sized businesses (See ref d) 
 
Despite Efforts, Corruption Persists 
------------------------------------ 
 
7. (SBU) VMT Sodbaatar reiterated GOM commitments to create a 
transparent legal environment and listed GOM efforts to fight 
corruption, including signing the UN Convention on Anti-Corruption, 
passage of the Anti-Corruption law, and creation of the 
Anti-Corruption Agency.  AUSTR Stratford praised these achievements, 
but then pointed to Transparency International's recent downgrading 
of Mongolia on its Corruption Index, from last year's ranking of 
85th among countries for corruption -- itself hardly a figure of 
pride -- to this year's disappointing 99.  Sodbaatar reluctantly 
concluded that Mongolia was perceived of as a state that has a 
growing problem with corruption. 
 
Concerns over Bank Regulation and Supervision 
--------------------------------------------- 
 
8. (SBU) Responding to U.S. concerns about the slow pace of bringing 
the recently established Financial Investigative Unit up to speed, 
Acting FIU Chair Tumurbat said the GOM wanted to ensure the FIU 
functioned with the proper legal underpinning (internal rules and 
guidelines for staff etc.) to conduct inspections and ensure proper 
confidentiality procedures were followed.  He reported the FIU has 
 
SIPDIS 
been seeking donor assistance for secure software and that the Unit 
should start proper operations by July 2007. 
 
9. (SBU) In background materials sent to the GOM in advance of the 
TIFA session, the USG noted it had raised concerns during the 2006 
TIFA Talks about the ability and willingness of the banking sector 
regulator, the Bank of Mongolia (BOM), to discipline and supervise 
the 17 banks under its control. These concerns had remained 
unanswered and have grown more pressing over the intervening year. 
The materials raised concerns about the sale of Trade and 
Development Bank (TDB), the bank with the largest holding of foreign 
currency accounts, to new owners under murky circumstances See ref 
h).  During the TIFA, USTR asked the BOM about these concerns, and 
BOM Representative G. Togtokhbayar said the BOM could not provide 
information outside of an official request. 
 
10.  (SBU) (Update: Recently the BOM approved the sale.  However, 
concerns about the both the identity of beneficial owners and their 
funding sources persist.) 
 
Concerns about the state procurement practices 
 
ULAANBAATA 00000300  003 OF 005 
 
 
--------------------------------------------- - 
 
11. (SBU) USTR's Tim Wineland noted that recent amendments to 
Mongolia's Law on State Procurements (ref b) excluded foreign 
participation in state procurements of less than 10 billion 
Tugriks(approx US$8.6 million), a higher threshold than the US$7.9 
million yardstick of the WTO's General Procurement Agreement (GPA), 
of which Mongolia is an official observer. Mr. Wineland noted that 
this threshold seemed at variance with Mongolia's FTA aspirations. 
Ministry of Finance Representative Mr. Munkh-Orgil responded that 
the 10 billion tugrik threshold set by Mongolia's Parliament was not 
egregiously higher than the standard set by the GPA, an agreement to 
which the GOM is not a signatory in any event. 
 
12. (SBU) Regarding disputed tenders in the energy field and for 
health care products, GOM officials reported that the Ministry of 
Fuel and Energy (MFE) had released the first tranche of funds for a 
solar power tender, but were concerned that the contractor would 
fail to honor the terms of the agreement. However, the MFE committed 
to meeting with the different sides to resolve the issue. 
 
13.  (SBU) (Update: In an effort to move both the GOM and the 
contractor to resolve existing disputes, post organized a meeting 
among the stakeholders to the dispute, as MFE had agreed to do 
during the TIFA.  This meeting revealed that GOM failings aside, the 
contractor may have failed to follow through on commitments. 
Consequently, after reviewing the contractor's assembly facilities 
in South Korea and ascertaining the contractor would not be able to 
meet the contracted deadlines, the GOM officially terminated the 
tender.  The contractor disputes this termination and promises legal 
action in a court of international arbitration, as is their right 
under the terms of the now cancelled tender.  See ref e.) 
 
14. (SBU) The GOM Ministry of Finance official said that he had no 
knowledge of the disputed healthcare tender in which the distributor 
of Johnson and Johnson Vicryl sutures claimed that the winner of the 
tender had provided product that could not meet Ministry of Health 
minimum quality standards at the price offered. The official 
promised to look into these claims. 
 
15. (SBU) (Update: So far the GOM has issued no formal or informal 
response.) 
 
Concerns over the tax system 
---------------------------- 
 
16. (SBU) USTR's Wineland noted that the U.S. Embassy had informally 
complained to the GOM about an abusive, predatory tax audit against 
Wagner Asia, the local Caterpillar and Ford dealer and the largest 
U.S. direct investor in Mongolia (see ref c).  The Embassy presented 
Wagner's public claims that the senior supervising auditor had 
attempted to extract a bribe of some US$250,000 to make a US$2.5 
million tax bill go away.  Without disputing the Mongolian Tax 
Authority's (MTA) legal right and obligation to review any entities' 
tax records for compliance and assess both civil and criminal 
penalties for non-compliance, the USG insisted that so far the 
process undertaken by the MTA seemed highly irregular and 
inconsistent with both Mongolian law and international best 
practices to which the MTA claims to subscribe. 
 
17. (SBU) In response to our questions, senior auditor Gansukh 
delivered a blistering denial of all accusations of bribe 
solicitation and charged Wagner of violating a long list of 
Mongolian tax laws.  (Comment:  Gansukh's venomous ardor was no 
doubt fueled by the fact that he is the auditor Wagner Asia accused 
of trying to solicit a bribe.)  He claimed that the Mongolian 
National Police were considering arresting corporate officials at 
 
ULAANBAATA 00000300  004 OF 005 
 
 
Wagner.  Embassy representatives responded to this claim that 
reliable information indicated that the police had dismissed all 
criminal complaints for tax evasion lodged by the Gansukh at against 
the company.  Mr. Gansukh did not respond. 
 
18.  (SBU) (Update: The audit remains unresolved.  Mr. Gansukh 
continues to threaten both Wagner Asia and all accountants, internal 
and external, who work for Wagner with criminal prosecutions, 
revocation of licenses, and all matter of fines.  To our knowledge 
nothing has come from his threats to date.) 
 
19. (SBU) In background materials sent to the GOM in advance of the 
2007 TIFA session, the USG noted that it had raised concerns during 
the 2006 TIFA talks about the Mongolian Railway's (MTZ) failure to 
honor contractual obligations to General Electric Corporation for 
the purchase of locomotive kits made the TIFA agenda for the second 
straight year. During March 12 TIFA round, USTR noted that MTZ has 
since paid 25% of the balance due, but commented that failure to 
satisfy its entire obligation raises concerns that the GOM will fail 
to act in good faith on its contractual obligations, causing U.S. 
commercial and governmental entities to hesitate to enter into 
arrangements with the GOM.  Ministry of Roads, Transport, and 
Tourism Representative Mr. Nyamdavaa pointed to the MTZ's 25% 
payment as a sign of good faith, and said that MTZ's income had 
dropped dramatically over the past year because of the temporary 
cessation of oil transshipments from Russia. However, the MTZ hoped 
for some movement at the next MTZ Board of Directors meeting. 
 
20. (SBU) (Update: This meeting and another have come and gone, 
producing no final resolution.  However, the MTZ did pay an 
outstanding but not past due bill for GE spare parts. The matter 
remains unresolved with MTZ begging GE and the USG to be patient.) 
 
Negative Mining Sector Vibes Threaten All Investment 
--------------------------------------------- ------- 
 
21. (SBU) AUSTR Timothy Stratford critiqued amendments to the mining 
law that gave broad discretionary powers to GOM officials to issue 
minerals exploration and mining licenses without any apparent checks 
and balances on those powers (see refs f and g).  He explained that 
the legislative process that had brought the Windfall Profits Tax 
into being was too quick and utterly lacking in any public comment 
and review with affected parties.  He noted that foreign and 
domestic mining businesses had complained about such abuses in 
formal letters to senior government officials. He concluded by 
noting that GOM actions had severely damaged investor confidence in 
Mongolia. 
 
22. (SBU) He drove this point home by citing the recent Fraser 
Institute survey of Mining Executives that rated Mongolia 62nd out 
of 65 nations as destinations for mining sector investment. 
Mongolia had dropped below 29 other nations, just beating out 
Venezuela and Zimbabwe.  AUSTR Stratford warned that now businesses 
had reason to look at 61 other investment locales before they would 
look at Mongolia.  Stratford hoped that by next year's TIFA meeting 
Mongolia would have regained or bettered its former rank of 33rd. 
 
23. (SBU) AUSTR Stratford then connected the results of the Fraser 
study with Transparency International's recent finding that Mongolia 
had slipped in TI's corruption index some 14 places from 85th to 
99th.  Stratford said that transparency was important for U.S. 
investors and businesses, all of whom pride themselves on being good 
corporate citizens and taxpayers.  Without the proper transparent 
underpinning, he said, U.S. business would not be comfortable coming 
to Mongolia.  The Mongolians accepted these critiques without 
argument, noting that they were taking unspecified steps to improve 
their international profile. 
 
ULAANBAATA 00000300  005 OF 005 
 
 
 
24. (SBU) (Update: Since the TIFA meeting, the GOM has undertaken 
several steps to improve the business environment for mining.  The 
GOM has: a) committed to compensating private rights holders for any 
share the GOM may wish to take in mining ventures; b) moved to clean 
up the process for registering exploration and mining license 
rights; and c) moved to complete an important mining deal with 
international mining giant Rio Tinto and Canadian Junior miner 
Ivanhoe on the world class Oyu Tolgoi copper-gold deposit in the 
South Gobi.  All these steps are meant to signal to the 
international business community that Mongolia is back on track. 
The business community, domestic and international, has reacted to 
these steps positively but waits to see if these improvements prove 
permanent.) 
 
"We Value Our Relationship with Mongolia" 
----------------------------------------- 
 
25. (SBU) In closing remarks, AUSTR Stratford promised to respond 
within two months with a concrete step Mongolia could take to deepen 
its trade relations with the U.S. He hoped that Mongolia's rank in 
the Fraser and TI surveys would improve before next year's TIFA 
meeting.  He wished Mongolia well in its continued reform efforts 
and finished by saying the U.S. highly valued its relationship with 
Mongolia. 
 
26. (SBU) Closing TIFA 2007, VMT Sodbaatar noted that he was glad 
that the establishment of steps toward an FTA was also important for 
the USG.  He said responses to the USTR's six questions on the GOM's 
cashmere waiver request to the WTO would soon be sent, and he looked 
forward to a successful conclusion to the MCC process by this time 
next year. 
 
27. (U) This cable was cleared by USTR. 
 
Goldbeck