The Uranium Shakedown: How Mongolia and Russia Conspired Against Western Investors 7
MONGOLIA - CIRCA 2014: A stamp printed in Mongolia shows Vladimir Putin and Tsakhiagiin Elbegdorj, Russian and Mongolia President, dedicated to the Visit of Vladimir Putin to Mongolia, circa 2014

The curious case of Khan Resources exposes how Mongolia seized uranium mine deposits from their Canadian legal owner and transferred them to Russian government control. And with elections imminent, the Mongolian government is now trying to clean up the mess. 


Mongolia is racing against time to make friends.

After years spent reneging on mining deals with the likes of Rio Tinto, the government has suddenly begun to settle its disputes with the promise of compensation and fresh projects.

The reason? Here too, it’s election time. And if you think America’s Democrats face a hard time defending their record, pity Chimediin Saikhanbileg. Mongolia’s Prime Minister has presided over one of the world’s most spectacular nosedives in economic growth – from 17% five years ago to near zero now.

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Not all of this is the government’s fault, of course. More than any other country on Earth, Mongolia’s economy relies upon China, with 90% of its exports flowing to its southern neighbor. Sales and prices of its copper, coal and other commodities have crashed with the Chinese slowdown.

But many of Mongolia’s economic troubles are self-inflicted. The government has sent foreign investors packing with punitive new laws to seize their assets. As a result, giant joint mining projects remain idle. Now, under the weight of disappointment from 3 million increasingly impoverished Mongols, the regime is scrambling to mend bridges to foreign investment. After freezing out Rio Tinto in its clamor for a bigger slice of copper and gold projects, the government struck a deal in 2015.

And after years of contesting international court orders, it has finally agreed this month to settle its long-standing dispute with a small Canadian mining company called Khan Resources. Khan’s story reads like an international espionage thriller, and is perhaps the most enlightening in assessing whether Mongolia really is changing – or just papering over the pre-election cracks.

The $70 Million Question

A decade ago all was going well for Khan – a relatively junior company in Mongolia, then known in international mining circles as the land of opportunity.

Khan was issued exploration rights to mine uranium in Dornod, the easternmost of Mongolia’s 21 aimags, or provinces. Its licenses from 2005 were extended for a further three years in 2008. And in 2007 Khan published a feasibility study that confirmed a substantial uranium deposit, with an expected annual production rate of 2.9 million pounds of U3O8 and an expected mine life of over 15 years.

But the next year, everything changed. Under its recently-passed Nuclear Energy Law, Mongolia designated uranium as ‘a strategic mineral,’ which retro-actively gave its government control over all existing and future investment agreements.

Vector map of Mongolia country

In an adolescent democracy, prone to bouts of nationalism and inherent in tribalism, this should have rung alarm bells in Vancouver, the global center of the mining industry. Companies like Khan had every reason to fear the ambiguities in the new law.

And it wasn’t only the Mongolian government that they needed to watch. The national media had revealed only months before the law’s enactment that the country was being “courted” (actually, targeted) by its uranium-hungry neighbor and creditor to the north – Russia.

Khan’s Eviction Notice

By April 2010, such fears had been realised. The government suspended Khan’s two licenses, then reinstated them, then suspended again, and finally revoked them following an investigation.

Viewed jealously within the country, Khan’s 58% stake in the rich Dornod province deposits was also openly coveted by Khan’s junior joint venture partner, Atomredmetzoloto. The company, also known as ARMZ, is the mining unit of Rosatom, the Russian state-owned nuclear energy company.

A camel caravan across the desert leaving the Gers of farmers to the distance

Khan was informed by Mongolia’s Nuclear Energy Agency that it had failed to address violations of the 2009 law and that as a result its licenses had abruptly been invalidated. The company’s chairman, James Doak, responded with a question: “[It’s] difficult to understand why only the Canadian partner should be investigated when there are two other partners in the joint venture. Are they to be investigated as well?” But no answer was forthcoming from the Mongolian government.

Khan sued for $326 million on the basis of ‘expropriation and unlawful treatment.’ That sum was reduced to $100 million in international tribunals before a finding was passed in Khan’s favor – in two separate arbitration hearings. Still, Mongolia rejected the settlement, dismissing appeals in Ottawa which placed the country in breach of the multilateral Energy Charter Treaty.

And now, four years on, it seems the government has had a change of heart. Just two days before a major mining convention in Toronto this month, Mongolia’s Finance Minister announced that the government would pay a reduced fee of $70 million to Khan. Settlement would be completed by May 15, a few weeks before Mongolia’s parliamentary elections. Of course this sudden change of heart was driven by cold-hearted pragmatism. With the country’s finances in a dire state, and its sovereign bonds trading at toxic levels, the finance ministry was desperate to raise money from investors. Yet, while the Mongolian government may not have given a second thought to investor sentiment until now, even they realized that they would have been laughed out of Canada had they not offered closure on the Khan affair.

So, all’s well that ends well? Signs from within the country suggest otherwise.

The nationalist rottweiler is tugging at the government’s leash. When hospitals are cramped and Mongolians are struggling for a roof over their heads, a large payment to a foreign mining company won’t shower the government in glory just six weeks before the general election. In our view, final payment is far from assured.

Old cracked wall with biohazard warning sign and painted flag, flag of Russia


Even before Mongolia awarded itself the right to Khan’s uranium deposits, the writing was on the wall.

Speculation was rife that Russia was yearning for the influence it once had over Mongolia’s uranium deposits during Soviet times. The ambition was clear from Moscow’s growing control of the international uranium market, for which it already controls 12 percent of global reserves.

Overtures from Russia notched up after Mongolia’s 2008 election, moderately to begin with, and then more forcefully.

In an agreement that year, Mongolia committed to cooperate with Russia in identifying and developing its uranium resources. Vladimir Putin, as Russia’s revolving door Prime Minister in 2009, met with Mongolian President Tsakhiagiin Elbegdorj. Then in May of that year, Putin visited Mongolia for talks on participation in mining uranium. It was only two months later, in July, that Mongolia began expropriating licenses from companies like Khan under the cloak of the New Energy Law.

A month later, Russia’s President, Dmitri Medvedev, paid a visit to Mongolia, accompanied by Sergei Kiriyenko, chief of the Russian state’s nuclear energy company, Rosatom.

On that visit, Medvedev agreed to end a $150 million dispute over unpaid Mongolian debt “to move ahead with the Dornod [uranium] deposit”, which holds over seven times as much uranium as Russia’s total annual production. Tellingly, Khan Resources management was not even invited into the conversation despite the fact that the Canadian company had been developing the Dornod site since 2005 and legally owned 58% of the joint venture.

At the same time, Medvedev generously signed off on a $300 million loan for agricultural development. Prospective atomic and infrastructure deals were also thrashed out.


It doesn’t take a Mongolian horse-trader to understand that a sudden dispatch of $450 million in investment and debt forgiveness wrapped with promise of future infrastructure deals was being exchanged for an opportunity to win the Dornod license for uranium.

A History Of Bad Deals

After the expressions of Russian interest in 2008 and backroom deals of 2009 came high drama in 2010, with accusations that foreign investors were in breach of Mongolia’s laws.

Along with Russia’s objectives, Mongolia’s politicians had another motive – the manifestation of a national curse: resource nationalism.

This has been a constant throughout both the 2008 and 2012 governments, thriving on the fractious nature of existing parties, intra-party factionalism and the growth in the number of new populist fringe party entrants – especially ahead of the 2016 elections. Resource nationalism has been a common ticket to earning political capital and votes.

Acutely sensitive to dependency on foreign investor giants like Rio Tinto Group as well as China’s economy, interest from Russia has been seen as a useful counterweight, intertwining with the nationalist agenda. Blinded to the damage to foreign direct investment, nationalist legislation has flowed.

The following timeline shows the buildup of nationalist fervor, the sharpening of Russia’s focus on resource security and the legal proceedings between Mongolia’s government and Khan:


  • In January 2009, the Russian and Mongolian governments announce a joint venture tied to uranium extraction. Later that year, Russian state-owned company ARMZ submits a hostile bid for Khan Resources stock in Canada. Khan’s board rejects the offer.
  • In July and August, Russian president Medvedev and prime minister Putin visit Ulaanbaatar within a month. The stated reason for both trips was to pursue control of the Mongolian uranium market.
  • Mongolia introduces the “Law to Prohibit Mineral Exploration and Mining Operations at Headwaters of Rivers, Protected Zones of Water Reserves and Forested Areas” – aka “the Long Name Law.” In essence, it bans mining in environmentally sensitive areas, imposing constraints particularly on gold. This nod to pastoral nationalism – or nomadism – proves highly indicative of what’s to come.
  • The passage of Mongolia’s new Nuclear Energy Law leads to the suspension of all 106 of the country’s existing licenses. Re-registration for those licenses is required the same year.
  • Russia steps up its focus on uranium as a national security objective.


  • In January, Mongolia’s parliament passes a law giving the government an uncompensated 51% stake in any resource extraction project with which it was involved.
  • Russia’s Pravda publishes report on Dornod project in Mongolia titled “Russia To Receive Control Over Uranium.”
  • The Mongolian government places a moratorium on all new mining licenses.
  • Seeing the situation develop against them, Khan Resources begins negotiations with the China National Nuclear Corporation (CNNC) to be acquired. The move spawns protectionist anti-Chinese sentiment within Ulaanbaatar and enables the Mongolian government to revoke Khan’s mining license.


  • Khan announces its lawsuit against Mongolia’s government for $326 million, citing the “expropriatory and unlawful treatment of Khan in relation to the Dornod uranium deposit.” Mongolia challenges the tribunal’s jurisdiction over the claim.


  • In Mongolia, anti-Chinese sentiment builds ahead of the Parliamentary elections, with parties using nationalist sentiment to foment opposition against foreign investment.
  • The Strategic Entities Foreign Investment Law (SEFIL) is passed in May, just before the elections. More than anything, this shamelessly protectionist and reactionary law was responsible for Mongolia’s abrupt fall from grace among foreign investors. It gives the government leverage against any foreign state-owned enterprise looking to dominate Mongolia’s natural resources. The enactment coincides with a proposal from the Aluminum Corporation of China (popularly known as CHALCO) for a deal that would have provided them with control of Oyu Tolgoi, Mongolia’s largest ‘super-mine’ and one of the world’s largest resource extraction projects.
  • An international tribunal is reported to have agreed with virtually all of Khan’s arguments and concludes that Mongolia is in breach of obligations under its Foreign Investment Law. As a consequence, Mongolia also falls afoul of the multilateral Energy Charter Treaty.


  • Mongolia abruptly cancels all 106 exploration licenses issued to foreign and domestic companies between 2008 and 2009, with no legal recourse given. This follows a corruption investigation, in a somewhat contradictory process that was intended to revive investor confidence.
  • Khan’s appeal for the right to pursue a $300 million claim against ARMZ, the Russian mining arm of Rosatom, is dismissed by an Ontario court.
  • The disastrous Strategic Entities Foreign Investment Law (SEFIL) is repealed following the collapse of FDI, yet government approval requirements and other restrictions remain for state-owned foreign investors. The new ‘Invest Mongolia’ Agency now has full authority for approving acquisitions by foreign SOEs of over 33% of a Mongolian asset.
  • The Mongolian government attempts to communicate a message of equal treatment for local and foreign investors, yet xenophobia and resource nationalism threaten a different reality. A crescendo of acidic rhetoric toward foreign investors, particularly its nemesis Rio Tinto in the Oyu Tolgoi standoff, continues to build within the national media.



  • Of the 106 licenses, 42 are found to have been obtained illegally, 29 are returned to former holders, six are sold to new owners and five become property of the state.
  • An international tribunal orders Mongolia to pay Khan Resources $100 million, an amount in line with previous offers made for the Dornod asset (notably from China’s CNNC in 2010), plus interest and costs.
  • “The Mongolian government, in order to protect its own interests, will work for the invalidation of the arbitration award,” the Justice Minister says. The country launches a formal appeal in France.
  • Mongolia lifts the June 2010 moratorium on new exploration licenses. The exploration licences area, however, is cut from 400,000 ha to 150,000 ha.
  • Rio Tinto and the government settle their dispute, triggering a no-confidence challenge for the Prime Minister, which he survives. The two sides then sign a $4.4 billion package to restart the Oyu Tolgoi project. The deal comes six months ahead of elections, in which addressing the lack of foreign investment is a major campaign issue.


  • Mongolia’s Finance Minister announces it will pay Khan $70 million by May 15 to end its dispute. In exchange, Khan agrees to stop pursuing court certification of its award in the U.S., which could allow it to seize Mongolian commercial assets there. The settlement comes a week ahead of the Toronto mining convention. Canada is the biggest direct investor in Mongolia after China.




In April 2015, a 59-year-old Canadian named James Doak travelled to Ulaanbaatar to negotiate with Mongolia’s government.

His company, Khan Resources, had been granted $100 million in compensation for the government’s decision to expropriate the Dornod uranium project. But Mongolia was refusing to pay.

Doak, Khan’s chairman, and Grant Edey, its CEO, met with officials on April 22. Then, during lunch at his hotel, Doak fell ill. He went to his room to rest before their flight home.

When Doak didn’t answer his phone later that day, hotel staff opened the door. He was dead.  An autopsy determined that the cause of death was complications related to the onset of late-stage Type 1 diabetes.

A mere three days later, in what could charitably be described as blithely insensitive toward the Doak tragedy, Mongolia’s Justice Minister announced that the government would rescind the payment awarded to Khan and attempt to annul the international arbitration claim.


How to Dismantle a Uranium Mine

Doak’s death has not been treated as suspicious – though whispered rumors abound in Mongolian business and government circles. But the events that stripped his company of its Mongolian assets should be.

It is clear that the government used the reactionary Nuclear Energy Law in 2009 as a construct to re-acquire the Dornod deposit licenses and sell them to Russia. The detail of the law was left opaque on the matter of how to avoid violation. Much clearer was the compulsion that all license holders must re-register, or re-apply – an essential element to coerce foreign mining companies to sign new and disadvantageous investment agreements with MonAtom Mongolia’s Nuclear Energy Agency and MRAM (Mineral Resources Authority of Mongolia).

Russia – through ARMZ, the mining unit of the state-owned nuclear energy company Rosatom – sealed the deal with a hostile bid for Khan’s equity stake, valued at 65 Canadian cents per share. The Russian government also extended some juicy offers to its southern neighbor: debt forgiveness, agricultural loans, and the promise of infrastructure financing and possible nuclear energy plant construction.

China duly provided the decoy with its offer from the China National Nuclear Corporation, or CNNC, of 96 Canadian cents per share for Khan’s stake. And Khan accepted the Chinese offer – less than two days after it had signed a new memorandum of understanding with the Mongolians which paved the way for its licenses to be reinstated.

Khan insists that it had every right to make such a decision on commercial grounds, and of course it did. However, the opaque new laws and anti-Chinese sentiment allowed the government to block the Chinese-Canadian collusion on grounds of national security.

Khan was held in technical breach of the terms of its license by proposing to accept the offer from CNNC. Rather than entering into dialogue or suspending its license, Mongolia confiscated it, revoked it and handed it to the Russians. Khan made a fatal error by misreading the Mongolian political climate in an election year when it agreed to do business with the Chinese.

We also noted a very interesting statement from CNNC, reported earlier this month. In its 2015 year-end financials, published by the Hong Kong Stock Exchange last week, the Chinese company announced:

During the Year, [CNNC] had negotiations with the representatives of the Mongolian Government in relation to the formation of a joint venture company for the operation of the uranium mine in Mongolia. The Group is still waiting for feedback from the Mongolian Government.”

While the exact nature of this ‘joint venture company’ is not yet known, it will be interesting to see whether CNNC soon announces any involvement in the formerly Khan-controlled Dornod project.

A Change of Heart?

But now, to the bigger question: has anything changed?

Mongolia and Russia

In these final months before the June elections, everything feels hauntingly similar to events in the run-up to 2012.

Yes, 2015 saw the restoration and re-tendering of the all-important yardstick – the licenses revoked in 2013. And, yes, the Rio Tinto debacle was finally resolved in a ‘work-out’ agreement – seven years in the making. Even Khan – after its five-year battle – has been promised a much-tapered $70 million payment.

But these events, coming in such close succession, seem to be the hallmarks of a jittery government that desperately hopes the investor confidence issue will just go away.

Its actions are being sold to the electorate as being in the public interest. The reality is that Mongolia remains captive to the same old system of tribal protectionism under the guise of national politics. Backdoor deals are the norm in Mongolia, where economic inequality is shockingly high.  A 2014 report stated that the country’s 76 members of parliament control nearly 8 percent of national GDP.  It is therefore not surprising that the electorate has lost faith in the government’s ability to negotiate resource extraction deals that benefit the public interest.

The economic malaise is matched by political stagnation. This election will see a greater influence from fringe parties, and therein a government with many voices. In a country where intra-party factionalism is already a significant barrier to political cohesiveness, Mongolia’s worst fate in 2016 may become a reality: an even weaker government coalition.

Fractured leadership could become Mongolia’s worst nightmare as it attempts to improve its well-deserved reputation within the global mining industry as a wholly unreliable and unpredictable investment partner, where political risk eclipses business opportunity.

To the educated observer, the Rio Tinto workout and Khan settlement look like last-minute attempts to demonstrate commitment to economic reform and improved investor relations. Yet the drumbeat from the main parties is populist. Their reforms have failed to incentivise the return of big business beyond the state sector.

What Lies Ahead?

This year marks the third election cycle in which Mongolia’s government is entering a bind of its own making. The investor confidence issue won’t just go away. Will Mongolia now begin to court international investor confidence by repealing more of the restrictive laws? Or will it choose to continue with the nationalist politics and xenophobic legislative activity that have had such a disastrous effect on its economy?

A transition to more investor-friendly policies would be a tall order for even a united and strong government. Mongolia was unable to accomplish this after the 2012 elections, and it would be little short of miraculous if Mongolia finds such a transition possible after June of this year. The proliferation of fringe parties and rhetoric from the government’s leadership has collectively bred political impotence, with an inability to dampen down resource nationalism or channel it into a more useful force.

The reality in Mongolia is that politicians, not businessmen, are in control of the private sector – and these are the same men who are responsible for re-starting the economy. Too many are fixated on protecting themselves, their personal interests, their factions, and their tribes. The country’s economic health and long-term prosperity is of secondary importance – or, more likely, not even a consideration.

The idea that Mongolia’s government might renege on its promised payment to Khan Resources almost defies logic. The country’s finances are in a dire state, and it has effectively been locked out of the global bond market for the past two years. Both Standard & Poor’s and Fitch downgraded their sovereign ratings to ‘B’ – effectively beneath where most private fund managers will consider offering support.

Earlier this month the Mongolian Finance Ministry announced that they would retain investment bank Credit Suisse to lead a syndicated loan to help shore up the country’s desperate finances. This was after several failed attempts to raise capital from the bond markets in Hong Kong, Singapore and the USA.  And on 30 March the country managed to raise $500m, though the expected yield of 11 percent is certainly unfavorable and a far cry from the 4.125% bond that they raised just four years ago.  While final terms for the new debt are not yet known, it is safe to assume that any astute would-be investor will be watching to see whether Mongolia honors its commitment to Khan Resources.

It is worth mentioning that, after five years of legal wrangling and false horizons, the agreed bill of $70 million is a significant compromise from Khan’s original position. Still, unlike Rio Tinto, Khan has been waved an unequivocal dasvidaniya. Its commitment to Mongolia has been deemed unimportant, and unlike Rio Tinto, it is dismissed as replaceable.

The same short-sighted politicians who sealed Khan’s fate in 2009 are still at the forefront of government and party decisions now. Failure to make a final payment to Khan would certainly put Mongolia at risk of an indefinite lock-out from the global capital markets. Yet Mongolia’s politicians have shown a disturbing tendency to act against their country’s national interest during election years.

To that point, it should be noted that the final $70 million payment to Khan Resources will need to be incorporated in the national budget, which will require approval by parliamentary vote before the May deadline – and only a few short weeks before parliamentary elections in June.

In summary, May 16 will make for a very interesting Monday morning. If Khan understands now what it failed to appreciate when its troubles began, it will have little faith in the payment deadline being met.


Phill Hynes and Mark Burke are analysts at ISS Risk, a frontier and emerging markets political risk management company covering North, South and Southeast Asia from its headquarters in Hong Kong


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