Mongolia’s Dilemma: A Politically Linked, Economically Isolated Small Power

Mongolia operates under the geopolitical and economic forces of rising China, reactive Japan and Russia, and retrenching America. It strives to preserve its nomadic, democratic, and Buddhist identities while accommodating currents of Western, Chinese, Russian, and Islamic civilizations. Thus, like other small powers, it faces new opportunities and uncertainties as the over-arching geopolitical, economic, and cultural dynamics shift. This article takes Mongolia as a prototype buffer state, discussing its three options: 1) riding the Chinese high-speed train; 2) accommodating Russia’s interests; and 3) embracing Japanese geopolitics. I argue that Mongolia needs to exploit all three options, but it should keep its heated domestic politics out of major economic projects.

Despite geographical isolation from proximate regions, Mongolia is politically linked as a member of the United Nations, NAM (the Non-Aligned Movement), G77, ARF and OSCE, while partnering with the European Union and NATO. Its initiative of a nuclear weapons free zone was unanimously endorsed by the five nuclear powers and later spread into Central Asia. Mongolia is the second largest peacekeeping contributor from Northeast and Central Asia after the PRC, while running the only annual peacekeeping exercise, Khaan Quest, which welcomes the militaries of historic and current rival states.¹ It hosted the seventh ministerial meeting of the Community of Democracies in 2013 and launched modest Helsinki-type diplomacy by welcoming city mayors, female parliamentarians, and track-II scholars from Northeast Asian states, including North Korea in 2014. It will host the 2016 Asia-Pacific Europe Meeting (ASEM), as it is fighting to join APEC and to become a dialogue partner of ASEAN. For a country with a meager population, its diplomatic role is impressive.

Yet, Mongolia’s wide-ranging political ties do not result in diverse global and regional economic links. About 90 percent of exports are China-bound, while Mongolia relies heavily on Russian fuel and oil products. In spite of much economic liberalization, diversification, and integration rhetoric in Ulaanbaatar, it is economically a regionless state. A long-lasting peaceful neighborhood, abundant natural resources, proximity to East Asian markets, and ideological appeal to developed economies do not satisfy its aspirations for global and regional economic connections. To be sure, there are on-again, off-again discussions with neighbors and western investors about trans-Mongolian railroads, pipelines, roads, grids, logistics hubs, and economic corridors, but none of these proposals has been realized, mostly due to Mongolia’s “crabs in a barrel” type of politics, the conflicting interests of its neighbors, and global market dynamics. Even so, as regional power dynamics shift, opportunities may be emerging for an economically isolated small power, such as Mongolia. The prospect that the door is open to new initiatives guides this article, despite awareness of multiple challenges.

Events in 2014 reveal the new regional power dynamics. While acknowledging the importance of economic interdependence, China and the United States have avoided direct confrontations, but apparently are preparing for strategic uncertainties. China and Russia, despite traditional mistrust, are committing themselves to an unusual, long-term, strategic partnership, confronting the United States and its allies as they expand their geostrategic assertiveness in the eastern littoral and Eastern Europe respectfully. They also struggle to suppress secessionist movements in their restive regions, while worrying about Islamic extremism as the United States withdraws from Afghanistan. Under these circumstances, China and Russia need to keep their strategic rears—Central Asia, especially Kazakhstan, Kyrgyzstan, and Tajikistan, Mongolia, and North Korea—as neutral, stable, and peaceful as possible. Even though they see economic integration, in general, as a solution, Russia does not want to lose its “privileged status” in Mongolia and Central Asia through integration that centers on China, and Mongolia faces the dilemma of yielding to its neighbors’ influence in order to become economically connected to wider markets. This is similar to dilemmas faced by other landlocked small states. Apart from reaching out to Japan, Mongolia has limited options, but that does not mean it cannot benefit from strategizing about the possibilities that are appearing.

A Prototype Small, Buffer State in a New Global Order

Mongolia is a prototype buffer state. Like Finland and Poland in Europe or Kazakhstan in Central Asia, Mongolia sits between two traditional rival states, maintains an independent statehood and possesses lesser economic and military capability than its neighbors do. Nevertheless, a buffer state bears strategic importance either to upset the balance of power or to facilitate constructive interactions between buffering rival states. In contemporary international relations, a buffer state can choose among three main strategies: 1) institutionalizing its neutrality; 2) leaning to one of the buffered powers; and/or 3) relying on third powers.² In the post-Cold War period, Mongolia has pursued the first and third strategies.

Mongolia institutionalized its neutrality and non-alignment unilaterally through its 1992 Constitution and its National Security Concept and Foreign Policy Concept as well as domestic laws; bilaterally with China and Russia by concluding friendly relations and cooperation treaties; and multilaterally through the United Nations and other international organizations. As a result of its non-alignment policy, Mongolia along with another non-aligned state, Turkmenistan, has remained outside of the Shanghai Cooperation Organization (SCO). Even though Mongolia’s reliance on third powers is constrained by its geographic isolation and lack of historic, cultural, and economic ties, it has pursued a soft-balancing strategy of reaching out to distant powers, namely the United States, Japan, Germany, and India.³ Democracy and peacekeeping have been the main currencies in Mongolia’s appeal for political, economic, and cultural support from these powers. Mongolian democracy has never regressed, while its military is making steadfast contributions to US and NATO operations in Afghanistan, Iraq, and Kosovo. But, in reality, Mongolia has very limited geo-strategic and economic value, not only for its neighbors, but also its so-called third neighbors.

Unlike Kyrgyzstan, Mongolia is far away from land and air routes to South Asia and the Middle East. It neither poses a nuclear/conventional threat nor raises refugee concerns for major powers, as North Korea does. Despite its cultural ties to Central Asia and the Xinjiang Uyghur region of China, Mongolia is not considered relevant to Chinese, Russian, and American military campaigns against religious extremism. Similarly, Mongolia is economically less attractive for major powers because it does not possess large oil and gas deposits, it lacks the supporting infrastructure for mineral exploitation, and it is not seen as providing a stable political and regulatory environment for foreign investment. But, these conditions in the post-Cold War setting are, arguably, about to change. China has started proactively pushing a series of potentially transformative regional initiatives, while the United States, Japan, and Russia are reacting, making strategic adjustments in their own policies.

China is institutionalizing a “new type of major power relations” with the United States, while deferring, to some degree, to the interests of other major powers, especially India and Russia, and implementing renewed peripheral diplomacy to its neighbors.⁴ These proactive moves, presumably, will enable China to prevent conflict with the United States, reduce misperceptions or confrontation with regional challengers, especially India and Russia, and increase political, economic, and even security dependency of smaller neighbors on China. Whereas a China-centric economic order has already become a reality, a China-centric regional political and security order is still being pursued.

In reaction to Chinese moves, the United States has reinvigorated its maritime strategy with special focus on the Asia Pacific region, reassuring its allies and reinforcing its hedging strategy against China’s military buildup. Despite its domestic economic troubles and geopolitical distractions in the Middle East and South Asia, the United States is gradually retrenching from the Eurasian heartlands while consolidating its capabilities in the maritime Asia-Pacific (Indo-Asia-Pacific region).⁵ At the same time, a key ally, Japan has begun to advance its global and regional influence under Prime Minister Abe’s watch. “Abegeopolitics” appears to be responding to US retrenchment and also to China’s attempts to institutionalize the China-centric order.⁶ Russia is also re-visiting its strategy in the Asia-Pacific region to reassert its major power status, while developing Siberia and its Far East region, and to integrate with China’s economy and other East Asian economies too.⁷ Russia’s ‘Look East’ strategy gained momentum as tensions with Ukraine escalated in 2014 and its eagerness for political and economic partnership with China has risen to counter Western economic pressure. Although China is its key partner, Russia has been attempting to diversify its economic interactions with other Asian states, i.e., Japan, South Korea, India, and Vietnam, as well as to maintain its “privileged status” in Mongolia, the Central Asian states, and North Korea.

The new dynamics of the major powers have already begun to affect Mongolia. Last year, during President Xi Jinping’s visit, China included Mongolia in its list of comprehensive strategic partners with which to develop “win-win” relations in all areas of cooperation.⁸ So far, Chinese leaders have not expressed any concern about US support for Mongolia’s democracy, while they have often acknowledged Russia’s special relations with it. Therefore, Mongolia is not a proxy state for rivalry with either great power. Concurrently, Russia is attempting to revive its ties with Mongolia. President Putin visited several times during the 2000s. Although Mongolia, unlike Kazakhstan or North Korea, is not geopolitically and economically significant, Russia is pressuring it to become an SCO member, to join in the Eurasian Economic Union, to reject both Western and Chinese involvement in its uranium mining and railways, and to gain “privileged” access to major mining and infrastructure projects in Mongolia. In 2014, Putin celebrated the victory against Japan in 1939, endorsed closer military-to-military cooperation, and approved long overdue visa-free travel with Mongolia.⁹ Compared to China, Russia is more assertive and more focused on regional rivalries.

Unlike Mongolia’s neighbors’ interests, the United States appears to be losing interest in Mongolia following the successful consolidation of electoral democracy, presumably due to its geopolitical and economic insignificance for Washington at a time of falling prices for natural resources. While defense and Peace Corps programs continue, USAID closed its assistance program in 2014, a bilateral investment transparency agreement is stuck in the Mongolian parliament, and US investors have failed to secure investment opportunities. However, amidst the Ukraine conflict, Secretary of Defense Chuck Hagel made a surprise visit and concluded a joint vision statement—a key pillar of the US comprehensive partnership with Mongolia.¹⁰ In contrast, Japanese interests in Mongolia have surged. Recognizing its geopolitical and ideological importance, Prime Minister Abe started his first foreign travel with a stop in Mongolia in 2013. Within a short period of time, Japan entered into a “strategic partnership” and it became the first OECD country to conclude an FTA in 2015.¹¹

The emerging constructive, albeit cautious, interaction of major powers opens a new set of opportunities as well as challenges for a buffer state such as Mongolia. It certainly appreciates how an over-arching, stable external environment would facilitate the country’s desire to become an economic corridor and serve outside integration. Mongolia now must weigh three opportunities to expand its economic linkages: 1) capitalizing on China’s economic power and growth (bandwagoning) for East Asian linkages; 2) accommodating Russia’s assertive behavior for more European linkages; and/or 3) balancing with Japan and its allies for global linkages.

The China Option: “Boarding the Chinese Bullet Train”

The China option is the most available and is seemingly inevitable, but domestically it is highly complicated. It is available because only China has the ability to finance and to provide technology, materials, and labor in building large-scale projects, such as railways, roads, power plants, and processing factories in Mongolia. It appears inevitable for Mongolia, a frontline country, which cannot escape the growing political and economic clout of China. For China, Mongolia sits on the roads to Russia, shares the longest land-border, and has strong historical, ethnic, and cultural ties with its autonomous Inner Mongolian, Xinjiang Uyghur, and Tibetan regions. For Mongolia, China is the only gateway to the Asia-Pacific region. Yet, this option is the least desirable in a country where anti-Chinese sentiments easily override any developmental discourse. Mongolian politicians are keen to avoid the demeaning experience of being labeled huaqiao, danjaad, erliiz, hurliiz, or even a Chinese spy, given that public opinion toward China is the least favorable among its neighbors.¹²

Despite this complexity, bilateral events over the last few years indicate attitudinal changes at the government level. Within a short period, both countries declared a “strategic partnership” in 2011 and upgraded to a ‘comprehensive strategic partnership’ in 2014. Consequently, Beijing and Ulaanbaatar concluded substantive mid- and long-term action plans and set up an annual strategic dialogue to monitor the implementation of these plans. A few changes are worth noting. In 2013, the Mongolian government welcomed Chinese state-owned enterprises, i.e. Shenghua Group, Sinopec Group, China National Petroleum Corporation, and Chalco, investing in major mining and developmental projects. It had previously been reluctant to approve large-scale investments from China. The revised National Security Concept (2010) limits investments originating from one country to a third of overall FDI. The government blocked the sale of the SouthGobi Resources mine to Chalco in May 2012. Subsequently, the Mongolian parliament passed a law restricting foreign state-owned enterprises investing in strategically important sectors.¹³

The government also approved construction of narrow (Chinese) gauge rails linking the Tavan Tolgoi mine to Chinese railways and agreed to establish the first-ever Sino-Mongolian joint railway venture.¹⁴ Previously, parliament had prioritized connecting this mine to the trans-Mongolian (north-south) railway and further to the Russian Pacific railways while rejecting any direct links to Chinese rails. The main rationale of this policy was: 1) to maintain the one country, one rail standard, which is the Russian broad gauge; 2) to expand the domestic rail network; 3) to diversify the buyers of Mongolian mineral exports; and 4) to produce value-added products.¹⁵

Another change was Mongolia’s request for China’s support in realizing its foreign policy objectives, especially for membership in APEC and the East Asia Summit and participation in such emerging regional frameworks as the China-Japan-South Korea trilateral grouping, the Silk Road Economic Belt initiative, and the Asian Infrastructure Investment Bank, while also asking China to help to implement Mongolia’s Ulaanbaatar Dialogue, Helsinki-type initiative for Northeast Asia. At the same time, Mongolia also seeks Beijing’s assistance in promoting itself as an economic corridor between China and Russia through trans-Mongolian railroads, roads, pipelines, and grids. Mongolia is used to looking for support from its “third neighbors” to implement its foreign policy objectives. Now its foreign policy is shifting to its real neighbors and the architecture for Northeast Asia.

These changes could be explained differently from Chinese and Mongolian perspectives. For China, its strategy appears to be driven by a geopolitical rationale for sensitive terrain used by rival powers. The withdrawal of the Russian political, and especially military, presence from Mongolia was one of the conditions for Sino-Soviet rapprochement. Today, US, Japanese, and Indian political and security engagements with Mongolia could be perceived by Beijing as part of their democracy promotion or strategic encirclement strategies. At the same time, Mongolia serves as an influential signaling post for leaders to project a benign, peaceful, major power image. China concluded a border treaty with Mongolia while conducting the Sino-Indian war in 1962. President Hu Jintao started his first foreign travel from Mongolia in 2003, and Xi Jinping repeatedly expressed the importance of a win-win principle in China’s neighborhood diplomacy during his visit in 2014. Xi became the first Chinese leader to publicly state in Ulaanbaatar that “China will respect Mongolia’s territorial integrity, independence, and developmental choice forever.”¹⁶ Under this geopolitical rationale, China’s policy has been progressive, tolerant, and particularly accommodative to Mongolia’s requests. Besides Mongolia’s economic importance for the Inner Mongolian Autonomous Region (linking to Tianjin port), China has limited economic interest in Mongolia.

From the Mongolian perspective, changes are driven mostly by economic need. China is the closest market and also the shortest gateway to East Asia. Whereas Russia has basically closed its market to Mongolia and not considered its requests for preferential tariffs and access to Russian transit facilities and ports, China has been accommodating its need for transit facilities, visa-free travel arrangements, and markets for meat products. Following the normalization of Sino-Mongolian relations, China offered 30-day visa-free travel while Russia imposed visa requirements for Mongolian travelers. This arrangement has basically changed the travel patterns for Mongolians given shorter travel hours to Beijing than Moscow, more access to foreign embassies not present in Ulaanbaatar, and the multiple airline and rail connections that Beijing offers. Russia closed its markets for Mongolian meat exports, while China recently opened its. Mongolia needs to be part of the Silk Road Economic Belt and the Asian Infrastructure Investment Bank. Otherwise, it would remain isolated from sub-regional economic integration bypassing it through the Russian Far East on the east and Kazakhstan on the west.

Overall, China is the most available option to connect with Chinese, East Asian, and even Central Asian economies. It will remain supportive of closer ties to project its benign, peripheral diplomacy, to neutralize the influence of its strategic rivals, and to attract Mongolia to its regional order. However, a few factors complicate the China option. First, more Chinese developmental investment will increase the presence of Chinese nationals (mostly male labor), which could easily provoke a historic, nationalist, and protectionist backlash in Mongolian society. Second, the infusion of money through Chinese FDI would complicate the ongoing anti-corruption campaign in Mongolia, unless the Chinese government increased its scrutiny over investment, businesses, and projects. This would trigger public discontent and media outrage over Chinese investment along with domestic corruption. Third is the Russia factor. Unless enmeshed in domestic turmoil and/or major external conflicts, it would not stand still for rising Chinese influence in Mongolia at the expense of its traditional geopolitical and economic interests.

The Russia Option: “Accommodating Traditional Interests”

The Russia option requires Mongolia to compromise to accommodate its traditional geopolitical and economic interests. Russian political and economic elites want their old privileged status in Mongolia, which is not supported by their Mongolian counterparts. In general, Russia’s relationship with Mongolia is ad hoc and reactive mostly to geopolitical contexts. Russia asserts its influence in Mongolia when it perceives a threat from its rivals, earlier Japan, but now China and the United States; however, it is the only potential partner to check China’s influence while reviving its role as a traditional trading partner and a gateway to Europe. Although Russia abandoned Mongolia in the late 1980s, it maintains leverage, providing about 90 percent of Mongolia’s fuel imports and a significant portion of the electricity to Central and Northern Mongolia. A shortage of either could upset Mongolia’s economy, society, and politics. It co-owns the trans-Mongolian railway, the Erdenet copper and molybdenum factory, and the Mongolrostsvetment fluorspar factory. All three joint enterprises, especially the railway and copper factory, are vital for Mongolia’s economy; therefore, Russia retains the ability to be a game-changer for Mongolia’s strategy and policies.

In the post-Cold War period, Russia’s policy toward Mongolia has been more consistent with its traditional geopolitical calculations than any economic rationale. Mongolia’s requests for reviving bilateral trade and upgrading joint ventures were simply ignored, while Russians should be partially blamed for the delays in the major mining and infrastructure projects discuss in Ulaanbaatar. From 2000, Mongolia was included in Putin’s strategy to revive Russia’s traditional great power image by re-engaging in its traditional geopolitical strongholds in Asia. Putin visited Mongolia and North Korea in 2000 and Vietnam a year later. Russia solved the Soviet-era debts with Vietnam and Laos in 2001, Mongolia in 2003, and North Korea in 2012. Its debt solution with Mongolia came right after Mongolia’s military deployment to Iraq from 2003 as well as increased American assistance to Mongolia. Moscow intensified political and military exchanges, including the provision of military hardware and the start of bilateral military exercises.

In 2008, Russia demonstrated another mostly geopolitically driven reaction, rejecting the use of US assistance (USD 188 million) to increase traffic and efficiency on the Mongolian railway.¹⁷ Instead, it agreed to a joint company, Mongolian Infrastructure Development, and provided Russian engines and trucks. Since then, Russian officials and state-affiliated oligarchs have been actively and openly engaged in heated railroad debates on whether to connect to the Chinese railway first, following efficiency logic, or the Russian Pacific railway, in accord with diversification logic, and whether to use Russian gauge or Chinese gauge in railroad extension projects. As a result, Mongolian railroad expansion remains hamstrung, much as the situation in Kyrgyzstan.

The re-assertion of interest in uranium mining appears to be driven by Russia’s geopolitical strategy of securing uranium deposits in Central Asia and Mongolia, where it operated a uranium mine in the 1970s. After high-level exchanges between Ulaanbaatar and Moscow in 2008 to 2009, Mongolia quickly enacted a new law on nuclear energy development, which cancelled the Canada-based Khan Resources Company’s license and resulted in establishing a joint uranium mining venture with Russia. It established a Nuclear Energy Agency and reported Russia’s promise to build a nuclear plant and resume training Mongolian nuclear specialists. As a result, the uranium mining projects were delayed, and the Mongolian government is required to pay a USD 100 million arbitration award to Khan Resources.¹⁸

Besides Russia’s engagement in defense, railroads, and uranium, state-affiliated oligarchs have expressed an interest in major mining, infrastructure, and banking projects. After the Mongolian government began the bidding process for operating the largest coking coal deposit, Tavan Tolgoi, Russians established a joint venture with Mongolia and managed to be included in the multinational consortium, which includes China’s Shenghua Energy and American Peabody, in 2009. Because of Japanese and South Korean complaints, the bidding process was cancelled and resumed again in 2014. Russia proposed in 2008 to operate 100 gas stations, but the proposal was immediately declined in the protectionist and nationalist atmosphere in Ulaanbaatar. Because Russian elites seek “privileged status,” new business deals or projects in which Russians express interest are delayed.

There were some changes in Russia’s attitude towards Mongolia in 2014. First, for the first time, it agreed to join a trilateral summit initiated by Mongolia in Dushanbe.¹⁹ Second, at Mongolia’s and also Russian republics’ request, Moscow agreed to resume visa-free travel arrangements between Mongolia and Russia.²⁰ Third, Rosneft chief Sechin visited Mongolia and agreed to build a pipeline to a new oil refinery, concluding a five-year supply agreement.²¹ Finally, Russia for the first time welcomed a Mongolian military contingent to a victory parade in Moscow. However, Russia has remained silent on Mongolia’s request to build a trans-Mongolian railroad, roads, and pipelines, to open its market to meat products, to reduce transit tariffs, and to increase Mongolia’s share of joint ventures, especially the trans-Mongolian railway. Russia supports bilateral military cooperation, especially an annual military exercise, and it now pressures Mongolia to join the SCO and Eurasian Economic Union. Despite sympathy for Ukraine, Mongolian discourse has concentrated on taking advantage of Russia’s shifting economic interests to China and Asia, not on European issues.

With public opinion generally positive toward Russia, Russia is still considered an important, even inevitable, option to reach the Russian and European economies, but there are complications. First, Moscow does not want to reduce its influence, whereas Ulaanbaatar does not want to grant it “privileged status.” Any Russian bullying to include Mongolia in its “new cold war” order would push Mongolia into the Beijing-centric regional order, although Mongolia’s domestic politics, overwhelmed by short-termism, could neutralize Russian assertive behavior by not locking-into long-term commitments. Second, it is unlikely that Russia would support proposals for Mongolia to become an economic corridor between China and Russia. Russia would rather build natural gas and oil pipelines, railroads, and roads through its Far East to develop its own local economies and lower transit risks. It does not want an increase of Chinese or Western influence in Mongolia, unless all parties accommodate Russian interests. Russia would rather see North Korea as a vital economic corridor to East Asian economies. Third, Russia and Mongolia are now economic competitors; both are trying to reach Chinese and East Asian markets with the same products, e.g. copper and coal.

Even if Mongolia wholeheartedly welcomed Russia’s involvement in developing its natural resources and infrastructure projects, Russia is unlikely and unable to invest into an economic corridor proposal jointly framed by Beijing and Ulaanbaatar.²² Its state-affiliated entrepreneurs would complicate any major developmental project until either Beijing or Ulaanbaatar accommodated the Kremlin’s desire. This makes the Russia option the most complicated one.

The Japan Option: A Card of Abegeopolitics?

For Mongolia, Japan is the only proximate major power that could potentially serve as an external balancer against a rising China and an alternate source of technology, capital, and markets. On the Japanese side, the relationship seems to be driven by geopolitical and ideological factors. Japan became a strategic partner in 2010 and the first G7 as well as OECD country to enter into a free trade arrangement with Mongolia from 2015. It is another option for global and regional economic linkage. Amid tensions with China and South Korea, Abe’s decision to begin his geopolitical and economic offensive from Mongolia was regarded as a “wake-up call” for China in the Japanese and Western media, but warmly received in Mongolia.²³ Amid talk about Japan’s interest in Mongolia’s mineral resources, especially coking coal, uranium, and rare earth minerals, Japanese support for Mongolia is geopolitical and ideological. Abe’s first official tours hopscotched across China’s worrisome neighbors, including India, Vietnam, and the Philippines. During his visit to Mongolia, the two governments agreed to increased collaboration in many areas, including military-to-military relations. Japan’s Ministry of Defense concluded an MOU to expand cooperation in military medicine and peacekeeping operations, especially around the Khaan Quest exercise.²⁴ Japan has been the largest donor for Mongolia’s political and economic transition; over 70 percent of its foreign loans and aid have come from Japan.²⁵ Assistance to Mongolia is driven by the ideological value of liberal democracy rather than alternatives to war reparations elsewhere. Japan values Mongolia’s geopolitical importance as well as its commitment to democracy.

Japan and China have avoided open competition over Mongolia. After all, Japan and Mongolia need China to facilitate their relations. Japan has been shown restraint; it advanced mostly cultural and economic (humanitarian/developmental aid) ties while holding back on political and security interactions with Mongolia. Even though Japan is now broadening relations into the political and security sphere, it has not demonstrated any interest in using Mongolia as an outpost for democracy promotion (unlike the US approach) or part of a military encirclement strategy. The Japanese SDF has begun participating in the Khaan Quest exercise, but is limited to peacekeeping and engineering.

Mongolia’s pro-active diplomacy toward Japan is explained by its soft-balancing strategy and great need for capital, technology, and markets. As US and EU interest in Mongolia declined, Mongolia’s third neighbor policy began to lose momentum. Apart from Japan, India and Australia appear to have kept their ties with Mongolia in this emerging order. Despite its long-standing political and spiritual ties, India is geographically isolated from Mongolia, and its partnership remains limited to small-scale military exchanges and Mongolians’ holy pilgrimage to Buddha’s birthplace in India. Australia is emerging as another important distant player, but its interests are restricted to mining investments rather than political and security ties.²⁶ This makes Japan the primary potential third neighbor in a soft-balancing strategy. Both share historical concerns about China, the values of liberal democracy, and interest in nuclear non-proliferation and human security. Both are also NATO Global Partners.

The other driving factor of Mongolia’s pro-active diplomacy to Japan is economic. It needs Japanese capital to finance infrastructure—the international airport, exploitation of mining deposits, and industrialization projects, and it has secured samurai bonds and requested ODA. Mongolia needs Japanese technology in urban development, the agricultural sector, and tourism. Japan is considered the most likely buyer of its mineral resources and livestock products. Welcoming the Sumimoto Corporation in the operation of the Tavan Tolgoi coking coal project sets an example.

There are other important foundations for an amicable partnership between Mongolia and Japan. Mongolia is the only Northeast Asian state which was not colonized by Japan. Following its own geostrategic calculations, Russia defended Mongolia from Japanese aggression in the undeclared war of Khalkhyn Gol (also known as Nomunhan) in 1939. In the 1990s, the Mongolian government facilitated the repatriation of Japanese POW remains from 16 locations. Unlike China and the two Koreas, it is not concerned with Japanese nationalism, Yasukuni visits, and other war-related matters. Rather, Mongolia supports Japan playing a larger role globally and regionally. Japanese sumo has also contributed to strong cultural ties between the two. Mongolian wrestlers have been in the forefront of Japanese sumo since 2003, numbering four Yokozuna Grand Champions and more than 30 wrestlers competing in five divisions, from makuuchi to jonidan. Mongolians in Japan now constitute the second largest Mongolian diaspora in Asia, after 40 thousand Mongolians in South Korea. Japan has provided extensive scholarships for Mongolian students; over 1000 are studying in Japan. These factors have built a strong foundation for bilateral relations and for Japan as a global and regional linkage.

Overall, the Japanese option is critical for Mongolia—to balance against rising Chinese influence, to consolidate its democratic identity, and to strengthen its political and economic engagement globally and regionally. Economic relations are limited, but there is potential given Mongolia’s mineral and livestock resources and Japan’s advanced technology and expertise. As outlined in the EPA agreements, more focus will be given to agricultural development, mining (rare earth minerals/uranium/coal), and tourism.

Conclusion

Regional dynamics are changing as all major powers, including China, are pivoting and readjusting their overall strategies. Because none of the major powers wants a conflict, Mongolia, like many other smaller states, will likely operate in a favorable geostrategic environment, which could provide new opportunities for forging economic linkages. Russia and China want to have their strategic rear Mongolia peaceful and stable while trying to manage tensions elsewhere, to suppress ongoing separatists movements, and to focus on more volatile neighbors in Central Asia. Neither wishes to trigger a security dilemma. China is more eager to offer economic linkages to its Silk Road Economic Belt, while Russia seems to be reluctant until it finds more economic benefits in Mongolia. Within this complicated picture, Japan provides an additional option for Mongolia’s economic linkages, but it has to go through Beijing. In this emerging scenario, taking sides would be extremely costly for a small state; Mongolia needs support and understanding from all major powers and to avoid being caught in their geopolitical rivalries.

In order to implement pragmatic economic policies, Mongolia needs to put its “crabs in a barrel” type of politics in order. Intensive competition among political parties, factions, and interest groups has resulted in a weak bureaucracy, a vulnerable judiciary, and an unstable legal and regulatory environment. In pursuit of short-term and parochial interests, domestic actors delay developmental projects and attempt to shake up the political landscape even before the four-year election cycle to improve their bargaining position. This intensifies mismanagement of resources, bonds, loans, and debts and undermines the democratic political order. Unless domestic political stability and the rule of law improve, Mongolia’s desire for economic linkages will be difficult to realize even if different options are becoming available for linkages to the markets of its neighbors.