OPEN ACCESS: Mongolia's new foreign investment law explained

Author: Ashley Lee | Published: 15 May 2012
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

Mongolia’s parliament is reviewing a new foreign investment law ahead of the country’s June 28 elections. But the complex raft of proposed changes has alarmed investors.

Mongolian parliament members, anxious to retain their seats ahead of the highly-anticipated 2013 opening of the Oyu Togloi mine, are introducing extensive legislative reforms, including the proposed foreign investment law.

The law was proposed in a bid to curb China’s increasing investment and influence in the country. It followed speculation that Chinese aluminum company Chinalco planned to acquire a majority stake in Canadian coal miner SouthGobi Resources, which runs the Ovoot Togloi coal mine in Mongolia.

Mongolia has long promised an open foreign investment regulatory scheme. Landlocked between Russia and China, it fears that the two may dominate its rapidly growing economy. To create a better balance, it has promoted a ‘ Third Neighbour Policy’ to encourage foreign investment from Western sources.

But Michael Aldrich, managing partner at Hogan Lovells’ Ulaanbaatar office, told IFLR the draft law was very complex. “It makes the foreign investment approval process in China and Russia appear relatively straightforward,” he said.

Early drafts included provisions that a foreign entity could not own more than 49 percent of any company worth MNT 100 billion ($ 76 million), as these would be classified as strategically important.

There has since been some relaxation of the most stringent proposals. The most recent draft focuses on the country’s mining and banking sectors. It stipulates that there will be a reporting requirement, if a foreign investment totals more than a 5 percent, but less than 33 percent interest, in a strategically important company. If a foreign entity owns more than a 33 percent stake, there will be a four-month review process.

The planned changes will leave broad and discretionary authority in government hands. Violation of the law may result in the rescinding of the business registration of the strategically important company.

Stephen Tricks, the head of Clyde & Co’s Mongolia practice, said investors were growing increasingly concerned about the wide range of industries potentially subject to the draft law and the level of state ownership of ventures operating under the law. “There is a danger that an over-zealous approach in the draft law could frighten foreign investors and choke off the rapid expansion in the economy,” he said.

There are also provisions within the law that indicate it can be retroactively applied. This would raise a number of constitutional questions.

Aldrich says that patience is critical. “The bedrock of Mongolia’s political system is a participatory democracy,” he said.” There is an element of popular sentiment in the political process: resource nationalism and populism can play a significant role. And there is a tendency for people to dwell on its faults, but Mongolia’s political system is very much to be admired.”