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COUNTRY RISK PROFILE: MONGOLIA

Introduction

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The report is organized as follows: In section I, we will look at significant changes that Mongolia experienced in the last 15 years by looking at some major macroeconomic indicators. Based on these observations, we will evaluate current socio-economic environment of the country and will identify key risks that may potentially lead to destabilization of socioeconomic conditions of the country. In section II, we will identify key risks the country faces and discuss their implications on socio-economic conditions and inter-linkages between these risks. This section has four parts. First part of the section discusses boom-bust cycle that Mongolia experienced in the last 15 year. As the economy grew or declined, there were various risks at play that originated these cycles and exacerbated them. Since fluctuations in major macroeconomic indicators often are explained by interplay between demand and supply, we concentrate on these two sides. Firstly, we identify key risks on the demand side as commodity price fluctuations and policy risks that are responsible for rapid fluctuations in the aggregate demand. Secondly, we identify environmental risks as crucially affecting the supply side. Thus, we argue that combination of these aggregate demand and supply factors led to past volatile economic conditions. Lastly, we also identify political risk as one of the key risks that the country will face in near future

Section I: Background Mongolian economy expanded rapidly in the last 15 years. In nominal terms, GDP increased tenfold during this period whereas in real terms it increased by twofold. According to WDI estimates, in nominal USD terms, Mongolian economy grew fivefold from USD1.2 billion to USD 6 billion during this period. Mongolia was classified as low income country by World Bank in 1996 with per capita income of

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USD512. In 2010, the country is classified as a mid-low income country with per capita income of USD2252, which implies fourfold growth in per capita income for the last 15 years. Figure 1: GDP, mln Togrog
9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0

real GDP (2005 prices)

nominal GDP

Sources: International Financial Statistics and National Statistical Office of Mongolia

Figure 2: real GDP growth, percent

12.00 10.00 8.00 6.00 4.00 2.00 0.00 -2.00

Sources: International Financial Statistics and National Statistical Office of Mongolia However, Mongolia experiences a volatile GDP growth. As can be seen from Figure 2 above, Mongolias GDP growth fluctuated between contraction of -1.3% and growth of 11.3% with average growth per annum of 5.6% for the period. Between 2003 and 2008, Mongolian economic growth accelerated dramatically averaging 8.7% of growth per annum. During this period, lower middle income countries GDP growth was 6.7%, whereas transition countries growth averaged 7.6%.

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It should be noted that, in 2009, Mongolian GDP decreased by 1.2% followed by a modest growth of 6% in 2010, significantly below its average growth in previous years. Looking further into major macroeconomic variables we see similar volatile behavior. Inflation, measured in rolling 12 months, is shown below. Figure 3: CPI inflation, rolling 12 months, percent
60.00 50.00 40.00 30.00 20.00 10.00 0.00 -10.00 1997 Jan 1997 Aug 1998 Mar 1998 Oct 1999 May 1999 Dec 2000 Jul 2001 Feb 2001 Sep 2002 Apr 2002 Nov 2003 Jun 2004 Jan 2004 Aug 2005 Mar 2005 Oct 2006 May 2006 Dec 2007 Jul 2008 Feb 2008 Sep 2009 Apr 2009 Nov 2010 Jun 2011 Jan

Source: Bank of Mongolia As we can see from the figure above, Mongolia experienced volatile inflation as well. During the last 15 years, average CPI inflation was 10% whereas its standard deviation was 10%. In comparison, emerging and developing countries for the same period experienced 8% of inflation, but standard deviation of 2.8% only. Thus Mongolia experiences not only higher inflation rate, but significantly volatile inflation. Interestingly, Mongolia is more in line with other transition countries, which averaged 10% of inflation with standard deviation of 15% according to World Economic Outlook database. Mongolias financial sector is growing rapidly. It should be noted that banking sectors total assets represent 96% of the financial sectors total assets as of 2010. In the last 15 years, the domestic banking systems total assets increased from Togrog 0.2 Trillion to Togrog 5.1 Trillion, or equivalently from 22% to 62% of GDP. More interestingly, between 2008 and 2010, it drastically increased from Togrog 3.6 Trilllion to Togrog 5.1 Trillion which is equivalent to 62% of nominal GDP. Mongolian stock exchange rapidly increased in the past years as well. Although, the market capitalization is still relatively modest at Togrog 2.4 Trillion as of 2010, which is equivalent to USD 2 Billion, it has become one of the most dynamic markets in the world. Top-20 index rose by 233% in 2010 alone, thus making it one of the highest performing markets in the world.

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Mongolia trades extensively with foreign countries. For the period between 1997 and 2010, Mongolias trade turnover increased from USD1 billion to USD6 billion. Following figure shows export and import dynamics for the same period in USD. We can see from the graph that this explosive growth accelerated starting in early 2000s until 2008. Predictably, composition of exports changed significantly during this period as mineral exports account for 81% of total exports, whereas composition of imports was relatively stable. Figure 4: International Trade, mln USD
4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0

2006

1997

1998

1999

2000

2001

2002

2003

2004

2005

2007

2008

2009

Exports

Imports

Sources: National Statistical Office of Mongolia and International Financial Statistics Mongolia experienced similar explosive growth in Government expenditure. In the last 15 years, Government expenditure rose from Togrog 0.29 trillion to Togrog 3.08 trillion. As a share of GDP, it also grew considerably from 35% in 1997 to 51% as of 2009 implying increasing government intervention into the economy. Thus, major macroeconomic variables exhibited high volatility as well as explosive growth, which indicate the country is undergoing significant changes and perhaps, the country is vulnerable to various risks.

2010

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Section II: Risks Volatility of the magnitude that Mongolia experienced in the last 15 years did not favorably affect decision making processes faced by foreign and domestic investors, producers and consumers and policy makers. Since this kind of economic volatility adds unpredictability to economic decisions at all levels, it would be interesting to discuss chief reasons for these fluctuations. These large swings in major macroeconomic variables such as GDP and prices reflect corresponding large swings in supply and demand of goods and services. Therefore, we can describe what economic factors cause this volatile economic environment by looking further into demand and supply factors at work. Mongolian economy has its own characteristics that differ from other countries economies. Therefore, we need to stress what are the unique characteristics of the Mongolian economy that makes the countrys economy vulnerable to these large swings. On the demand side of the economy, Mongolia experienced large increases as well as a large decrease in aggregate demand, which resulted in fluctuations of prices and productions of goods and services. In order to explore the impact of changes in aggregate demand, we need to look at the structure of the economy carefully. Mongolian economy underwent significant structural changes in the past 15 years and became increasingly reliant on mineral sector. In particular, the share of the mining sector in GDP increased considerably in the past becoming the biggest sector in the economy. Following graph shows changes in the structure of the Mongolian economy for the period. Figure 5: Structural change in the economy 1997
14% 7% 21% 8% 14%
Mining and quarrying Agriculture, forestry and fishing Transportation and storage Wholesale and retail trade; repair of motor vehicles and motorcycles Manufacturing Other

36%

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2010
18% 39% 16% 12% 8% 6%
Other Mining and quarrying Agriculture, forestry and fishing Transportation and storage Wholesale and retail trade; repair of motor vehicles and motorcycles Manufacturing

Sources: National Statistical Office of Mongolia Noticeably, agricultural sectors share decreased significantly indicating that Mongolia is transitioning from agriculture based to mineral based economy. Thus the role of the mineral sector was of paramount importance for the country in the past and it is expected that in the future it will be even more so. Mongolia has vast natural resources. It is estimated that the country has more than 6000 known mineral deposits of 80 different minerals. Mongolias abundance in natural resources makes the country highly competitive in the world market for minerals. Namely, Mongolia has vast resources of coal, copper, molybdenum, gold, zinc, fluorspar and uranium. Out of these, the country produces significant amount of copper, gold and coal that has deep impact on the countrys economy.

--------------------------------------------------------------------------------------------------------------Big mining projects Mongolian-Russian joint venture Erdenet became operational in 1976 with resources of 1.2 billion tonnes of copper. This venture alone contributes around one third of the government budget and around one fourth of the total exports. It produces 130,000 tonnes of copper concentrate annually and exports it mostly to China and European markets. More significantly, the country is on the verge of having two mega mining projects operational in the near future. Tavan Tolgoi is one of the largest coal deposits in the world with 4.5 billion tonnes of confirmed deposits of brown and coking coal. It is expected that by 2020, the mine will produce 10 million tones of coking coal and 40 million tones of thermal coal per year. At todays prices, it will worth more than USD 2.5 billion. After 2020, some estimates suggest that the mine will produce as much as 50 million tonnes of coking and 200 million tonnes of thermal coal per year. Government fully owns the deposit and now in negotiation with mining operators to make the project operational. The other significant project is Oyu Tolgoi mine. This is a mine with proven and probable deposits of 1.39 billion tonnes of ore with copper and gold. It is expected

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that by 2020, the mine will reach its peak of production by producing more than 800,000 tonnes of copper concentrates and more than 32 tonnes of gold. It is expected that the mine will be operational for 70 years and is jointly owned by Ivanhoe Mines LLC (66%) and Government of Mongolia (34%). Investment agreement between Ivanhoe Mines LLC and Government was signed in October 2009 and it is expected the mine will start its production as early as December 2012. ---------------------------------------------------------------------------------------------------------------

Thus, Mongolia is expected to significantly benefit from these two new large mining projects. Since Government owns significant shares of both mines and it is expected that it will increase its share in the future, these two mining projects will have lasting impact on the country. Before discussing the risks associated with commodity driven economy, it should be noted that Mongolia is a landlocked country, which borders with China in the south and Russia in the north. This geographical feature poses added challenges to the country in terms of transportation. Because of underdeveloped transportation infrastructure, Mongolian produced goods are uncompetitive in the international market. This makes it difficult to diversify the economy and makes it concentrate more on services and mineral sectors. It has been estimated that the cost of shipping is 3.4 times higher than that of other East Asian countries. As a result, China and Russia are Mongolias major trading partners. In particular, trade with China accounts for more than 84% of exports and more than 30% of imports.

II.1. Boom-Bust cycle We saw that Mongolia is vulnerable to boom-bust cycles. There are two major drivers for this cyclical behavior. One is risks associated with commodity price fluctuations and the other is heavy pro-cyclical policies that exacerbate cyclical fluctuations. We discussed that the share of the mining sector increased significantly. Although the level of production of minerals increased in the past years, production of major exporting commodities such as copper, gold has been relatively stable since early 2000s. Namely, production and export of copper concentrates has been stable at the level around 600,000 tonnes per year, whereas production of gold is estimated to be around 15-20 tonnes. It should be noted that because of windfall taxes imposed on mineral exports, there was a strong tendency not to sell the gold to Bank of Mongolia (the Central Bank) and hence it became difficult to measure the production level of gold with reasonable accuracy.

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With increasing coal prices, coal is starting to become major exporting commodity for the country. Production of coal increased significantly for the last 10 years. In 2001 Mongolia exported only 1.9 tonnes of coal, whereas it exported 2.2 million tonnes in 2005 and 16 million tonnes in 2010. As of 2010, export of coal represents 30% of total exports overtaking copper as the biggest item of exports. In the past years not only the level of commodity production increased, prices of Mongolias major exporting commodities significantly increased as well. Figure 6: World prices of major exporting commodities (Jan 2000=100)
900 800 700 600 500 400 300 200 100 0 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 GOLD ZINC COPPER COAL

Sources: International Financial Statistics Fluctuations in prices of commodities or terms of trade shock represent a major risk to the stability of the economy and hence continuation of the boom-bust cycle. Since the level of production cant be adjusted flexibly and the mineral sector is already a significant sector of the economy and moreover, major mining projects are expected to be operational in near term, fluctuations in commodity prices represent major risk to the stability of the economy. This source of risk was clearly on display during 2008/2009 crisis. Because of almost no exposure of the sector to the world financial markets, Mongolia did not suffer from the first wave of crisis. However, because of increasing dependence of the economy on mineral sector and sudden fall of world commodity prices, the country experienced hardships. As revenue from commodity exports took a significant hit, it put pressure on prices, exchange rates, government revenue, international reserves and consequently, on the production and banking sector as the demand for goods and services declined. In particular, export revenue decreased by 25.6% and total trade turnover decreased by 30.4% in 2009. Because of the negative shock to the countrys terms of trade, trade deficit was 13.8% of GDP in 2008 and 5.4% in 2009. The trade deficit put pressure on the domestic currency to depreciate.

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Figure 7: Nominal exchange rate (Togrog per USD) depreciation and trade deficit (mln USD) in 2008/2009
12 month trade surplus
200.0 0.0 -200.0 -400.0 -600.0 -800.0 -1,000.0 -1,200.0

EXCHANGE RATE
2,000.00 1,500.00 1,000.00 500.00 0.00

Source: Bank of Mongolia From Figure 7, we see that trade deficit led the exchange rate to depreciate significantly in April of 2009. It should be noted that during the first few months of the crisis, especially between September 2008 and April 2009, Bank of Mongolia intervened in the foreign exchange market to fend off the sudden pressure on Togrog to depreciate by selling foreign currency out of its reserves. Inevitably, when the international reserves reached unacceptable low levels of only around USD500 million, the Bank of Mongolia stopped the intervention and let the currency to depreciate. This brings us to policy risks that threaten to exacerbate the boom-bust cycle caused by fluctuations in the commodity prices. During the economic boom years before 2008, fiscal and monetary policies were highly pro-cyclical. Because of increasing commodity prices and revenues generated from mineral exports, both public and private demand for goods and services increased. Government revenue increased from Togrog227 billion or 27.3% of GDP in 1997 to Togrog3.1 Trillion of 37.3% of GDP in 2010. And, more interestingly during this period dependence of the budget revenue on mineral sector increased as well. Mineral sector contributed around 6% of the fiscal revenue in 2003 (footnote:

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World Bank (2003)), whereas this contribution significantly increased to reach around 25% as of 2010. More importantly, with increasing revenues, Government implemented pro-cyclical fiscal policies during this period. Government expenditure rose drastically as can be seen from the figure below. Interestingly, as the Government spending increased, the structure of the fiscal spending changed as well. In particular, the share of spending on social safety net programs in the budget increased to finance spending on new transfer programs such as Child Money and Newly Wedded Couples. Figure 8: Pro-cyclical fiscal policy, in mln Togrog
9,000,000.0 8,000,000.0 7,000,000.0 6,000,000.0 5,000,000.0 4,000,000.0 3,000,000.0 2,000,000.0 1,000,000.0 0.0

Government Expenditure

GDP

Source: Bank of Mongolia, National Statistical Office of Mongolia However, with unfavorable changes in the world commodity prices, Governments revenue took a significant hit by missing the target level by 14% or 5.7% of GDP in 2008 and decreased by 6% in 2009 adding a significant pressure on government spending. However, in 2010, as world commodity prices increased government revenue increased so did expenditure. Thus fiscal spending closely followed fiscal revenue, which in turn closely followed world commodity prices. Government of Mongolia attempted to break this habit by creating a Mongolia Development Fund, which was designed to collect receipts from windfall tax on mineral exports and one third of it to be saved for rainy day. However, the fund financed regular government expenditures such as social safety net programs and quickly ran out of money when windfall tax receipts diminished. During the height of the crisis, when fiscal stimulus was the most needed policy measure, Government not only did not have resources for stimulus but it also did not have financial resources to maintain the level of spending. When economy was booming government expenditure increased which further boosted aggregate demand and when economy declined government expenditure decreased, which further aggravated the economic decline.

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Pro-cyclical fiscal policy was not the only factor exacerbating boom-bust cycle. During the period of high growth monetary policy was also accommodative. Figure 8: Pro-cyclical monetary policy (inflation, monetary supply growth and CBB rate)
70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

-10.0

CPI inflation

M2 growth

Source: National Statistical Office of Mongolia and the Bank of Mongolia As we mentioned above, the country experienced highly volatile and high level of inflation. Although there were many factors contributed to the inflation increase, one of the chief reasons was indeed expansionary monetary policy conducted by the Bank of Mongolia (the Central Bank). For the past 15 years, money supply increased on average 28.4% on 12 months rolling basis with standard deviation of 15.1%. Interestingly, during the pre-crisis period between 2005 and 2008, money supply increased twofold. Although, during the period between 2005 and 2007 inflation was on average 7% on rolling 12 month basis, it significantly increased in 2008 reaching average 12 month inflation of 26.7%. Moreover, because of heightened inflation during the crisis, the Bank of Mongolia tightened its policy by raising policy rate and intervening in the foreign exchange market which resulted in 5% decrease in money supply by the end of 2008. Thus, in the same manner as in fiscal policy, monetary policy was highly pro-cyclical. During the period of boom money supply increased significantly and accelerated the economic growth, whereas during the economic decline monetary supply was tightened because of high inflation concerns thus limiting the supply of credit and worsening the real sector decline. For Mongolia, demand side risks are closely related to risks associated with fluctuations in the world commodity prices or terms of trade risks, which is the major origin of shocks to the economy and a major driver for aggregate demand. However, fiscal and monetary policies pose yet additional risks or policy risks to the stability of the economy. We discussed that past experiences suggest that pro-cyclical policies

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exacerbated the terms of trade shocks further destabilizing the economy and continuing the boom-bust cycle.

II.2 Resource curse Boom-bust cycles threaten to destabilize socio-economic conditions in the short to medium term. In the longer run, increasing share of mining sector and increasing dependence on the mineral export might lead the country to experience resource curse symptoms. Resource curse is a phenomenon that refers to an empirical observation that resource abundance does not always translate into economic development. In particular, there are many cases of resource rich countries that failed materialize its resources into high economic growth, better institutional quality and generally, increase in the well-being of its citizens. For Mongolia, resource curse presents a major long term risk to the stability of the economy and society as a general. There are at least two important aspects that we should pay attention in the discussion of the resource curse that we need to be aware of. First, in terms of long term economic structure, the country will be vulnerable to Dutch disease effects. Dutch disease effects refer to the fact that disproportionate increase in one sector, i.e. mining sector, leads to drastic real exchange rate appreciation, which in turn makes other sectors of the economy uncompetitive in the world market. This loss of competitiveness leads the country to specialize in mineral exports, as well as to concentrate more on non-tradable goods sector. Moreover, since goods and services become more expensive in the domestic market, there will be a growing competition for tradable goods market between domestic and foreign producers. Hence, there will be an increasing pressure on the Government to protect domestic producers from foreign competition. Because Mongolia borders with China, who trades extensively and has comparative advantage in many goods and services, and Mongolia is too dependent on exports of minerals, this risk is expected to pose a real challenge for Mongolian authorities. Some estimates suggest that development of two big mining projects will lead services sector to drastically expand by 2020, whereas construction and transport services will have increasing share beyond 2020. However, it also estimates that agriculture and manufacturing sectors will significantly decline in terms of share in GDP by 2020. Thus, in the longer term, the economy might suffer from loss of competitiveness in terms of narrower diversification of the economy and hence, lower economic growth.

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The second aspect that we want stress is that there are other risks that can directly lead to resource curse symptoms. That is quality of institutions and governance plays critical role in translating resource wealth into proper economic development. Weak law and contract enforcement, bureaucratic hurdles, corruption, weak government accountability and overall, unfavorable business environment all significantly derail the country from fully capitalizing on its resource abundance. Mongolia does not fare well in terms of institutional quality. Various business environment surveys consistently rank the country very low. In many countries, natural resources became a source of rent-seeking from political groups and lobbyists. In terms of corruption, Mongolia ranked in 102 out of 179 countries by Transparency International. Indeed, many enterprise surveys specifically cite corruption as one of the major hurdles in business environment. (footnote to be added) Business Environment and Enterprise Survey by International Financial Corporation and European Bank for Restructuring and Development shows that 31.1% of firms mentioned corruption as a major constraint. There are other institutional shortcomings in the country as well. In terms of law and contract enforcement, Economic Freedom of the World index by Frasier Institute ranked Mongolia at 70 out of 141 countries in 2010. In general, Mongolia ranks very low in business environment surveys. World Banks Doing Business report ranked the country at 73 out of 183 countries, whereas World Competitiveness Index by World Competitiveness Forum ranked it at 117 out of 133 countries. Although these surveys were conducted not long after the economic crisis of 2008/2009, it still shows symptoms of unfriendly business environment in the country. Governance arrangements pose additional challenge for the country. Generally, it is possible to dampen risks associated with Dutch disease effects and to avoid Resource curse altogether as several countries showed. However, it also showed that it requires self restraint and political leadership to implement policies that are beneficial for the country in the long term. Pro-cyclical policies that we discussed above, which exacerbated the boombust cycle, are one of the symptoms of poor governance in the country further accentuating policy risks. The country is expected to experience significant capital inflow related to expected boom in the mining sector and the current policy framework for regulating capital inflows will be tested. In other words the country is susceptible to financial risks. Current regulatory framework does not adequately deal with capital inflow. In other words, capital flight that we experienced during 2008/2009 crisis happened because of inadequate capital control mechanisms. After the crisis, the policy framework

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dealing with capital control did not change. Therefore, the country is still susceptible to the large swings capital flight. Currently, there are discussions taking place about what mechanisms of capital control the country should be using and how much of government intervention should be allowed. There are two types of capital control that other countries implemented. One is foreign exchange related prudential regulations. These regulations on one hand protect Mongolian banks from exchange rate risks and on the other hand, it also protects the domestic financial market from sudden flow of capital in and out of the country. Currently, banking regulations state that foreign exchange open positions of a bank should not exceed 15% of banks capital for a single foreign currency and 40% for all foreign currencies. These ratios should be maintained every day. Trade and Development Bank of Mongolia and XAC Bank are exceptions to this regulation as the bank was allowed to implement value at risk model by the Central Bank. Needless to say, since this kind of regulation restricts the banking operation, many banks are interested in value-at-risk models. Therefore, it should be noted that if a significant number of banks are allowed to implement value-at-risk models, banks will be vulnerable to un-hedged currency risks which means that risks of untamed fluctuations in capital flow in and out of the country will be more prominent further destabilizing the financial market. Since it is expected that the country will be experiencing significant capital inflows into the country, authorities are contemplating further actions on capital control. In particular, imposition of taxes on the capital or unremunerated reserve requirements are control tools of interest.

II.3 Environmental risks Past experiences suggest that the country is also vulnerable to supply side risks. One of the prominent risks on the supply side is environmental risks. Agriculture sector was a dominant sector for the Mongolian economy in 90s and is still an important sector for the economy accounting for 23% of GDP as of 2010 and employing around 30% of population. Mongolian agriculture sector primarily consist of livestock, which represent around 90% of the sector. Contribution of agricultural products to countrys exports is also losing its significance. In early 2000s, export of agricultural products were around 5% of total exports whereas as of 2010, it accounted for less than 2%. Because animal husbandry is such an important sector for the domestic economy, drastic climatic changes affect the countrys economy significantly. Severe winters and dry summers pose real challenges to herders. In the last decade, Mongolia

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experienced two dramatic climatic changes. During the 2000/2001/2002 and 2009/2010 severe winters (dzud) countrys livestock was severely depleted. For example, during the latest 2009/2010 dzud around 8 million or almost 20% of total livestock was lost. Climate changes crucially affect supply of food and therefore, have destabilizing effect on prices and levels of production. However, climatic risks are not man-made and it can be at least partially addressed by a proper insurance system for herders. The country also suffers from man-made environmental degradation. In particular, pollution in Ulaanbaatar reaches catastrophic levels during winter, which severely impacts health and quality of life of citizens. According to the Mongolian Social Health Institute estimations Ulaanbaatar has between 1.5 to 7.8 times higher nitric acid, carbon dioxide and dust particles in the air. Air pollution not only decreases productivity as it is one of major sources of various diseases and disabilities of labor, it also increases cost of healthcare. Moreover, in relation to expanding mining sector, land and water degradation, deforestation, desertification are becoming one of the major sources of unrest in rural areas. Environmental degradation is not sitting well with herders as their livelihood crucially relies on pastureland and good supply of water. It also intersects with political risks, since growing unrest over environmental issues spills over into political movements. II.4 Political risks Abovementioned risks are all associated with economic conditions of the country in general. However, there are other risks that affect the countrys socio-economic conditions. These risks are tightly interconnected with economic, policy and environmental risks, but are not necessarily classified as those. Since Mongolia made transition 20 years ago from one party political system into democratically elected system it experienced comparatively stable political system and successfully held 5 parliamentarian and 6 presidential elections. Because of this political stability, the country ranks highly in comparison to other transitional and developing countries. With expected increase in the mining sector and in GDP growth, there is a growing concern about future political stability. There have been occasional political demonstrations in the past especially during spring time, dubbed as spring syndrome. Moreover, after results of 2008 election, there was a violent clash between demonstrators and police in front of the winning partys headquarter resulting in the of five citizens. Growing revenue from the mining sector may lead to more populist policies such as handouts by the ruling party. This is a major political risk because although the policy may lead to more equal distribution of the receipts, it will also enable the running party to win more votes in elections. These politically motivated policies intersect with policy risks we discussed above and test the

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willingness of the ruling party to self restraint and conduct policies that are beneficial to citizens in the longer run. Moreover,

However, new economic environment will test political stability of the country. We are proposing to discuss stability of the current political environment and related aspects that would challenge its stability.

Geopolitical risk: between Russia and China.