Written by OBG Admin Viewpoint

I am often asked by foreign investors about my perception of Mongolia’s economic prospects. In the short term, there are a number of hurdles that need to be overcome in order to improve the country’s legal framework and facilitate greater economic activity. Over the long run, however, there seems to be a strong political will to continue strengthening Mongolia’s legal structure in the effort to facilitate foreign direct investment.

In many ways, a country’s legal system is the primary form of infrastructure needed to promote economic activity. As I travel around Ulaanbaatar, the roads and traffic patterns remind me very much of Mongolia’s legal system. Much like its roads, Mongolia’s current legal infrastructure is bumpy in places, and some areas remain completely unpaved. Furthermore, a lack of clarity regarding the substance of the rules, or how they will be enforced, often results in gridlock.

While there are many shortcomings in Mongolian law, the desire to improve the legal system is unquestionably present. The adoption of the Investment Law in late 2013 is a good example of this type of duality. On the one hand, considering parliament repealed both the Foreign Investment Law and the Strategic Entities Foreign Investment Law (the latter being particularly disruptive to foreign investment), the Investment Law was widely seen as a positive development to enhance investor confidence. On the other hand, the Investment Law creates a bias towards deep-pocketed investors: tax stabilisation certificates are only available to those companies and individuals who are willing to invest substantial amounts, and the minimum paid-in capital requirement has changed from $100,000 per foreign invested company to $100,000 per foreign investor. Despite these minor drawbacks, the Investment Law can be remedied over time.

Mongolia is in the process of developing legislation across several different sectors. For foreign investors, particularly those from Western jurisdictions who have the benefit of legal systems which have developed continuously over the past few hundred years, it is worth remembering that Mongolia is only a recent entrant to the global stage and has essentially started its legal development from scratch.

Revisions to the Company Law and the Securities Law in the past few years, as well as the adoption of the Investment Fund Law, for example, are helping the legal framework to establish vibrant capital markets. The Mongolian Stock Exchange is not going to experience a large influx in new listings overnight, but these developments have laid the foundation to improve the securities markets nevertheless.

There are some additional overarching changes to the legal framework which, if made, would have a positive effect. Judicial and administrative procedures are often opaque, causing a great deal of uncertainty and consequently slowing down business activity. Open courts are a basic principle of democratic governance; in order for the public at large to have faith in the judiciary, its activities should be subject to public scrutiny.

Accordingly, a consent letter or power of attorney from an interested party should not be necessary in order to obtain information on matters being heard or decided in public courts. Similarly, the procedures that administrative agencies use should be transparent, consistent and publically available. Changes in these areas are low-hanging fruit that would go a long way to improving the legal system as a whole.

Mongolia’s laws will require continuous upkeep in order to keep them in good order. The process of developing a legal system is not complete once a particular piece of legislation is passed; laws need to be refined, developed in practice, amended and, when they stop serving their original purpose, scrapped altogether.

Given Mongolia’s vast mineral resources, the potential is obvious. In the long run, there is no direction for the economy to go but up. The political will to develop a strong legal system, which facilitates a modern economy, is clearly present. Investors who are patient will almost certainly reap the benefits of the stability of what will eventually become a well-developed legal system.