Potential For Mongolia-EAEU Free Trade Agreement Among Intertwined East Asian Regional Ties

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Mongolia’s new President, Ukhnaagiin Khürelsükh is a champion of China’s Belt and Road Initiative and is looking to expand Mongolian trade and investment into Asia. Yet the landlocked country, sandwiched between China and Russia, has to tread carefully between the two superpowers.

Russia and China are key neighbors for Mongolia, while 2021 had marked the 100th anniversary of the establishment of diplomatic relations between Russia and Mongolia, with Moscow becoming the first foreign power to formally recognize Mongolia’s sovereignty in 1921.

Following Khürelsükh’s election in July, Moscow was quick to stress a ‘mutual resolve to continue developing friendly ties and comprehensive strategic partnership between Russia and Mongolia’.

That was followed by Khürelsükh attending the Far Eastern Economic Forum in Vladivostok in September, where he stated that Mongolia supports both Putin’s foreign policy vision of the Greater Eurasian Partnership and Chinese President Xi Jinping’s Belt and Road Initiative.

Khürelsükh also mentioned the possibility of a free trade agreement between Mongolia and the Russia-led Eurasian Economic Union (EAEU) which fills a geographic space between West China and the Eastern European Union, and also includes Mongolia’s western neighbor, Kazakhstan. To date, Mongolia’s only free trade agreement is with Japan.

Not all infrastructure plans however are so easily aligned. Mongolia’s plans to build river dams that could impact the environment in Russia’s eastern Siberia, and Russia opposes these developments as a result. Mongolia also cancelled plans to build hydropower plants on its North-Western Egiin Gol and Shuren rivers. These are tributaries of the Selenga river which feeds north into Russia’s Lake Baikal. Mongolia has though commenced construction of a dam on the Uldza river, bordering Mongolia and Siberia. The dam is needed to divert water for mining projects in Mongolia’s southern Gobi region, but there are concerns it will impact the ecology of the Torey Lakes in Russia’s Daursky Reserve, a UNESCO World Heritage Site.

Despite Moscow’s concerns, Mongolia’s Foreign Minister Battsetseg Batmunkh has said that the country will not abandon its ambitions in hydropower and dam construction, which Ulaan Baatar views as a path to energy self-sufficiency. How much regional impact these projects have in Russia’s Siberia remains an issue that Moscow and Ulaan Baatar have to work out.

That said, there are cooperation’s elsewhere. Russia and Mongolia are committed to the Soyuz Vostok natural gas pipeline project that is intended to transport gas from Russia’s western Siberia into China via Mongolia. A feasibility study is nearing completion, with Russia’s Gazprom expecting to start the construction in 2022. If, as expected, it gets the green light, the pipeline will become the biggest joint undertaking by Russia and Mongolia since the Soviet era.

Russia and China have the option of constructing a gas pipeline from western Siberia directly into western China via the Altai Mountains. Yet, the Mongolian route would bring gas directly to the areas of China that need gas.

Meanwhile, Mongolia established a ‘strategic partnership’ with South Korea in September, becoming its sixth after Russia (2006), Japan (2010), China (2014), India (2015) and the United States (2019).

That spreading of Ulaan Baatar’s foreign policy can also be seen in its Covid vaccine diplomacy, with Mongolia receiving vaccines from Russia, China, India, the EU and the United States. Thus far however the majority of vaccinations have been from China’s Sinopharm with Russia’s Sputnik contributing about 5% of the total. Mongolia has so far achieved a near 70% vaccine take up of its 3 million population.

As can be seen, Mongolia is pursuing a multi country foreign policy, and refuses to put too many eggs in one basket. The Chinese are treated with suspicion in Ulaan Baatar, the Russians tolerated, and the Japanese and Koreans welcomed at arms length. Neither socialize together in what can still be a fiercely patriotic nation. Nevertheless, an EAEU free trade deal could still be on the cards as it may provide a buffer against the extensive Chinese imports entering the country. That will depend upon whether Russian and Kazakh imports to Mongolia can compete with the Chinese. An FTA may help them do just that.

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Russia Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Eurasia, including China, Russia, India, and the ASEAN nations, assisting foreign investors into the Eurasian region. Please contact Maria Kotova at russia@dezshira.com for Russian investment advisory or assistance with market intelligence, legal, tax and compliance issues throughout Asia.

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