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Viewing cable 08ULAANBAATAR90, THEY'RE BA-ACK! RUSSIANS RE-ENGAGE MONGOLIA

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Reference ID Created Released Classification Origin
08ULAANBAATAR90 2008-02-25 08:33 2011-08-26 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Ulaanbaatar
VZCZCXRO6108
RR RUEHLMC RUEHPB RUEHVK
DE RUEHUM #0090/01 0560833
ZNR UUUUU ZZH
R 250833Z FEB 08
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 1924
INFO RUEHMO/AMEMBASSY MOSCOW 2114
RUEHBJ/AMEMBASSY BEIJING 6009
RUEHUL/AMEMBASSY SEOUL 3201
RUEHKO/AMEMBASSY TOKYO 2896
RUEHVK/AMCONSUL VLADIVOSTOK 0235
RUEHSH/AMCONSUL SHENYANG 0470
RUEHBK/AMEMBASSY BANGKOK 1723
RUEHML/AMEMBASSY MANILA 1644
RUEHJA/AMEMBASSY JAKARTA 0238
RUEHGP/AMEMBASSY SINGAPORE 0398
RUEHKL/AMEMBASSY KUALA LUMPUR 0250
RUEHHI/AMEMBASSY HANOI 0114
RUEHPF/AMEMBASSY PHNOM PENH 0077
RUEHGO/AMEMBASSY RANGOON 0029
RUEHVN/AMEMBASSY VIENTIANE 0053
RUEHPB/AMEMBASSY PORT MORESBY 0032
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RHEHNSC/NATIONAL SECURITY COUNCIL WASHINGTON DC
RHHMUNA/HQ USPACOM HONOLULU HI
UNCLAS SECTION 01 OF 04 ULAANBAATAR 000090 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, EUR/RUS AND INR/EAP 
NSC FOR PAUL HANLE 
 
E.O. 12958: N/A 
TAGS: PREL ECON MARR ETRD EMIN EPET PBTS EAID KIDE KCOR
MG, RU 
SUBJECT: THEY'RE BA-ACK! RUSSIANS RE-ENGAGE MONGOLIA 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION. 
 
1. (SBU) SUMMARY: Russia has recently focused renewed attention on 
the Russia-Mongolia relationship.  Russia recently offered to equip 
Mongolia with around $120 million worth of military hardware, 
possibly including pushing Mongolia to take two MiG-29 fighter 
jets..  Less conspicuous, but no less important, are other actions 
that signal an increasing Russian effort to re-establish its 
presence in Mongolia.  High-level visits are occurring with greater 
frequency and at higher levels, governmental agreements are being 
signed and efforts are being made to strengthen trade links.  Prime 
Minister S. Bayar, a former Ambassador to Russia, will make his 
first official visit to Russia soon, probably in March.  This will 
follow a visit to Mongolia by the acting chairman of Russia's NSC. 
The No. 2 official of Mongolia's dominant political party recently 
visited Moscow at the invitation of Vladimir Putin's party.  Russia, 
Mongolia's second biggest trading partner, has dispatched several 
senior railway officials to Ulaanbaatar and reportedly plans to 
invest US$1 billion in Mongolia's railway system.  Interaction 
between Mongolia and the neighboring Russian Republic of Buryat is 
flourishing; an agreement aimed at boosting trade was recently 
signed, and ethnic Buryat tourists and businesspeople from Russia 
are flocking to Ulaanbaatar.  To date, the Russians have made little 
headway in securing the Mongolian mineral resources they crave, but 
corruption and a reliance on Russian petroleum renders Mongolia 
vulnerable.  How receptive Mongolia is to Russian attempts to 
rekindle their old flame will be guided more by strategic 
self-interest than any sense of bilateral affinity.  END SUMMARY. 
 
 
BACKGROUND 
---------- 
 
2. (SBU) Ties between the two countries run long and deep.  For 
nearly 70 years, Mongolia was known as the unofficial 16th republic 
of the Soviet Union.  But in late 1989 and early 1990, street 
demonstrations set Mongolia on a path toward democracy and open 
markets.  Not long thereafter, Moscow rapidly withdrew its soldiers, 
advisors and material support.  Years of painful economic and social 
adjustment ensued.  Because Russians had managed most Mongolian 
companies, Mongolians lacked the skills and experience to keep the 
firms afloat.  As enterprises failed, many city workers went back 
into agriculture or herding, but not before food and power 
distribution networks collapsed, leading to near-famine conditions. 
Over the past few years, with western and Chinese influence in 
Mongolia expanding, Russia has taken steps to re-engage Mongolia. 
Russia now provides virtually all of the oil (95%) that powers 
Mongolian vehicles, and is the largest buyer of Mongolian meat. 
Russian officials and industrialists salivate at Mongolia's largely 
untapped mineral deposits.  Russia watches as Mongolia increasingly 
asserts itself on the world stage, contributing troops to the Iraq 
coalition and hosting six-party talks (6PT) on North Korea. 
 
HIGH-LEVEL VISITS 
----------------- 
 
3. (SBU) Prime Minister Bayar will make his first official visit to 
Russia soon, probably in March.  This will follow a visit to 
Ulaanbaatar by the acting chairman of Russia's national security 
council, Major General V.A. Sobolev (septel), who met on February 21 
with President Enkhbayar to discuss security cooperation.  Sobolov 
also had meetings scheduled with PM Bayar and Mongolia's Ministers 
for Defense, Foreign Affairs, Justice and Agriculture.  Separately, 
the Secretary General of the ruling Mongolian People's Revolutionary 
 
ULAANBAATA 00000090  002 OF 004 
 
 
Party (MPRP), Yo.Otgonbayar, along with another high-level MPRP 
official, visited Moscow recently at the invitation of Vladimir 
Putin's United Russia party.  Otgonbayar was to meet with United 
Russia leader V. Gryzolv (who is also Speaker of the Duma). 
 
DORMANT DEFENSE COOPERATION GAINING LIFE? 
----------------------------------------- 
 
4. (SBU) Russia's decision to provide to Mongolia around $120 
million worth of conventional weapons and other military equipment, 
including MI-24 attack helicopters and possibly two MiG-29 fighter 
jets, has drawn renewed attention to the bilateral relationship. 
(Note: Although the terms of the deal are not yet clear, it would be 
a combination of grant aid and low-interest loans.) 
 
WORKIN' ON THE RAILWAY 
---------------------- 
 
5. (SBU) The President of the Russian railway, V.S. Yakunin, is 
scheduled to visit Mongolia from February 27 to 29.  The Russians 
are reportedly planning to invest US$1 billion in Mongolia's railway 
system and to offer railway training to 33 Mongolian workers. 
(Note: After providing virtually no real investment in the joint 
venture railroad for decades, the Russians have recently  offered 
these improvements in the form of loans, which they say the 
Mongolians can pay off by ceding development rights to a variety of 
mineral and natural resources. End Note.)  Yakunin's visit was 
preceded by that of the Russian railway's vice chairman, who held 
talks with Transport Minister R.Rash. 
 
RUSSIAN BANK LOANS SOUGHT 
------------------------- 
 
6. (SBU) Rash has courted Russian funding for new buses to replace 
the creaking, overcrowded ones that blight the streets of the 
Mongolian capital.  It was reported on February 7 that Rash's 
Transport Ministry is seeking to borrow US$21 million from Russia's 
Vostok Bank, to pay for 13 Kamaz buses.  If a loan is extended, new 
buses could start service in Mongolia by November 2009. 
 
GROWING INTERACTION WITH RUSSIA'S BURYATS 
----------------------------------------- 
 
7. (SBU) In mid-February in Ulaanbaatar, officials of the Mongolian 
Government (GOM) and the Russian Buryat Republic  signed an 
agreement on border cooperation, aimed at facilitating trade.  Media 
quoted Buryat President Vyacheslav Nagovitsyn as saying that annual 
trade between the Buryat Republic and Mongolia should be ramped up 
to US$1 billion, up from US$39 million at present.  The agreement 
identifies specific steps to boost cooperation in industry, the 
energy sector, construction, transportation and agriculture. 
Meanwhile, there has been a notable increase in the number of ethnic 
Buryat Russians making visits to Ulaanbaatar as tourists and 
businesspeople.  Buryats are now present in many shops and cafes of 
Ulaanbaatar.  Their appearance is virtually undistinguishable from 
Mongolians; it is only when they speak that most are identifiable as 
Buryats. 
 
REGIONAL CONTACTS 
----------------- 
 
8. (SBU) In Russia's Chita region, northeast of Mongolia, 
authorities received a delegation in late January led by Ts. Janlav, 
the Governor of Mongolia's far eastern province of Dornod.  The two 
 
ULAANBAATA 00000090  003 OF 004 
 
 
sides signed an agreement calling for cooperation in the fields of 
agriculture, road construction, and energy/infrastructure.  Earlier 
that month, business representatives from the Mongolian provinces of 
Uvs and Khovd met in Uvs with counterparts from Russia's Tuva 
Republic and the Chinese Inner Mongolian province of Altai.  Four 
agreements and eight business deals were concluded; among the latter 
were transactions involving milk, wool processing and pasta 
production. 
 
MONGOLIA'S MINING SECTOR EYED 
----------------------------- 
 
9. (SBU) In Ulaanbaatar in December 2007, a business forum was 
organized by Gazprombank, Russia's biggest non-state-owned bank. 
The gathering brought together Mongolian and Russian business 
groups, with many of the latter expressing interest in investing in 
Mongolia's mining sector.  Gazprombank and another major Russian 
firm, Polimetal, made clear their interest in uranium extraction and 
a poly-metals deposit in Mongolia's far west.  (Note: Although 
Mongolia has generally resisted Russian efforts to dominate key 
Mongolian copper and coal projects, Mongolia has embraced Russian 
proposals for involvement in uranium projects.  End Note.) 
Separately, an industrial group created by President Putin, Russian 
Technologies, is reportedly exploring the purchase of the Russian 
government's 49% stake in Mongolia's biggest copper mining company, 
Erdenet.  (Note: Erdenet, 51% owned by the GOM, mines 530,000 tons 
of copper annually and 3,000 tons of molybdenum.  End Note.) 
 
ADDICTED TO RUSSIAN OIL 
----------------------- 
 
11. (SBU) Russia remains the source of about 95% of the oil used in 
Mongolia.  (Note: In 2007, Mongolia imported US$533.5 million worth 
of oil products.  Mongolia has also sought oil deals with Kuwait and 
others to reduce its dependency on Russia. )  Petroleum price 
increases have led to 15-percent inflation that caused gas prices 
and taxi fares to double in the second half of 2007.  With 
Parliamentary elections scheduled for June 29, Mongolia's Trade and 
Industry Minister Kh.Narankhuu indicated on February 20 that the GOM 
had reached an agreement with oil importer Rosneft to keep fuel 
prices stable -- through June.  Some Mongolians are concerned that 
Mongolian economic development could be arrested if Russian energy 
suppliers hike prices too sharply.  Others worry about their 
country's food security, with wheat imports, primarily from Russia, 
meeting between 60 and 70 percent of domestic demand.  (Note: 
Russia's Agriculture Minister Gordeyev reportedly said that Russia 
is prepared to deliver 250,000 to 300,000 tons of grain to Mongolia. 
 It has also been reported that Russia will waive export taxes on 
wheat and flour products to Mongolia.  End Note.) 
 
GEOGRAPHY 101 
------------- 
 
11. (SBU) Mongolia is positioned to benefit from its location 
smack-dab between Russia, the regional oil supplier, and China, one 
of Russia's key oil buyers.  Much of the Russian oil bound for 
China, to feed that country's seemingly insatiable thirst for fuel, 
could be pumped more efficiently through Mongolia.  However, the 
Chinese have resisted Russian and Mongolian pushes for pipelines and 
large-scale, regular petroleum shipments through Mongolia.  At 
present, most Russian oil is shipped to China via roundabout routes 
that add to shipping costs and cut out Mongolia (thus denying it the 
ability to charge a tariff).  GOM contacts say Mongolia has made 
clear to Russia that if it wants to show good faith in re-engaging 
 
ULAANBAATA 00000090  004 OF 004 
 
 
Mongolia, it should press for oil transshipments through Mongolia. 
 
ALLEGATIONS OF RUSSIAN MOB PRESENCE 
----------------------------------- 
 
12. (SBU) Mongolian newspapers have increasingly reported on the 
alleged presence of Russian Mafiosi in Mongolia, but little evidence 
has been presented to bolster such claims.  The leading "Onooder" 
daily reported that the director of gold-mining firm Altan Dornod 
was leaving Mongolia and selling his mining licenses because of the 
influx of new Russian gangsters.  The truth, however, may be less 
sensational.  It seems that the firm owes the GOM a considerable 
amount of tax money. 
 
WATER A POTENTIAL FLASHPOINT 
---------------------------- 
 
13. (SBU) Water is shaping up as a potential flashpoint in 
Russia-Mongolia relations.  The Selenge River Basin, Mongolia's 
largest watershed, provides 51% of the flow into Lake Baikal, whose 
waters and rivers confer substantial economic benefits upon Russia's 
far east.  Mongolia has never significantly tapped the Selenge River 
Basin for agricultural purposes or hydroelectric power.  But the 
Mongolians have started weighing their options.  Some have suggested 
establishing a dam along the Eg River, a Selenge tributary.  GOM 
sources say that when Mongolia has raised the issue of Mongolia's 
rights to Selenge waters, the Russians have unenthusiastically 
responded with vague ideas about "sharing the waters."  Because the 
development of various minerals and agricultural resources will 
require water from the Selenge Basin, Mongolia's long-ignored water 
could become a source of bilateral friction. 
 
COMMENT 
------- 
 
14. (SBU) The Russians are clearly on their way back.  Russian 
mining firms, largely state-owned monopolies, have made no secret 
that they would love to be involved in Mongolian mining projects (or 
that they would pay dearly, above the table or elsewhere, for 
exclusive rights.)  The press and the rumor mill have continued to 
spit out allegations that the Russian Government - and oligarchs 
such as Oleg Deripashka, owner of Russia's Basic Element group -- 
routinely offer million-dollar bribes to GOM officials and 
Parliamentarians, to secure rights to resources.  Yet for all the 
talk of bribes and intrigue, the Russians have thus far made little 
headway in securing the resources they crave.  The GOM has in recent 
years proven adroit at keeping Russia interested but at bay, by 
balancing promises of cooperation with threats to turn to other 
nations.  However, Mongolia's reliance on Russian fuel leaves 
Mongolia vulnerable, as does Mongolian corruption.  How receptive 
Mongolia ends up being to Russian attempts to rekindle their old 
flame will depend more on strategic self-interest than on any sense 
of bilateral affinity.  Many Mongolians are fond of the Russians, 
and Mongolian culture is still heavily influenced by that of its 
northern neighbor.  But the painful Russian pullout of 1990 has not 
been forgotten. 
 
MINTON