Dateline: Tbilisi, Georgia
Mongolia has been on my radar for some time. Only recently, however, did I decide to get the advice of leading experts who work and invest in Mongolia to learn more about the country, its economy, and the opportunities available there for investment and business.
It seems that just a few years ago everyone was talking about Mongolia, but that excitement has since cooled and I wanted to know why. I’ve never been one to follow the herd, so I wanted to understand what it was that drove so many investors to Mongolia, and whether the fundamentals that got everyone excited in the first place are still in place.
We discussed it all, from business opportunities to real estate investment, the mining industry to China’s One Belt One Road initiative. If you’ve ever wondered about Mongolia as an investment opportunity or wanted to learn more about one of the fastest-growing economies in the world, this article draws from the experts to cover it all.
So let’s dive in and start with a little bit of background behind the boom that got the world talking about Mongolia ….
Mongolia’s fundamentals and challenges
While investors the world over couldn’t say enough good things about Mongolia just a few short years ago, much of that attention has waned in the face of the global commodities crisis. We all know, however, that world trends are finicky. While the Washington Post is already writing the country off as a land of lost opportunity, others would argue that Mongolia hasn’t really happened yet.
There are incredible fundamentals there. The country is enormous, it is extremely resource-rich, and it sits right on the border of China, the world’s largest consumer. So, today and five years ago and ten years ago, on paper, you can see the opportunities there.
Taking stuff out of the ground and selling it to the Chinese is a market in which Mongolia has a huge advantage. You can mine gold, copper, iron ore, coal, aluminum and pretty much everything else on the periodic table except for diamonds in Mongolia. More importantly, you can get those resources to market faster and more efficiently and more profitably than any other resource-rich country in the world.
Nevertheless, there are limitations to Mongolia’s progress that really can’t be avoided and, to some extent, will continue to affect the economy into the future. For one, Mongolia is only a 25-year-old democracy emerging from over 70 years of Soviet communist rule. While there has been great progress towards more democratic and free-market fundamentals, the youth of Mongolia’s democracy cannot be ignored.
Another limitation (and in other ways a great advantage) is that there are only three million people in Mongolia. With such a small population to work with, Mongolia has struggled to create a diversified economy. In fact, some would argue that it’s the main reason a diversified economy hasn’t happened so far.
The mining boom background
As mentioned, Mongolia is one of the most resource-rich countries in the world. The first bite at the apple was around 2009-2010. When the mining opportunity happened, almost every single business and every single person in Mongolia got into the mining or mining services industry. It just seemed like a natural response from a population that, not too long before, had zero economic opportunities and, to a large extent, were all nomadic herders.
As such, there was little thought about a balanced economy and diversified market. It was mining. People referred to Mongolia back then as “Minegolia.”
In 2010 there was the appearance of some economic momentum and then, out of the blue, in 2011 Mongolia was the single fastest-growing economy in the world. Investors flooded in from all around the world and they were funding and buying everything. It became an extremely frothy market immediately because, as an eleven and a half-billion dollar economy, it doesn’t take too much cash to drive everything into overdrive.
For the Mongolians — with a brand new country, brand new democracy and brand new free-market system — this was the first time that any of this had ever happened. And, like young people fresh out of business school, they didn’t have the experience of market fluctuations.
This, of course, is understandable on Mongolia’s part. What is difficult to understand is that the investors and mining companies who were investing failed to recognize that commodity prices might come down sometime over the following decade.
In 2011, Mongolia was the fastest growing economy in the world. However, in 2012 commodity prices started to decline and, with no diversification in their economy, the drop in commodity prices immediately started to have a systemic effect on Mongolia. This then triggered the liquidity crisis that continued to get worse and continues to linger today.
Overcoming the crisis
Some can argue that the fact that the commodity boom and bust happened so early on in the democracy’s history is a good thing and that they’re going to come out better than before. Everybody understands NOW what the multilaterals and the western democracies were warning the Mongolian government about in 2011-2012. They warned that without a diversified economy, something like this might happen.
Though they couldn’t change the past, from 2012 to 2014 the government — to the extent that they could — started a diversified economy. They sourced a bunch of money and put it into infrastructure development, construction and a bunch of different areas to start the diversification that should have happened before. This has continued to keep the economy afloat and maintain jobs in the market, but they started too late.
However, there is still hope on the horizon for Mongolia. The fundamentals that were there five years ago when the economy was about to dominate the world with explosive growth are still there. With a more diversified economy, the fundamentals are even better. And new developments and investments are already on their way, bringing money that could once again put Mongolia on top.
For example, Rio Tinto has already signed a deal to invest $5.3 billion in Mongolia’s Oyu Tolgoi mine. With an economy valued at eleven and a half-billion dollars, an investment of this size could be enough to boost the economy into overdrive once again.
Expanding infrastructure development
On top of that, Mongolia plays an essential role in China’s new One Belt One Road initiative that aims to revive the ancient Silk Road that once connected East Asia to Europe and Africa. China plans to build roads through both Mongolia and Russia and all the way to Europe, allegedly to Venice, to facilitate trade and access to both food and energy.
This project will make a bunch of money available for infrastructure development throughout Mongolia. Mongolians have always known that infrastructure development is absolutely essential to further growth. Now they will have the ability to do pursue those goals.
The mines that you hear about — Oyu Tolgoi and Tavan Tolgoi — are located right along the Chinese border. It’s no coincidence that Mongolia’s gigantic mega-mines are located right along the border of the country that they’re selling to. It is a result of having no infrastructure. There are probably larger mega-mines in the country, but it doesn’t make any sense to drill, much less talk about mining if you can’t accurately predict the cost of extraction and delivery to market.
There is more infrastructure now than there was a few years ago, but there are still very few roads, railroads, power or water pretty much anywhere outside of Ulaanbaatar. Mongolia’s current mega-mines could possibly be the smallest mining opportunities in the country. You just don’t know yet. What Mongolia has done so far is just the tip of the iceberg.
Is geopolitical security an issue in Mongolia?
Overall, things are looking good for Mongolia. However, before we get into business and investment opportunities, there are a couple more factors we need to analyze to know if Mongolia is among the places that follow my five magic words and will treat you and your money the best.
The first thing to consider is the general geopolitical security of the region. For instance, I often hear people say that they would never go to Singapore for fear that China will take over the defenseless city-state. So will China play nice with Mongolia?
According to one Mongolia expert, there’s no concern about China at all.
In the past, there was no concern about China invading because, if it did, Russia was on the other side and there was little chance it would sit still. Conversely, if Russia were to roll into Mongolia, China was on the other side. Mongolia is there because it is a buffer between these two enormous countries. They need that buffer there and they want that buffer there. And that’s been true for 25 years since they left the Soviet Union and started their own government.
Today, China has other reasons to maintain good relations with Mongolia. If China expects to build infrastructure throughout numerous countries all over Asia and Europe as part of their One Belt One Road initiative, it has to be super friendly and extremely respectful of Mongolia.
If they act aggressively or even look aggressively towards Mongolia, how many countries along that path or along the waterways are going to trust them to make infrastructure development investments in their country? So now the Mongolians — not that there was any threat at all before— are really sitting easy.
On top of that, Mongolia is protected by the trilateral arrangements between Russia, Mongolia, and China that will bring oil and gas from Russia to China through further infrastructure development. These agreements have given Mongolia the opportunity to further solidify relationships with these two countries as part of a vast array of agreements for the development of the region.
So the security of Mongolia’s sovereignty really isn’t a concern of anybody at all.
Regulation and tax in Mongolia
The second thing to take into consideration is regulation and tax. When it comes to taxes, it seems like Mongolia is moving in the wrong direction. They have introduced a VAT and a “capital city tax” on cigarettes, alcohol and other items, which is not encouraging.
They have also increased the minimum wage, which really isn’t helpful to anyone. Singapore has no minimum wage and everyone does well. Additionally, the corporate tax is 25%. It’s not the worst tax rate, but it’s definitely not the best — especially from a country that wants foreign capital.
However, Mongolia is making improvements in terms of overall regulation. It used to take a long time to start a business or open a bank account, but the Mongolian government realized that to develop a nation they need a lot of money to come in from overseas.
As a result, they have become one of the least regulated countries around. There are only three industries that are regulated in Mongolia: mining, media, and banking. Mining, of course, requires regulation because there is a permitting process, but other than that there is almost no regulation.
On top of that, they’ve made it extremely easy for foreigners to go there and do business, open a bank account, or form a corporation. In a nutshell, there is plenty of opportunity and little regulation, but tax is a concern.
Mongolia’s immigration policy
Mongolia is beginning to look more attractive, but we still need to analyze a couple more things: the country’s immigration policy and it’s general attitude toward foreign investors. The country may have all the right fundamentals, but you should see little red flags if they don’t offer opportunities for residency or frown upon foreign investment.
Fortunately, Mongolia favors both immigration and investment. With only three million people in the country, Mongolia needs to attract a lot of smart people that can do a lot of different things. There are many different avenues for you to reside in Mongolia for longer than what is allowed on a tourist visa in order to invest or set up a business.
The investor’s visa — or T-1 visa — allows for a year of residency at a time, but can be renewed annually. You can get a driver’s license and take up employment in the country with this visa as well.
While a Mongolian passport isn’t among the most powerful passports in the world, it does allow visa-free travel to some harder-to-get-into countries like Russia and Cuba. I’ve been to Russia several times and you have to report every country you’ve ever been to on their visa application — I’d get a Mongolian passport just to never do that again.
You can also travel visa-free to places like Brazil, Chile, Ecuador, Panama, and Serbia. So, if you had another bad passport, a Mongolian passport could fill in some gaps.
Are foreign investors welcome in Mongolia?
Finally, are foreign investors welcome in Mongolia? We’ve made it pretty clear that Mongolia definitely wants to attract foreign investors, but how does Mongolia treat them once they’re there? From the experts who’ve been on the ground in Mongolia, it appears that foreign investors are pretty welcome in the country.
The Mongolian government isn’t likely to take advantage of a foreigner’s bank account or purchased land because — with a country this small and with so few people — if they take advantage of even one person it reverberates through the international media. And then the Mongolian economy suffers the consequences.
There’s a perception in Mongolia, in the government and among the people, that what happened to their economy in 2012 was a result of decisions that they made that upset foreign investors. And now it’s very important for them to attract them back.
The truth of the matter is, I’m not sure if they scared them off. I think the investors who were there were mining investors and international commodity prices caused those mining companies to lose access to capital for themselves and that was the reason why foreign investment dropped off. But if you read any article coming out of Mongolia, the Mongolians say that they made a mistake and scared off foreign investors and that they’re doing everything they can to try and win their confidence again.
In reality, you and I know that every mining company in the world has trouble, every economy that has mining as a larger part of their economic balance is suffering today and has been suffering since 2012.
Even so, Mongolia just had elections a few months ago and the new government’s message to the world is that they’re the business-friendly, mining-friendly government. Their number one job is to attract back foreign investment.
Opportunities for the average guy
With Mongolia’s message to come back and invest, all that’s left is to ask “What is possible?” In places like Myanmar in Southeast Asia, there aren’t that many opportunities for the average guy. If you’re McDonalds or Coca Cola you’ll do fine, but someone looking to start a hamburger stand or get into the real estate game doesn’t have much of a chance.
So what about Mongolia? Sure, mining companies are making major investments in the country, but is there an opportunity for the average person? Or are mining experts the only people who can benefit from Mongolia’s massive potential?
In reality, there are two answers to that question. The first answer is that there are only opportunities for the average guy. The entire economy is $11.5 billion; it’s too small for anybody other than the average guy to participate. If you’re a large international cooperation you’re looking for economies that have consumer markets. With three million people, Mongolia’s just not ready for prime time for major international players (other than, in some small way, getting a foothold in the country.)
So Mongolia is a player for smaller players for the most part — at least until it gets to the stage that it has so many proven reserves that they’ll need to spend a couple billion dollars, or twenty billion dollars, to develop a mega-mine. Until then, all the exploration companies, all the hamburger stands, everything in the economy will depend on smaller players.
The second answer to that question is that going to Mongolia for mining is not the best use of your time and energy. Obviously, if you’re a mining company or an exploration guy then it is a good choice. But for someone who’s not an expert in that field, there’s no need to become one in order to profit from Mongolia’s growth.
The same drivers that make the mining industry so attractive in Mongolia apply to other industries as well. Anything that you raise or grow or manufacture, etc. in Mongolia and sell to the enormous consumer market of China gives you the same economic advantage over every other country and business in the world that the mining industry has.
What could YOU do in Mongolia?
So what type of businesses would do well in Mongolia? In reality, the answer to that question doesn’t have anything to do with Mongolia. Instead, ask yourself the question, “What can I do?” What are you good at? What have you done in the past successfully? Then look at Mongolia and see how your skills and what you have to offer are a good fit.
Though it is a small consumer market, demand is bound to increase throughout the Mongolian economy. With only three million people in a country that has barely scratched the surface of the three trillion dollars worth of its proven reserves, there’s a good chance that every single one of these three million people could be millionaires or billionaires.
Look at the numbers that the luxury brands are doing in Mongolia with their stores. Brands like Zegna, Armani and Gucci are flying off the shelves. There’s going to be a small, very wealthy consumer market there. That’s going to be a great place to participate.
Not in the luxury business? No problem. Anything else that anybody else in the world wants, as Mongolia continues to accumulate wealth they’re going to want some. The advantage to Mongolia isn’t a difference of a few opportunities; everything is an opportunity with only three million people in a brand new democracy.
Coffee shops, diners, KFC, pizza places and more are already popping up all over the place in Mongolia. If you do something new or different, it’s just like Los Angeles where everybody flocks to the latest greatest thing. It’s all about trying to hang on to those customers; but every time a new nightclub opens, everybody goes. Everybody gets dressed up and goes to see how much money was spent building these incredible places that, for the most part, you don’t even see in the US.
Mongolia’s meat opportunity
Another unique opportunity in Mongolia is the meat industry. Within Mongolia, people are far outnumbered by livestock. In fact, there are over 70 million head of livestock in the country. With not a lot of people to eat all that meat, domestically, the price of meat is cheap.
The companies that are in the meat business or meat processing business or otherwise participate are just not in a hot industry. However, just across the border, there are over a billion people who are willing to pay top dollar for what they perceive is premium organic meat from Mongolia.
The belief is that, because Mongolian soil is so resource-rich, plants and grains that grow there are higher in minerals and trace elements than plants that grow any place else on the planet. Consequently, people in China who buy meat from Mongolia strongly believe that the meat that walks around and eats green stuff from the resource-rich earth in Mongolia has higher minerals and nutrients than any other beef in the world.
That belief, combined with the fact that China is consuming more and more calories and more and more dense proteins makes the Mongolian meat industry an attractive option for someone looking to invest or do business.
Is it possible to own foreign real estate in Mongolia?
If you’re like me, you’ve probably been wondering about real estate opportunities in Mongolia. I am constantly looking for opportunities to invest in foreign real estate, and Mongolia is no different. The first question to ask, then, is whether foreign ownership is even allowed in Mongolia.
The short answer is yes.
The country is still in a slow transition from whatever their previous form of government and ownership was to something new. Again, it’s only been 25 years and, again, there are only three million people in the country. As such, there’s only so much that can happen in a government, regulatory and economic framework in such a short period of time.
Things are happening as quickly as they possibly can, but everybody was so focused on mining during the boom that things like real estate didn’t receive as much attention. More recently, the focus has been on patching things up from the liquidity crisis. Even so, Mongolia is generally happy to have you and they’re happy to have you own stuff.
There are no legitimate prohibitions against you owning land or a business, but you will need an attorney to explain the details of Mongolia’s strange set up for owning anything in the country, as there haven’t been proper processes put in place yet.
Before the democratic government took over, everything was owned and controlled by Russia and so there wasn’t any private ownership for 70 years. Now, if you need something that nobody’s ever owned before, you fill out a form, you go to the government and you get it.
If you know exactly what you want to do with a piece of land, you can literally pound some stakes in the ground, take some pictures of it, take it to the government, show them your plans, tell them what your timeline is, provide evidence of your financing, and then get the property that you need.
They’re looking to develop things.
How NOT to invest in Mongolian real estate
If you can show the government how you can help them develop their country, your chances of obtaining access to land are high. However, there are other cases where land ownership is not only more difficult to obtain, but also less attractive as an investment.
For one, there’s not a lot of demand for land in Mongolia. The country is three times the size of France with only three million people. They have nothing but real estate and very few people to stand on it or to utilize it. There’s enough real estate that everybody could build houses and never see each other. So investing in Mongolian real estate solely for speculation purposes at this moment in time may not be the best investment.
In addition, the process to obtain land doesn’t actually transfer full ownership rights. After staking out a piece of land and getting permission from the government to use it, what you get is something that looks like an expiration license for a piece of real estate.
For example, if you want to mine a piece of property, you go and stake the desired area and then apply for an exploration license. Once you have the license, you’re given a set period of time to work that land and prove some reserves. Then, if you’re able to prove some reserves, you turn that exploration license into a mining license and you mine the land.
So real estate ownership, as the country has been largely mining driven, looks like that. If you want a piece of property, you get a use permit for the piece of property, not necessarily ownership.
Now, if you put a slab on the piece of property, the government can’t give anybody else a use permit for the piece of property that’s underneath your concrete slab. Foreign businessmen took advantage of that rule in the past, but the situation didn’t end in their favor. Many went into the city and obtained a piece of property, poured a slab and put up some rebar or steel frame and that was the end of their investment.
Soon, the city was littered with these buildings that had some concrete and steel framing and nothing else. The owners had done just enough to hang on to the property and then left. Obviously, this didn’t do much to advance Mongolia’s development. When the government realized that the foreign businessmen were holding on to prime real estate in the downtown area of Ulaanbaatar with no intention of completing their construction, they decided to take action.
Mongolia’s process for obtaining land was not put in place so investors could hold real estate for speculation for some time in the future. They want development now from investors who are ready to help them build their country.
The weathered slabs and steel had to come down. It wasn’t possible to build on top of it, and it couldn’t stay the way it was. So the Mongolian government went through and contacted the foreign businessmen and alleged real estate developers and said, “Either do something productive with your land or we’re going to have to go there and tear that stuff down and take that piece of real estate back.”
Where to invest in Mongolian real estate
If truth be told, it’s still hard to know which piece of real estate is going to have high yields in Mongolia. Somebody is going to be right. Everybody is going to buy stuff everywhere and someone’s going to be right, but at the moment it’s hard to know how one piece of land will compare in value to another.
With all of the roads and power plants and water treatment plants that are going to built as part of the Mongolian government infrastructure development program, plus the One Belt One Road initiative, waiting to see where infrastructure is going to be built throughout the country is probably a better bet than going to Ulaanbaatar and trying to figure out if people are going to continue to work in offices there or if they’ll build a whole new office complex somewhere outside of town.
Because of the tremendous amount of space in Mongolia, there is a lot of talk about just building a whole new city with modern technology, modern buildings, and unlimited parking. There are even plans for a new capital with an all-natural city powered by alternative energy with all the latest sustainable technologies in the buildings.
Land is plentiful and it’s just too early in the game to know exactly where all the development and growth is going to happen. You don’t need to build on top of the old infrastructure and the old buildings, you don’t need to tear something down; there are lots of reasons why they can continue to sprawl outside. So your best move, for now, may be to wait when it comes to real estate.
If, however, you are itching to buy some type of property in Mongolia, you can buy from people who own it today. Americans like Harris Cooperman at Mongolia Growth Group or Lee Cashell with Asia Pacific Investment Partners have large real estate portfolios in Mongolia.
If you’re more interested in making your own investment, it’s likely that the city of Ulaanbaatar will continue to spread outward, especially now that they’re building a brand new international airport so far out.
Buying property or staking property out near the new airport or somewhere along the road between Ulaanbaatar and the new airport, could be the best place to be. You’d obviously be on a road that’s going to have a bunch of traffic and, if you’re smart and you pick the right space, you might have the perfect place for a diner or a storage facility or a logistics operation or anything else.
Mongolia’s banks and currency
Finally, let’s take a look at banking and currency in Mongolia. It’s been widely talked about that in Golomt Bank you can make incredibly high interest. But are such banks safe? According to one expert, considering the small size of the economy and the liquidity crisis, the banks are safe.
Now, the currency and the liquidity crisis obviously cause trouble for the financial industry across the board, but overall they have done very well maneuvering the situation since 2012-2013. They’ve done so well that one particular expert does business with almost all of Mongolia’s banks.
The banking industry is one of the three industries that is regulated in Mongolia and the government has intervened in the past. There was a bank a few years ago that had troubles and the government stepped in and took over the bank and guaranteed everybody’s deposits.
However, just in the past couple of weeks, Moody’s Investors Service downgraded Mongolia’s government issuer rating to B3 from B2. The country is also under review for further downgrade.
Furthermore, the foreign currency long-term deposit ratings of seven Mongolian banks were downgraded to Caa1 from B3 and the local currency deposit ratings of five banks have been downgraded from B2 to B3. You can read more about the downgrades here.
As far as the Mongolia Tughrik (MNT) is concerned, the currency’s exchange rate has been rising at a rapid pace the past few years and it hasn’t really recovered. What can we expect from the currency in the future?
One expert says that he keeps thinking back to 2010 and 2011 and everything that led up to Mongolia’s impressive development. In 2010, nobody was really interested in investing in Mongolia; but the economy seemed like it was moving and was ready for greater movement. Then, with a little bit of investment, Mongolia’s economy shot to 17.5% growth, the fastest growing economy in the world.
The same is possible today.
So, sure, Mongolia and its currency has some problems, but none of those problems are insurmountable if some money comes into the economy. And we know that money is coming into the economy. We know that Rio Tinto is on the verge of investing 5.3 billion dollars (among other investments) and that alone could be enough to drive the Mongolian economy to be the fastest-growing economy in the world once again.
And that means that everybody who’s never heard of Mongolia is going to try and get some money in the country. So don’t bet against their currency just yet. I’m not sure if I’m a huge buyer today, but I wouldn’t make a bet against it either.
The Mongolian economy has the ability to turn on a dime. Everybody’s got an opinion about it and everybody thinks they’re right, but it’s too new, too small and there’s not enough data to really know what will happen.
What we do know is that there is huge potential there. All the potential that anybody ever saw in Mongolia’s market is still there. The exact same reasons people were investing a few years ago are still true today, people are just getting a lot better prices now than they got in 2012.