Mongolian Currency Law – Transactions MUST Be in Tugrugs
ULAANBAATAR, MONGOLIA – New Mongolian currency law takes effect on August 9, 2009. Starting on this date, all Mongolian businesses and agencies must do business in tugrugs (often referred as tugriks), the Mongolian official currency, and not in foreign denominated or foreign currency based rates.
The Government of Mongolia passed the law in July 2009 to better control the currency fluctuations as a response to the sudden devaluation of the tugrug in March 2009. Mongolian government is taking the currency measures seriously and have passed severe penalties for the offense. It is well advised for companies to follow the government’s new law.
Sudden Drop in Tugrug’s Exchange Rate
As the saying goes, any port in a storm will do. As the economic downturn seemed to hit its peak around at the end of 2008 and during the first few months of 2009 the Mongolian tugrug grew increasingly weak against foreign currency. While the exchange rate had been hovering around 1170 tugrugs to the US dollar for several years, it suddenly spiked to over 1700 tugrugs per dollar in March. As a result individuals and businesses began to conduct more and more business in US dollars, British pounds or other convertible currencies.
Mongolian Government’s Response to the Currency Devaluation and Fluctuation
The Government of Mongolia felt the need to get a handle on the situation, passing a Currency Law in late July 2009 in order to do this. The newly-passed Currency Law mandates that all prices, all settlements and all advertisements within the territory of Mongolia must be set in tugrug, prohibiting the use of foreign currency for domestic transactions.
US Dollar Was the Unofficial “Official” Currency in Mongolia
It is a fairly common practice, especially amongst foreign-invested companies, to advertise or charge in dollars as many of the goods sold in Mongolia are imported, most likely bought and paid for with dollars. Politicians felt this was undermining the tugrug, and thus the Currency Law was passed. Ironically, the Mongolian Immigration Office, the Foreign Investment and Foreign Trade Agency and the Mongolian Tax Authority all charge various services or fees in US dollars, at least until this law was passed.
Violators Beware
The penalties are quite high for those who continue using foreign currency for settlement in Mongolia. The first offense is confiscation of the income, the second offense is a fine ranging from ten times to one hundred times the minimum wage, and the third offense can result in the confiscation of any special licenses a company may hold.
Based on these consequences, it is clear that the Government is taking the violation of this law seriously. If you or your company currently lists prices and makes settlement within the territory of Mongolia in currencies other than tugrug it is definitely time to begin the switch to tugrugs.
NOTE: The correct way to spell Mongolian currency is tugrug, not tugrik as often spelled.
As of right now, there still are many Mongolian business websites with prices in USD or in USD based rates. Interesting to see what will happen in the next few months as regulators start to tighten on this.
Companies will probably see some leniency over the next few months as companies update their pricing information. The last time government passed a law, I remember the regulators showing extreme mercy and leniency for a couple of months.
I think the regulators will provide some grace period for businesses to make the switch. Anyway lets see how it goes.
Thanks Mergen and Mwisunji for the comments. It is reasonable to think there may be some sort of grace period, but the fact is the law went into effect Sunday, August 9, 2009 and as far back as Dec 08/Jan 09 TV stations were running banners across the screen for people to report businesses that were charging in dollars. When it comes time for audits to happen in the next year or two don’t look for the tax auditors to have much mercy.
I think it is better to be safe than sorry and to comply with the law as quickly as possible. I know from first-hand accounts the tax authorities going after businesses and individuals who they feel are not paying taxes (whether they are valid charges or not), and I do not think they will miss this opportunity to penalize those who have violated the Currency Law. I am not trying to fear-monger, I just want to be realistic.
Bobby, thanks for the reply. My question is this – what do we do with contracts that were signed prior to the law was passed? What if the current contract had pricing in USD?
Redoing all the contracts is excessively burdensome. At the same time, pricing can’t be in USD or even be based on foreign currency.
Hi Mergen,
Any law is going to override currently executed contracts. I am afraid contracts/agreements are going to need to be re-executed to be expressed in tugrug and all settlements, including salaries, in Mongolia must be done in tugrug. Previous Mongolian law stated that all prices should be expressed in tugrug, but it was not enforced. Now that the Currency Law is in effect I think the tax authority are going to be much more strict, although it is impossible to say how the law will be enforced or interpreted in the future since it only went into effect this month.