Mongolia Wins Debt Relief (and Russia Does Well, Too)

The Mongolian government hails record Russian debt write-off. But was there really anything to be forgiven?...

The deal is huge. In the past, the Mongolian Finance Ministry has said that since 1947, the country has built up a debt of $11.4 billion to the Soviet Union and its legal successor, Russia. (This assumes that the old Soviet ruble was worth $1.) This puts Mongolia third on the list of Russia's debtors, behind Cuba and Syria, and equates to roughly $4,800 for each of Mongolia's 2.4 million inhabitants.

The decision to write off 98 percent of the debt removes an otherwise unbearable burden: the entire debt is well over 10 times Mongolia's gross domestic product in 2002. Even the remaining 2 percent amounts to a quarter of the GDP.

But who really came out ahead, Mongolia or Russia? Did Mongolia owe Russia more than Russia owed Mongolia? Maybe this is simply a debt swap, an agreement for each side to write off its uncollectible loans to the other and start with a clean slate.

Beyond the opposition's doubts about the procedural matters lies a deeper question: whether there is in fact any debt and whether it should be paid. Economics professor G. Purevbaatar pinpointed many of the issues when he argued that there was no debt to be settled between Mongolia and Russia and, that if there was, it should have been annulled when the Soviet Union collapsed.

"Mongolia was like a republic under the rule of the Soviet Union," he said. "When the [Soviet] republics became independent, the matter of debt between the Russian Federation and the republics was never raised."

A second option, he believes, would have been to try and recalculate the figures, placing the Soviet loans in Russia's credit column and, in the debit column, the inflated figures, underpriced purchases, ecological costs, land seizures, and terror of the Soviet era. He said that the Soviet Union sold its goods and technology at a 20 to 30 percent premium over their real value on the world market and spent 20 percent employing inefficient Soviet cadres. The net effect was, for example, that Russian work in Mongolia cost two to five times more than it should have. In addition, he contended that the USSR bought goods and raw materials from Mongolia at 40 to 50 percent less than their market value, that it illegally seized two tracts of land, and that its troops ruined 420,000 hectares of Mongolian land.

In the 1930s, Stalin-inspired purges cost the lives of many thousands of Mongolians (official estimates put the figure at 36,000) and left over 700 monasteries and temples in ruins.

A proper balance sheet of the Soviet era, Purevbaatar believes, might even indicate that Russia should pay compensation to Mongolia.

Whether one-sided or two-sided, this debt cancellation seems to clear the decks for expanding economic cooperation.

The clearest benefit of the write-off may be a further strengthening of economic ties with Russia, which have been recovering fast in recent years. According to Russian Foreign Ministry spokesman Aleksandr Yakovenko, bilateral trade rose 50 percent over the past three years to around $300 million in 2003.

Russia also occupies some key strategic positions in the Mongolian economy. Russia is Mongolia's key supplier of oil and gas. The national railway system is run by a joint Russian-Mongolian venture. There are another 300 joint ventures, with Russian capital particularly evident in mining, metallurgy, and financial services. Altogether, Yakovenko said, these 300 companies produce over 30 percent of Mongolia's GDP and 50 percent of its exports.

SOURCE: Transitions Online, 13-19 January 2004