Antonia Colibasanu
Protests erupted in Mongolia more than a week ago, culminating in an attempt by demonstrators to storm the State Palace on Dec. 8. Standing in the freezing cold, they demanded accountability for government officials who had been implicated in an embezzlement scheme, in which more than 30 individuals stole 385,000 tons of coal worth more than $120 million. A public hearing is scheduled to take place on Dec. 21, but it may be too little, too late for citizens whose problems extend well beyond a single act of corruption.
One such problem is its location. Mongolia is a landlocked country caught between two regional powers, Russia and China. Geographically, its most prominent feature is its vast steppes. Much of the country lies in a plateau, but in the west, the Altai Mountains rise to Mongolia’s highest point, more than 14,000 feet (4,300 meters), while the Gobi Desert stretches across the country’s southern border. The country may have once been the seat of a vast Eurasian empire, but much of its recent history has been spent under Chinese or Russian control. As recently as 1968, the Soviet Union had six military divisions in Mongolia, effectively relegating the country to buffer zone status until the bloc fell in 1992.
For Mongolia, it was a blessing and a curse. The country gained its independence, but it was also economically bereft; all its energy imports and about 50 percent of its consumer goods came from the Soviet Union. It was also left vulnerable to Chinese machinations. Although Beijing recognized Mongolia’s independence in 1945, there was concern that younger and more nationalistic Chinese functionaries, who saw Mongolia as an extension of Chinese territory anyway, would press for annexation. Mongolia’s strategy since the Cold War, then, has been to balance between a “good neighbor” policy with Russia and China while looking to establish a “third neighbor” policy to build ties to other countries – the United States, Japan, South Korea, India, Germany, the United Kingdom, Australia and Canada.
Mongolia has thus tried to distance itself from Chinese influence, but this is easier said than done. “Traditional” Mongolian lands inhabited by ethnic Mongolians lie within China’s borders – which points to an acute demographic problem. Of a population of just 3 million, with one-third living in the capital, Mongolia has the world’s lowest population density.
This matters for a country with an economic profile like Mongolia’s. Agriculture accounts for less than 15 percent of its economy, so it must import much of its food. Some 90 percent of the country is prone to desertification, according to the Food and Agriculture Organization, and crop and livestock productivity remains low.
However, the country’s vast deposits of coal, copper, gold and uranium, as well as rare earth elements, have drawn significant international investments in the past decade. China is Mongolia’s primary customer, buying about 80 percent of its exports – primarily copper, coal and gold. But even this relationship, as well as promised infrastructure projects into Eastern Europe, has been disrupted thanks to the pandemic and the war in Ukraine. While coal exports accounted for more than half of Mongolia’s export revenue in the first 10 months of this year, according to central bank data, the pandemic years and the zero-COVID policy imposed by China have destabilized its economy. The export contraction due to border closures and higher global prices for imported food and fuel drove inflation up from 2-3 percent in the spring to 15 percent currently. It’s no surprise, then, that many of the protesters claim they don’t have enough money to make ends meet. Business owners talk of heavy taxes imposed by the government, and those who rely on social welfare say they don’t receive enough to live on.
It’s no coincidence that Mongolia is also facing a debt crisis. According to a central bank report published in June, the country’s public debt amounted to 70 percent of gross domestic product. The World Bank estimates that the overall debt ratio, including off-budget items, amounted to 92 percent in 2021. The central bank acknowledged in early October that things may only get worse.
And this is to say nothing of its relationship with Russia, which may be getting increasingly precarious. Mongolia receives about 95 percent of its energy needs (fuel and power) from Russia, giving Moscow disproportionate influence there even in normal times with normal prices. Thousands of Russians, meanwhile, have fled to Mongolia to avoid conscription, threatening to make an unstable economy even more volatile.
Unique, But Not Alone
Mongolia’s geostrategic problems are its own, but its plight is somewhat typical of smaller countries around China’s periphery. High inflation rates due to high energy and food prices have been registered throughout Asia, especially in countries in which China has expanded its influence.
Laos, for example, owes about half of its foreign debt to Beijing, which is financing infrastructure projects such as railway lines or energy projects like hydropower plants. Also a landlocked country, Laos depends heavily on both its imports and exports with trading partners in Asia. The pandemic has disrupted supply chains and caused a spike in food and fuel prices. Although Laos has tried to shore up ties with others such as Japan and Vietnam, China is still its largest foreign investor. Since 2013, China has put more than $800 billion into its Belt and Road Initiative, with Laos as a key ally to build stronger economic ties across Southeast Asia.
To the northwest, Myanmar is dealing with political conflict and an economic crisis. The increase in the prices of imported inputs and consumer goods in the past year has aggravated domestic unrest. China is the only country to have invested in Myanmar since 1988, when the West imposed sanctions against the military regime. China gave the country a 650-million yuan (about $93 million) grant in the spring and promised financing for a new liquefied natural gas plant. However, with about 40 percent of the population living under the poverty line, and with electricity outages and disruptions in the logistics and financial sectors persisting, it is unlikely that the country will recover even if its political conflict is resolved peacefully.
China has been also trying to make inroads in Nepal and Bhutan via the Belt and Road Initiative. Both are similarly landlocked and thus pursue similar foreign policies as Laos and Mongolia, but they are comparatively less dependent on China. Even so, the pandemic and the Ukraine war have left them with similar economic challenges resulting in similar social stresses.
Both countries are paying more for the imports on which they depend, both are struggling to maintain production amid soaring energy prices, and both are facing inflationary pressures while dealing with a trade deficit. Nepal is also dealing with a potential liquidity crunch because remittances, its traditional source of foreign exchange earnings, have flattened since the pandemic. In Bhutan, the pandemic created labor shortages, particularly in its hydropower sector, which, along with tourism, is the country’s most important source of revenue. The latest data released by the government shows that the country has sufficient foreign reserves to fund the import of essential goods for 14 months.
Hanging over all these countries is the concern of Chinese debt – or rather, falling into China’s supposed debt-trap diplomacy. In September, a spokesman for China’s Foreign Ministry noted that Beijing had outperformed other G-20 member nations in debt service suspension initiatives introduced in May 2020, adding that China will proactively support developing nations in addressing loan repayment through a proper burden-sharing process. Still, this process is hardly transparent, leaving debtors unable to optimize their positions. Such was the case with Sri Lanka, which has been dealing with an acute economic and political crisis, struggling with shortages of essential items, including food, fuel and medicine. The resulting public fury and resentment toward the country’s political leadership forced President Mahinda Rajapaksa to flee the country, which only delayed resolution of its economic problems.
Uncertainty Remains High
Put simply, the instability surrounding China bodes poorly for Beijing, which needs these countries just healthy and viable enough to metabolize its investment, particularly its Belt and Road Initiative projects, and thus prime them to succumb to its influence. China sees them all as geostrategic opportunities, not just to create buffer zones (like Mongolia) but also to circumvent its own geographic shortcomings. Sri Lanka, for example, gives it a potential port in the Indian Ocean. Myanmar (potentially) gives it a land route to the Indian Ocean, while Bhutan and Nepal can give it leverage against India, its regional competitor.
All of China’s projects would have continued had the pandemic not derailed them. Zero-COVID lockdowns and the associated economic downturn have only made things worse. Many of its partners, and especially the landlocked countries bordering China, now blame the lockdowns for their economic woes. Exporters had to find new customers. Both importers and exporters had to find new routes to ship their goods. Businesses have had to adapt, even as the war in Ukraine drives up energy prices, making food and other commodities more expensive. The standards of living in these countries dropped dramatically. People had less work and less income, and as is reported in Mongolia, many were forced to limp from loan to loan. Inflationary pressure has already created political instability in Sri Lanka and Mongolia. It’s not unreasonable to think others may fall victim soon too.
Little is known about the real problems of the Chinese economy, uncertainty remains high, and the global economic restructuring process will drive more instability in these countries in 2023 – much of which will pose security threats to both China and Russia.
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