Visiting Canadian Trade Minister Advises Against State Ownership of Natural Resources

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SUBJECT: Visiting Canadian Trade Minister Advises Against State

Ownership of Natural Resources

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION

¶1. (SBU) SUMMARY: Canadian International Trade Minister David

Emerson's 24 hour visit to Mongolia, the first by a Canadian

Minister in over 10 years, included meetings with President N.

Enkhbayar, Prime Minister S. Bayar, Foreign Minister Oyun, and his

counterpart at the Ministry of Industry and Trade Kh. Narankhuu.

Minister Emerson also spoke at a business breakfast largely attended

by Canadian mining firms active in Mongolia. At meetings with the

GOM and business representatives, Emerson made clear that the

Government of Canada (GOC) sought to discourage the Government of

Mongolia's (GOM) apparent insistence on owning and perhaps even

operating mines. However, he also signaled that Canada would engage

with Mongolia in the important mining sector, would support several

initiatives to improve mining administration and would begin

negotiations on a bilateral investment agreement with the GOM in

March. Emerson assured the business community that Canada intended

to support their positions before the GOM and that the GOC would

raise its profile in Mongolia. A local Canadian businessman was

made Canada's Honorary Consul, filling a position vacant these past

18 months. The Charge'and the British Ambassador respectively

explained U.S. and British approaches to moving investment forward.

END SUMMARY.

President Enkhbayar Bangs The Old Time Socialist Drum

--------------------------------------------- --------

¶2. (SBU) At the North American Mongolian Business Council's January

10 breakfast with business and diplomatic representatives, Minister

Emerson described the results of his meetings the previous day with

GOM senior officials. Emerson said he met with President Enkhbayar,

whom he characterized as extremely well informed, articulate, and

visionary. After this brief encomium, Emerson expressed concern

that Enkhbayar's approach to mining was too statist for Canadian

tastes, saying that Enkhbayar was behind many of the efforts to

re-nationalize Mongolia's natural resources, in spite of clear

evidence that this was not the best development path. Emerson

recounted for Enkhbayar that Canada, much to its regret, had already

tried nationalized resource businesses in mining and lumber, and

that those efforts had largely failed to produce sustainable,

efficient industries, forcing Canada to eventually privatize those

industries in the end. Canada's experience, and that of other

nations, demonstrated that a sound legal and administrative

framework could achieve the state's financial and social goals for

its environment and people more effectively than outright government

ownership and operation of assets.

PM Bayar's Pragmatic Government More

Encouraging Than Presidential Visions

--------------------------------------

¶3. (SBU) Emerson collectively praised PM Bayar, Foreign Minister S.

Oyun, and MIT Minister Narankhuu for their pragmatic approach to

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developing Mongolia's resources. While the three senior GOM

officials acknowledged the severe political pressures for

nationalization impinging on Mongolia's development process, each of

them also recognized and agreed with the GOC's view that the GOM

needed foreign investment to bring its mines on line, and they

agreed with GOC views that government ownership of assets was not

the best way to develop them. However, ministerial discussions

revealed that the GOM simply lacked the statutory and regulatory

apparatus needed to manage its resources effectively even as just a

regulator, much less than as an owner. In response, Emerson stated

that the GOC intended to provide technical assistance to help the

GOM improve its regulatory framework. (Comment: Local analysts say

it is this gulf between the GOM's fear that it won't get its fair

share of Mongolia's mineral wealth and its inability to regulate the

sector to that end that is, as much as anything, driving GOM

attempts to nationalize assets, based on a belief that if the GOM

owns a piece of the pie outright, then it will at least get

something from natural resource extraction. Given that at least 30%

of the GOM's budget is underwritten by the state-owned Erdenet

copper mine, Mongolia's insistence on state participation is

explainable. End Comment.)

¶4. (SBU) Emerson also formally announced that the GOC would enter

into negotiations with the GOM on an investment agreement, the

"Foreign Investment Promotion and Protection Agreement," the aim of

which is to boost Canada's trade ties with Mongolia. Canada is

Mongolia's second-largest investor, with about US$397 million worth

of assets in the country, and the prospective agreement would give

investors from either country legally binding rights in the other.

Emerson stated that "our desire to put in place an investment

agreement with Mongolia is a clear expression of Canada's commitment

to building a strong long-term partnership."

Interaction with Canadian Mining Business,

Diplomats, and NGO Representatives

-----------------------------------------

¶5. (SBU) During the January 10 breakfast, Minister Emerson and his

delegation also heard a range of viewpoints regarding the GOM's

approach to mining. Mining representatives delivered consistent

points to the Minister. Firms stated they are able and willing to

handle the commercial aspects of their respective businesses, but

they want and need foreign governments to project a united front to

the GOM to cover their political flank. In short, the mining

companies told Canada to join U.S., British, Japanese, Australian

and German efforts to encourage (cajole, harangue, etc.) the GOM

into staying out of the mining business while creating a

transparent, predictable, best practice-based, rule of law approach

to regulating and profiting from its resource base.

¶6. (SBU) The British Ambassador echoed these sentiments. He noted

that Mongolia had not really grasped the implications of its

"Third-Neighbor" policy. Her Majesty's government was reconsidering

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its level of engagement with Mongolia because Britain had little of

substance on the ground. If Mongolia wanted the British relationship

to continue or increase, it had to do what was necessary to get

British investment. If Mongolia really wants to balance China and

Russia with investment and political support from Britain, the U.S.,

Canada, Japan, etc., then it must create and sustain an environment

conducive to investment.

¶7. (SBU) The Charge' agreed with the British position, noting the

USG had consistently and constantly encouraged the GOM to create and

sustain a solid market environment for all investors. He added that

attracting investment also depended on Mongolia giving full and

careful consideration as well as a timely decision to major

development project proposals such as the copper-gold mine at Oyu

Tolgoi.

Chances For A Canadian Embassy In Mongolia Seem Slim

--------------------------------------------- -------

¶8. (SBU) Minister Emerson went out of his way to assure his fellow

Canadians that Canada intended to represent their interests more

assiduously. He noted that this first ministerial visit in 10 years

clearly indicated Canada's growing interest in Mongolia. (Note:

Minister Emerson's Policy Advisor told Commoff that he had to "beg"

Minister Emerson to take a day in Mongolia. Apparently, the

Minister was concerned about the distance between Beijing and

Ulaanbaatar (two hours flight time). The Advisor also pointed out

that Canada had at least US$400 million invested in Mongolia with

the prospect of more in coal, uranium, services, etc., and that the

Minister should give some push to an emerging portfolio.) He pointed

out that Canada had just the previous day formally installed a new

Honorary Canadian Consul, Mr. Alain Fontaine, a very accomplished

French Canadian who serves as the CEO of one of Mongolia's largest

technology and infrastructure firms.

Comment

-------

¶9. (SBU) The visit by Canadian Trade Minister Emerson has provided a

temporary boost in attention here and perhaps in Canada, but it is

important to note that neither the Mongolians nor the Canadians

present seemed to be much moved by Canadian protestations of

interest. One prominent local businessman was extremely indifferent,

saying he used to get excited about Canadian promises to set up shop

in Mongolia, but he has been disappointed so many times that he no

longer believes GOC promises. After all, the Minister provided no

time tables for raising the profile on the ground. And it was only

after Canadian firms protested loudly to Ottawa in recent years that

their Beijing Embassy increased the frequency of its brief TDY

visits to UB from annual to quarterly to monthly levels, albeit not

always consistently nor with the right officer at the right level.

And even the Honorary Consul post was left vacant for 18 months.

Nonetheless, from post's perspective, it was useful for senior

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Mongolian officials to hear messages similar to our own from a

senior Canadian minister representing their second largest investor,

and one which can speak from experience of the faults of state

ownership and participation in the mining sector. END COMMENT.

Goldbeck

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