Rosneft’s interest in Mongolia
Due to higher fuel prices, there has been growing sentiment amongst Mongolian political circles and the public to support Russian state-controlled Rosneft’s penetration into the Mongolian market as a direct supplier and retailer of fuel.
Heightening speculation has been driven by more and more frequent meetings with Rosneft officials by key government officials, the most important of which has been Minister of Mining and Heavy Industry D.Sumiyabazar. In early October, D.Sumiyabazar headed a delegation to Russia to discuss key potential agreements with the Russian government and Rosneft.
On the sidelines of the Eastern Economic Forum organized in Vladivostok, Russia from September 11 to 13, President Kh.Battulga held discussions with Russian President Vladimir Putin and Chinese President Xi Jinping. While the potential for a gas pipeline stretching through the three countries grabbed the headlines, other meetings were just as critical to the visit.
During the forum, the Mongolian delegation also met with Denis Manturov Russia Minister of Trade and Industry, Minister of Natural Resources and Environment Dmitry Kobylkin, and CEO of Rosneft Igor Sechin.
Minister D.Sumiyabazar’s most recent visit to Moscow was intended to iron out the details regarding the prospect of the gas pipeline and cooperation in petroleum, including fuel supply from Rosneft to Mongolia. Several unconfirmed reports have stated that Rosneft has expressed interest in entering the Mongolian market. Rosneft currently serves as a supplier to almost all of the fuel importers in Mongolia. Mongolia is almost fully dependent on Russia for fuel and Rosneft is the biggest benefactor of that fact.
Outside of supplying a majority of Mongolia’s fuel supply, Rosneft has been enhancing its operations in Mongolia further recently. In 2017, Rosneft and the Ministry of Roads and Transport Development signed basic terms of cooperation for development of optimal technical solutions, commissioning of hydrant system and jet fuel supply for the new Khushig Valley International Airport in Ulaanbaatar. The purpose of signing the document is to provide assistance to the Mongolian party in commissioning jet fuel supply facilities of the new airport and to ensure uninterrupted supply of Rosneft jet fuel to the Mongolian market.
In addition, Rosneft has been increasing the amount of aid and scholarships it provides to Mongolia along with an expansion in cooperation. A delegation headed by Rosneft Vice President Yuri Kalinin visited Ulaanbaatar in early October to meet with several government officials. Under a cooperation agreement between the Ministry of Education, Culture, Science and Sports and Rosneft, 10 Mongolian students receive scholarships from the company to study engineering in Russia every year. During their meeting, the sides agreed to raise the scholarship quota for Mongolian students in order to meet Mongolia’s demand in the engineering sector.
The Rosneft delegation also pointed out that as Mongolia’s fuel demand increases each year, to meet this increasing demand, they are holding a meeting with the president’s chief of staff to talk about mutual cooperation related to oil exploitation, refinery, and fuel export in detail. In addition, Rosneft pledged to donate eight million EUR to Mongolia for a plan to develop Khalkh Gol soum of Dornod Province, where the Battle of Khalkhyn Gol occurred in 1939.
Rosneft’s recent actions have led some to speculate that the company is actively improving and promoting its image to the Mongolian public in a potential lead up to a market entry. Fuel prices have surged significantly recently as the Organization of the Petroleum Exporting Countries (OPEC) and Russia agreed to cut production of oil. Meanwhile, Iran, a major oil exporter and the surrounding sanction related turmoil has driven down production and increased prices. As a result of these circumstances, Rosneft increased oil export prices to Mongolia by 45 to 85 USD per ton. This has increased the average price per ton of AI92 fuel to 766USD and diesel fuel to 758 USD.
This has inevitably created and fueled public resentment towards the government for not being able to maintain fuel prices. This has led to a growing sentiment and support of Rosneft entering the Mongolian market as a direct retailer of fuel. Many have supported this as it will undoubtedly decrease retail prices for fuel in the short to mid-term, but at what cost?
Rosneft is Russia’s third largest company and second largest statecontrolled corporation that turns in revenue upwards of 80 billion USD annually. Allowing such a massive corporation, never mind one controlled by the Russian government, will be consequential, for better or worse. The worst case scenario and frankly the one that is most likely if Rosneft operates in Mongolia, Mongolia will have to deal with a foreign monopoly for the foreseeable future. This in itself would be a delicate issue in any sector and the fact that it is in energy makes it that much more significant.
Currently, most if not all Mongolian fuel importing companies have an agreement with Rosneft to purchase fuel. If Rosneft starts opening up its gas stations in Mongolia, it will effectively bypass Mongolian local fuel importers and sell straight to the consumer. The lack of other sellers will make it difficult for fuel importers to compete with Rosneft. Add onto the fact that bypassing a middle man in fuel importing will allow Rosneft to sell at prices much lower than other companies, the situation looks very bleak.
In the short-term, Rosneft will drive down prices for the final consumer but as with most monopolies, it can freely dictate prices to its content in the future once it has run Mongolian competitors out of business. There is a reason most countries around the world employ comprehensive antitrust laws to combat monopolies and promote fair competition. If Mongolia bites the bullet and lets Rosneft essentially take over the fuel market, it will be dealing with the consequences for decades. Any forceful attempt later down the line to break up a Rosneft monopoly could result in a souring of MongoliaRussia relations and action by Rosneft and Russian government to protect its interests.