September 1, 2005｜Russia & Mongolia
Director General, Trade and Economic Cooperation Policy and Coordination Department, Ministry of Industry and Trade of Mongolia
Mongolia is over a decade-long democracy in the heart of Central Asia, surrounded by Russia and China and in proximity to North Korea. The results of the Mongolian parliamentary election in held June 2004 and the formation of a Coalition Government testify that the country is deeply committed to consolidating its democratic achievements.
Since its transition to democracy and market economy in 1990, Mongolia has been striving to strengthen the progress achieved in economy and social life. Thanks to appropriate measures taken by the Government, Mongolia has become one of the most liberal and open economies and trade regimes today.
Mongolia’s macro economic framework for 2004 looks extremely positive: a GDP growth rate is expected to reach 10,6%, inflation dropped down to 11%, and a budget deficit comes out to be minimal-2%. The new Government’s Action Program is set to continue these policies.
In its Action Program for 2004-2008, the Mongolian Government aims to consolidate stable, private sector-led economic growth, and democratic achievements.
Foreign trade plays an important part in Mongolia’s economy. Since acceding to the World Trade Organization in 1997, Mongolia has substantially liberalized its trade regime. This liberalization has involved the reduction of tariff rates and elimination of a number of import licensing requirements. Mongolia’s overall trade policy objectives are to support economic growth through an effective trade policy, promote the industrial, agricultural and services sectors and increase exports.
More than 50% of our total trade accounts for trade with the Russian Federation and the PR of China. The main export products of Mongolia to Russia are mainly products of animal origin and minerals, including beef, horse meat, fluorspar and copper concentrates and gold and to China are copper and molybdenum concentrates, wool, cashmere, hides and skins. Due to the reason that exports to these countries are dominated by agricultural products, they are fragile to technical barriers of these countries. Besides, access to the Russian market is becoming more problematic, import duties on Mongolian traditional products are sharply increasing and external trade activities are becoming more costly in relation to Russia’s accession process to the WTO. In particular, Russia’s transportation costs and export taxes have been increased, which negatively affect Mongolia’s trade as a whole, and bilateral trade deficit is increasing year by year. As of 2003, compared to 1995, trade turnover with Russia dropped by about 10%, whereas trade with China increased by 3.5 times. Within the framework of its accession to the WTO, Mongolia held bilateral negotiation with Russian negotiators on tariffs in goods since 2000, and the negotiation has successfully completed by the two parties in July 2005.
Mongolian exports are composed of few items, namely minerals such as copper, molybdenum and fluorspar concentrates and gold, textiles and animal originated raw materials such as wool, cashmere, hides and skins, meat and intestines. Minerals and textiles account for more than 60% of total exports. The country’s main export destinations are the PR of China, the USA, the EU, the Russian Federation and Singapore. Mongolian export items enjoy preferential tariffs under the GSP schemes of the USA, EU, Canada, Japan and Russia.
The country’s imports are more diverse and less centralized compared to its exports. For instance, heavy machinery, equipment, electrical appliances counted for 21% of total imports in 2003, fuel-21%, vehicles-11%, textiles-10% and food and foodstuffs-8 %. The imports of these goods account for more than 70% of total imports.
Mining, information technology, agricultural, infrastructure, tourism have been identified by the Government as priority sectors for development and FDI. The imports of some equipments and heavy machinery in these sectors enjoyed customs and VAT tax exemption.
The Government considers FDI as an important thrust in the economic development of the country. In reaching its objective to ensure a 6% annual economic growth, the Government in its Action Program stated to create an environment that protects FDI.
Considering Mongolian cooperation with Russia as one of the priority issues in our foreign policy, it has been reflected in our foreign policy conception. Mongolia has conducted intensive activities to expand relations and cooperation with other countries to keep the balance of relations.
A contract of Mongol-Russian friendly relations and cooperation held in January 1993 created a new legal foundation to the current bilateral relations. By making bilateral agreements such as the Agreement on joint trade and economic cooperation, the Agreement to establish a committee of joint trade, economic and technical cooperation between the Government of Mongolia and the Government of Russia in 1991, Agreement on promotion and mutual protection of the investment and the Agreement on Avoidance of double taxation on income and property in 1995, the legal foundation has been renewed.
The Mongolian-Russian Government committee has held its 10th meeting since the first meeting in Ulaanbaatar in 1992 and has taken specific measures on solving the faced issues for expansion and development of bilateral trade, economic, science and technical cooperation. Within the committee activities between the Government of Mongolia and the Government of Russia, the regional and border area cooperation subcommittee set their meetings four times taking distinctive steps by discussing confronted issues to border and regional trade cooperation and giving real support in the bilateral businesses.
Although bilateral trade turnover reached to 354.6 mil of USD in 2004, which was increased by 15% comparing with previous year, export volume declined to 18.1 mil of USD and import reached to 336.5 mil of USD.
Russian share volume to our foreign trade has been decreasing for last five years. The trade deficit has a tendency of increasing more over, because the Russian export in value to Mongolia has increased and Mongolian export both in value and quantity to Russia has decreased. The current high import duties, VAT, railways tariff rates are still remaining main barriers to increase Mongolian export and product varieties.
Mongolia has joined to the WTO in 1997, well before our neighbors joined to this club. China has joined to WTO in 2001, and nowadays Russia is on its way of accession process.
As of 2004, 412 Russian companies invested 36.1 mil of USD in Mongolia.
Russia stands 6th position from 73 investment countries to Mongolia. Because most of the Russian investments are small and medium enterprises and individuals, it is observed that their capital capacity is very low. Russian companies in sectors except in mining and banks are working inadequately and some even closed 3-4 years later since opening. Incomplete research for investment environment and market, lack of knowledge in laws and regulations, badly chosen partnership, and capital capacity are main reasons for failure.
Mongolia has full of possibilities attracting Russian investors comparing with other countries. For instance: Many years of neighbor relations and sociable cooperation and direct links in air, rail and auto roads, and less language barriers.
During the Mongolian and Russian business meetings, it was observed that the cooperating interest and desire of both sides was so high, especially Russian small and medium enterprisers have noted that Mongolian taxation system is more favorable and flexible than Russia.
We should bind the following principles for further cooperation with Russian investors.
The cooperation in the border and in the region plays an important rule to the bilateral trade and economic cooperation. The trade volume with Irkutsk, Chita, Kemerovo, and Tiva states and Republic of Buriat is accounted 70% of trade with Russia. Russian petroleum supply stands 90% of Mongolian total import. As a result of establishing a protocol of trade and economic cooperation in the border area and regional states, the regional cooperation has been expanded. Irkutsk, Buriat, Novosivirsk, Kemerovo trade centers are operating their activities since 2000.
Mongolian students are studying in these universities and institutions sponsored by the Governors of Chita, Novosivirsk, and Kemerovo. The businessmen arranged their meetings and exhibitions while visiting Mongolia. Tuva and Ulaangom (Western province) arrange the trade fairs every year in addition to opening the Tuva representative office in the Ulaangom. The following issues should be paid attention to develop the further cooperation.
Mongolia is implementing the specific measures to expand a policy of establishing the free economic and trade zone in the frame of promoting agriculture and services sectors in order to implement the objective of economic growth by increasing export and foreign investment through enhancing the structure changes based on private sectors and technology reformation through confirming the stability in the economic and financial field.
[Translated by ERINA]