How Mongolia is Transforming into a Beacon for Foreign Direct Investment in East Asia

Darren G. Spinck

Lord Cameron’s April 2024 visit to Mongolia and Central Asia demonstrates the growing importance that London places on protecting and promoting British interests in the Indo-Pacific. Mongolia’s strategic location and Ulaanbaatar’s significant democratisation and anti-corruption efforts make the country an ideal partner for collaboration with the United Kingdom as London builds upon its strategy to shape economic and cooperative ties in the region.

UK policymakers seeking to promote more transparent business and to strengthen governance and rule of law throughout the region can highlight the Mongolian Government’s determined anti-corruption reforms aimed at whistle-blower protection, asset recovery and prosecuting corrupt officials. With its vast territory and resources, Mongolia also holds immense potential for helping lead broader regional efforts toward democratisation, as illustrated by The Economist Intelligence Unit’s 2023 Democracy Index, which ranks Mongolia in the top 35% of all countries for its global efforts, including electoral process and pluralism, functioning of government, political participation, political culture and civil liberties. According to Freedom House, Mongolia ranks alongside the world’s top democracies for its electoral process, political pluralism and participation, freedom of expression and belief, and associational and organisational rights, while in its most recent annual Index of Economic Freedom, the Heritage Foundation praised Ulaanbaatar for its regulatory efficiency and efforts to attract foreign direct investment (FDI) through market liberalisation.

Landlocked between Russia to its north and China to its south, Mongolia has long demonstrated its commitment to deepening economic and strategic ties beyond its borders. Despite Ulaanbaatar’s commendable reform efforts, however, Mongolia, and other countries most in need of FDI, have seen falls in foreign investment since the Covid-19 pandemic, according to the United Nations Conference on Trade and Development (UNCTAD), due in large part to rising public debt and economic uncertainty from the world’s most industrialised democracies. Mongolia did successfully enter the international debt market in 2023, following the Covid-19 pandemic, with the successful issuance of two $650 million and $350 million five-year bonds, an indication that Mongolia’s economic recovery from the pandemic was not slowed, as many other Indo-Pacific regional economies were, due to policies outlined in the Government’s “New Recovery Policy”. Post-pandemic, Mongolia’s long-term development will be guided by “Vision 2050”, a strategy focused on social development and economic growth.

If London intends to solidify its role as a long-term partner with Ulaanbaatar, the UK and its partners must better compete with investment into Mongolia from the People’s Republic of China, which has led to the creation of over 100,000 jobs and $2 billion in tax revenue, including past development finance for planned road, rail and energy infrastructure links between the two countries and their neighbour Russia. The UK should incentivise the private sector to invest in Mongolia and, through British International Investment (BII), its development finance institution, bridge the regional infrastructure investment gap.

The UK and Mongolia can best begin to strengthen their trade and investment ties through a Partnership and Cooperation Agreement which would allow both parties to seek greater market access for goods and services; better provide UK goods with intellectual property rights protections; encourage the flow of investments through the easing of administrative hurdles which slow investment flows; and provide transparent, non-discriminatory rules for investors and cooperation on sub-regional and regional cooperation agreements.

As Mongolia strives to diversify its investment and trade partners, it offers unique opportunities for the UK to deepen its engagement in the region. With its abundance of rare earth elements and other valuable minerals, Mongolia presents avenues for cooperation in resource development and securing critical supply chains. UK policymakers should prioritise determining which infrastructure is needed to further UK economic security objectives vis-à-vis Mongolia, as Mongolia is currently overly dependent upon China’s Port of Tianjin for the export of its goods. This will require building new roads and railways to potential mining sites to handle heavy machinery and to export the rare earths and minerals. While Mongolia’s strategic positioning between China and Russia will necessitate a nuanced approach to the UK’s regional partnerships, it also offers opportunities for the UK and US to help Mongolia better mitigate its strategic risks associated with overdependence on non-democratic governments for its commercial ties.

In addition to investment opportunities in Mongolia’s rare earth elements and mineral sectors and infrastructure development finance, other industries which should attract foreign direct investment interest from the West include renewable energy, agriculture, digitisation and the expansion of American and British fast food/convenience store franchises.

It is crucial for UK policymakers to recognise Mongolia’s role as a vibrant democracy in a largely non-democratic region and to seize the opportunities presented by its democratic and economic reforms. By strengthening relations with Ulaanbaatar and supporting its efforts toward democratisation, anti-corruption and economic diversification, the UK can contribute to fostering stability, prosperity and good governance in Mongolia and the broader region.

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