Driven by its vast abundance of coal, copper, iron ore, gold and uranium (to name a few), Mongolia is forecast to have the world’s fastest growth rate in 2013, at 12% of GDP—a figure Western economies can only dream of in the long shadow of the global and euro financial crises. Its proximity to China also affords Mongolia considerable cost advantages against other major commodities suppliers such as Australia and Brazil.

It is no wonder then that foreign investors have been flocking to Mongolia’s capital Ulan Bator, which now hosts some of the world’s largest and most important natural resources players.

Over the past twelve months, however, the Mongolian Government has proposed a number of changes to the legal framework affecting foreign investors that have caused some unease. These include the recent publication of a draft minerals law (“DML”) and the foreign investment law put in place in May 2012 (the Regulation of Foreign Investment in Business Entities Operating in Sectors of Strategic Importance (“SSI Regulation”). But in an effort to appease investors, the Mongolian Government has recently taken steps to address some of these concerns. On 15 April 2013, Mongolia’s Parliament amended the controversial SSI Regulation, in a move that commentators suggest may allow over 100 pending Mongolian investment deals to now progress.

In this OnPoint our Energy & Natural Resources and International Arbitration lawyers take a look at recent changes affecting foreign investors in Mongolia. We then provide some practical suggestions to aid foreign investors navigate the opportunities and challenges presented in rapidly developing markets such as Mongolia.

Recent Changes Affecting Foreign Investors in Mongolia

April 2013 Amendment to the SSI Regulation

In a move that will encourage foreign investors, in mid-April 2013, the Mongolian Parliament passed into law, amendments to the controversial SSI Regulation of May 2012.

The SSI Regulation

The SSI Regulation was a response to Chinese state-controlled Chalco’s US$1bn bid for a majority stake in Mongolian coal producer SouthGobi Resources, which was seen as a strategically important company. The Mongolian Government was concerned to control the transfer of such strategic assets (particularly in cases where the prospective acquirer was another state or a foreign state-owned entity).

The SSI Regulation required inter alia:

  • Parliamentary approval if a foreign investor was to acquire more than 49% of a Mongolian company operating in a sector of strategic importance if the stake to be acquired was valued greater than 100 billion Mongolian tughriks (around US$70 million).
  • Approval by the Cabinet, or the Ministry of Economic Development, would be required for stakes above 33% or where a foreign investor would control the business or the business affected the pricing of mining raw materials or exports.

Sectors of strategic importance identified by the SSI Regulation included the mining, banking and finance, telecommunications and media sectors. The SSI Regulation applied to all foreign investors, not just those controlled by foreign state interests.

Ever since its inception, however, the SSI Regulation has been widely criticized by the international business community as a barrier to foreign investment, and responsible for holding up significant foreign direct investment into Mongolia. Changes have been rumored over recent months.

April 2013 SSI Regulation

Reflecting these concerns, it is now reported that an amendment to the SSI Regulation was passed by the Mongolian Parliament on 15 April 2013. Most significantly:

  • Parliamentary approval is no longer required for the purchase of equity in a company operating in a sector of strategic importance, provided the acquirer is privately-owned (private foreign investors will still require approval from the Mongolian Cabinet or the Ministry of Economic Development for proposed acquisitions in sectors of strategic importance where the foreign investor would acquire more than 33% equity, or where the foreign investor would control the business or could affect the pricing of mining raw materials or exports).
  • The restrictions on foreign state-owned entities acquiring a 49% or greater interest in a company operating in a sector of strategic importance have been tightened. Parliamentary approval of all such proposed acquisitions is now required, regardless of the value of the proposed stake (the 100 billion Mongolian tughriks threshold has been removed).

While these changes will be welcomed by private foreign investors, some finer details and an understanding of how the SSI Regulation will be implemented in practice remain unclear. Implementing regulations are yet to be finalized and some uncertainty remains as to the scope and application of the SSI Regulations and the recent amendments. For example:

  • The exact scope of the definition of “strategically important sector", currently construed expansively by the Mongolian authorities, remains to be determined.
  • There is no definition of what constitutes a foreign state-owned enterprise.
  • Other important aspects of the SSI Regulations, such as the degree to which foreign management control may trigger the approval process and the extraterritorial application of the SSI Regulations on foreign transactions, remain uncertain.

Notwithstanding these uncertainties, the Government’s support for further investment in strategically important sectors is clear. Investors should also recall that Mongolia has some history of introducing legislation only to repeal or suspend its implementation when adverse affects on the Mongolian economy are identified (in one recent example, a windfall profits tax enacted in 2006, and which imposed a 68% tax on revenues derived from commodities, was effectively repealed on 1 January 2011).

With commentators suggesting the amendments to the SSI Regulation may allow over 100 pending Mongolian investment deals to now progress, we will be monitoring developments with interest and reporting on any further changes.

The Draft Minerals Law

While the SSI Regulation has caused concern and uncertainty, it is the DML which has drawn the strongest reactions from the international business community.

Broadly, it is reported that the proposed articles of the DML allow the Mongolian Government to compulsorily acquire mines and licenses from an investor with an obligation to compensate it only for actual expenditures incurred. International investors would not be entitled to exclusively own and operate mining projects and would have to partner with local actors. The key terms of the DML are:

  • Holders of prospecting, exploration and processing licenses relating to areas other than the special border zones must be Mongolian-incorporated entities (including foreign invested entities).
  • Not less than 34% of the equity in a foreign-invested mining license holder must be held by a Mongolian citizen.
  • The local equity participation requirement increases to a minimum of 51% where the mineral deposit was discovered by means of state-funded exploration.
  • As it is currently drafted, the DLM is retroactive. There are no grandfathering provisions or guidelines regarding any transition periods, and license holders are unsure whether they must re-register their licenses or resubmit plans and reports, whether the duration of their licenses will be modified, etc.

If passed into law in its current form, the DML is likely to trigger renegotiations of past investments and financing conditions, which would ultimately affect the entire Mongolian economy.

The status of the DML remains extremely uncertain, however. While some commentators suggest that the DML may be adopted before the forthcoming Presidential election in June 2013, there have been indictations that the adoption of the DML by the Mongolian Parliament could be delayed until after the Presidential election to enable further dialogue with the mining industry.

We will be monitoring the passage of the DML, and reporting on progress.

Navigating Uncertain Environments in Foreign Markets

So what can international investors do to protect their investments in the face of evolving economic and political policies, whether in Mongolia or elsewhere? We offer some practical suggestions.


Sufficient planning usually allows for appropriate and timely responses to difficulties:

  • Consider the nature of your local partner/target. Is your counterparty a private company or state-owned entity ("SOE")? How has your proposed partner treated its other business partners?
  • Identify potential regulatory risk areas. Is governmental approval required? Are there foreign ownership limits? How are domestic regulatory agencies interpreting and applying rules that may impact your business?
  • Understand the domestic interests in your industry. The more your business understands domestic political influences, the better placed you will be to identify future risks and plan for them.
  • Have you negotiated contractual mechanisms to respond to changes during the life of your investment? These might include: mechanisms to deal with changes in commodity prices and/or cost inputs; legal and/or economic stability provisions; put/call options and/or forced buy-out mechanisms with defined valuation methodologies.
  • Does your investment enjoy the benefits and protection of a bilateral investment treaty (BIT) between Mongolia and your home country? Have you structured your investment to ensure application of that BIT? Is your business maximizing enjoyment of the benefits the BIT provides?
  • Do you have an exit strategy? This may involve negotiating a contractual exit mechanism.

Stay Informed

Staying informed of developments within the government and industry will help your business anticipate potential changes that may impact its operations:

  • Have a local team of trusted advisors in place (local advisors, counsel, public relations, etc.).
  • Make regular visits on the ground to build relationships with local partners, and to become accustomed to local market conditions and specificities.
  • Follow closely local political and commercial developments having the potential to affect your business.
  • Always maintain a negotiating stance: negotiation does not stop when contract is signed.

Be Prepared to Adapt

Be prepared to adapt in the event of changes:

  • Does your contract include mechanisms to deal with change?
  • In the event of a dispute do you have the ability to turn to a neutral and independent dispute resolution mechanism such as international arbitration?
  • Does your business have a practical way to implement an exit strategy? (put and call option agreement, forced buy-out, contractual valuation mechanism, etc.).

As with any business strategy, planning for potential challenges and how you will adapt to them can assist in averting or minimizing the risks associated with a continually evolving global economic landscape.