A New Russian Gas Pipeline Is a Bad Idea for Mongolia

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A New Russian Gas Pipeline Is a Bad Idea for Mongolia

The Soyuz-Vostok pipeline, part of the larger Power of Siberia 2 project, will make Mongolia even more vulnerable to pressure from its autocratic neighbors.

A New Russian Gas Pipeline Is a Bad Idea for Mongolia

Russian Security Council Deputy Chairman and the head of the United Russia party Dmitry Medvedev, right, and Mongolian President Khurelsukh Ukhnaa shake hands during their meeting in Moscow, Russia, Friday, Dec. 17, 2021.

Credit: Yulia Zyryanova/Pool Photo via AP

Ukraine’s President Volodymyr Zelenskyy spent his middle childhood years in the Mongolian mining town of Erdenet, as the son of a Soviet specialist with corresponding privileges. At the time Mongolia’s dependence on the Soviet Union was the inspiration of numerous jokes and the giant Erdenet copper mine was being developed to supplement the Communist bloc’s copper supplies after the 1973 Chilean coup d’etat.

Today, as Zelenskyy is leading his nation in the fight against a renewed Russian aggression, Mongolia’s political class is sleepwalking into a pipeline deal that will increase its dependence on (and thus vulnerability to pressure from) Moscow, while exposing its Tibetan Buddhist community to Beijing’s intervention.

The idea of a trans-Mongolian gas pipeline is not new and was revived by Mongolia at the 2018 Eastern Economic Forum. In 2019, with tacit approval from Beijing, Gazprom and Mongolia’s state-owned Erdenes Mongol started a feasibility study on the Power of Siberia 2’s Mongolia leg, the Soyuz-Vostok pipeline.

Early this year, Mongolian authorities and Gazprom approved the Soyuz-Vostok feasibility study, notwithstanding the fact that the Power of Siberia 2’s overall feasibility study is still ongoing. A few days after the start of the Russian invasion of Ukraine, Erdenes Mongol and Gazprom speedily signed an agreement for the engineering and design work of the pipeline, with the aim of starting construction in 2024. With a capacity comparable to that of the suspended Nord Stream 2 project, the Soyuz-Vostok is well-positioned to bring gas from Russia’s Yamal peninsula, which was originally destined for European markets, to China.

Despite having no expertise in developing natural gas pipelines, Ulaanbaatar up to now has not engaged any third-party advisers to evaluate the technical and financial aspects of the Soyuz-Vostok project. Neither Mongolia’s political leadership nor Gazprom seem to be interested in involving a third party, which could have potentially increased transparency, provided additional capital, and allowed for greater scrutiny of the financial, engineering, and environmental aspects of the pipeline.

As a result, Gazprom appears to have locked Erdenes Mongol into a predetermined set of technical and financial parameters, which will allow the Russia company to shift an unwarranted amount of the total project cost onto the Soyuz-Vostok section while leaving itself, or the Power of Siberia 2 pipeline, the lion’s share of the net profits.

Without a proper evaluation of the project and third-party involvement, Mongolia is likely to take on a sizable loan from Russia, possibly on predatory terms, to finance its portion of the costs, while agreeing to pay it off from the gas transit fees. In this scenario, ironically similar to Soviet-era development of the Erdenet copper mine, Mongolia would be bearing heavy, possibly unjustified cost burdens, likely making just enough for the project to break even while not being able to secure long-term benefits such as scalable discounted gas supplies. Accordingly, negotiating on the transit fees, gas prices, and project funding in an information asymmetry will be detrimental to Ulaanbaatar’s interests.

From the way Soyuz-Vostok has been depoliticized and locked out of any public scrutiny, it is clear that Russia has successfully coopted Mongolia’s kleptocratic political class. Only recently, on the back of the war in Ukraine, have certain corners of the public started to question the morality of hosting a new Russian pipeline. However, no meaningful debate on the economic, geopolitical, and social impacts have taken place; apparently none of Mongolia’s political parties want to oppose the project.

Such depoliticization and co-optation of the Mongolian political elite would have been impossible without Russia’s recent soft power push into Mongolia. Starting from the mid-2010s Russia has increased Russian language and culture promotion activities, provided direct military assistance in the form of fighter jets and reconnaissance drones, and revived Soviet-era war memorials in Mongolia.

Furthermore, Moscow has exported the May 9 Victory Day celebrations to Mongolia in a format indistinguishable from Russia’s. Russia has also integrated uniquely Mongolian experiences – the 1939 Khalkhyn Gol battle commemoration and Mongolia’s World War II assistance – into its new memorials, such as at the Main Cathedral of the Russian Armed Forces. Meanwhile, Moscow-friendly politicians in Ulaanbaatar have been systematically promoting an illiberal value system driven by the rise of neo-Eurasianism, with far-right and anti-LGBT motives. Not surprisingly Mongolia’s ruling party, which controls all branches of the government, was among the two dozen international parties that expressed support for Russia’s war in Ukraine.

Moreover, there is little reason to believe that Mongolia will be able to shield itself from the geopolitical and geo-technical risks of the Soyuz-Vostok pipeline. A politically motivated suspension of gas transmission from Russia could delay cash flows, devalue Ulaanbaatar’s investment, and further indebt the country. In this context, it is suspicious that Russia continues to block Mongolia’s attempts to build indigenous hydropower generation capacity, which could provide an alternative to Russian energy.

Political risks in this case also come from the country at the other end of the pipeline, China, which has a habit of closing borders and applying diplomatic pressure on Mongolia every time the Dalai Lama visits at the invitation of Mongolian Buddhists.

Russia, constrained by sanctions and oil and gas embargoes, will be even keener to increase its exports to China by making use of a co-opted regime in Ulaanbaatar. This gives China not only the leverage to negotiate for cheaper gas prices, but also a means of imposing its will on Mongolia’s Buddhist community. In particular, Beijing is likely to ask Moscow for help in pressuring Mongolia’s Buddhists into cutting relations with the Dalai Lama and choosing a pro-Beijing Jebtsundamba Khutuktu.

Mongolia’s historic deity Jebtsundamba Khutuktu also happens to be one of the three top-ranking lamas of Tibetan Buddhism, along with the Dalai Lama and the Beijing-controlled Panchen Lama. His ninth reincarnation passed away in 2012. The Jebtsundamba Khutuktu’s reincarnation process, currently guided by the Dalai Lama, will significantly tilt the power balance in the fight for Tibetan Buddhism and has long been a ticking time-bomb for China-Mongolia relations. For Mongolia which has seen numerous border closures and other diplomatic fallout with Beijing over the Dalai Lama’s visits, ceding control over recognition of its religious leader will be interpreted as a highly symbolic loss of sovereignty.

Under the current circumstances, the risks of agreeing to a deal with Gazprom include Mongolia’s increased dependency on both Russia and China, further exposing Ulaanbaatar to political risks and potential pressure on sovereign domestic matters from its neighbors. All this will come with minimal economic gains, given the steep cost of the project and Mongolia’s unwillingness to aggressively negotiate its fair share of the profits.

Mongolia can’t afford to host a Russian gas pipeline given the repercussions to political and religious freedom. Shelving the Soyuz-Vostok pipeline project until better times is the best choice Ulaanbaatar can make given the current geopolitical environment and the state of its weakening democracy.