Mongolia and the Power of Siberia-2
A guest post from Bill Bikales, a U.S. Mongolia hand
Mongolia would be a transit state for the proposed Power of Siberia-2 gas pipeline, yet its interests and constraints are often treated as an afterthought. Bill Bikales recently returned from a mid-September trip to Ulaanbaatar and has generously agreed to share his reflections on Mongolia’s choices.
Mongolia’s High-Stakes Choices on Power of Siberia-2
Since the CEO of Russian energy giant Gazprom announced the signing of a ‘legally binding MOU’ with China National Petroleum Corporation (CNPC) regarding the Power of Siberia-2 (PoS-2) gas pipeline, attention has centered on China’s ambiguous stance on the rumored agreement. Little thought, however, has been paid to the economic and strategic benefits and risks of PoS-2 for Mongolia, the transit country at the center of the pipeline. Clearheaded assessment and firm negotiations with its two much larger neighbors will be essential if PoS-2 is to be a positive step for Mongolia.
Mongolia has promoted this pipeline for years. When PoS-1 was negotiated in 2012, then-President Elbegdorj urged that it include a Mongolian route. After the PoS-1 project was finalized without a Mongolian segment, the Government of Mongolia began persistently calling for a second pipeline that crosses their country. Mongolian President Khurelsukh and Prime Minister Zandanshatar have both endorsed the pipeline plan since the September announcement.
Mongolia’s economic interests are clear. Mongolia will earn transit fees of as much as $1 billion per year, 4% of current GDP, if the line is utilized at full capacity of 50 bcm/yr. PoS-2’s planned route passes near Ulaanbaatar, Mongolia’s capital, offering access to natural gas that could replace substantial coal-burning heat and power generation and help solve the grave winter air pollution problem in Ulaanbaatar.
Strategically, Mongolia’s credibility as a partner to her autocratic neighbors has seemed questionable, given Mongolia’s democratic system and close ties with the US and other western countries. In today’s global environment maintaining such an ambivalent stance may no longer be viable. PoS-2 could lead to an enhanced role for Mongolia in the Russia-China strategic partnership and add momentum to other trilateral initiatives, such as the China-Mongolia-Russia Economic Corridor, which has not achieved much tangible progress to date.
PoS-2 would be a clear signal of Mongolia’s acceptance that its path to prosperity lies in deeper economic integration with its two giant neighbors, uncomfortable as that might be. Until now, that integration has been almost entirely directed toward China, whose importance in Mongolia’s economy has grown steadily for decades. In 2024 over 90% of Mongolia’s exports, mostly minerals, went to China, and for the last five years the Government of Mongolia has set aside previous reluctance and prioritized investment in cross-border infrastructure that will facilitate even more rapid growth in mineral exports to users in north China. However, Russia’s role in the Mongolian economy has been steadily declining as China’s grew, and rests largely on its legacy role as Mongolia’s main supplier of petroleum products and roughly 20% of Mongolia’s electricity. Mongolian exports to Russia are minimal, and non-energy imports are also insignificant. PoS-2 would dramatically reverse that trend.
But the potential benefits come with costs and risks.
The economic benefits of PoS-2, should the project even be implemented, will not be realized for years. Negotiations are still underway. Construction is expected to take at least as long as the five years that PoS-1 required. The Mongolian section could be slowed by a lack of supporting physical and institutional infrastructure, reducing the real value of future transit fees and causing a politically unacceptable delay in solving Ulaanbaatar’s winter air pollution crisis, with its harsh impact on health and on Mongolia’s appeal as a tourism and investment destination.
In any case, it is not clear that gasification, if it happens, will solve this problem. 60% of Ulaanbaatar’s population live in gers, the traditional Mongolian tent homes, each heated by its own coal-burning stove. Many of these are located in low-density communities on hillsides, making connection to the district heating systems infeasible. Only a multi-faceted approach including more efficient insulation, stoves and fuel, introduction of renewable-powered sources of heat, such as heat pumps, and a gradual reduction in the size of these shantytowns will provide a sustainable solution.
The climate benefits of converting the district heating system to natural gas also need to be weighed carefully against the large required investment and the long-term lock-in effect of constructing a pipeline. China’s hesitancy about committing to PoS-2 may reflect similar concerns; while natural gas will be an important part of their energy mix for a long time, other alternatives offer more flexibility than new pipelines.
In addition, replacing Mongolian coal or other potential domestic energy sources with imported Russian gas would negatively impact employment and Mongolia’s balance of payments, at least partially offsetting the transit fee revenues.
Strategically the deepening of economic links to Russia would come with significant risks. The transit fees, gas offtake purchases and infrastructure will be arranged directly between Mongolia and Gazprom, a notoriously opaque state-owned company with very close ties to the Russian government. Indeed, even prior to the announced MOU with CNPC, Gazprom signed an MOU with the Government of Mongolia to cooperate on pipeline construction and power-sector gasification.
The history of Gazprom pipelines in Europe and Central Asia is littered with controversies and scandals. Similarly, Mongolia’s dealings with Russia since 1990 have also been marked by repeated controversial incidents, including the expropriation under Russian pressure of the uranium assets of Khan Resources, a Canadian mining company, Mongolia’s rejection of a sorely needed Millennium Challenge Corporation $170 million grant assistance for modernizing the country’s largest rail company Ulaanbaatar Railway (UBTZ) when the Russian joint venture partner refused to allow an independent audit of UBTZ’s books and the still ongoing controversy around the 2016 purchase by an obscure Mongolian private company of the Russian 49% stake in the large Erdenet Copper complex.
Russia’s influence is exercised primarily through its control over economic chokepoints, such as the UBTZ joint venture and its monopoly in Mongolian gasoline imports. Gasification of Mongolia’s heat and power generation would provide Russia a gigantic new chokepoint. The inflow of $1 billion a year from Gazprom would also provide Russia with financial leverage that it has not had since the collapse of the USSR.
If PoS-2 is to benefit Mongolia there will be a need for full financial transparency in its construction and its operations, including all fee payments, strict environmental management, inclusive engagement with affected communities and an independent dispute resolution mechanism. The history presented above highlights how difficult it will be to secure these. A first step should be objective and transparent government statements and public debate in Mongolia about the benefits and risks of PoS-2.
Mongolia’s challenge now is to establish negotiating credibility as a central component of PoS-2 whose participation cannot be taken for granted unless its terms meet Mongolia’s requirements. Without such credibility both the PoS-2 and the broader integration into the Russia-China economic alliance will prove a step backwards in Mongolia’s democratic and economic development.
Bill Bikales is an IDEAS Associate at the London School of Economics and development economist who has worked at the UN and other institutions. His ten years in Ulaanbaatar included service as Economic Advisor to six Prime Ministers.
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