After a tumultuous and contested decade of politicking around the potential security implications of expanding its freight logistics to China, Mongolia is expected to complete three critical rail lines by the end of this year. These developments will have a massive impact on commodity markets, allowing China and Russia to look inland for trade, especially in bulk commodities like coal and metals—making both countries more energy secure and less subject to pressure from sanctions.
Given Mongolia’s landlocked position, the country’s economy naturally demands strategic connectivity and trade ports with its neighbors. As of today, Mongolia shares 13 trade ports with China, mostly exporting coal, iron ore, and concentrated copper. For decades, Mongolia depended on old Soviet railway systems and highways for exports, utilizing trucks for most trade by volume. Currently, Mongolia is nowhere near its export capacity due to basic infrastructure constraints.
During Mongolian Prime Minister Oyun-Erdene Luvsannamsrai’s visit to Beijing in February, the two governments finalized the Mongolia-China crossing points for three main rail projects all from Mongolia’s mineral-rich South Gobi to China. Tavan Tolgoi-Zuunbayan’s 416.1-kilometer (or 259-mile) railway, which has the capacity of transporting an incremental 15 million tons of freight, is expected to be completed by October. Tavan Tolgoi-Gashuunsukhait will provide 30 million tons of freight, and the Zuunbayan-Khangi line would be 226 kilometers (or 140 miles) long and reach China’s port in Mandal. That line has already broken ground in March, with an aim to export around 20 million tons.
After a tumultuous and contested decade of politicking around the potential security implications of expanding its freight logistics to China, Mongolia is expected to complete three critical rail lines by the end of this year. These developments will have a massive impact on commodity markets, allowing China and Russia to look inland for trade, especially in bulk commodities like coal and metals—making both countries more energy secure and less subject to pressure from sanctions.
Given Mongolia’s landlocked position, the country’s economy naturally demands strategic connectivity and trade ports with its neighbors. As of today, Mongolia shares 13 trade ports with China, mostly exporting coal, iron ore, and concentrated copper. For decades, Mongolia depended on old Soviet railway systems and highways for exports, utilizing trucks for most trade by volume. Currently, Mongolia is nowhere near its export capacity due to basic infrastructure constraints.
During Mongolian Prime Minister Oyun-Erdene Luvsannamsrai’s visit to Beijing in February, the two governments finalized the Mongolia-China crossing points for three main rail projects all from Mongolia’s mineral-rich South Gobi to China. Tavan Tolgoi-Zuunbayan’s 416.1-kilometer (or 259-mile) railway, which has the capacity of transporting an incremental 15 million tons of freight, is expected to be completed by October. Tavan Tolgoi-Gashuunsukhait will provide 30 million tons of freight, and the Zuunbayan-Khangi line would be 226 kilometers (or 140 miles) long and reach China’s port in Mandal. That line has already broken ground in March, with an aim to export around 20 million tons.
Since 2009, Mongolia has made a big leap in improving its domestic infrastructure. These infrastructure goals played a major role in Mongolia’s efforts to diversify its mining-based economy. Between 2016 and 2020, in a country whose road networks were previously poor, the Mongolian government was able to construct a highway system that connects all 21 provinces to Ulaanbaatar, the capital.
In an effort to increase Mongolia’s exports, in March, Mongolia’s cabinet passed a resolution to jump-start the long-delayed construction of the Choibalsan-Khuut and Khuut-Bichigt railways, totaling 426.6 kilometers (or 265 miles), as well as the 1,255-kilometer (or 800-mile) Artssuuri-Shiveekhuren-Nariinsukhait railway. These railways have been discussed since 2013. To accelerate the construction of these railroads, Mongolia’s Public Procurement System announced a concession tender for the Choibalsan-Khuut railway megaproject.
This would provide greater connectivity to the west of Mongolia that is resource rich but less populated and has weak logistics interconnectivity. The Ministry of Mining and Heavy Industry recently closed its application dates for both domestic and foreign investors to be part of this megaproject.
During the 2022 Mongolian Economic Forum, Oyun-Erdene emphasized Mongolia’s effort to ramp up its commodity exports, particularly coking coal and copper. The government’s plan for partial privatization of state-owned companies aims to attract foreign direct investments in energy, border ports, and industrialization megaprojects, with a goal of 150 trillion-tugrik (or $48 billion) investment. According to S&P Global Commodity Insights, “Mongolia is a key metallurgical coal and copper concentrates suppliers to China, with most of the trade happening through trucks. Mongolian truck suppliers in 2021 faced severe logistics issues in hauling shipments from land ports to China due to the pandemic-led restrictions at border crossings.”
The railroads are intended to solve these logistical challenges, increasing exports to between $14 billion and $17 billion in 2025-2028 and $20 billion by 2029.
Assuming a coal price of $200 per ton, this translates to an incremental 65 million tons of exports—$13 billion of exports for coking coal alone in a country whose total exports in 2020 were just $8.47 billion. And it would mean a large expansion of Mongolia’s fiscal revenue from mining royalties and corporate taxes. Conservatively, this would add $800 million in royalty revenue and hundreds of millions of dollars in tax revenue based on listed coal mining company financials and the prevailing 6 percent royalty rate.
This represents a structural shift for Mongolia’s trade balances and debt serviceability. If it happens, it will raise the question of whether Mongolia will require a sovereign wealth fund to stabilize its currency against all these financial inflows, which could otherwise end up inflating local asset markets or be misallocated. Managing this fiscal boom will be important as global decarbonization targets imply that coking coal demand will start to fall by the mid 2030s, according to most Intergovernmental Panel on Climate Change scenarios.
There’s also the big question of whether China will actually need or want all this coal. China’s recent climate and steel targets already imply limited growth for coking coal demand. China has publicly stated it plans to peak coal emissions by 2025 and steel emissions by 2030 as well as reduce the share of blast oxygen furnace steel production, which uses coking coal, by switching to electric arc furnace production, which does not. Many analysts expect this to be achieved earlier than planned. A substantial and rapid expansion of Mongolia’s exports could eat up the remaining sector.
At the same time, the Mongolian railway expansion is a foretaste of current Sino-Russian infrastructure plans. The first Sino-Russian cross-border railway is expected to be completed in August—at a cost of $355 million. The energy connectivity between Russia and China illustrates Mongolia’s energy vulnerability, further revealing why it is of strategic interest for Mongolia to be included in such a major development.
Moreover, the two countries have other major cooperation plans, such as the Power of Siberia 2 pipeline. This would allow more than 80 billion cubic meters or approximately 70 percent of Russian gas exports from the Yamal Peninsula fields that previously went to Europe to be rerouted to China through a Gazprom pipeline built in 2019.
In response to Sino-Russian energy cooperation, Mongolia sealed a Memorandum of Understanding in 2019, followed by a meeting between Russian President Vladimir Putin and Alexey Miller, the CEO of Gazprom, where Putin stated Russia had no political objections to the project. While this infrastructure expansion plan has potential to impact the energy sector in Northeast Asia, the project will likely struggle to complete by its planned 2025 date with the Russia-Ukraine conflict and sanctions preventing the supply of key equipment. If the war concluded or trade normalized, its completion would otherwise lead to a further rerouting of Russian exports from Europe to China—permanently.
Moreover, the prolonged pandemic and China’s restrictive COVID-19 policies are a major challenge for Mongolia. As of today, only five trade ports are operational. According to the Ministry of Mining and Heavy Industry, between April 15 and April 21, Mongolia exported 300 containers of coal, totaling of 3,342.000 tons of coal exports to China.
This will have a material impact over China’s dependence on seaborne sources of material and no doubt affect China’s thinking around maritime security. If China does not need open sea lanes for food or fuel in the East China Sea, then China’s capacity to absorb the kind of trade stoppages now visible in the Black Sea will be materially higher—with consequences for Taiwan’s security. China could fight much longer and harder in a prospective Taiwan conflict if it does not face food or energy fuel importation constraints due to supplies from Russia and Mongolia, whereas Taiwan would still need uncontested maritime logistics to keep its power grid operational and its people fed.
Expanded infrastructure cooperation between China and Russia shows that despite talk of deglobalization, trade is intensifying between countries and regions with aligned geopolitical interests and is declining between those that have divergences in values and interests. Mongolia may be a democracy, but its geographic position is already making it a key transit point for these new autocratic trading routes.
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