Got this email titled "Investing and Living in Mongolia" from a reader. Good questions here -

Hi Sebastian,

I enjoy your blog. I saw that you recently moved to Mongolia. I am curious what made you move to Mongolia (i.e. curiosity to explore vs. a new job)? What is it like there for foreigners? Is it a suitable environment for investing capital? Do you feel safe?

Mongolia is an extremely promising country from the outside, yet nothing beats the perspective of someone who is there on the inside (even though you have not been there a very long time).

All the best,

B

Why I'm in Mongolia, and staying for a while

One of the things I'm working on is going to every country in the world. A lot of people have blogs about that sort of thing these days, but I started about 6-7 years ago before it was really en vogue on the internet.

Why do I do it? Well, one of my goals you'll see written about on here is to be the greatest strategist of this generation. ("What's a strategist?" answered here)

Part of that is understanding the way the whole world works. I study a hell of a lot of things. I like seeing how different business and culture works in different places. When I get somewhere, I walk around the neighborhoods, and if possible, I like to spend time checking out the construction, what areas are being built in, what the shipping areas look like (trucking, docks, rail, etc), the military/police/security/judiciary in a place, etc. I research a little about a country's economy and GDP before I go in, and then I see what that level of GDP and economy actually looks like on the ground. It's all fascinating and wonderful.

Why Mongolia? Well, I hadn't been here, I was in Beijing, my China visa was up, and I had to go somewhere. I've already been to Taiwan, South Korea, Hong Kong, and Japan. Russia's not a place you can get a visa to go casually, it's a big process and a hassle. But hey, Mongolia's right there, so I'll check that out.

Honestly, I fell in love with the place a little bit once I got here. It's so strange and different from anywhere else I've been. The people are of East Asian descent, but the culture is far more like Eastern Europe. It reminds me of the Ukraine a little bit. It's a very masculine culture, very assertive and somewhat confrontational, extremely high levels of pride and interest in traditional masculine pursuits - hunting, weapons, nature, wrestling and martial arts, horseback riding, things like that. The people carry themselves very strongly.

After a week, I was sold. Americans can enter with no visa, but you have to register at Immigration within seven days if you want to stay longer than a month. On day seven, I went to the Immigration Bureau, paid $1, waited four hours, and got registered to stay for three months. (The four hour long line would have been a bummer, except the restaurant in the Immigration building is excellent with great food and a good atmosphere, so I basically just had a normal day working and reading in there.)

Then, kind of on a whim, I got an apartment a couple days later with a three month least and a security deposit. They were asking $450, I counter-offered 500,000 tugruk, which is about $395. The director said okay, but wanted three months + security upfront. I insisted on first month + security only, and it took two hours to convince them but they eventually took it. This wasn't really wasted time, the owner's agent was turning on the internet, showing me around the place, showing me the keys and laundry, things like that while steadfastly repeatedly insisting on three months + security, before eventually taking two months.

I still probably overpaid and could have found somewhere cheaper, but I like the place. It's a short walk from Sukhabar Square (the city center), nice, clean, modern, furnished. Electricity, water, and decent but not great internet included in the price. Decent desk, chairs, nice bed, laundry, and well-furnished modern kitchen.

For perspective, you can get a dorm bed at a hostel for $6 USD per night, $10 to $15 USD for a private hostel room, $25 USD for a decent cheap room at a hotel, and $40 to $70 per night for a nice hotel room.

While talking prices, a really big good meal of street food is $2, less for a smaller one. $3 to $4 for a hearty meal at a traditional restaurant. The moderately upscale restaurants will run you maybe $10 per plate? You can find more expensive if you want, I imagine, but you're eating very well in an incredible ambiance for $10 per plate.

What is it like there for foreigners?

We're still a rare breed here. I've got some Eastern European blood from my maternal grandmother and I kind of walk fast and like I'm pissed off, so a lot of people have asked if I'm Russian. I almost never see white people anywhere here, and people do stare at you. Little kids will talk to you and have a good time. A few times, one kid from a group has run up to me, kind of looked at me, ran back to his friends, and giggled. You're very much a curiosity.

I've experienced this before deep in the provinces of China. Actually, even more so in China - I was about an hour outside of Chengdu in Sichuan, and I was the first non-Chinese person some people had seen. Back then, I had long bleached-blond hair, and I'd been lifting weights really hard so I was jacked. People wanted to take pictures with me and invited me to play a basketball game with some local college kids. One baby saw me and freaked out and started crying :(

So, I've experienced this before. Ulan Bator is still a capital city, so it's not like you'll be the only foreigner someone has seen. But you'll get looks and people paying attention to you, with all the good and bad that comes with that.

Beyond that, everything is written in Mongolian, which uses the Russian alphabet. Stuff is sporadically and haphazardly translated into English, so it's surprisingly difficult to buy, for instance, plain yogurt. There's lots of good yogurt here in Mongolia, but no English on any of the containers so I'm never sure if I'm getting solid yogurt or yogurt drink, or if there's sugar in it. I guess that's a pretty minor problem in the grand scheme of things, but really, it's a very English-limited society, one of the most English-limited I've been in. I'm kind of used to it from my time around the world, but it'd probably shake a non-veteran traveler. You'd do better if you had a Mongolian guide, partner, girlfriend, boyfriend, or some such.

Is it a suitable environment for investing capital?

Well, let me answer your question with a question - how do you feel about investing in Russia?

A lot of money is made in Russia. A hell of a lot of money. But a lot of money is lost in Russia too.

Mongolia is still very wild, wild west-ish. There's not much in the way of security regulations, or regulations at all really. From what I hear, they don't really have the capacity to process non-serious offenders at all, so most petty criminals get a slap on the wrist and are sent on their way.

The central government still owns 20% to 50% of most businesses. They distributed most of the shares in the state-owned enterprises by sending vouchers out, and letting people invest in their own Mongolian stock market. On the one hand, that's good because it means a lot of people have share ownership and the government has an interest in not seeing business owners totally loot the business.

On the other hand, there's a serious lack of auditing and basic security regulation and expectations. They're about to see more capital get invested in the place in the next few years and a boom like they haven't seen since the Khanate era. Well, any student of history knows how that goes - there's going to be some opportunities that pay off staggeringly amazingly, but millions and millions of dollars will be stolen and defrauded out and things like that. That's not a point specifically about Mongolian, that's just what happens in boom countries without established controls. It happened in the USA on a number of occasions, it happened in England, etc, etc. It's going to happen here. Fortunes will be paid, but there will be all sorts of traps and pitfalls that can be had.

The government seems pretty hands-off. Well, in their first elections, the Communist Party re-branded themselves and won, so things changed slowly. Lately, the opposition has been in control, and there's been some back and forth jockeying between them. The reason for the boom in mining is because the government revoked their "windfall profits tax" which taxed 68% of any profits on discovered mining.

Y'know, that's classical communist thinking, where they just assume that everyone will work as hard as they can regardless of self interest, take all risks and burden on, and do that without worrying about getting a return. "Windfall profits" - anyways, as soon as they repealed that, a lot more capital investment came into the country in terms of mining investment by the Australians, Chinese, and others. Thus creating jobs, prosperity, and more tax revenues.

There's always a danger to the foreigner investor that some nationalist/communist sentiment kicks up and your investments are nationalized or otherwise regulated or taxed differently... probably not going to happen, but could totally wipe out any investments you make.

They also engage in some minor protectionism of their economy - for instance, taxing raw cashmere exports, but not processed cashmere. They want the business being done domestically to build industry up. You'd want to be aware of those if you invested in an industry that has protectionism or doesn't - for instance, if the raw cashmere tax was repealed, domestic cashmere production might wind up with lower margins. Likewise, agriculture currently is favored and doesn't pay VAT or import taxes on farm equipment and supplies because the Mongolian government wants food costs low - but as the standard of living increases, those taxes might be added, lowering the margins on farming.

The political situation here is a big risk because it's such an unknown. Also, it's a seriously young culture - the average age is only 21 years old. 70% of the population is under 35 years old, and people are still having a lot of kids. That means you're going to see very significant voting shifts over every one of the next decades in Mongolia. If the current foreign investment and liberalization goes well, you'd think the young people will be more market-inclined and it will develop more towards a Western-style economy, law, and politics. But if there's some bumps in the road, there could be some kind of backlash which wipes out or damages your investments. It's tricky.

Do I feel safe?

No.

This is the most dangerous country I've spent significant time in.

There's the standard developing country problems with infrastructure - lack of sidewalks, poorly marked roads, potholes, bad/reckless driving, etc. Also, for reasons unknown to me, many of the manholes are left wide open all over the place. I almost fell in the first one I came across. Now I watch the ground constantly when I walk around, even in busier areas.

It gets very dark at night. There's very little in the way of streetlights. I normally like to go walking late at night to do thinking when I'm up late, but I'm scared to do it here, and I've got some martial arts training and I'm a somewhat big guy. Partially that's because of the bad infrastructure in the darkness, but also because it's a bit of a rough culture.

Pickpocketing is quite common, and I met a guy that thwarted a pickpocket the same day I met him at the guesthouse I was staying at when I first arrived. Apparently the pickpocket unzipped his bag in one pass, and the visiting guy (American) literally caught him with his hand in his bag. He was a big guy too, the American. He grabbed the Mongolian guy and held him while checking to make sure he had all his stuff, and then let him go.

In a little deli I was in, I went to the counter after the accidentally served me pork in a salad I'd ordered without pork. The girl apologized and went to make me a new one, but a guy in his late-40's or early-50's started pointing at me and cursing and kind of acting menacingly. He had one friend with him and seemed drunk, though it was only 4PM in the afternoon or so. I was readying for a fight - one of the girls working at the deli kind of shooed him out the door and that was the end of it. He didn't seem particularly tough, more like empty drunken braggadocio, but who knows if he has a knife or what else could happen in a combat situation?

Now, I'm mostly giving you the bad stuff here so you can get an honest assessment of the place. You can find all the good stuff in tourist brochures or investment materials, but like you say, someone on the ground can tell how things really are.

Partially, the problems are because the country is both young and poor - that's a very dangerous combination, but both will be changing soon. A staggering huge amount of crime that happens is committed by young men - once a guy gets a family, an occupation, and settles down, he generally stops pickpocketing and fighting and things like that.

Also, being poor is generally bad for crime rates. And on top of that, it's a super proud, macho, masculine culture.

As the place gets wealthier, this will change. More young guys will get jobs in mining and construction. Service industries will emerge to support those industries. Hopefully the government puts a lot of money into infrastructure, police, and judiciary - I think those are the biggest needs in terms of attracting a virtuous cycle of foreign investment, higher production, and higher tax yields.

There will be lots and lots of money made here, but hopefully I've outlined some of the risks so you can make good decisions and mitigate some of them. I spent more time on the negative than the positive, to be honest, because you can get the positive easily anywhere.

Overall though, I really like the place. It's a strong culture with frontier ethics, and there's a high level of pride and purposefulness in Mongolians that a lot of the West has lost. I talked about how Bat helped me with the China/Mongolia border crossing and taught me about Mongolian diplomacy.

To give another example of the neighbor-helping-neighbor frontier ethics, when I was leaving the Immigration Bureau, I stopped a car that was also pulling out. I was looking for a taxi, but it was just a regular guy who was about 30 years old who works for an energy company here. He was going the same way as me and gave me a lift back to Sukhabatar Square without even asking for money, though I gave him 5,000 tugruk and said thanks. His English was so-so and my Mongolian is non-existant, but we still chatted a little about business and things happening. He spoke excellent Mandarin Chinese and I speak a tiny bit, so sometimes we were able to communicate concepts in Chinese that we couldn't in English.

That's the kind of place it is - it's the Wild Wild West. There'll be gold rushes, and people will legitimately make lots of gold. As in any gold rush, the people that sell picks and shovels will probably make the most money, and some people will overpay for land that has no gold and lose their investments. It's a frontier culture, which means you've got to be vigilant and protect yourself, but it also means you can establish a close camaraderie and people will really help you for no reason at all just because that's the kind of society it is.

My advice

Overall, a lot is happening here, but it's not a place to rush in blindly. The judiciary and financial regulations are very weak and it's very anything-goes right now, so put a premium on impeccable integrity in managers/operators - check the guy's character out, and don't invest in anyone that you wouldn't lend cash to on just a handshake.

Is that a high burden? Oh yeah. But in the short term, you probably can't count on any court or regulator for redress if something goes wrong, unless you go out of your way to network with the government and make personal connections.

Also, keep aware of the political scene - the two dominant factions seem very opposed to each other ideologically, so a shift in electoral patterns could seriously change the value of various businesses. Domestic protectionism could go up or down in any industry, significantly affecting margins. Restrictions and taxes on foreign ownership might also go up or down - if things keep going great and trending upwards rapidly, then a lot of the worst-case scenario is unlikely to happen. But if it unwinds a little bit, it seems like it could potentially cascade and unwind a lot.

Final random thought? Align your incentives with the Chinese government if you can. If I heard that the PRC was investing in a particular business in Mongolia, I'd feel much more protected that it's going to be run without too much tomfoolery in terms of taxes, nationalizing property, regulation, or looting the business. One of Mongolia's biggest priorities economically, militarily, and diplomatically is to keep China happy, so if I heard the PRC government or individual leadership were invested in Mongolia, then I'd think those investments were even more sound.