Tag Archives | Mongolia

Exploring Mongolia’s balancing behaviour

In the near future, it’s unlikely that Mongolia will position itself as one of the allies in India’s efforts to balance out Chinese influence | by Pranay Kotasthane (@pranaykotas)

Mongolia’s supposed volte-face has attracted the attention of India’s strategic community in the last few days. A simplified sequence of events is as follows: In May 2015, Mr Modi made a trip to Mongolia, the first ever by an Indian Prime Minister to that country. The most substantial outcome for Mongolia from this visit was the announcement of a $1 billion line of credit. Notably, the $1 billion amount is the second largest credit line issued by the Government of India, since the inception of this assistance programme in 2003-04. This was followed the Dalai Lama’s ninth visit to Mongolia in November 2016 (the last planned visit in August 2014 was cancelled by Mongolian authorities because President Xi was to set foot there on the same dates). China unsurprisingly objected to the November visit: it closed down a key border crossing between the two countries and cut-off talks on providing a $4.2 billion debt to Mongolia. Soon enough, the Mongolian Foreign Minister was made to publicly apologise for permitting the visit. He went on to say that the Dalai Lama will not be allowed to visit Mongolia under the current administration henceforth.

China’s official response to the events was sullen — an approach that has come to characterise its relations with most of its neighbours. The Chinese Foreign Affairs Spokesperson said:

we hope that Mongolia will truly learn lessons from this incident, truly respect the core interests of China, honour its promise and make efforts to improve the relations between China and Mongolia.” In turn, the Mongolian ambassador to India on called on India to extend support in this moment of crisis.

Now, because of the India angle to this story, some analysts pointed out that India’s inability in extending sufficient help was to blame Mongolia’s spectacular capitulation. Accurate or not, this assessment leads us to the following questions: what does this turnaround say about Mongolia’s capacity to challenge China? And, can Mongolia ever demonstrate balancing behaviour and ally with states such as India in countering China? On examining the recent turn of events closely, two possibilities come forth.

The first possibility: it was Mongolia that initially sensed an opportunity — a visit by the Dalai Lama could signal that his reincarnation could appear in Mongolia. Hence, the Mongolian government permitted the visit, albeit one strictly classified as that of a ‘religious nature’ alone. But when the Chinese stick came down with all its might, Mongolia quickly retracted.

Mongolia has played this game before — this was the Dalai Lama’s ninth visit to the country since 1979 and on each occasion, the Chinese response has been unkind. In 2002, China retaliated by closing the border rail crossing for two days, isolating the land-locked country further. The response in 2011 was milder — a ‘stern representation’ was made to convey Beijing’s displeasure at Ulan Bator. With this history in mind, it is difficult to believe that Mongolia permitted the trip without expecting a pushback from China.

The second possibility: India was, either a failsafe option that Mongolia presumed it could revert to in case the Chinese retaliated, or was the one that abetted the Dalai Lama’s visit. In either case, this possibility relies on a perception that Mongolia can be a balancing power — ready to join hands with weaker sides such as India to challenge the regional hegemon.

If this was indeed the intent from the Indian side, we’re on the right track. However, the same cannot be said about the instrument used. It would take a lot more than a mere increase in Line of Credit (LoC) to get a land-locked country — one that is struggling with a ‘$1 billion budget gap and looming debt repayments’ — on your side. A Line of Credit — whatever the amount extended may be — count merely as an attempt that can at best marginally change incentives of the recipient country. Projects undertaken as part of LoCs come with riders — 75% of the value of the contracts must be sourced from India. And the utilisation rates of LoCs are often slow, because of supply side constraints (read incompetence of Indian exporters) or because of demand issues (read inadequacies of recipient nation’s importers). [Data on lines of credit available in this xls sheet from the EXIM bank website.] 

Probably, the truth lies somewhere in between both the possibilities. What is clear is that China’s response this time around was swift and unforgiving, in continuance of China’s aggressive stance against its neighbours under President Xi. And it came at a time when Mongolia is already struggling economically. Under such circumstances, can Mongolia be one of the allies in India’s project of balancing out Chinese influence in the near future? Can, for instance, Mongolia take the risk of allowing the next reincarnation of the Dalai Lama to appear in Mongolia?

Very unlikely, especially if India is unwilling to think beyond Lines of Credit. If India is seriously considering challenging China, that demands it to offer something that can drastically change its partners’ incentives. Perhaps it is time to consider options such as offering unconditional development (if not military aid), or investing in long term developmental projects (like CPEC, minus all the Chinese characteristics) to bolster the capacities of smaller states in China’s neighbourhood. And even that wouldn’t guarantee the balancing credentials of states such as Mongolia, too low on the national power scale to inflict pain to China. Perhaps, a better balancing strategy for India would be to consolidate relations with Vietnam — a country that has the credentials to take the fight to the Chinese in alliance with partners such as India.

Also read: my piece on how India’s Lines of Credit stack up.

Pranay Kotasthane is a Research Fellow at The Takshashila Institution. He is on twitter @pranaykotas

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Data story: Lines of Credit supported by India

A brief overview of India’s lines of Credit to other nation-states

by Pranay Kotasthane (@pranaykotas)

India’s relationship with Mongolia has been in the news recently. After the Dalai Lama visited the Buddhist country, China suspended ongoing talks to grant a $4.2 billion loan and made Mongolia’s Foreign Minister apologise for permitting the visit. When Mongolia’s ambassador urged India to raise it’s voice against the Chinese overreaction, India’s response was as follows:

We are closely working with the Mongolian government to implement the credit line in a manner that is deemed beneficial to the friendly people of Mongolia by its leadership. We are aware of the difficult budgetary situation that Mongolia is facing due to various factors including high cost of servicing of debt raised by them in the past.

The credit line being referred to was the US $1 billion committed to Mongolia during PM Modi’s visit in May 2015. Meant to finance the ‘development of railways and related infrastructure projects’, this was the second-largest single line of credit by India since the programme started in 2003-04. This data point got me interested in this creature called Line of Credit. This post gives a basic overview of India’s Lines of Credit.

What is a Line of Credit?
A LOC is a ‘soft loan’ (not a grant) provided at concessional interest rates to developing countries and has to be repaid by the borrowing government. Besides serving the foreign policy aim of increasing India’s presence in critical geographies, LOCs are meant to promote exports of Indian goods and services — they come with a conditionality that a minimum of 75% of the contract value must be sourced from India.

One important factor to consider while looking at LOC figures is that the utilisation rates are typically low (the mean utilisation rate currently stands at 42%).  There are primarily two reasons: one, demand side issues such as inadequacies of recipient nation’s importers, insecure conditions, or lack of statutory clearances by the recipient government. Two, because of supply-side issues such as incompetence of Indian exporters, customs restrictions,  or lack of clearances from the Indian government.

Because a LOC is a soft loan (not a grant) and suffers from slow utilisation, regardless of the size of the amount approved as part of a LOC, it merely counts as an attempt to change the recipient country’s incentives at the margin. Which means, if a country is extremely critical to India’s national interest, it would require the government to do a lot more than announce billions of dollars worth of credit lines. Especially because China can match any LOC figure that the Indian government attempts — a direct outcome of continuous economic growth.

 

Nevertheless, how do India’s LOCs stack up? The summary is in the image below (click to expand the image). The data used to create these infographics can be downloaded from here.
locs

Also read: My colleague Pavan’s excellent Pragati Infographic: Foreign Aid going out of India.

Pranay Kotasthane is a Research Fellow at The Takshashila Institution. He is on twitter @pranaykotas

 

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