BACKGROUND: Enkhbayar was arrested on April 13, 2012 in a televised raid by dozens of police after investigators from the Independent Authority Against Corruption of Mongolia alleged that he had failed repeatedly to turn up for questioning. Enkhbayar, who served as prime minister and then president until he lost office in a 2009 poll, denied all the charges and called them politically motivated. On 1 August 2013, Mongolian President Tsakhiagiin Elbegdorj pardoned Enkhbayar, releasing him from serving the rest of his jail term. Now, following the pardon, Enkhbayar has announced his intention to return to politics.

Corruption charges swirl around the development of the country’s mineralogical assets. Unlike most of its post-Soviet neighbors, foreign investors are not seeking hydrocarbons in Mongolia but minerals, including copper, silver, gold and coal. After abandoning Soviet Communism in 1990, Mongolia’s government has sought international investment to develop its mineralogical reserves, given the government’s fiscal shortfalls. Mongolia could invite former Soviet allies, its rising eastern Asian neighbor China, or seek Western capitalist investment, but ultimately decided on the last option, with decidedly mixed results.

How to develop these riches to best benefit Mongolian society has been the prime economic political issue for more than a half decade. In 2006 Mongolia's Mineral Law was amended to increase government royalties and licensing fees, reduce tax incentives, set limits on exploration licenses and provide for up to 50 percent government ownership of strategically important resources when jointly funded by the state and private investors.

On August 25, 2009, the Ulsyn Ikh Khural (State Great Hural, or Parliament) finally repealed the 68 percent windfall profit tax, effective from 1 January 2011, setting the stage for massive foreign investment. Quite aside from energy reserves in the form of coal and minerals such as copper and gold, according to a 2009 U.S. Geological Survey, Mongolia has 31 million tons of rare earth reserves, or 16.77 percent of the world’s total, exceeded only by China, currently the world's largest producer of rare earths.

Mongolia’s two largest mining sites are the 7.5 billion ton Tavan Tolgoi or "Five Hills" massive coal coke deposit and the US$ 7 billion Oyu Tolgoi gold and copper mine, the world's largest untapped copper deposit, which is expected to produce 1.2 billion pounds of copper, 3 million ounces of silver and 650,000 ounces of gold annually in its first decade of operation.

Oyu Tolgoi was discovered in 2001 and is now being developed as a joint venture between Turquoise Hill Resources (a majority owned subsidiary of international mining concern Rio Tinto, which bought out the original developer, Canada’s Ivanhoe Mines) with 66 percent ownership and the Mongolian government retaining a mere 34 percent.

The Oyu Tolgoi mining project is the largest financial undertaking in Mongolia's history and is expected upon completion to account for more than 30 percent of the country's gross domestic product.

IMPLICATIONS: Since Mongolia rejected Soviet Communism, it has been effusively praised in the West for its transition to democracy. However, that transition has not been a smooth one, as rampant corruption and a growing rich-poor divide are causing mounting public frustration, as many Mongolians have yet to see the benefits of economic growth. While democracy and privatization were written into the country’s new constitution, the economic collapse after Soviet subsidies ended resulted in widespread poverty and unemployment.

Mongolia is currently one of the world's fastest growing economies, driven by foreign direct investment. It reported a 17 percent growth rate in 2011, and 16.7 percent in the first quarter of 2012.

During a September 2011 Discover Mongolia forum in the capital Ulan Bator, Rio Tinto’s country director Cameron McRae essentially threatened those nationalist Mongolian politicians who felt that the current 66/34 percent split on the mine favoring Ivanhoe was inequitable, saying “If even a few voices call for Mongolia’s commitments to be broken and agreements to be changed, there is a risk that this will undermine investor confidences. These few will have to answer to the many Mongolians whose jobs will be on the line, and the local businesses whose prospects will be jeopardized. We are confident that Mongolia will not let this happen; that stability and the rule of law will prevail; that Mongolia’s long-awaited economic promise will become a reality.”

Disputes over the iniquitous Oyu Tolgoi contract terms continued to fester through 2012 and continued as a political issue in Mongolia, when the government suggested to Turquoise Hill yet again that it was interested in renegotiating the contract terms. In a 22 September Parliamentary session, the Mongolian government determined to seek to increase its share of the Oyu Tolgoi mine but Turquoise Hill again firmly rejected the government’s efforts to seek renegotiation of the terms.

The CIA estimates that more that 36 percent of Mongolia’s population lives below the poverty line, with an annual per capita income of US$ 2,900.

Developing the country's mineralogical resources over the last several years acquired distinct political overtones; during the June 2009 parliamentary campaigns, the opposition Ardchilsan Nam, or Democratic Party, promised each Mongolian a 1 million tugrik (US$ 696) "share of treasure." The successor to the former Communist Party, the ruling Mongol Ardyn Khuv'sgalt Nam, or Mongolian People's Revolutionary Party, subsequently topped the DP's largesse, promising that each Mongolian would receive from the "country's profit" a 1.5 million tugrik (US$ 1,043) grant.

In the long term the most negative effect of Enkhbayar’s pardoning may be to weaken the average Mongolian’s respect for the rule of law as being both equitable and just. Enkhbayar’s leniency stands in stark contrast to the sentences handed out to six environmentalist nationalists.

On 16 September 2013 the leaders of Mongolia’s Gal Undesten (“Fire Nation”) environment and human rights coalition organized a mass protest in front of Parliament). The Gal Undesten demonstrators were concerned that MPs were preparing to amend the 2009 "Law to Prohibit Mineral Exploration and Mining Operations at the Headwaters of Rivers, Protected Zones of Water Reservoirs and Forested Areas" in favor of foreign corporate mining interests, with the demonstrators noting that many protected lands had already been mined despite the law, which was intended to preserve the integrity of Mongolia’s environment. Six Gal Undesten leaders were arrested at the peaceful demonstration.

On 21 January 2014 the six were sentenced to prison. Five received sentences of 21 years and six months, reduced from 22 years and six months for time served, while one received a two-year sentence for supplying weapons, arrows symbolically fired at the parliament. The discrepancy between Enkhbayar’s treatment and the sentences meted out to the Gal Undesten leaders could not be more pronounced.

Finally, Enkhbayar’s reemergence complicates Mongolian domestic politics, further muddying the country’s political life, and implying that corruption charges can be used for political vendettas, hardly an encouraging development for Mongolia’s political life.

CONCLUSIONS: Even before his conviction on corruption charges, Enkhbayar in 2012 played the populist card on Oyu Tolgoi, calling for the contract terms to be renegotiated to grant better terms to the government while pressing for the Tavan Tolgoi coal mine, potentially one of the world's biggest coal suppliers, to remain in local hands. Enkhbayar’s political reemergence will introduce a further complicating element into future foreign investment in Mongolia.

That said, this year the Mongolian economy is projected to grow by 15.3 percent and the International Monetary Fund expects it to be the world's fastest-growing economy over the next decade. Accordingly, Enkhbayar’s populism may yet result in the Mongolian people receiving more equitable arrangements for their mineral riches than before. Whether Mongolians will get an increased share of the profits from the country’s mineral riches remains to be seen. Enkhbayar’s pardoning is no doubt convincing many Mongolians that their government is more concerned with cozy relationships with foreign mining international than public welfare, and the sentences handed out to Gal Undesten leaders underline that relationship.

AUTHOR’S BIO: Dr. John C.K. Daly is an international correspondent for UPI and Central Asia-Caucasus Institute non-resident Fellow.