Mongolian Sandwich

Being a landlocked country between Russia and China is a huge disadvantage for Mongolia.  Chinese and Russian influences are growing, sparking concerns among investors and the Mongolian people.  The Chinese already dominate Mongolia's exports, having bought 90 percent of Mongolia's exports in the first half of 2012.  According to Mine Web, Mongolia needs to expand its trade with China in order to ease its long-term dependence.

Dependence on Russia and China also poses a risk to the mining sector.  Mongolian mines rely on Russian and Chinese fuel, power and transportation to operate.  If a major disruption occurs in Russia or China, then Mongolian mines could shut down.  Furthermore, if Mongolia wants to export to other countries like South Korea or Japan it must rely on Chinese and Russian transportation.  In theory, Russia and China could coordinate their policies by limiting Mongolia's access to their railway networks in order to keep the Mongolian extraction economy under Russian and Chinese control.

Corruption is also a major issue.  Chinese and Russian businesses are viewed as some of the most corrupt in the world.  With their increasingly overbearing influence in Mongolia, it is not unlikely that corruption could spill across the boarder and into the Mongolian economy.

For these reasons, the Mongolian government has pursued a third neighbor policy, trying to build strong relationships with Japan, South Korea and the US.  In July, the government rejected a proposal that gave the development rights of the Tavan Tolgoi coal project over to Shenhua of China, Peabody of the United States and a Russian-Mongolian consortium.  The government is now trying to devise new deal that would include Japanese and South Korean partners.  This move, though disruptive to the launch schedule of TT, will probably pay off in the long term by promoting economic relationships with fellow democratic market economies in the region.