Since the third quarter of 2023, the Mongolian public have been shaken by regular media reports of gasoline and diesel shortages in various parts of the country. Furthermore, to lend credence to these reports, a regular succession of publications have appeared stating just how many days’ worth of fuel are left in the country.
This trend has become particularly evident since the Russian Federation introduced restrictions on fuel exports in 2023 to stabilize its domestic market. Mongolia receives more than 95% of all its fuel by rail from its northern neighbor, and more than 75% of all of Ulaanbaatar’s fuel imports come from Rosneft.
Nevertheless, a detailed examination of the issue reveals that the Russian restrictions could not have been responsible for the shortages on the Mongolian market, as the actual suspension of supplies across the border was in effect for only two weeks, and was lifted following the visit to Mongolia by Vyacheslav Volodin, Speaker of the State Duma of the Russian Federation, in September 2023 During that visit, the high-ranking Russian representative assured concerned Mongolian colleagues that the restrictions do not apply to friendly states. Mongolia and Russia’s relations, though there have been a number of ups and downs in the last thirty years or so, have traditionally remained cooperative and neighborly. Later, the issue was discussed between the two countries on a number of occasions and was placed under the full control of the Mongolian Foreign Ministry and other government authorities.
Soon after Vyacheslav Volodin’s visit, several one-off agreements for additional fuel supplies were signed, and their fulfillment was monitored in detail both by the exporting companies and the management of the Ulaanbaatar Railway, through which fuel is imported to Mongolia, and even by the national Parliament. It is thus clear that the Russian Federation has been careful to fulfil all its obligations to its neighbor. In addition, in 2023 Mongolia tripled its fuel purchases from China.
Nevertheless, the question remains: what was the reason for the fuel shortage which led to a prolonged shutdown of a number of mining operations in December 2023?
There are several reasons for this situation. The main reason is probably a significant increase in Mongolia’s fuel consumption – a factor which could not have been predicted during the procurement planning process. The fact is that, in terms of output, 2023 was the most successful year to date for Mongolia’s mining sector. This was due to the commissioning of major projects, such as the deep copper and gold mine at the Oyu Tolgoi deposit, and also to the lifting of coronavirus-related import restrictions by China, which accounts for more than 90% of Mongolia’s mining exports. As a result, productivity in the industry increased by a third, compared with 2022, with almost 70 million tons of coal alone extracted and exported to China, as opposed to 30-40 million tons in previous years. To judge by the reports of fuel shortages in the country, it is diesel, a staple for the mining industry, that has been the most affected.
Another no less important factor in the shortage was the problems in Mongolia’s system for importing and selling fuel. The fact is that the Mongolian authorities have not allowed Russian companies to participate in the internal distribution and sale of the fuel supplied by them. Thus, there are no Russian gas stations to be found in Mongolia, and Russian fuel is sold by numerous local entrepreneurs. This decision was made out of concern for the country’s energy security, which Mongolia was unwilling to entrust entirely to a foreign state. As a result, Mongolian fuel supply businesses started to work as intermediaries between Russia and Mongolia. These were often small or medium-sized enterprises with limited organizational, technical and financial capacities. Due to both this factor and the lack of transparency of their activities, discrepancies between the volume of fuel imported into the country and that sold within the country began to emerge in the 2000s and 2010s. Moreover, some prominent figures in Mongolia have accused these companies of creating artificial shortages to increase fuel prices in the domestic market. And by December 2023, there had already been a dramatic increase in the number of gas station inspections nationwide.
A third significant factor is the state of the infrastructure supporting fuel imports in Mongolia. Almost all imported fuel comes through a railroad crossing point connecting the Russian railroad network and Ulaanbaatar Railways, which has very limited capacity and outdated infrastructure. Nevertheless, the modernization of the crossing has been stalled by differences of opinion between Russia and Mongolia concerning its vision (it is important to remember that Ulaanbaatar Railways JSC is a joint venture, with 50% of its shares owned by the Russian Federation).
While this is a serious problem, there are a number of promising solutions. Mongolia could consider the possibility of allowing Russian suppliers to participate in its domestic market or establishing a state structure to organize fuel imports and distribution, and the parties could make concerted efforts to modernize Ulaanbaatar Railways. Other options include the establishment of a permanent bilateral body for regular consultations on procurement volumes, the creation of opportunities to increase the proportion of fuel imports carried into Mongolia by road, and even the possible return to discussions on a proposed oil pipeline through Mongolia to China.
Of course, the problem of fuel shortages will be somewhat mitigated by the progress in the construction of the Mongolia’s first oil refinery in Ömnögovi (South Gobi) Aimag, as well as a pipeline to it from the country’s oil fields. However, even the successful commissioning of the refinery in 2025 will not solve the current fuel shortage problem, as the real root of the problem lies not so much in the amount of fuel available in Mongolia, but in distribution issues. A second boom in Mongolia’s mining sector is not expected in the next few years, and thus the imperfections in the system of fuel sales on the domestic market will remain a pressing issue.
Boris Kushkhov, Department of Korea and Mongolia at the Oriental Studies Institute of the Russian Academy of Sciences, exclusively for the online magazine “New Eastern Outlook”