Mongolia: A Case for Flexibility in U.S. Economic Engagement

The United States will be unable to fulfill its goals of engaging economically in strategically important countries, including implementing the G7-led Partnership for Global Infrastructure and Investment, elements of the Quad, and the Indo-Pacific Economic Framework, if it takes an inflexible and zero-sum approach toward deploying U.S. investment tools overseas. Though challenges vary from country to country, one illustrative case is Mongolia; its geography, wealth of critical natural resources, and efforts to diversify its foreign direct investment portfolio to “third countries” beyond Russia and China makes an appealing case for significant U.S. engagement. This should be a welcome opportunity for U.S. financing agencies such as the U.S. International Development Finance Corporation (DFC), the Export-Import Bank of the United States (EXIM Bank), and U.S. Trade Development Authority (USTDA). However, investment in countries like Mongolia is difficult because agencies are bound by mandates and statutes outlined by Congress, and their own executive authorities that dictate the conditions under which they can engage in markets and with the private sector.

Mongolia has extensive deposits of coal, copper (with two of the largest copper mines in the world), fluorite, gold, iron, molybdenum, tungsten, uranium, and zinc. Most of these minerals go to Russia and China. According to U.S. Geological Survey data, in 2019 Mongolia was the world’s third-ranked producer of fluorspar (excluding that of the United States), accounting for 10 percent of the world’s production. Fluorspar is mainly used in steel and iron making, refrigeration and air conditioning, aluminum making, solid fluoropolymers for cookware and cable insulation, fluorochemicals, nuclear uranium fuel, and in processes for oil refining and is listed by the U.S. Department of Energy as a critical mineral.

Several countries have made overtures to develop Mongolia’s mining of rare earths and critical minerals, including German chancellor Olaf Scholz in 2022 and French president Emmanuel Macron in 2023. In June 2023, the United States, Mongolia, and the Republic of Korea held a trilateral dialogue on supporting the development of Mongolia’s mining sector. Mongolia is also now up for candidacy in the Minerals Security Partnership, which promotes sustainable investment in critical mineral mining, processing, and recycling. The country has embraced this engagement, seeing it as a step to move beyond engaging just Russia and China.

U.S.-Mongolia relations have significantly strengthened on both the economic and diplomatic fronts since the two established bilateral ties in 1987 and Mongolia has expressed a willingness and desire to expand its roster of “third neighbor” countries and add non-border neighbors beyond Russia and China. In 2018 (and reintroduced in 2019 and 2021), the U.S. Congress proposed the Mongolia Third Neighbor Trade Act which would allow the import of Mongolia’s high-quality cashmere and textiles to the United States duty-free. In 2019, both countries established a strategic partnership during the administrations of former presidents Donald Trump and Battulga Khaltmaa. During Prime Minister Oyun-Erdene Luvsannamsrai’s visit to Washington in August 2023, the United States and Mongolia issued a joint statement outlining cooperation on a number of economic issues, but perhaps most importantly on critical minerals and mining and climate change, two areas of great importance to the United States.

These are all good steps toward making a solid foundation for economic engagement, eventually leading to greater investments both by government agencies and the private sector. However, Mongolia remains quite risky and U.S. taxpayer dollars typically are not funneled to projects that could lead to significant environmental damage, human rights abuses, or supporting state-owned businesses. Mongolia and the mining companies involved in the project would have to pony up serious environmental and social impact assessments. Additionally, conducting due diligence around ownership could prove problematic. Most natural resource-related projects have a large government stake. Agencies like the DFC have a policy to finance private sector-only projects, with very few exceptions. This policy is in place for good reason in most cases; government support distorts the value and long-term financial stability of the project and subjects projects to political interference through vague policy or regulations, making investments quite risky.

Some of the same issues extend to climate related projects as energy supplies are held by the state. Seventy percent of Mongolia’s energy mix comes from coal, with the rest supplied by oil, hydropower, and wind. The country is desirous of an energy transition, particularly as coal has rendered Ulaanbaatar one of the world’s most polluted capitals with devastating consequences on the health of its residents. Mongolia could benefit from not only financing from U.S. departments and agencies, but from legislation and initiatives that prioritize decarbonization and energy transitions, such as the Indo-Pacific Economic Framework, the Partnership for Global Infrastructure and Investment, and the Inflation Reduction Act.

Complicating climate investments and other engagement in Mongolia are Russian and Chinese business interests. With sanctions lists abound and flaming hot rhetoric coming from Washington, the tolerance for any investors or shareholders with Russia or China ties is near zero. That will be particularly difficult in a country with Russia and China as its only neighbors, particularly as they are deeply involved in the energy sector and for China, in solar and wind power manufacturing. For the energy transition, the solar supply chain has been plagued with credible accusations of forced labor in polysilicon production. Companies and investors working on the energy transition will have to be careful in tracking its supply chain to ensure it does not get caught up in something more sinister.

Countries like Mongolia should be welcomed as an opportunity, not an impossibility. The strategic importance of Mongolia—geography, natural resources, political development, and diplomatic opening—makes for a solid case in pursuing flexibility to provide financing and development assistance. The intention of these statutes and regulations come from a good place, but oftentimes undermines the ability for U.S. financing agencies to accomplish the mission of providing values-based and high standards of development finance and burnishing U.S. economic diplomacy overseas, especially in middle powers such as Mongolia.

Erin Murphy is a senior fellow with the Asia Program at the Center for Strategic and International Studies in Washington, D.C.