Friday, December 25, 2009

76 Ministers

The structure of a democratic consists of three governing powers: legislative, executive and judiciary. A real democracy is established when each of these three powers executes its own duty properly on its own accord. They create basic conditions that protect individuals’ lives, liberties and property so that citizens can peacefully reap what they sew.

In places where the three powers get comingled, the state faces a crisis and that often becomes the reason for demonstrations and chaos. A small group of the population plunders the nation’s wealth while the majority becomes poor. Then a time comes to completely change this condition by the root.

In Mongolia, a small group of people, in the name of political party agendas, compete for power in order to pursue their personal (and business) interests. They mix the three systems up so much so that in the end it is difficult distinguish one from another. There is no use in even discussing our judiciary system, as the President himself who promised to clean it, got lost in the problems. The other legislative and executive powers have merged together so strongly that one of them has almost disappeared.

The take-over of the executive power by the legislative branch, which starts to occur when members of the parliament become cabinet ministers, has recently reached a whole new level. Each will be entitled to spend one billion tugriks from the budget in own constituency. Thus, everyone in the Mongolian parliament is frantically seeking for labels of fame and wealth to stick on their chests all at the cost of taxpayers’ expense. This “pandemic” is going to infect the city hural and is also spreading further into aimag representatives. The direct or indirect transfer of budget spending rights into the hands of parliament members proves the nonexistence of the executive system and the duality of all seventy six members of the parliament as cabinet ministers by form and substance. This is not a new phenomenon for Mongolians: majority of the cabinet already serves in the parliament anyway.

In Mongolia’s near future, the state revenue will increase with the rise of the world-market price in our abundant mineral commodities. At that time, the political fight for distribution of revenues will heat up and the crisis in political power will deepen. As a result, every leader and his allies in each of the three powers will take over the entire wealth of the country as well as the political power. The rest of the population including their children will work for these leaders and their off-spring forever. At that time there will be no principle difference between who is the Prime Minster, or President or which political party is in power, since all will be selected by a group of a few individuals and their families under a staged election. Such has already been the case in other such defacto democracies.

The voting power of the poor is easily bought. If large demonstrations are needed, they will put red or yellow t-shirts on the people, flags in their hands and some small money in their pockets for a few days’ food to close main roads and squares or block the airport.

There is a “democracy” where the poor get poorer and the rich get richer. Wealthy people’s power slowly starts to dominate since quality education becomes too expensive for the poor. The difference in the living standard of the two groups will be like sky and earth forming a new layer of extremes in both poverty and wealth.

A “Puppet democracy” becomes established in countries where the three powers of the government are not independent and where people cannot fully understand, monitor or protect the value of democracy, i.e. where civic societies have not matured. One of the best examples of this kind of democracy is the Philippines. It is the first republic in Asia to establish a democratic constitution in 1902 and where the poor people are still as much as a majority today, as they were then. The political and economic powers of this country, which has gone ahead of us on the same road, are in the hands of a dozen families. The only difference with us is that the weather is not as cold these so there is not suffer from smoke, as we do here in Ulaanbaatar.

So far, it looks like Mongolia’s current political crisis, combined with Ulaanbaatar’s smoky and disastrous conditions, does not show any signs of clearing up in the future.

Friday, December 18, 2009

Capital trust

Recently, the newly nominated Prime Minster S. Batbold raised an important economic issue at a meeting with representatives of Mongolia’s major state owned enterprises, securities and insurance companies.

At this meeting called “Capital market is the key to development”, according to detailed press release, the participants tried to answer the question “why we cannot raise capital ourselves when foreign owned companies raise a huge capital at the international stock exchanges by using our mineral resources as collaterals?” The high level public officials could not find not only a key or a lock but even the door itself in their agenda. They could not elaborate on the real problem: why people do not trust in Mongolian institutions?

Some twenty public western stock-exchange-listed foreign investment companies, including Robert Friedland (5 bln dollars), Chinese investors of Khushoot coal deposit (3 bln), Canadian investors of Khan resources (300 mln dollars), raised a large capital in Mongolia. Yet Mongolians, the true owners of these deposits are still not able to do so. This anomaly makes many Mongolians wonder and confront problems that need to be solved for future development of the economy.

At the end of the Edo era, a big black ship from the US that came to Yokohama port scared and shocked the Japanese people one morning. For the Japanese, who were isolated from the outside world and were used to making windows with paper and boats with wood, it was impossible to comprehend that a large metal ship called “Black Monster” could have been built by man. However, they made realistic conclusions about the achievements of other nations and compared them to their own. They soon made great changes. The entire nation seriously and consistently learned from the best knowledge and skills of humankind. Japan adopted the leading standard of production and management. In 150 years it became world’s one of top nations in multiple industries including ship building and car manufacturing.

Mongolia’s opportunity to change and achieve world-standard has opened up in the mining industry which is the only existing bridge so far that connects Mongolia with the international arena. Nations who create standards, rules and regulations, also have institutions that most importantly enforce these laws. In societies that do not have established institutions, everything depends on individuals. In developing nations, economics and politics are not stable or predictable because all depends on one individual or a group of individuals. In developed nations, by contrast, extreme revolutions do not happen because political leaders are rotated again because of the enforcement of their institutions. As a consequence, private citizens by large believe in their state institutions.

One of the clearest indexes of institution capacity level is development of the country’s capital market. Capital market is a trading place between a party with surplus of capital, willing to lend in order to earn interest and a party with deficit of capital, willing to borrow and pay interest for financing its business. Capital markets work well in countries where special institutions coordinate all transactions and enable conditions for smooth and consistent trading operations.

The technical “oil” that smoothes this operation of the capital market mechanism is information. An institution creates standards for the information or data that is prepared and delivered to everyone.

The question is, do we have institutions in Mongolia that we can trust today? There is a Canadian standard called NI 43 101 (National Instrument 43-101) which is well known to anyone in the mining business. This is a guideline for mineral reserve classification for disclosing information related to mineral properties. Companies follow this procedure in order to issue and trade shares on the stock exchange under the control of Financial Securities Administration of Canada. This is a methodology for disclosing scientific and technical data of related mineral projects.

Because the Financial Securities Administration makes sure that these data are correct and true, people trust them and buy or sell securities for the purpose of making profit, even though no one can guarantee that trading securities will always be profitable, of course. FSA has its own system of auditing and verifying data released by companies. People buy Ivanhoe Mines’ shares because they trust in the Canadian institution, rather than just in R. Friedland.

We have much to do to gain foreign trust in Mongolian institutions. Until Mongolia creates and enforces similar standards for information disclosure of all mineral properties in Mongolia, no one will trust enough to invest money. In order to develop capital market in Mongolia, there must be institutional capacity and criteria created to gain the capital trust of people. First of all, we should be able to trust in those institutions ourselves. How many of these state owned companies made profit? Who nominates these executives to their positions? How and why are the board members selected? Have we ever in history selected them on the basis of merit or competition? We keep sliding down the corruption index from year to year. With the way our state institutions run the state owned enterprises today, it is irrational for the Mongolian Stock Exchange to ask Mongolian companies to make their IPO (Initial Public Offering) on Mongolian Stock Exchange and “share the wealth with its own people.”

Friday, December 11, 2009

Eighty Five

Sixty percent of the world’s railways run on a standard gauge of 1435mm in width.

This gauge width originated from England in the 1820’s; was subsequently introduced to the USA in 1881, and then was eventually adopted by other countries. China started to build its railroads in 1876 using this gauge. However, Imperial Russia on the other hand, began building its railroad in 1840 with a 1525mm gauge. This figure was then shortened a bit to 1520 mm, by a law of the Soviet Union, in 1960. Today, the Russian gauge is used in all former Soviet Union countries, former Soviet Satellite countries, Mongolia, and Finland.

The difference between the two gauges is only 85mm. Yet this little distinction holds an enormous political, social and economical significance for Mongolia’s future. Mongolia will soon be making a historic choice in deciding the size of their gauge width. We have three options: accept the Russian gauge, accept the Chinese gauge or build both.

Option 1: 1520
Mongolia is one of a few countries whose ownership of major infrastructure is shared with the government of another country. The railroad running down Mongolia from north to south is property of Ulaanbaatar Railways, which is a Russian and Mongolian joint venture, equally shared by the two governments. Since the price for railway services has been constantly rising during the last sixty years under rigid transportation and insurance amendments, the ownership monopoly of this sector has been the highest operational cost item of all Mongolian businesses. Ulaanbaatar Railways has never issued a transparent operation report and the Russian government does not allow third party auditing.
In spite of Russia’s questionable policies and ethics in this sector, our new president has signed a memorandum to further develop railway infrastructure based on the 1520mm gauge. And Prime Minister Bayar has established another joint venture with the Russian government called “Infrastructure Development”. This company is owned 50% by Russian railways, 25% by Mongolian railways and 25% by Erdenes MGL, a Mongolian state company. Taking into account Russia’s real influence on Mongolian railways, Russia controls this new company de-facto.
The advantage of continuing the development of Mongolian railway infrastructure based on the Russian gauge is that we can complete the Sainshand – Dalanzadgad connection relatively fast and we can begin the extract-process/export scenario. So far, the Tavan Tolgoi project is being delayed. The initial plan of extracting coal and exporting it, then with that revenue, creating processing facilities and power stations, will require a much higher initial investment.

The disadvantage of the 1520mm option is that we will become completely dependent on the Russian and Mongolian government for management. Governments have never been excellent managers, particularly these two. The transportation prices will still be high for Mongolian businesses. Mongolia will not have a direct connection with the Chinese railroad and our competitiveness will depend on transloading goods at the break-point facilities in Ereen and Zamiin Uud.

Option 2: 1435
Energy Resource: A Mongolian company was granted permission by the Mongolian government to build railroads with the international gauge (1435 mm). They have already made the design and have started the project. In theory, there must be a special tender announced for having infrastructure built by a private company. Secondly, in principle, the builder of the infrastructure should never be the end-user of the project. Our government is not “aware” of this. Pretending to look confused, the government mocks its citizens instead.
This 260 km of railroad across the Chinese border will replace the current transportation method of trucking raw coal on dirt roads. This railroad will go through Oyu Tolgoi and other key mineral deposit areas. If this road gets completed first, there will be less interest to transport minerals to Sainshand for further processing. Even though they will try to process it themselves, this is an extract-export option.

Option 3: 1435+1520
If Dalanzadgad and Sainshand are connected with the standard (1435mm) or dual gauges (a combination of both, or four lines, like at the border between Finland-Sweden), we have a chance to directly connect with both our neighbors with their own gauges. If we can create transloading facilities in Sainshand, we will have created a value. Services will be charged and there will be a demand for creating new railway lines with the Chinese gauge to the southern border.

We will then have two lines accessing the ocean without having to change the wheels, and two lines accessing Kazakhstan. The northern line of the Mongolian network will run on the Russian gauge, while the southern line will be run on the Chinese gauge. Eventually, we will need to create a second transloading facility in the western part of the country someday. So thus, Sainshand - Choir will be connected by the Russian gauge as it was specified in the above mentioned memorandum.

This might be a unique chance for Mongolia to become a player in a big geopolitical game.

It is my hope that this column inspires discussion among Mongolian citizens on this historic decision, for our representatives to make the best choice among the three options. If we do not discuss this issue as we did the constitution of Mongolia, the people, in whose hands the power really is, might soon present us with another surprise “gift.”

Friday, December 4, 2009

Comparing Ulaanbaatar to Bishkek

I thought about where the country of Kyrgyzstan might be heading while I was waiting for my boarding call to Moscow from Bishkek at the Bishkek international airport, Manas.

A similar thought about Mongolia may come to a foreigner who visited Mongolia before they depart from Chingis Khaan airport in Ulaanbaatar. Intelligent friends, ordinary people that I met, and places I visited in Kyrgyzstan for the last few days led me to think that the history of our two countries during this difficult and responsible time might be similar in some ways, while different in others. However, solutions for the future of both may have similar formulas.

Ulaanbaatar and Bishkek international airports are alike in shape and size. This is typical of a small country with a small population and non standard services. An officer of the border inspection was accompanying his friend without queuing up and he was serving him like a guest in his home. When you arrive at these airports, dozens of men will come up to you all at the same time offering taxi service. Anyone who has a car can also be a taxi driver. High unemployment rates and low salaries are a well known calling card for a failed economy.

In Kyrgyzstan too, the state leaders have privatized all formerly state owned properties and have sold the former state owned manufacturing plants and factories to their acquaintances and partners for a cheap price. Soon the buildings will stand empty after the equipment is sent into scrap metal. In Kyrgyzstan, they do not produce anything except for some food supplies and import the rest from China, like we do. Nothing made by human hand is exported. In the summer, they accumulate water from rivers that run down the mountains in order to produce power in the winter; but this makes Uzbekistan, its neighbor, very unhappy because it blocks the irrigation of the Fergana valley cotton fields, and water for drinking. For many years, it has been a topic of hot debate between the two countries.

Additionally, radioactive wastes from the former Soviet uranium mines is washed down along with the rain water into Uzbekistan causing toxicity and death for thousands of its citizens.

President Bakiyev, (the leader after a 2005 coup d’├ętat, during which the parliament palace was looted and the former president, Akayev was forced to escape), has given out all possible state properties to his relatives and the people of his own province. In the words of an influential politician, Bakiyev has accomplished in fifteen months what Akayev managed to plunder during fifteen years.

Similarly to its neighbors, Kyrgyzstan is ruled not by a state, but by a family. The fee from using one airport by the American military and two by the Russian military goes straight to the state budget. Only one company run by “the family” supplies the country’s gasoline, and only the same family controls the largest bank as well as communication companies and the media.

One fifth of the five million people go abroad, the majority to Russia, for simple jobs as guards and cleaners. They transfer money back home, which supports the economy of that country. In Mongolia, this figure reaches one tenth of our population and the majority of this money comes from Korea.

10% of Kyrgyzstan’s population is Russian. Russian also is the official language of business and communication. The Kyrgyz are in the process of upgrading their own language to this level. The population is well educated in general. The main religion is Islam. Many government functions are done by trial and error as the country has little experience of sovereign governing skills. They try to imitate Russia and Kazakhstan, particularly their leaders.

As for Mongolians, we do not admire large countries and their big leaders because we have no tradition, habit or need to worship them. We have an independent way of thinking. Even though we do not protect sufficiently well, human rights, liberty and properties, we are relatively ahead in this matter compared to other Central Asian nations. We have a grand history of state, and a larger experience of governance.
At the present, we are not ruled by one family. Unfortunately there is no guarantee that this will not happen because one can expect anything from a government that is not fully transparent. In Kyrgyzstan, an opposition leader able to compete with the president and voice his disagreement with the leader gets (coincidentally) burnt to death in a car accident. One hopes that this will not happen in Mongolia.

The Future Formula:
As I thought about the differences and the similarities between these two countries, the future formula for both appeared to be the same.
The fundamentals of economic development and its driving force is a free market, not government. A nation prospers when the services and products of a competitive industry based on free competition reach the world market. Government should invest alone or in cooperation with the private sector in projects that cannot be developed by private sector alone (particularly infrastructure) in order to create conditions for development.

For that, the government should be small with wise spending and transparent operations. A government cannot do this by itself. It is accomplished only through the scrupulous monitoring by informed citizens who impact the voting process with knowledge, thereby subtly affecting the quality of governance.

Citizens that cannot make the government fair and transparent, however, slowly will start to believe not in themselves, but in some other outside power, and will look for solutions from that power, in both life and religion.

Tuesday, December 1, 2009

Nigeria Spam

Recently, a friend of mine called me and said very happily, “I have great news, we should talk.” Upon our meeting he said in one breath, “I am a lucky man, God blessed me with fortune just when I needed money.” It turned out that he received an email from the UK, supposedly from a banker of a rich man who had just died. My friend was “selected” to be the “recipient” of his fifty million pounds. The bank manager would receive only 2 or 3 percent for a modest fee for transferring this money abroad. My friend should only send his full name, address, passport information and bank account number in order to receive this big lump sum.

I told him a story that happened a few years ago when I worked in a bank. A man whom I used to know asked me one day to meet a young lady and four men. This lady, who could barely understand English, had already sent 60,000 US dollars abroad after collecting it from the other four men. Among the four men, there was a famous person. They came to ask me to lend them 200,000 US dollars more, which was required for hiring a lawyer in order for her to inherit 10 million dollars. Once the transaction was completed it was to be returned 5 fold into our bank.

When I asked where to transfer the money, I was told, “to Burkina Faso,” a country in Africa. Skeptical, I looked through all the documents that they had brought, which were sent as email attachments. She got the first email about this offer from a girlfriend who worked in England. Since then, after understanding the letter with the help of a dictionary, she felt “lucky” to inherit such a large sum of money and had been communicating with the ‘banker’ secretively for almost a year.

She was able to convince her brother and his two other friends to pull out all their life savings. Now they were only waiting to receive this inheritance, any day now.

I called immediately to Burkina Faso. A man receiving at the other end knew about the Mongolian lady. I told him that I am calling from her bank and asked a number of questions about his previous contacts and transactions, to which he replied unconfidently taking long pauses. I expressed my desire to transfer the money directly to his business address and not to a secret combination code. When he hung up, I tried to call him back several times, all in vain.

I explained to the visitors that they should not send any more money and that there is almost no chance for them of getting back what they have already sent. I told them that there are many scams such as this one on internet nowadays. Then I showed them a number of mismatches in their documents. The more I explained, the angrier they got, as they begun to understand their situation. Including the woman who was cheated, all four left quite unhappily.

A few months ago I got an email from my friend who served in a high ranking position for the government. He spoke a number of foreign languages and used to work abroad. His message read that he was robbed in Paris in a metro station and his bag with all his documents and money was gone. He was asking his friends to send him some money for help. I was surprised because I had seen him the day before. He had not mentioned of any trip to Paris. I called his cell phone. He told me that many of his friends, international ones included, kept calling him and asking where he spent the night. It turned out that he replied to an email which asked him to verify his yahoo account and password due to the increasing load in the network.

If he was just a little cautious he could have understood that it was not from yahoo. Since then, he was not able to check his email anymore. His friends still ask him to this day if the money they sent was helpful.

Originated first in 1992 from Nigeria the cases above are called “Nigerian spam or scam.” They have ruined many people’s wealth and lives so far. This spam usually starts with the promise of huge lump sums and winnings, which require a prepayment in order for the victim to receive them. They are sent to many recipients at the same time via email. Somewhere, inevitably, someone accepts it and gets cheated. This is a criminal network. In the beginning, this spam told the story about the death of a president/dictator who stole money from his country and had transferred it abroad to a bank and after his death either a bank manager or his widow were asking someone to inherit those funds. Later on, more spam came from large banks where a bank manager of a wealthy deceased person with no successor is searching for someone to transfer the funds to for a very small fee and promise to send the money to the selected individual.

I receive this spam everyday. I delete them immediately. There is even a spam folder in yahoo itself. There still are many people in Mongolia who do not know about this spam system and some of them still lose their money and time. I write this letter with hopes that it will help these innocent people and prevent them from becoming the next scam victim.