Chingis Gombosuren in Ulaanbaatar reports on Russian oligarchs’ sudden appetite for Mongolian banks.

Mongolia used to be considered one of the most remote places on earth. So far from western Europe and the US that is was hardly considered, except for the occasional documentary here and there. After 300 years of Chinese rule and 70 years as a Soviet protectorate, Mongolia is enjoying its first true economic boom of sorts.

It is enjoying its proximity to the large neighbouring markets of China and Russia thanks to the rise in their economies over the past decade. The power of these two giants does not merely stop here. China is seeking natural resources as far away as Africa and Latin America. Russian oligarchs are firmly established in Europe and the migration continues today. Once ignoring their largely desolate neighbour, it seems that many are now keen to set up shop in any way possible in Mongolia.

Thanks to the recent growth in mining, Mongolian banking is enjoying a very favourable period of growth. The rich mineral resources first attracted Canadians, Australians, then the Chinese and the Russians. There are currently 17 commercial banks operating in Mongolia, a very high banking density considering the country’s population is only 2.56 million. In 2006, the country’s economic growth rate was 8.4%, compared with 7.1% in 2005. Gross domestic product (GDP) increased to $2.7bn, and inflation in terms of the consumer price index increased by 5.1% in 2006 (12.7% in 2005).

According to the first deputy to the governor of the Central Bank of Mongolia (Mongolbank) B Enkhhuyag, there are only three banks in Mongolia that make reasonable profits. One of them is Trade and Development Bank, which was privatised in 2001. The US-based non-ferrous metals brokerage company Gerald Metals bought 70% of the Mongolian government’s stake for $12m, and it managed to sell it for $70m this year to a group of Mongolian private investors. Second, Golomt Bank is the banking arm of the Bodi Group, which has been making sustainable profits over the past few years.

Third, Khan Bank (previously Agricultural Bank of Mongolia) is probably the largest success story for Mongolian privatisation overall. The United States Agency for International Development (USAID)-funded Development Alternative Inc (DAI) provided management to the bank and improved the weak state-owned bank’s financial position, and then the Mongolian government sold it to a group of Japanese investors through an international tender.

Local minnows

Nevertheless, these numerous banks cannot cover the entire retail and corporate markets needs in Mongolia. Mongolian banks are unable to satisfy big corporate players with long-term loans greater than $10m; they are reluctant to grant loans to private consumers, which caused the creation of many non-banking institutions, such as credit-savings co-operatives, which collapsed recently.

Individuals who lost their savings have been trying for some time to force the government to pay them back what they lost and have even resorted to hunger strikes and demonstrations. Some political parties and movements are endeavouring to use them for their own aims in next year’s elections.

Last year, Mongolians celebrated the 800th anniversary of the establishment of the Mongolian state. Virtually every aspect of Mongolian history has always been accompanied by something to do with its two neighbours: Russia and China. In the 21st century, the Russians realised that they should come back to Mongolia, which started with the state visit of Russian president Vladimir Putin in 2000. This was the first visit by a high-ranking official since Leonid Brezhnev, general secretary of the Communist Party of the Soviet Union, in 1974.

The recent demand for larger sources of money lured foreign-owned banks to set up shop in Mongolia. The first Russian to come to town was Sergei Gromov from the Siberian city of Bratsk. He opened his Chinggis Khaan Bank in Ulaanbaatar in 2001, which officially belongs to two shareholders from the British Virgin Islands. Russians quite often prefer to use offshore registration to avoid complicated taxation in their own country. Mr Gromov also later managed to purchase the largest Mongolian insurance company, Mongol Daatgal, for $5.8m.

Russian bank Menatep, part of the Yukos group, also opened a subsidiary in Mongolia in 2002. Unfortunately, the collapse of Yukos shut down this bank and the Russians sold it to an international group of investors. Interestingly, this group was lead by the first Mongolian born champion of sumo wrestling in Japan, D Dagvadorj.

Nevertheless, it took another five years for the true Russian oligarchs to land in Mongolia. The visit of the Russian prime minister Mikhail Fradkov last summer confirmed the importance of Mongolia to the Russian economy as he was accompanied by several Russian oligarchs and their representatives, such as Alexei Mordashov, chairman of Severstal, Russia’s second largest steel company which lost Arcelor’s bid to Lakshmi Mittal, and Oleg Deripaska, chairman of Basic Element, which holds key global interests in aluminum.

Russian interests

There appears little doubt that Russian big business has turned its attention to the rich mineral resources of Mongolia. Currently, it looks as though the huge reserves of coal at Taivan Tolgoi in Mongolia is their main goal. Mssrs Mordashov and Deripaska, along with Viktor Vekselberg, president of conglomorate Renova, have created a consortium and all want to participate in this coal project. It has been estimated that Mongolia has a potential reserves of 100 billion metric tonnes of coal.

During the auction to privatise the state-owned Savings Bank of Mongolia, Mr Deripaska attempted to make his mark in Mongolia, with his bank Soyuz unsuccessfully bidding and losing to his countryman Mr Gromov’s consortium of two banks, including his Chinggis Khaan Bank of Mongolia and his insurance company Mongol Daatgal.

The opening bid for this bank was $12m and Mr Gromov succeeded in winning the tender for nearly $20m. Mr Deripaska’s company, Rusal, merged recently with Sual and the Swiss commodities group Glencore. Sual belongs to Mr Vekselberg, who has shown interest in a special former Soviet-Mongolian uranium mine. This mine is now a three-way joint venture between Canada, Russia and Mongolia. Except for the Canadian stake, all other stakes belong to the Russian and Mongolian governments.

Mr Vekselberg recently visited Mongolia again with former Russian prime minister Sergei Kirienko, who is in charge of the Russian Atomic Energy Agency. The mine, located near the Mongolian-Russian border, was abandoned by the Russians and vandalised by local Mongolians. A Russian uranium processing plant is located just across the border near the Russian city of Chita, where one-time Russian billionaire and oligarch Mikhail Khodorkovsky of Yukos Oil is currently serving a nine-year tax evasion sentence in a local jail. Mr Vekselberg is more than likely concerned since some Canadian firms are quite active in areas near this mine.

After his unsuccessful bid for Savings Bank, Mr Deripaska took his revenge by purchasing the small Credit Bank for $9.8m through his offshore arm. It might have actually been fortunate that his bid failed because Mr Gromov revealed shortly after he had purchased Savings Bank that there was a shortfall of $13m. Mr Gromov is currently hoping that the State Property Committee of Mongolia will reimburse this amount to him. In further banking developments, another Russian-Swiss consortium bought another Mongolian bank, Bank of Transport Development, soon after.

Chinese interests

Mongolia’s other key neighbour, China, seems to be deliberately ignoring the banking sector, busy with its own domestic banking issues. China is mainly represented in the construction and mining industries. During socialist times, Ulaanbaatar, the capital city of Mongolia, was built mostly by Soviet Union constructors, and now they have been replaced by Chinese construction workers, who live on building sites and come for the summer only. It is cheaper for newly rich Mongolians to build new houses and hotels, such as the Hilton and the Shangri-La, to name two, with Chinese rather than Mongolian workers.

But there are concerns for the health of the economy. Mongolian mining is seen to be in a fragile state and is highly susceptible to world commodity prices, while Mongolian banking is equally perilous due to poor management and the rapid overheating of the Mongolian economy.TABLE: TOP 10 MONGOLIAN BANKS: PROFITABILITY DEC 31, 2006 (TÖGRÖG)


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