Why adventurous investors should keep an eye on Mongolia

I can’t claim to know a great deal about Mongolia. I’ve never visited this huge, sparsely-populated state, which is sandwiched between China and Russia. And it’s not an easy country to invest in – in fact, I’m not aware of any vehicles that do so. But I have a hunch that will change over the next few years.

The Mongolian government has finally signed a long-awaited deal with mining groups Rio Tinto and Ivanhoe over the huge Oyu Tolgoi copper mining project, which will have a major impact on the country’s prospects over the next few years.

Investment in Oyu Tolgoi is going to be around the same size as Mongolia’s GDP of $5bn. So development of the project up to its 2013 start date is going to mean a huge infusion of cash into the local economy. But this mine is just the start.

Oyu Tolgoi has taken years to get off the ground, mostly as a result of a windfall tax on minerals which was introduced in 2006, and only repealed this year. However, with a deal finally done, progress towards other projects will hopefully be much quicker. And there are plenty of deals to be done.

Mongolia has huge reserves of copper, coal, gold, uranium and other resources, and is in a prime position to benefit from China’s appetite for commodities. Given that the country has a population of just three million, this could quickly transform it from a state that had to go to the International Monetary Fund last year, into a relatively wealthy nation.

The risk, of course, is that these mining riches disappear into a sinkhole of corruption and waste – the infamous resource curse. In its favour, after a Russian-style extreme free-market binge followed by a lurch back to socialism, the country’s politics seem to be settling into a reasonably pragmatic middle-of-the-road multi-party consensus, which may help prevent it becoming another Nauru.

Of course, investing in a frontier market such as Mongolia is very high risk, but it could be appealing once the right vehicles come along. I don’t know of any so far, but I suspect they’ll emerge soon: the Wall Street Journal reports that the first Mongolia-focused private-equity fund is already raising money.

• Cris Sholto Heaton writes MoneyWeek Asia, a weekly email containing investment ideas and news covering the world’s fastest-developing and most exciting region.
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