Compliance with the Company Law is Mongolia is still a relatively rare thing.  Most companies are not publicly listed and are owned by single shareholders so therefore do not feel the need to follow the Company Law.

Under the Company Law of Mongolia there are a number of decisions which must be approved by a shareholder’s meeting held at least once a year, including the appointment of members of a board of directors, approving annual reports, and the reorganization or liquidation of the company, amongst other matters.

While these aspects of the Company Law may not be strictly enforced in Mongolia yet, they nevertheless remain important features of properly maintaining a company.  Compliance is not overly onerous for companies in Mongolia.  A shareholder’s meeting must be held within four months of the end of the company’s fiscal year in order to make the necessary decisions.  While a company may have a different internal fiscal year, in Mongolia it is defined as January 1 through December 31 for the purpose of submitting documents to the tax authority.

A limited liability company may or may not have a board of directors.  If a BOD is defined in the company charter then it must meet as stated in the charter, which may vary from once a quarter to once a year.  The BOD meeting needs to be held before the shareholder’s meeting as the BOD sets the meeting time and place as well as the agenda for the shareholder’s meeting.  A shareholder’s meeting announcement then needs to be sent out to each of the company shareholders, assuming there is more than one.

I have not seen a case where a company has been fined or forced to be liquidated because of non-compliance with the Company Law.  In many cases it comes up with there is a due diligence investigation being done by a potential buyer/investor in the Mongolian company.  Investors, of course, want to see as much of a paper trail as possible to lead them from point A to point B, and the proper shareholder’s resolutions issued as a result of meetings is one way to accomplish this.  Not only does this show the investor the company has been compliant with the Company Law and is therefore in good standing, it also shows the company is striving to be transparent, document its decisions and has nothing to hide.

Slowly companies are beginning to keep better records and increase transparency.  We are two decades out from the very secretive days of the Soviet era and companies are starting to realize that everything cannot be done behind locked doors anymore.  While things still have a ways to go, an increasing number of companies are subsidiaries of companies that are listed in foreign markets, from Hong Kong to London to Toronto.  Of course scrutiny of publicly listed companies is very high, which then trickles down to the Mongolian subsidiary.  There is also increased interest from abroad, and perhaps now more than ever there is a large amount of international interest in investing in Mongolia, especially in already existing Mongolian companies.

While most may think corporate compliance need only be practiced by publicly traded companies, limited liability companies would do well to be more open.  As the world market becomes increasingly globalized customers and partners are going to want to work with those they know operate transparent, fair and legal businesses.  Having a partner who is loath to disclose any information automatically raises alarm bells in this era of corporate transparency and disclosure.  Currently there are a number of NGOs and other organizations focusing on corporate governance and transparency, including projects by USAID.  You can find a podcast on these topics here.   The podcast can also be found on both the Mongolia Business Blog website as well as iTunes.

In a surprise announcement last week, the Prime Minister of Mongolia S. Batbold reported that Mongolia will cancel the auction of the exploration and mining licenses associated with the Tavan Tolgoi (TT) coal deposit in the Umnugovi province of Mongolia.  The TT deposit is located in southern Mongolia and is considered one of the largest untapped coal deposits in the world.

Previously it was understood there was going to be a 51%/49% ownership structure between the Government of Mongolia and the private company(ies) awarded licenses to exploit the TT site.  Based on the understanding that TT was to be developed as a joint venture, much like Oyu Tolgoi (OT), a number of high profile companies were in the running for receiving a license to develop a section of the TT deposit, including USA’s Peabody, China’s Shenhua, BHP Billiton, Vale of Brazil, as well as Jindal from India and consortiums from both South Korea and Russia.

It seems the Mongolian public feels as if it received very little from the OT deal, despite the fact that the agreement was signed a few short months ago and production is still years away.  So instead of the private sector bearing at least half of the risk in the TT project, the government of Mongolia, and more specifically the citizens of Mongolia, are now going to have to worry about market fluctuations, the availability of credit and all of the other associated risks of owning and running a project of this size.

To me this begs the question:  where will the money come from?  The government has already been spend-happy during the past few months with the handing out to every citizen MNT70,000 (USD50), which does not seem like much on an individual basis but when multiplied by the entire population of 3.7 million it comes out to be about USD180 million.  Add to that the MPs (there are 76) voting themselves MNT1 billion to use as they sees fit in their constituencies, and you suddenly have the makings of massive inflationary issues when the country can least afford it, during the Tsagaan Sar lunar new year holiday when spending and purchases spike.

I am all for assisting the poor and ensuring the citizens of Mongolia get their fair share of the minerals Mongolia is lucky (or unlucky, depending on your perspective) to have.  I simply think a more targeted and long-term approach to the situation should be taken,  Instead of giving each individual the same amount, whether they are walking around with a Louis Vuitton bag on their shoulder or digging through the trash for plastic bottles.  The MNT70,000 comes from the Human Development Fund.  It seems to me Mongolia would do well to upgrade its schools, hospitals, and infrastructure (especially running water, heating and electricity to the ger districts) before handing out free money, which is probably going to do very little to actually develop anything.  When the Mongolian Minster of Health goes to Korea for treatment, something is seriously awry.

As pessimistic as this may sound, I do have hopes for Mongolia.  The country is in a position to benefit enormously from its minerals as long as they are handled with care and an eye on the future.  It would be nice to see Mongolia benefit more from taxes, royalties and profit-sharing schemes instead of having an equity stake in these huge, money-intensive projects.  The people of Mongolia deserve more from its elected officials than the paltry sum they have received thus far, namely education, healthcare and safety and security.  With such a small population the benefits derived from the gold, copper and uranium underground could help support the building of world-class hospitals and universities in the country.  Here’s hoping the politicians of Mongolia focus on bettering the lives of their constituents instead of padding their own bank accounts.

Visas – those little bits of paper in our passports that allow us to enter and leave the country.  If you happened to be lucky enough to be born in the US, Europe, Australia or other countries considered the “West” then you can probably travel fairly freely without the worry of getting a visa.  Of course when it comes to employment we all need visas in order to live and work in a foreign country.

While it would seem to make sense that Mongolia would make it relatively easy for people to apply for and be approved for visas, this is not necessarily always the case.  Mongolia, especially during the summer season, actively seeks to increase the number of tourists that visit the country each year.  In a country that has a viable tourist season of only three to four months, one would think applying for a tourist visa would be made as easy as possible.  This, frustratingly for many, is not always the case.  A friend of mine applied for a tourist visa in September at the Mongolian embassy in Vienna to come for a fishing trip.  The embassy required him to present a letter from a Mongolian tourism company confirming he had a hotel reservation.  Luckily I work above a tourism company and this was not much of an issue.  Meanwhile, in London, another person was applying for a tourist visa for the same trip and was not required to provide additional documentation outside of the visa application.  Needless to say, as a company providing visa services this type of discrepancy in policy from one embassy to another makes it extremely difficult to advise clients on visa matters.

I know of several other cases involving work permits and visa issues.  In one case an expat was working as a teacher for a school here in UB.  When the owner of the school began to make teaching there unpleasant he decided to leave, as most people would.  Well, it turns out the owner is the wife of a powerful figure in Mongolia and she was able to single-handedly persuade the Mongolian Immigration Department as well as the Labor Office to deny him a work visa and work permit.  This denial was not based on any actual infraction or breaking of Immigration rules, but was simply imposed on the back of a letter to these agencies.  At a time when Mongolia could use well-trained teachers, of any nationality, she was able to make life very difficult for this teacher because of a grudge.

Another case I am aware of is of an expat worker who was also here teaching.  He had a multi-year visa that was nowhere near expiring and ended up taking another job on that visa but neither he nor the company registered this with Immigration.  When he tried to leave he found out the hard way that somewhere along the way the rules had been broken.  He spoke with the head of Immigration, who ended up fining the company for not properly registering him and telling the expat that there would be no problem for him in the future.

Well, you guessed it.  He subsequently tried to return to work for a company here in Mongolia but was told he had violated not one but two Immigration laws.  He went back and spoke with the same person at Immigration, who feigned not remembering the situation although it had taken place just a few months before, who said there was nothing he could do, even though he is the head of the Immigration Department.

So at a time when Mongolia should probably be actively seeking to increase tourism numbers and the amount of foreign investment, and thus expat workers, it seems to be doing just the opposite by making a visa more difficult to obtain.  While I fully understand and support a country’s right to give visas to anyone it pleases, I also see a need for Mongolia to have exposure to international best practice in any number of sectors of the economy.  A great way to get this exposure is to allow foreign employees to work in Mongolia and pass knowledge and skills on to Mongolian workers.  Mongolia already practices a foreign worker quota system, so there is little fear that foreign employees are going to overrun the country.

This blog has morphed into a different beast than originally intended, but the moral of the story is to always follow the rules.  The Mongolian authorities will definitely seize an opportunity to deny a visa, registration or some other application.  At the end of the day, as tempting and easy as it may be, it is better to follow the letter of the law.  It may take a bit longer, but following the law is going to be your best defense against future problems.

Following up on my previous two-part blog on difficulties and challenges of doing business in Mongolia, this blog will focus on why some expats may experience difficulties because of the way they think things should be done in Mongolia but aren’t.

That’s Not How We Do It

A major difficulty I see foreigners dealing with here, especially as managers of companies, is their wanting to run their companies according the legal system they are familiar with.  While we are all guilty of saying “Well, in the US we do this” or “In the UK we do that” unfortunately this just does not translate well to doing business in Mongolia.  The legal system in Mongolia is undeniably a product of the Soviet system, and while Mongolian lawmakers have pretty much rewritten most laws since the transition nearly 20 years ago, the major influence on many of the politicians remains the Soviet Union.  So while it is easy to fall into the mindset of “that’s not how we do it in…” you will only end up driving yourself mad thinking that way.

Laws in Mongolia can be extremely different from what we are used to.  For example, the Labor Law in Mongolia is extremely employee friendly.  The employer cannot really dictate anything to the employee as everything must be mutually agreed upon.  There is also no at-will termination, and based on Supreme Court interpretations of the law it actually leans towards lifetime employment.  That can be difficult for many foreign HR people to get their heads around.

Many expat workers also expect the Mongolian legal system to be comparable to either China or Russia’s legal system as well.  I am no expert in either one of those systems but I do know that Mongolia has a unique legal culture unto itself.  While the Mongolian legal system would share some characteristics from these countries, one no definitely not come expecting to understand the Mongolian legal system based on either one of these countries.

You Mean We Need it in Mongolian?

Many expat workers, unless they have experience working in foreign countries, also tend to forget about the translation issue.  While the Civil Code does allow for freedom of contract meaning contracts and agreements can be executed in any language, whenever your company is dealing with a Mongolian government agency, which will be fairly often, they require everything be translated into Mongolian.  For foreign-invested companies agencies usually want to see the original in English and a Mongolian translation.

It is also easy to forget that every Mongolian does not speak English equally well as the employees most foreigners work with.  Whenever meeting with Mongolian clients or doing business with other Mongolian companies, pretty much everything will need to be translated into Mongolian if originally produced in English or another foreign language.  The same rule applies equally to Mongolian documents.  It can easily slip the mind of an expat that the working language is not your native language and documents will probably need to be translated from Mongolian.  My bit of advice on this is to allow plenty of time to translate documents before meetings to make sure they get done in good time.

The Personal Touch

In our world of 24/7 connections via our computers, iPhones or Blackberries it often seems to slip our minds that we can actually meet face to face.  Well, in Mongolia they still believe in the art of the in-person meeting.  That takes a lot of getting used to for most foreigners who feel that their time may be better utilized by sending an email or making a quick phone call.

This is especially true when dealing with Mongolian government agencies.  Virtually everything, from submitting monthly tax reports to simply requesting the steps and documents necessary to apply for a license will require a trip to that office.  This drives more than a few expats mad as it seems like an enormous waste of time, as indeed it is.  But try calling Immigration for the procedure to apply for a tourist visa and see where it gets you.  There’s nothing like some good ol’ face-time in Mongolia to accomplish your mission.

We Don’t Need No Stinkin’ Employment Agreements

Well, yes you do.  As I stated above the Mongolian Labor Law is very pro-employee.  As such it is illegal to have someone work for you without an employment agreement/contract in place.  Although many companies in Mongolia are guilty of doing this and usually do not think twice about it, it can come back to haunt them if the employee were to ever bring legal proceedings against the company.  Dollars to donuts the employee will be returning to work if s/he were to sue the company for wrongful termination and there was no employment agreement in place.

It is very easy not to execute employment agreements when hiring a new employee.  Even companies with a dedicated Human Resources department can fail to properly comply with the Labor Law in this respect.  Most employees are most likely not that familiar with the Labor Law and do not know the company is legally bound to sign an employment agreement with them.  On the other hand, the company may think they are getting away with something by not having an employment agreement.  This definitely is not an idea that will work and will only be trouble in the future.

To deal with this issue it is highly advisable to simply have an employment agreement template that your company signs with every employee upon hiring.  A foreign contract/employment agreement could be used as a base but it will definitely need to be vetted by a law firm or an HR consulting firm in order to ensure it complies with Mongolian law.

The Mongolian Labor Law also makes a distinction between a contract, which can only be used for high-level employees, and employment agreements, which would be used for the majority of your employees.  These two documents have different regulations and procedures in the Labor Law.  There is also a Government Resolution that defines which positions can actually be contracted.  Yet another issue to contend with.

Foreigners Need Not Apply

Another issue many foreign-invested companies are often surprised by is the foreign-worker quota in Mongolia.  The quota is regulated by an annual Parliamentary Resolution that defines, by business sector, the number of foreign employees a company can have.  It can be as high as 90% of the workforce for petroleum exploration, but generally varies from 10%-20%.  The default quota, for a sector that is not listed in the resolution, is 5%.

This quota is based on the number of people the company has listed as paying social insurance for.  Every time a company applies for a work permit for a foreign employee it must get a Social Insurance reference letter that shows for how many employees social insurance is paid and how many expat employees the company has.  If the company has reached its quota then the Social Insurance office will not approve a work permit being issued.

Visit Early and Often – Getting Legal, HR and Other Advice

In more cases than I care to remember I have seen companies come to ICMC after a situation has already gone pear-shaped.  While most of the time there are no issues when a company relies on its own staff to handle matters, for some issues, especially those legal in nature, or those dealing with specialized areas such as labor matters, HR matters, immigration problems or company registration issues it can be better to consult with another party who may have more experience in the area concerned.

I probably see this most often relating to tax issues or labor matters.  A company may try to use its own employees to handle problems as they arise, which is perfectly understandable, but many times these issues are too complex for the average employee to be able to handle well.  Usually it comes down to having a law firm or another consulting firm help solve the problem.  All too often I have seen companies realize they will need outside help when it is almost too late to achieve good results.

The best advice I can give if your company is new to Mongolia, or even if it is not, is to find a good law firm to consult with when those pesky legal issues pop up.  It is also a good idea to find a firm this is able to assist with immigration issues, tax problems or company certificate renewal and other compliance issues.

We’re Going To Need That in Writing

My final topic is on corporate registration and any changes to a company’s State Registration Office (SRO) certificate or its Foreign Investment and Foreign Trade Agency (FIFTA) certificate.  Mongolian agencies require a Shareholder’s Resolution in order to register any changes on either certificate, including registering a new Executive Director, increasing the capital, changing shareholders (in which case you will need resolutions from the old and new shareholders), and adding a new business activity of the company.  Regardless of whether the shareholder of the Mongolian company is located here or not, the authorities will require an original signed resolution from the parent company.

In a similar vein official request letters are needed for virtually everything your company will want to do in Mongolia.  To open a new bank account, a request letter is needed.  To have a telephone line installed, a request letter is needed.  Even to get a detailed phone bill listing numbers dialed, you guessed it, a request letter is needed.  It can get out of control at times but at least you can’t accuse Mongolia of not continuing its socialist background of needing paperwork for everything.

This is a small list of what I see expats struggle with when working in Mongolia.  Some issues, like the legal system, are usually just a person falling back to what they are familiar and comfortable with.  Others, like translation or request letters, usually takes a little getting used to and then it ceases to be much of an issue.  Working in any foreign jurisdiction has both its challenges and its rewards and Mongolia is no different.

]]> http://icmc-mongolia.net/expats-in-mongolia-your-not-in-kansas-anymore/feed 2 http://icmc-mongolia.net/doing-business-in-mongolia-potential-business-challenges-part-two http://icmc-mongolia.net/doing-business-in-mongolia-potential-business-challenges-part-two#comments Mon, 14 Sep 2009 10:24:34 +0000 Bobby http://icmc-mongolia.net/?p=546

Following up on Part 1 of some challenges to be prepared for when working or doing business in Mongolia, here is Part 2. This list really focuses on more practical things that many people who have worked in foreign countries may have already experienced, such as occasional electricity or internet outages or translation issues.

Electricity and Internet Outages

As I have already mentioned above, Mongolia, like many developing countries, has at times issues with electricity. This is due, in no small part, to the construction boom that has been going on for the past several years, but which came to an abrupt halt almost exactly a year ago. Mongolia is a very centralized country, with virtually everything coming through UB before being sent out into the aimags, and electricity is no exception. Of course is doesn’t help matters when all of the power plants are also located in the capital city.

Because of the huge surge in demand for electricity, mostly from new apartment and office buildings throughout the city, electricity outages are prone to happen. That said, more often than not they are caused by construction crews not really knowing what they are doing and cutting through the line. Power outages are occasional, but when they do happen they can last for a half a day or longer. My advice…have some good old fashion non-computer work on hand, or a laptop with a long battery.

Internet outages similarly occur.  Internet outages seem to occur more often but usually last for shorter periods, usually ranging from ten to 30 minutes. Internet service interruptions are sometimes caused by problems with lines from China or Russia but are usually a result of someone cutting through the line. If the intertubes are an absolute necessity for you Mongolia’s internet service providers are offering better and faster service every day and USB modems are available from several ISPs.

Don’t Forget the Translation

Needing documents translated can cause major delays to projects if proper time has not been given. A translator, at the most, can probably translate ten pages a day and this number could easily become lower if the translation is technical or an area where s/he does not have much expertise.

According to the Civil Code agreements, contracts and the like can be executed in any language the parties select, but if at any time there are going to be Mongolian governmental agencies involved, it will need to be translated regardless of what the Civil Code says. Mongolian government officials are going to want to see contracts, company resolutions, employment agreements or any other documents that may be necessary to form a company, apply for special licenses or apply for visas in Mongolia.

Translation is easily forgotten about when making arrangements for meetings or registration with the government, yet it remains one of the most important aspects of doing business in a foreign country. It is easy to forget that not everyone attending a meeting will speak English and quite often it dawns on the organizer at the last minute that documents and materials need to be translated. The best advice I can give is to plan ahead, be prepared and get everything translated in good time.

Mongolian Currency Law

The new Currency Law went into effect on August 9, 2009, and while I think many people are under the impression that Mongolia will give some leeway on its implementation, I highly suggest it be taken seriously from day one.

The Currency Law states that all advertisements, contracts, agreements, invoices, and settlement within the territory of Mongolia must be made in tugrug. This includes paying or receiving money for goods or services, employee salaries including expat workers, and contracts must all be in tugrug, if they are in Mongolia between domestic companies. Obviously the tugrug is not a freely convertible currency so transactions between Mongolian and overseas companies do not fall within the realm of the Currency Law.

The penalties for breaking this can be high indeed. For first-time offenders the income involved in the transaction can be confiscated. For second-time offenders the fine can be from ten to thirty times minimum wage (currently MNT108,000, or about US75) for individuals or fifty to one hundred times the minimum wage for companies. For those who violate the law more than twice any special licenses that the company may hold are subject to revocation. Is losing your minerals or construction license really worth paying in dollars or euros? I don’t think it really is.

Are We Boring You?

This is a problem that really is a worldwide issue, but at times Mongolians seem to take it to the extreme. Very rarely will a Mongolian receive a call on their mobile and not answer it, regardless of the importance of the meeting. Often they’ll get up and go stand in a corner or lean down under the conference table and whisper, but that hardly reduces the distraction of someone speaking while a meeting is taking place. Texting is very common as well, but I think texting, while distracting, is much less so than actually having another conversation during a meeting.

Incredibly enough I have also heard stories of Mongolians walking into a meeting, sitting down, open up a newspaper and begin reading. While taking an important call or answering an urgent text may necessary occasionally, reading the newspaper or any other unrelated document is shocking or distracting for many. I think most Mongolians do not notice because it is a somewhat common practice for Mongolians to be seen reading the throughout the day as well. If you can live with it then there is obviously nothing more to do but carry on with the meeting. If it gets to be too big of an issue politely ask the person to put away the paper so they s/he can fully participate in the meeting.

Workforce Challenges

The final challenge to foreign companies is to keep in mind the small pool of workers available from which to pull in Mongolia. The small overall population of Mongolia is only 2.7 million and coupled with an education system that is vastly different from what most of us are used to can make it difficult to find suitable workers. While Mongolia does have a high literacy rate, and is justifiably proud of that fact, that does not necessarily mean your company will have an easier time of finding an accountant with knowledge of international best practice or a qualified geologist. This, along with the fact that many of those who are part of the influx into Ulaanbaatar during the past years are herders or farmers with few marketable skills, can make it somewhat difficult to find the skills you need.

Of course one solution is to hire expat workers, but this can only fill so many positions as Mongolia operates a foreign worker quota system that varies depending on the sector. More and more Mongolians are going abroad to foreign universities to study. Luckily for Mongolia and Mongolian companies, they quite often return to Mongolia after finishing university or living overseas for several years. Most Mongolians I have met in other countries talk about how much they miss it and look forward to returning when they can. So instead of a brain drain of the most educated Mongolians the opposite happens, with many returning to increase the quality of the workforce.

Thus ends my two part blog on challenges foreigners may face working in Mongolia. Again, this is not to be negative or disparage Mongolia, its government or its people, it is simply meant as an honest look at what I have observed from the tiny microcosm in which I operate. Your experience can, and probably will, vary, but these issues are certainly worth bearing in mind as your company prepares to set up shop in Mongolia.

Some Realities of Doing Business in Mongolia

When attempting to talk up a place for investment, tourism or attracting people for some other reason the difficulties of a country is often downplayed or completely ignored, and Mongolia is no exception. At many of the numerous investor’s conferences that pop up here in Ulaanbaatar or in Hong Kong, London, or New York I think many panelists simply pay lip service to the fact that some aspects of doing business here are just plain difficult while ignoring the reality of the situation.

While I believe Mongolia has much to offer an investor or business person, in the interest of full disclosure I would like to present some of the difficulties of doing business in Mongolia. I was originally going to make this two parts, with part one will focusing on the way things actually operate in Mongolia and why this might make things difficult and part two focusing on why running a business may seem difficult to expats because things don’t work like they think they should. But it kept growing so now this is going to be part one of an unknown number in a series .

Attack of the Bureaucrats

One of the biggest difficulties in operating a business is dealing with the bureaucracy in Mongolia. Don’t get me wrong, I’m not talking Soviet-era bureaucracy, but Mongolia is a product of the Soviet system and there are many tell-tale signs of that when registering a company, applying for special licenses, or dealing with government agencies in general. Routine practices, such as submitting monthly income tax forms or social insurance sheets must all be handled in person at the relevant office. While much data can now be submitted online, agencies still require the accountant to personally deliver forms to an agency inspector in order to answer any questions.

One must also deal with ever-changing procedures on immigration issues, company registration, or tax issues, just to name a few. On more than one occasion I have had colleagues return from various agencies with stories of different regulations in effect or of the requirement of new, previously unneeded documents. Often these new requirements aren’t based on law or existing regulations but are usually the head of the agency willy-nilly deciding that a change needs to be made. Often the new requirements aren’t particularly difficult to follow, but are more of a nuisance, especially when you think you have everything you need and the curveball of a new document is thrown your way. The Immigration Office is often the worst offender, with the employees at times seeming as if they make up procedure as they go along. It is definitely still possible to get things done, you just have to be prepared for it taking just a bit longer than expected.

Legal System Woes

As with many developing countries, the Mongolian Legal system is not quite up to the standards that most foreigners expect from their home countries. While legally foreigners, foreign invested companies and Mongolians have equal protection under the law, a foreign-invested company should be prepared for the Mongolian courts may very well be biased towards a Mongolian company in a court case, however unfair that may be. “Foreign companies must learn to follow the laws of Mongolia” is a common refrain, while in my experience it is often the foreign-invested companies which often go above and beyond in order to comply with Mongolian law. I am not implying Mongolian companies do not follow the law, but many foreign-invested companies here are public and therefore must operate transparently and according to law.

Mongolia, and Ulaanbaatar by extension, is very small, and so many attorneys practicing also know many of the sitting judges as the judges are often professors at universities and law schools. Similarly parties are often related since in Mongolia is it probably more along the lines of three degrees of separation, not six degrees, as a friend once said to me. This can translate into having just the right attorney arguing your case make the difference between winning and losing.

Finally, regarding employment cases, if an employee who feels he was unfairly sues the company to get his job back he will most likely win the case. The Mongolian Labor Law is heavily pro-employee, which at times can make it virtually impossible to terminate an employee, even one who is completely useless. I work closely with a law firm and I have seen time and again employees be reinstated to their jobs simply because they are the employee, and several times when the reinstatement seemed to fly completely in the face of the Labor Law.

Cultural Misunderstandings

As anyone who has worked outside of their home country knows, cultural differences or cultural unawareness can make a business deal blow up in your face, and the same is true in Mongolia. There is no way I can list all of the to do’s in a paragraph, but I can point out a few things I have seen that have surprised foreigners.

In negotiations between a Mongolian company and a foreign company looking to possibly invest I have seen the Mongolian owner being extremely anxious, effectively pulling a Jerry Maguire yelling “Show me the money!” during the very first meeting. This, of course, can be a bit off-putting to foreigners as many of us have the idea that negotiations are usually done over the course of several meetings and may take weeks or months in order to finalize a deal. Of course Mongolians realize quickly that negotiations are going to take more than one meeting and settle in to  a pace we are used to.

On the other hand I have seen Mongolians put off time after time what was virtually a done deal. In one particular case the Mongolian party kept saying he was coming in to “sign the contracts.” In preparation for the signing multiple copies of contracts in both English and Mongolian were printed, equaling hundreds of pages of paper. Once he arrived he had actually come just to read the contract, and of course this brought up additional questions or issues, and the signing did not happen. After this repeating itself two or three times the foreign company finally realized that the Mongolian party was not in fact coming in to sign and they stopped printing in advance, and so preparation for actually signing the documents were not made until they were absolutely positive the contract was ready to be signed.

Mongolian Business Partners

Having a Mongolian associate to partner with or manage your company can of course be extremely helpful to help you navigate the sometimes rocky terrain of doing business in a foreign country. Mongolian partners can be especially helpful in dealing with the tax authority, licensing agencies or other government offices. They are also handy to have on board as they know the business environment and culture in Mongolia and can prove invaluable when acting as liaison with other Mongolian businesses.

On the other hand a Mongolian manager most likely will not have the same ideas about doing business as many foreigners do. Many Mongolians of a certain age have an educational background that is more Soviet in nature and so may be slightly at odds with how many foreigners think about doing business. Foreign companies also seem especially susceptible to the “need it yesterday” culture, especially in this age of Blackberries and being connected 24/7. In Mongolia there may not quite be that sense of urgency to get things done or that sense of connectedness,  with Blackberries being virtually unknown until the service was introduced just a few months ago. Of course all of this is slowly changing as more and more young Mongolians travel abroad and are educated at foreign schools and universities. And with the increased exposure to “Western” thinking through the internet, TV, and expats in Mongolia the changes are happening very fast indeed.

In my next blog I will continue with some of the realities of doing business in Mongolia.  Again I want to stress that my intention of these blogs is not to be negative about Mongolia, but I feel that often the whole truth may not be told when others are trying to lure investors to give up their money. I simply hope that these blogs will serve to give a fuller picture of what doing business is like in Mongolia, to balance the good with the realities.

Wednesday, August 26, 2009

According the today’s edition of The Mongol Messenger, an English-language newspaper in Mongolia, and several other sources amendments to four laws were approved yesterday by the Mongolian Ikh Khural, or Parliamnet, in a bid to increase the likelihood of the Oyu Tolgoi Investment Agreement’s passing.  An extraordinary session of Parliament was convened last Wednesday, August 19, in order to discuss these possible changes to Mongolian law.

Windfall Profits Tax Out as of 2011

54 of the 64 MPs voting have supported the annulment of the Windfall Profits tax from January 1, 2011.  Opponents of the annulment argue this will cost Mongolia billions of dollars in future revenue, but often tax revenue increases after windfall taxes are annulled because of the increased investment in these sectors.  Many MPs agree that in the long run this will increase investment in the mining sector, thereby creating jobs and increasing the tax base of Mongolia.

Once the Windfall Profits Tax is no longer in effect the overall tax burden of Erdenet Mines will decrease from 116% to 49.6% and OT’s tax burden will decrease from 72% to 46%, numbers that are much more palatable to foreign investors.  Finance Minister S. Bayartsogt has stated a bill to increase royalty payments to the Government will be introduced in the Fall Session of Parliament in order to help offset loses from the Windfall Tax.

Corporate Income Tax, Road Law and Water Law Amendments

The Law on Corporate Income Tax has also been amended.  Currently loses can be carried over for a period of two years.  The new amendment, coming into effect January 1, 2010 states that a company will be 100% exempt from corporate income tax from four to eight years depending on the amount of losses.

Unspecified amendments to the Road Law and Water Law were passed.  Changes in the Road Law were passed in an effort to further development paved roads linking Ulaanbaatar to aimag (province) centers as well as the road system overall in order to meet the demands of the equipment necessary to build, maintain and operate mine sites across the country.  Ivanhoe Mines have agreed to the maintenance of roads the company builds.  While privately built roads will be Government-owned, the builder will not be charged road-use fees for a period of time.

MPs are concerned with the amounts of water necessary to run OT and surrounding towns and settlements, and are worried that the amounts OT will use from subterranean water sources will adversely affect surface water.  Conflicts have also risen between the division of water for uses in agricultural and corporate sectors and as drinking water.

While debate will most likely continue for the foreseeable future on the issue of water and road use, the amendments to the Windfall Tax and Corporate Income tax seem to bode well for the much-anticipated finalizing of the Investment Agreement.  As the world seems to be slowly pulling out of the economic malaise, hopefully this will be the spark needed to again ignite interest in Mongolia, not just in the mining sector but in the overall economy.

]]> http://icmc-mongolia.net/mongolia-inches-closer-to-oyu-tolgoi-deal/feed 1 http://icmc-mongolia.net/business-in-mongolia-what-to-expect http://icmc-mongolia.net/business-in-mongolia-what-to-expect#comments Tue, 04 Aug 2009 04:17:44 +0000 Bobby http://icmc-mongolia.net/?p=229

August 4, 2009

Foreign Expectations of Doing Business

Often foreign businessmen come into Mongolia with the expectations that doing business in Mongolia is going to the similar to working in the US, Europe, or Australia, or at the very least like China or Russia.  While there are definitely similarities between Mongolia and the rest of the world, doing business here is usually very different from what many foreigners expect.

Companies often expect Mongolia to be similar to China or Russia because of the proximity to these countries.  There are definite similarities, especially bureaucratically, to the old Soviet system, and there are hints of Chinese business practices, in no small part due to the amount of Chinese investment in Mongolia.  Despite this, Mongolians maintain their own brand of doing business that is a blend of past influences mixed with future ambitions.

Many people lose sight of the fact that Mongolians have only really been doing business in a fully capitalist system for 20 years.  The West has been practicing capitalism for centuries, making it very easy for those of us who have grown up in capitalist societies to forget about the newcomers.  Capitalism is ingrained in most of us who grew up in the West and therefore we perhaps have fewer problems with capitalist business models than those who grew up in different systems.

New Kids on the Capitalist Block

As we know, Mongolia was closely aligned with the Soviet Union from the early 1920s until its collapse in 1989, when Mongolia suffered one of the worst peace time economic collapses of the 20^th century.  Because many Mongolians who went overseas for university or training during this time went to Russia, East Germany or other Easter bloc countries, they were, of course, trained in the Soviet economic system.  After the Soviet Union fell apart Mongolian businesses and businessmen had to change their style of doing business in short order, or not live to fight another day.

This is slowly but surely changing as time goes by.  An increasing number of Mongolians go abroad to study each year.  As these students return to Mongolia, bringing with them different ideas of how businesses should be run, the Mongolian business environment naturally changes into something that is perhaps a little more recognizable to Western companies.  As these students grow older and become the power-brokers in Mongolia the differences between business in Mongolia and the West will lessen.  Ideas also flow fast and free across boundaries in a way not seen before, giving the average Mongolian access to new ideas and innovations, allowing them to better compete in the Mongolian and international markets.

Proud Businessmen

Foreign companies must also bear in mind that Mongolian businessmen are very proud of their companies.  Being landlocked between two competing giants it is easy to understand why.  Much like homegrown companies in the US, Mongolian companies are proud of being locally owned and operated.  Like companies anywhere in the world, Mongolian companies do not want to give up too much power or control to others.  That said, Mongolians realize working with foreign companies on an international scale is often a necessity in order to survive.  While possessing a small domestic market, no direct access to ports and a small work-force from which to pull makes it an imperative they work closely with foreign companies in order to reach bigger markets with their goods, import technology and build the capacity of the Mongolian workforce.

Foreign Investment in Mongolia

Foreign companies invest in many sectors of the Mongolian economy, from mining and exploration to education and services.  Companies with at least 25% of its shares held by foreign investors are considered foreign-invested companies and companies can be 100% foreign-owned.  As stated in the Mongolian Foreign Investment Law, foreign investors and business owners enjoy the same legal protection as their Mongolian counterparts.

Foreign companies have invested in wide-ranging sectors of the Mongolian economy, from the service industry to mining, infrastructure and construction.  Foreign companies can invest in virtually any sector of the economy with few restrictions.  Of course, just as they enjoy equal protection under the law so must foreign-invested companies comply with Mongolian law.

It’s an exciting time in the Mongolian business world.  The country is attracting attention from international companies due to the minerals and mining sector as well high-end retailers to cater to a growing middle class.  Now is certainly the time to consider investing in this up-and-coming economy.