Mongolia’s economic potential is significant, with vast deposits of copper and coking coal situated close to its main market in China: according to World Bank estimates, Mongolia's economy in the coming decade will grow on average at 15 per cent. However, this potential is vulnerable as the country is increasingly reliant on two main commodities being exported to one country, making Mongolia susceptible to external shocks such as changes in commodity prices and demand in China. According to 2015 data from Trading Economics, China accounts for 89 percent of Mongolia’s exports and 26 percent of its imports and so the slowdown of the Chinese economy is of critical significance to Mongolia. Charting a course for the country from mineral wealth to long- term sustainable and diversified growth is a key task facing Mongolia.
Despite 70 years of Soviet domination, the majority of Mongolians today consider China a greater threat than Russia to its national identity and sovereignty. Although China is by far the bigger trade partner, Russia remains the more popular of its neighbors, however this might be changing.
The “Third Neighbor Policy” of building economic, political, social and military relations with outside countries, the United States foremost among them, speaks directly to Mongolian concerns about the influence of its neighbors. In the past the government has tried quietly to maintain as pragmatic an approach toward China as possible (despite strong public opinion to keep its distance). On Xi Jing Ping`s last visit in 2014, bi-lateral relations were upgraded to a “comprehensive strategic partnership”, and this has seen a distinct ramp up in Governmental relations.
Speaking of Xi JingPing`s visit, President Ts.Elbegdorj confirmed his satisfaction with the steady development of relations regarding the economy, culture, education, and humanitarian work and expressed the hope that the visit would serve as a “push to deepen the full strategic partnership between Mongolia and China.” Communications between Mongolia and China immediately dramatically increased, not only between citizens of both countries in the context of cultural exchanges, but also at the highest levels: President Ts Elbegdorj was in contact with Xi Jinping 5 times in 2014, and 3 times in 2015.
Infrastructure development.
Mongolia is keen to use China's rail network to deliver coal and other minerals to other markets as well as turning Mongolia into a "transit corridor" linking the Chinese and Russian economies. Integration of the Mongolian Steppe Route infrastructure project into the Chinese One Belt, One Road project in order to enhance cooperation in the field of agriculture and the creation of conditions required for increasing the export of Mongolian meat and meat products to China are well under way.
2014 saw a MOU for a high speed rail line project linking Beijing and Moscow through Mongolia signed by Russia and China during a visit to Moscow by the Premier of the PRC State Council Li Keqiang. This new passenger train project would reduce the 7000 km journey from 6 days to 2.
Growing debt crisis.
When a new Mongolian coalition government took office in 2012 facing extremely favorable economic conditions, including high mineral prices and strong demand from China. Gross domestic product had grown by 17.3% in 2011 and by another 12.3% in 2012. The mineral-rich country’s prospects were bright, however due to irresponsible borrowing (rapidly expanded spending on housing, government salaries, social welfare and pensions) over the last four years Mongolia now faces a debt crisis.
Mongolia became a significant global issuer of commercial paper. Between 2012 and June 2016, the government raised $3.6 billion, roughly one-third of GDP, on global bond markets, paying high interest rates. Adding in the swap arrangements with the Chinese central bank and other loan guarantees, Mongolia’s external debt position by 2015 became highly precarious, with total debt of more than 70% of GDP.
Coinciding with a continued collapse in foreign investment and a steady decline in global mineral prices due to China’s slowdown Mongolia’s growth has slowed sharply to 2.3% in 2015 and is likely to be zero or negative in 2016.
Looking to the future, three distinct possibilities arise:
Regional Renaissance: North-East Asia becomes more politically integrated, with strong economic growth. This gives Mongolia the opportunity to sell its main minerals and achieve economic diversification, and the challenge of managing export revenues in a way that prevents economic overheating and social unrest. The sector already accounts for nearly 90% of the country’s exports and the foreign direct investment (FDI) it attracts amounted to nearly 50% of government revenues
China Greening: A revolution in environmental attitudes sees China lead the way in the “circular economy” and pioneering new products and services. This reduces demand for Mongolia’s main minerals, but opens up new opportunities to diversify into green products and services. Being next door to the world’s largest market presents a tactical advantage and tremendous opportunities, but also means the country’s economic performance is tightly coupled with that of China. This makes it important for Mongolia to understand emerging developments in China and what trade and investment opportunities they raise.
Resource Tensions: Geopolitical tensions ravage the region; natural resources are used for political leverage, making trade difficult. Mongolia struggles to access finance and markets for its minerals and to pursue diversification opportunities, but this scenario presents opportunities to carve out a role as a neutral and respected neighbour.
Mongolia’s newly implemented ‘third neighbor policy’ is one of the more innovative foreign affairs approaches in the country’s history. As the global political sphere changes rapidly, Mongolia’s political stability, economic developments, non-traditional national security environment, and far-sighted foreign policy strategies are crucial for continuing its democratic transition and keeping up with new developments in the Asia-Pacific