Penn State University professor Randall Newnham talked about how Russia turned its energy resources into a leverage used for its foreign policy in his paper published in 2011. He used specific examples to describe how Russia has utilized its energy resources in their carrot and stick policy to reward friends and punish enemies. Newnham used facts and evidence to show Russia supplied Armenia, Belarus, and Ukraine (during the time of President Kuchma, who was pro-Russia) with specifically low-priced energy resources, namely natural gas and fuel, but consistently punished the countries such as Georgia, Moldavia, President Yushchenko’s Ukraine, who opposed Russia’s policies by imposing higher energy prices and even disrupting its supply.
Since 2011, Russia increasingly used this energy leverage. A clear example would be Kyrgyzstan, whose first president Akayev and his family made tens of millions of dollars by allowing a U.S. military base inside the country and supplying the Manas airbase with Russian fuel. Their second president Bakiyev and his family replaced the U.S. military base with a Russian one and got wealthy by supplying Russian fuel as well.
When public governance is poor and corrupt and if your fuel supply is dependent on a single nation, it is inevitable for any country to experience political instability and existential challenges depending on actions of the fuel supplier.
Until 2010, Mongolia used to purchase fuel at the price set by Rosneft. There was no other choice. At the time, Rosneft was making a profit of 400 USD per tonne from the fuel they supply to Mongolia. Mongolian ministers kept visiting Rosneft, begging them to reduce its prices. But it didn’t take long for Mongolians to start buying fuel from China or from a third party via China. As a result, Russia started using Singapore’s Platts price as base, which relatively reduced Mongolia’s fuel dependency.
However, the situation is about to change starting from this year.
Vladivostok meeting between two presidents
In September 2018, Mongolian President Battulga met with his Russian counterpart Putin during the Eastern Economic Forum held in Vladivostok. They agreed to co-celebrate the 80th anniversary of the victory of the Battles of Khalkhin Gol, which will be marked this year, and work together to organize a joint exhibition and produce literary works as well as a movie and a documentary. President Battulga also used the time to share with President Putin his plans to reform Khalkh gol soum ahead of the anniversary celebrations.
A month later three executives of Russia’s largest oil company Rosneft visited Ulaanbaatar and held meetings with Z. Enkhbold, President’s Chief of Staff, on investing in Mongolia, doing oil explorations, and meeting Mongolia’s increasing demand for energy and fuel. They also donated 10 million USD to the project to celebrate the Khalkhin gol anniversary and reform the soum.
Two weeks later, a groundbreaking ceremony to redevelop the soum was held in Dornod aimag’s Khalkh gol soum. The ceremony was attended by B. Saruul, President’s Deputy Chief of Staff, M. Badamsuren, Governor of Dornod aimag, Ts. Nasankhuu, Head of Citizens’ Representatives’ Khural of Khalkh gol soum, and Kh. Khurel-Erdene, Governor of Khalkh gol soum. They intend to have the project completed by the time the two presidents visit them in August this year.
A country is not a company
President Battulga is a nimble businessman. Having entered small-time trading following the democratic revolution, he eventually went on to privatize some huge assets for himself, including the country’s biggest meat, bread, and sweets factories as well as Bayangol, the largest hotel at the time. He also was able to raise enough capital to erect the world’s largest equestrian statue. Since 2004, he had three tenures as an MP and a cabinet member. When he was the Minister of Industry and Agriculture in 2013, he initiated the New Soum project and reformed Bayankhongor aimag’s Bayanlig and Buutsagaan soums – his constituency and where he is originally from.
However, after assuming the office of presidency, President Battulga started proposing leaders of other countries to invest in or donate to his own private project Maidar to build a town. It makes sense to reform soums and develop a satellite town when the capital city cannot contain its people and cars and when the migration from the countryside to urban areas cannot seem to stop. However, it is more ethically appropriate for the government, not the president, to do this line of work.
A country is not a company (as said by Paul Krugman). You cannot run a country with the same principles you follow when running a company. When one president requests another president for investment or funds, it is a tricky situation to oblige or not oblige. If the funds go through business channels or it is in the form of donations to a state-owned company, it is often the case that the money comes with specific interests.
Rosneft’s chief executive Igor Sechin obliged President Battulga. Although Sechin might be earning a million dollars a month, it is clear that the 10 million dollars he donated did not come from his own pocket. It has come from Russian taxpayers’ money, given Rosneft is a state-owned company. Therefore, we should expect the President’s Office to report on how they used the 10 million dollars to reform one soum, at least to Mongolian citizens, and if not to Russian taxpayers. After all, Mongolia is a democracy.
Is an oil refinery plausible?
Rosneft’s 10 million dollars came with the interest to control Mongolia’s fuel market. Mongolian government representatives have been actively meeting with Rosneft in both Moscow and Ulaanbaatar, discussing about a potential investment in the oil refinery intended to be built with the one billion USD aid from India.
Russia has a track record of opposing many of Mongolia’s ideas, including building a narrow-gauge railway, building a hydroelectric power plant, and processing our own crude oil. It is probably why none of these initiatives amounted to anything concrete. However, this time Prime Minister Khurelsukh has already started implementing the project to build an oil refinery, having made a promise to do so and reduce Mongolia’s fuel dependency.
Ninety-five per cent of Mongolia’s energy and fuel supply comes from Russia. Ninety per cent of the trade turnover between our two countries account to crude oil imports. Mongolia is currently using 1.5 million tonnes of crude oil products. If we were to make these products domestically, we will need 1.5 billion USD.
It is reported that the Indian loan is just enough for building a refinery. If we were to build a 670-km-long pipeline from Dornod aimag’s Tamsag deposit where a Chinese company is mining oil to Dornogovi aimag’s Altanshiree soum, it would cost 350 million USD.
The Mongolian side proposed Rosneft to invest into the oil refinery to be built and supply crude oil that may be needed to meet its full processing capacity. Rosneft responded by saying that the capacity of the intended oil refinery is too small, Mongolia’s crude oil is too heavy, and building a pipeline is too costly. Then they suggested the Mongolian side to invest into their Angarsk Refinery and become a shareholder.
The Angarsk Refinery is the closest refinery to Mongolia and boasts high quality products. Rosneft accounts for one third of Russia’s market by processing 118 million tonnes of crude oil annually. The Angarsk Refinery is responsible for 8.4 per cent of this processing power, which translates to 10 million tonnes a year. It doesn’t hurt to assess what their market value is, what percentage, if Mongolia was to purchase, would be optimal, and how plausible it is.
Fuel supply for new airport
Rosneft put forward a proposal to urgently establish a concession agreement to supply the new airport at Khushigt Valley with avia kerosene, operate the fueling facilities at both the old and new airports, and build its own fuel station in Mongolia.
In 2008, Prime Minister S. Bayar supported the idea of Rosneft building its 100 fuel distribution stations in Mongolia. This proposal ended up getting stuck in the parliament. There is a specific regulation in the law in relation to supplying petroleum products to domestic market. Mongolia’s Law on Petroleum Products states in its Clause 7.2 that “Any foreign legal entity that supplies more than 30 per cent market share of petroleum products cannot sell its products in the domestic market through entities or units they own or control.”
In the recent years, Rosneft has been supplying kerosene to the Buyant-Ukhaa airport via Merge Van company, which was invested 50:50 by them and Sod Mongol Company. There is another company named A-Jet (Eznis co) in Mongolia that supplies kerosene, which means Mongolian aviation companies had a choice until recently.
It is expected that fuel supply will come with a choice when the new airport becomes operational. When it comes to aviation fuels, there are two standards: Russian TS-1 and International Jet A-1. Aviation companies usually use both of these fuels, but don’t normally mix them until they get to the wings of an aircraft. However, due to repeated requests from our government to the Japanese side, the new airport is going to be equip all four of its 2,000 tonnes fuel tanks with the TS-1 standard. If we were to have fuel with the other standard available for choosing, we would need to have additional two tanks at least.
Mongolian political and business groups are currently in a fierce struggle to take control of the right to supply fuel at the new airport. But, in the end, it looks like Rosneft will take full control of the entire fuel supply for aircrafts and vehicles.
Smallest channels in fuel supply
Allowing one foreign company to have full control over the fuel industry at national level would likely result in total economic dependency. Therefore, no matter how small it may be, Mongolians must retain all other channels for fuel supply other than Russia. It may be too small, but it is critical we have a choice when it comes to fuel.
2019.01.02
Trans. by B.Amar