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Mongolia reels from impact of Russian sanctions

Russia’s full-scale invasion of Ukraine has hurt the Mongolian economy, its prime minister said, citing financial damage including loss of airline revenue and difficulty importing essential goods from Russia.

Nearly a year after the full-scale invasion of Ukraine and the subsequent imposition of wide-ranging sanctions by the US and its allies on Moscow, a landlocked democracy of just 3.3 million people sandwiched between Russia and China is still reeling from the blow.

“Even though Mongolia is a democratic country, it is also under pressure because of the sanctions imposed on Russia,” Prime Minister Luvsannamsrai Oyun-Erdene, 42, told the Financial Times. He added that the punitive measures constitute “a double sanction against Mongolia, although it is not our fault.”

The collateral damage ranges from difficulty paying Russian companies, on which Mongolia is “totally dependent” for fuel, Oyun-Erdene said, to loss of revenue for airlines that once flew over the country.

“The situation in Ukraine is not just a conflict between two countries,” the prime minister said. “This has a negative and huge impact on the global economy and especially on small and landlocked countries, including Mongolia. . . Economic sanctions should be introduced on the basis of extensive research because they have wide-ranging implications and negative impacts on other countries.”

Airlines that once operated Europe-Asia routes through Russian airspace also flew over Mongolian territory, for which they paid Ulaanbaatar valuable “navigation fees.” They have dissipated as Russian airspace bans imposed by Moscow in response to EU measures against Russian jets have forced many European airlines to either fly over the North Pole or take a more southerly route through Central Asia and Turkey.

Prime Minister of Mongolia Luvsannamsrai Oyun-Erdene
Mongolian Prime Minister Luvsannamsrai Oyun-Erdene: “The situation in Ukraine is not just a conflict between two countries” © Lisi Niesner/Reuters

“Because planes cannot fly over Russia, we lack income from navigation,” Oyun-Erdene said. “Secondly, we import fuel from Russia. [Russian energy] companies and banks are under sanctions, we have problems with payments.” He added that Russia’s war-induced shortages of commodities such as diesel fuel, sunflower oil and mining equipment had led to “the cessation of production of some products that we use on a daily basis.”

Oyun-Erdene has highlighted these issues during diplomatic talks in recent months, including a trip to Germany in October and an August visit to Ulaanbaatar by UN Secretary-General António Guterres.

Wang Yi, then China’s foreign minister, also traveled to Mongolia late last year shortly after he was promoted to a member of the Chinese Communist Party’s politburo.

“We believe that China, the EU and Germany have a great influence on [the Ukraine] situation,” Oyun-Erdene said. “In this context, I made an official visit to Germany, and we also had discussions with our Chinese colleagues, in particular, during Wang Yi’s visit to Mongolia.”

Reflecting its dependence on Russia for critical supplies, Mongolia is equally dependent on Chinese demand for coal, copper and other export commodities. Coal and copper account for about 60 percent of the country’s total exports, followed by gold and iron ore with 20 percent.

In late November, Oyun-Erdene oversaw the opening of a new cross-border rail link with China, which his government hopes will increase pre-pandemic coal exports from about 30 million tons a year to 80 million tons a year.

“Ninety percent of Mongolia’s exports go to China, and Mongolia is completely dependent on Russia for fuel. We are also dependent on our two neighbors for food and other products,” the prime minister said. “But Mongolia is a parliamentary democracy and [our] the mentality of the people and society are very different from those countries. . . Mongolia is landlocked, but we are not limited by reason.”

Such democratic thinking can fuel public pressure on Mongolian leaders that their counterparts in China and Russia rarely have to contend with. In early December, large crowds, outraged by the alleged theft of state-owned coal assets, threatened to storm government buildings in Ulaanbaatar.

“The disillusionment and mass protests were the result of the uneven distribution of wealth that has taken place over the past 32 years,” Justice and Interior Minister Nyambaatar Khishigi told the FT in a separate interview, referring to the period after Mongolia’s transition to democracy in 1990.

Since then, the Oyun-Erdene administration has launched wide-ranging investigations against government officials and executives of state-owned mining and transport companies.

Authorities have arrested dozens of people on suspicion of bribery, abuse of power and “unjust enrichment,” including a police seizure of 7.3 billion tugriks ($2.1 million) at the home of a state railroad executive.

But the government disputes protesters’ claims that MNT 40 trillion has been stolen from government coal stocks since 1995, compared to official MNT 45.2 trillion in coal export revenue during that period.

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