Russia is expanding its global trade by enhancing its infrastructure and transportation options in its eastern regions. In light of that, the business relationship between Russia and Mongolia has strengthened in recent years. Both countries are exploring new areas for collaboration and working together to create favorable conditions for joint ventures. Russia sees Mongolia as a key player in improving its connectivity with China, but this partnership is mutually beneficial. Russia has the potential to strengthen its economic ties with China and the Asia-Pacific region, while Mongolia’s economy is experiencing growth because of it.

Mongolia’s geographical location provides transit and transport corridors that are strategically important for Russia. The Trans-Mongolian Railway connects China to Russia’s Trans-Siberian railway system, providing a vital route for the movement of goods between Russia and East Asia. This rail link is essential for Russia’s trade with countries in the Asia-Pacific region.

Acting as a buffer state between China and Russia, Mongolia plays a significant role in ensuring that Russia’s southern border is separated from a powerful neighbor, reducing the risk of direct conflicts and providing a degree of security to Russia’s southern regions.

Mongolia’s foreign policy of maintaining a balanced relationship with Russia and China has yielded mutual benefits. Mongolia’s strategic location serves as a valuable bridge between these two major powers and has the potential to facilitate communication and cooperation between them. This balancing act not only benefits Mongolia but also helps preserve regional stability.

Historical Relations

Throughout history, Russia and Mongolia have maintained a strong and friendly relationship. A significant number of Mongolian leaders in politics and technology, as well as members of the artistic and cultural community, received their education in the USSR or one of its Eastern European allies. The Mongolian economy heavily relied on the Soviet bloc for investment, trade, and energy imports.

On November 5, 1921, the Mongolian People’s Republic (MPR) and the USSR signed a Treaty of Friendship to establish diplomatic relations. One year later, in 1922, embassies were opened in Ulaanbaatar and Moscow. From 1921 to 1990, the relations between the two countries went through different phases. There were periods of mutual assistance regarding moral, material, and financial aid, periods of robust economic growth, and successful projects such as the construction of The Trans-Mongolian Railways. However, there were also periods of great sorrow and destruction when political and religious ideologies clashed, like during the Stalinist repressions in the 1930s and 1940s.

In 1990, the Mongolian People’s Republic (MPR) collapsed, and the country formed its first democratically elected government. This change led to a rift in the previously close relationship between Mongolia and the Soviet bloc. As a result, Russian technical aid stopped after 1992. Furthermore, Russia requested that Mongolia repay all the aid it had received from the Soviet Union from 1946 to 1990, estimated to have amounted to almost US$180 million.

Following the dissolution of the Soviet Union and the end of the Cold War, Mongolia’s trade with Russia suffered a significant decline, while the influence of Western countries and China on Mongolia increased. Since the beginning of this millennial, Russia has been making efforts to strengthen its ties with Mongolia, with the aim of enhancing its status as a regional power.

In 2000, Russian President Vladimir Putin visited Mongolia and renewed a major bilateral treaty, which led to Russia lowering the prices of oil and energy exports to Mongolia and boosting cross-border trade. In 2016, Russia forgave 98% of Mongolia’s state debt.

In March 2022, Mongolia abstained from a UN vote to condemn the Russian invasion of Ukraine.

Balancing Tradition and Progress

Mongolia’s cultural identity and way of life have been shaped for generations by its vast steppes and abundant natural resources. However, the country is now facing a series of environmental challenges that are disrupting its ecosystem; the rapid growth of livestock and human activities such as mining and transportation are putting pressure on land and causing air pollution. Mongolia relies heavily on coal for energy and uses outdated Soviet-era-coal-fired power plants that in winter are heavily polluting. Overdependence on mining also makes the economy of Mongolia structurally vulnerable to external market shocks and commodity price cycles.

Meeting the increasing energy demand while reducing dependence on coal for health and environmental benefits remains one of the top priorities of the Mongolian government. The country’s expansive undulating steppes and deserts are perfect for harnessing wind and solar energy, offering enormous potential. With approximately 270 sunny days per year and almost one-tenth of the land endowed with wind resources, Mongolia has the potential to become a leading exporter of clean energy in the region.

CMR Corridor

Russia, Mongolia, and China have signed several tripartite agreements since 2016 to simplify the border clearance process and promote smooth transportation via road and railway along the corridor. The most notable agreement is the comprehensive deal for developing the China-Mongolia-Russia (CMR) economic corridor. The primary aim of the CMR corridor is to enhance transport connectivity and cross-border trade services by investing in infrastructure development.

Strategic Investments and Infrastructure Projects

In September 2019, a Comprehensive Strategic Partnership Agreement was signed between Russia and Mongolia to enhance and strengthen partnerships in politics, economy, trade, business, infrastructure, and humanity.

In addition, the two countries signed an agreement to create the Russian-Mongolian Investment Cooperation Fund. The main objective of this fund is to substantially enhance investment cooperation between the nations. The initial focus of the joint fund will be on investments in Mongolia’s transportation infrastructure, with plans to extend to the mining, energy, and agricultural sectors in the future.

Railway Projects

Russia, Mongolia, and China have agreed to conduct a feasibility study for the modernization of the central railway corridor. The plan involves implementing double railroads, electrifying the line, and repairing it. The project is progressing quickly, and by the end of 2023, the relevant agencies of Russia, Mongolia, and China are planning to complete the feasibility study. Practical implementation of the project is expected to begin in 2024.

Not only the above-mentioned project is taking on greater appeal —The Eastern Railway Corridor is emerging as an attractive option for linking the Trans-Siberian Railroad, Northeast China’s railways via the Trans-Baikal Territory, and the eastern aimaks of Mongolia. While the feasibility of this route was previously questioned, it is now taking real shape with Mongolia preparing to construct the missing Choibalsan — Huut — Bichigt section. The primary purpose of this new route is to transport container traffic and export Mongolian mineral resources. It also presents an opportunity for Russia to reduce freight traffic congestion in the East and export coal despite its Far Eastern ports’ challenges.

Road Projects

In October 2022, a 745-kilometer portion of the AN-4 highway was opened in western Mongolia. This highway connects the Russian regions of Western Siberia with the Chinese Xinjiang Uygur Autonomous Region, passing through the Tashanta checkpoint in the Altai Republic. Currently, Russia and Mongolia are in talks to construct additional trans-Mongolian and CMR highways, which would further strengthen the transportation network in the region.

Power of Siberia 2 Pipeline

Scheduled to begin construction in 2024, the Power of Siberia 2 natural gas pipeline is the most significant economic collaboration between Russia and Mongolia. The pipeline will span 2,600 km, connecting Russia and China via Mongolia, with a gas capacity of 50 billion cubic meters per year. It is expected to become operational by 2030, generating substantial revenue from transit fees and gas supplies for Mongolia. The construction and maintenance of the pipeline will create thousands of new job opportunities in the region and generate billions of dollars in revenue. Mongolia expects the PoS2 to contribute up to $1 billion annually in transit fees, create employment, facilitate economic diversification, and accelerate its transition away from coal. All of these developments are crucial for Mongolia’s sustainable growth.

Trade Dynamics

During the last 25 years, the exports of Russia to Mongolia have increased at an annualized rate of 8.8%, from US$218 million in 1996 to US$1.81 billion in 2021. In 2022, Russian-Mongolian trade increased by almost 50% compared to 2021 and reached US$2.7 billion, a historical high between the countries. Figures are expected to hit as high as US$3 billion by the end of this year. Almost 95% of trade turnover is accounted for by Russian exports.

Russia’s main exports to Mongolia include mineral products, primarily fuels and oils, energy commodities, as well as food products and agricultural raw materials, mostly grain, flour, and cereals. Additionally, machinery and equipment, vehicles, chemical industry products, and metals and metal products are also among the main exports.

On the other hand, Russia’s main imports from Mongolia include mineral products such as salt, sulphur, earth and stone, plastering materials, lime, and cement. Additionally, they import articles of clothing and clothing accessories, machine or hand-knitted, railroad locomotives or streetcar motor cars, rolling stock and parts thereof, nuclear reactors, boilers, equipment, and mechanical devices.

Currently, Mongolia’s exports to Russia account for less than 1% of its total exports. For all that, supplies from Russia account for around 32% of Mongolia’s imports and are substantial as far as some commodities are concerned: more than 90% of petroleum products, 27% of foodstuffs, and 30% of electric power.

Participation in International Organizations

Both countries are full members of the Organization for Security and Cooperation in Europe.

Russia is interested in Mongolia becoming a full-fledged member of the Shanghai Cooperation Organization (SCO). Mongolia has been an observer state of the SCO for over 20 years.

Mongolia became the first State to sign the Memorandum of Cooperation with the Eurasian Economic Commission in 2015. Since then, a working group has been operating to discuss matters related to broadening economic ties between the EAEU member states and Mongolia.

Mongolia has expressed its desire to join ASEAN and has attended its meetings in the past. Russia forms part of ASEAN as a dialogue partner.

Lastly, both countries are part of the Asia-Europe Meeting (ASEM), an intergovernmental process established in 1996 to foster dialogue and cooperation between Asia and Europe.

The Future of Russia-Mongolia Relations

The growing relationship between Russia and Mongolia is a positive development for both countries. Russia’s efforts to improve infrastructure and transportation in its eastern regions have resulted in better connectivity with China, which in turn benefits Mongolia’s economy. Mongolia’s development and stability are heavily dependent on Russia’s support and assistance. As both countries continue to expand their cooperation, with a multitude of exciting and innovative projects on the horizon, their partnership holds the promise of mutually beneficial outcomes and increased prosperity for both countries.

By Michael Barantschik

Dezan Shira & Associates maintain an office in Ulaan Baatar. For assistance in the Mongolian market, please email mongolia@dezshira.com

About Us

During these uncertain times, we must stress that our firm does not approve of the Ukraine conflict. We do not entertain business with sanctioned Russian companies or individuals. However, we are well aware of the new emerging supply chains, can advise on strategic analysis and new logistics corridors, and may assist in non-sanctioned areas. We can help, for example, Russian companies develop operations throughout Asia, including banking advisory services, and trade compliance issues, and have done since 1992.

We also provide financial and sanctions compliance services to foreign companies wishing to access Russia. Additionally, we offer market research and advisory services to foreign exporters interested in accessing Russia as the economy looks to replace Western-sourced products. For assistance, please email russia@dezshira.com or visit www.dezshira.com