Why you should think twice before taking that business trip to Mongolia

February 11, 2013
February 11, 2013

Justin Kapla, a US citizen and president of the coal mining division of Hong Kong-listed coal miner SouthGobi Resources, cannot get out of Mongolia.

Without having any criminal charges filed against him, Kapla has been detained inside the country for several months. The government has not stated reasons for his exit ban. A SouthGobi spokesman told Quartz that Kapla, who could not be reached, had been interviewed as part of a government corruption investigation against a recently imprisoned Mongolian mining official.

Meanwhile SouthGobi, which is majority owned by Anglo-Australian mining giant Rio Tinto, has stopped mining in Mongolia after having its licenses suspended. The company is also under investigation by Mongolia’s anti-corruption authority, and has also filed a legal complaint against the government.

That investigation could be credible. But Mongolia’s government is also clashing heavily with foreign investors. The country, which has a tiny economy but boasts vast untapped reserves of valuable minerals including copper, coal and gold, used to be viewed by overseas miners and financiers as the next El Dorado—or perhaps the next Saudi Arabia (pdf p.6). This changed when a bloc of resource nationalists emerged as the big winners in the country’s parliamentary elections last June. The US government has since raised concerns about overseas companies being harassed by Mongolian authorities and law enforcement agencies.

“I have always been very bullish about Mongolia’s cosmopolitanism, openness and commitment to international commerce and investment when compared to some other Asian countries,” says Michael Aldrich, an Ulan Bator-based partner of transatlantic law firm Hogan Lovells. “However, the country has undergone an extraordinary sea-change in the past year. “

For the past few years, miners and financiers have regularly crammed into upmarket Hong Kong hotels to attend Mongolian investment summits. The country’s economy grew by 12.3% last year.  And the nation’s government pulled off its first international bond issue last November, raising $1.5 billion.

As foreigners became more excited about extracting money from Mongolia, however, the nation’s impoverished people (many of whom are nomadic) became increasingly unhappy about outsiders getting rich off of their land. Some foreign financiers have been attacked. The country also has a small anti-Chinese neo-Nazi movement.

SouthGob may have been an early victim of resource nationalism.

Its problems started last April. Its parent Ivanhoe Mines, a Canadian company founded by billionaire Bob Friedland—and now majority owned by Rio Tinto—decided to sell its majority share in South Gobi to Beijing government-backed Aluminim Corporation of China (Chalco). The deal sparked public outcry, and led the Mongolian parliament to accelerate passing a law that bans foreign government-owned companies from controlling key resources assets.

Last May, SouthGobi said it had received a request (pdf) for information from Mongolia’s Independent Authority Against Corruption (IAAC), adding it did not believe it was under investigation itself.

Then in late June, the coal miner said it would stop work at its flagship Mongolian mine indefinitely because the government had suspended some of its mining licenses. The following month, it filed a legal complaint  against the Mongolian government as part of a dispute over license agreements.

SouthGobi last week said the IAAC has now frozen its Mongolian bank accounts. The Hong Kong-listed company suggested it was possibly being targeted (pdf) in connection with a recent conviction of a former senior mining official.

The company did not name the official directly. But in emailed comments to Quartz, the SouthGobi spokesman said that Kapla himself “has been interviewed as part of the investigation by Mongolia’s Independent Authority Against Corruption (IAAC) into the criminal case against, D. Batkhuyag, the former Chairman of the Mineral Resources Authority of Mongolia.”

Batkhuyag was convicted by a Mongolian court on charges of bribery and corruption last month for illegally issuing mining licenses.  He was sentenced to six-and-a-half years in prison.

Meanwhile, the US State Department has raised concerns about Mongolia’s treatment of foreign companies. In this report (pdf p.14), it said:

“Many investors have reported increasingly abusive enforcement by elements of the Tax Authority, the Anticorruption Agency, and the National Police in 2012. Officials show up unannounced, and without formal writs authorizing their activities, accuse the business of committing some sort of tax fraud or other abuse, and order immediate payment or compliance with demands. If the business refuses to comply, insisting on its rights under law and regulation, the officials immediately threaten to turn the case over to the Anticorruption Agency or the  National Police—an act which can lead to seizure of assets, closure of the business,and detention or arrest of personnel.”

SouthGobi’s parent Rio Tinto is also in conflict with the Mongolian government.  Rio is developing Oyu Tolgoi, a massive gold and copper deposit in the Gobi desert that the World Bank has said could contribute a third of Mongolia’s GDP by 2020. The government, which is under pressure to plug a growing budget deficit, wants to levy a new tax on Oyu Tolgoi’s proceeds. It has also claimed Rio’s costs are running over and that it should have more control of the project.

The Wall Street Journal reported last week that the Mongolian government was against Rio’s efforts to raise up to $6 billion of new loans to finance Oyu Tolgoi. And while the state has no direct control over Rio’s international lenders, its statement certainly flagged that Rio’s project now comes with unwelcome political risks.

A Rio Tinto spokesman responded to Quartz’s request for comment by pointing to this somewhat vague statement on its website that it is “committed to being transparent and open” with the Mongolian government.

Kapla is the second SouthGobi executive to be detained in Mongolia. Last year Sarah Armstrong, an Australian lawyer who worked for the company, was also banned from leaving the country. She was eventually allowed home last December.

Kapla is also a high profile businessman in the Mongolian capital, having worked in the country since 2003. A well-known member of the country’s small expatriate community, he is also a director of the local business council.

A spokesman at the US Embassy in Ulan Bator confirmed the embassy was involved in Kapla’s case.

“We are following the case and working closely with Mr Kapla, but because of privacy concerns we are unable to give further details,” the spokesman said.”

Mongolia’s detention policies are opaque. According to the US State Department’s report (p.17), Mongolian law says: “there need be no actual arrest warrant or any  sort of official determination that charges are warranted: mere complaint by an aggrieved party is sufficient to deny exit.”

In holding Kapla without publicly stating why, Mongolia is raising suspicions that its attack on his employer is politically motivated. And while the Asian nation prides itself on its democracy, detaining people long-term for no given reason feels like a relic of its Soviet past.

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