This paper discusses how the third neighbour policy of Mongolia is being targeted by China to push out US from any significant role vis-a-vis Mongolia and how OBOR and other large Chinese investments are being used as a carrot to achieve the same.

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ISS Risk Special Report:
Another US anchor in Asia lost to Chinese manoeuvring?
Will China’s rebalancing of relations with its northern neighbour see US foreign policy
set adrift in Northeast Asia too?
1 March, 2017

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The ‘Third Neighbour’ foreign policy of Ulaanbaatar appears to be being targeted for
disruption with woeful economics being seized upon by their most important trading partner
(and neighbour!) in a move designed to manipulate a realignment of geopolitical fealties.
With obvious hopes that the US’s foreign policy and position with Mongolia will follow the
way of the Trump-TPP decision or relations with the Philippines; China has thrown a quick
one-two (a debt jab and geopolitics cross) so as to reposition itself rather snugly at the US’
expense and by default Russia’s too. Beijing, ever pragmatic, has again managed to use the
promise of economic corridors of mass investment, currency stability and good old fashioned
geography, to potentially displace its main rival in Asia, the US. All the more impressive is
that they would appear to have achieved this by turning an argument that touched on deeply
sensitive sovereign and nationalist issues into a ‘new position’.
With the Philippines we saw The Hague’s ruling against China on the South China Sea Nine
Dash Line claim followed by Duterte and Xi agreeing to open the doors to infrastructure-led
investment, and even an invitation for Chinese naval vessels to patrol the Sulu Sea. One out
of one. With Mongolia, we are seeing friction over a Dalai Lama visit and an associated
inflammation of One-China Policy sensitivities towards Tibet being converted into a
lifesaving extension of the 2014 bilateral currency swap line (valued at 15 million yuan -
US$2.18 billion) and equally importantly high-level communications opened for the aligning
of Mongolia’s Prairie Road Program with China’s One Belt One Road (OBOR) initiative. It
would appear that Prime Minister Jargaltulga Erdenebat will also visit Beijing in May to
attend the OBOR Forum for international cooperation. That’s two out of two.
China’s Foreign Minister Wang Yi, on 20 February stated that the two countries’ bilateral
relationship ‘is ready for another start’ following Beijing’s cancelling of meetings to discuss
financial assistance arrangements last November, in consequence to the Dalai Lama’s visit
to Mongolia. What were the Mongolians thinking (or promised)...? Whereas Wang’s
statement is undoubtedly true, Beijing is clearly of a mind to consolidate a stronger position
with its natural resources rich neighbour – and they have recognised now is the time to move
on this. The implicit yet more important issue firmly dovetailed to Beijing’s economic decision
here however, is their apparent enveloping of Mongolia in its ever more potent economic
globalisation strategy – the OBOR. Until now China’s global economic strategy has
successfully reached out far and wide across the Eurasia land mass (and global maritime
routes!), yet, rather awkwardly, not to its immediate neighbour Mongolia. When looking at
the two countries’ relationship in this context, it is no wonder China has seized an
opportunity to bring its neighbour into the fold. Yet OBOR is not simply an economic avenue
for Chinese trade, it is without question a geopolitical one too, and importantly should

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Mongolia’s inclusion in OBOR be achieved will this lead to another historically US-friendly
domino starting to wobble?
To press this geopolitical point further we can examine the announcement of this ‘another
start’ in the Chinese (State) media, as no response has been seen from the US nor for that
matter from Russia. State media presented the decision in a near benevolent manner,
saying that now that Mongolia has admitted its wrongdoing in regard to disrespecting the
One-China Policy it wishes to help the repentant debt-riddled neighbour. It is not lost on any
observer that this announcement was made a day after the latest (seventh!) IMF rescue
package was agreed upon with Mongolia. An attempt at eclipsing the western institution’s
actions possibly?
Despite false market rumours being spread that the IMF were undecided on whether to
provide US$440 million in loans ahead of sovereign bonds maturing in March, the IMF (as
well as the ADB, World Bank and Japan and South Korea) has shown faith in Mongolia.
Although this decision, as too with China’s decision, will buttress the grounds for a return to
confidence in the economy, and bring positive economic goodies such as currency stability,
foreign reserves preservation and improved credit ratings; the China decision is somewhat
distinct. The swap line can be accompanied by access to the far larger sums of investment
synonymous with OBOR economic corridors if a China facing geopolitical position is also
adopted. One need just look to Pakistan or Indonesia for evidence of the economic benefits
for doing so.
Can the US compete with such an offer? Can Japan or South Korea? Can Western
supranational entities like the IMF or World Bank compete and therein maintain their ‘heavy
influence’ if other creditors are waving larger facilities around? It would appear not. How
quickly Mongolia will align to the OBOR remains to be seen, but what amount of evidence is
actually required to be seen before change is (finally) recognised? What Russia will have to
say about this move by Mongolia’s other neighbour will merit close attention, but as any
banker or Foreign Minister will recognise, whoever owns the debt, controls the game, and
ahead of Mongolia’s Presidential elections this coming June, China wants to be well placed
should the long decline in Mongolia’s economy start to reverse. With the Democratic Party
most likely to be out come these June elections, a less resource-nationalistic and business-
orientated environment should emerge.
Simply put, China is looking to force a beaching of the good ship USS Foreign Policy here,
and Mongolia’s vulnerability is being leveraged to accomplish this whist also securing access

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to high quality natural resource deposits. Let’s see what deals and side-deals might come
from the OBOR Forum in May. Beijing already has its cheque book out.