What Shall We Do About The So Called “Stability Agreement” That Causes Instability?

Udriin Sonin, 2006-04-17, issue 094


“Ivanhoe Mines’ stock price reached 15 dollars and 40 cents at the Toronto Stock Exchange.” “You may buy stocks of Oyu Tolgoi at this price.” “Mongolian stock exchange launched its technical preparation for you to buy Oyu Tolgoi’s stocks.” These surprising news announcements emerged amid the citizen protest movements and the Democratic Party’s decision to say “no” to any stability agreement.

First of all, let’s say “Wait a minute!” to the Mongolian Stock Exchange. Exactly what prompted the stock exchange to make its surprise announcement? Whose property is it offering to sell and to whom?

oyu tolgoi

Imagine Ivanhoe Mines (Friedland) as a guest who came to a household and saw that the household had gold in its avdar. The head of the household, a herdsman, puts his tobacco in his mouth and sits with his back to the guest with the thought that he doesn’t like the idea of giving away his gold for nothing. Unfortunately, the guest doesn’t understand, or doesn’t care, what his host is thinking.

A servant, who occasionally visits the household with cleaning and bookkeeping duties, whom we can visualize as a government high official, gives a preliminary promise to the guest, Friedland, that he can take the gold from the avdar of the household almost for free. The servant is trying hard to conclude a stability agreement with the guest concerning the number of years that the guest can remove gold from the household avdar for nothing. The head of the household is frustrated and angry and can’t find his place inside or outside.

Suddenly a fashionable, modern salesperson named Mongolian Stock Exchange arrives at the household. The guest proposes a brilliant idea that he could hire the salesperson to raise money from the household members in order to remove gold from the household avdar. And the guest urges the salesperson to prepare the necessary technical conditions.

The salesperson immediately agrees and announces a fundraising activity for the digging gold from the owner’s avdar pretending that the guest is the real owner. If this game continues, it is obvious that the money-less herdsman’s stock will be a miserable pittance in relation to the rich guest’s share and therefore, the head of the household will end up owning a tiny little particle of the gold taken from his own avdar.

But what does it all mean to be obliged to buy his own avdar and gold from someone else in order to be considered as a share-holder of his own possession? Why can’t the guest who wanted to make a profit by selling the gold acknowledge that the herdsman is the rightful owner of the gold? How could he dare to announce “if you invest in me, I’ll give you a small share of your own gold”? What enables him to act in this greedy way instead of saying from the very beginning, “I want to make a profit out of your gold. You take your 51% and I will make myself wealthy on the remaining 49%”?

How distorted must the mirror in front of Ivanhoe Mines be to lead it to conclude that, “this household’s gold is rightfully mine”?

The answer lies in provisions related to the stability agreement that appears in some laws of Mongolia. Because of these provisions foreign investors are mislead into concluding that the “avdar with gold” is theirs. In short, the old Mongolian saying “comes from north, says that the sheep fence is mine, comes to the sheep fence, says that the sheep is mine” is coming true. In fact, the “avdar with gold” was guaranteed to the Mongolian people under our Constitution.

The term “stability agreement” entered Mongolian law in 1993 in two provisions, the 19th and 20th, of the Law on Foreign Investment. The law draft submitted by the P.Jasrai’s government was adopted with no challenge by a parliament in which 71 out of 76 seats were occupied by the MPRP. When giving a description of the law, the government did not explain anything about the stability agreement, nor did it think to alert the parliament that these provisions might someday give rise to public discontent.

According to the 1993 law, any foreign investor who invests more than 2 million dollars can apply to the government for a stability agreement that will establish a fixed tax obligation.

Not long after, the two provisions related to the stability agreement were repeated nearly verbatim as the 20th and 21st provisions of the Law on Mineral Resources adopted in 1997. Under this law, a license holder desiring a stability agreement was encouraged to press for it because the agreement would “provide a stable tax condition and export the product at the world market price…” Also this law allowed 20 days for the Minister of Finance to sign the stability agreement from the time of its submission provided no unsettled issues remained to be resolved. This term was only a few days longer than the 14 days allowed by the 1993 Law on Foreign Investment.

At the beginning of 1998 the Democratic Union Coalition introduced a new tax policy that touched upon the stability agreement. The new policy, as adopted in the General Taxation Law, said “all relations in regard to creating, imposing, changing and reducing the taxes, freeing from taxes and enforcing the tax payment shall be regulated exclusively by the Taxation laws.” Based on this provision, the government of that time submitted a law draft “on Considering Some Provisions of Laws Ineffective.” Among those laws and provisions, were our well known two articles, 19th and 20th, of the Law on Foreign Investment. It was the governments first “no” to the stability agreement.

Unfortunately, M.Enkhsaikhan’s government, while submitting changes in ten laws, forgot to make the 20th and 21st provisions of the Law on Mineral Resources, the law they enacted, ineffective. This is how the stability agreement found its safe harbor to survive the changes to the Taxation Law. The door, to use these provisions as a tasty cake for foreign investors, was left open.

In 2000, the MPRP took power once more. As in 1993, they had an absolute majority in the parliament having 72 seats. This ‘favorable condition’ with no strong opposition enabled the MPRP government to reintroduce the stability agreement back into the Law on Foreign Investment.

At the beginning of 2002, N.Enkhbayar’s government initiated “minor” preliminary changes to the Law on Foreign Investment. These little changes cut out provisions that were considered “obstacles” for investors. Upon initiation of N.Enkhbayar’s cabinet, for example, crucial duties and powers given to the Mongolian government were terminated by an amendment to the Law on Foreign Investment adopted on November 30, 2001. Among them was the power of the Ministry of Trade and Industry to suspend or stop activities of foreign invested entities if a professional monitoring report concluded that the entity’s activity did not meet certain legal, environmental, health, and technological standards. By stifling the government’s monitoring power, the MPRP government relinquished the state’s right to monitor foreign investors. The door was open for potential investors to freely play their games.

Just one and half months after the government power to monitor was cut, the same N.Ekhbayar government initiated another change to the Law on Foreign Investment. The stability agreement was welcomed into the Law on Foreign Investment for the second time.

There is one coincidence that I can’t avoid mentioning. The stability agreement was brought to the Law on Foreign Investment by two MPRP governments. In both cases, the MPRP majority was over 95% of the parliament. In both, the MPRP government initiated the changes to the existing law. In both cases, the Ministry of Finance was obliged to sign the stability agreement within 14 days.

More recently, however, the chairman of the Democratic Party, Ts.Elbegdorj, announced that the Democratic Party was saying “no” to the stability agreement. N.Batbayar, a member of the parliament, promised that he would draft a law to render elements of the law on the Foreign Investment ineffective. Both these announcements were received happily by the head of the household. The herdsman, whose face had become dark and angry, suddenly became cheerful and he began offering tea and friendly chat. It became obvious that he seemed capricious not because of the spring winds but because he didn’t like the “inequitable and suspicious distribution” of the wealth he inherited from his ancestors.

The next question is what to do about the Mongolian Stock Exchange and its head, the MPRP’s R.Sodkhuu, who glibly tries to persuade the advar’s owners to buy their own gold.

It is essential that we eliminate once and for all the provisions related to the stability agreement from Mongolian legislation such as the Law on Foreign Investment and the Law on Mineral Resources. They have caused nothing but instability and confusion, enabling our resources to be whisked away under our own noses. Not only the two abovementioned laws, but all past and future laws must be cleansed of references to this deceitful stability agreement. Otherwise, the stability agreement trap will continue to cause worry, confusion, and instability. It will emerge again and again like a chronic disease, as we saw from abovementioned facts.

If our government and parliament can’t solve this issue and try, instead, to sell the “gold in the avdar” to its own owners with the help of the Stock Exchange, the rulers are better off dismantling the parliament and the government than pretending they represent the people of Mongolia.