Back in the saddle

Mongolia gives a little in investment tug-of-war

Resource-rich countries can get away with bad behaviour, but only in small doses. Mongolia is finding the balance. The nomad state came close to tarnishing its reputation with its choppy treatment of miner Rio Tinto. A new law that offers equal treatment for foreign and local companies is a shift back in the right direction.

Rio cried foul after its 2009 agreement to develop Oyu Tolgoi, Mongolia's prize copper mine, became a political plaything. Newly elected officials criticised the project's fees and cost overruns, and have tried to hold up a $4 billion financing package. The resulting stalemate has been an economic drag.

Foreign investment in Mongolia, to which Rio is a major contributor, fell to $1.8 billion from January to August, half the amount in the same period a year earlier, according to Moody's. The new law suggests Mongolia's nationalist tendencies are easing. Foreign companies will be able to invest in formerly protected sectors without government approval. Most importantly, investors can seek "stabilisation" certificates that lock in their tax rates for a number of years. Though state-owned companies will still need approval to invest, Mongolia comes out looking more open than its neighbour China.

That doesn't benefit Rio directly, but may pave the way for a graceful compromise. One sticking point has been that Rio's fee, struck with the old government, is calculated as a percentage of investment, which hurts Mongolia when project costs go up. Switching to a share of revenues in return for steady future taxes and a promise by politicians to stop meddling could appeal to both sides. Mongolia would avoid looking too generous, while Rio would get access to high-quality copper without seeming a pushover.

Most importantly, Mongolia has probably not done any lasting damage. Yields on its US dollar bonds have increased by over two percentage points since they were issued last November, but have kept pace with comparable issuers like Slovenia, Zambia and Rwanda. When countries offer growth and scarce assets, and investors crave super-normal returns, it takes a lot to ruin a reputation.