In Mongolia, a Tilt Toward a Free Market
By JAMES BROOKE and JARGAL BYAMBASUREN October 21, 2003 http://www.nytimes.com
ULAN BATOR, Mongolia - Mongolia, once a remote Soviet satellite, is rapidly becoming a country hailed by investors for its openness to foreign capital and ideas - not to mention its proximity to Asia's big play, China.
Perhaps nothing better symbolizes the new free-market tilt of this economy than the snappy white baseball caps with the bold green logo of the XAAN Bank. Once a stodgy government-run institution known as the Ag Bank, it has been rebranded and privatized, and now uses its initials, which sound like the Khan in Genghis Khan.
The bank's managers are Americans; the Japanese owner works out of his skyscraper in Tokyo; and most of the Mongolian employees live in gers, the traditional circular felt homes of the steppes.
In addition to dreaming up Mongolia-friendly marketing campaigns, the American managers in three years have doubled the bank's deposits, to $40 million; doubled the employees, to 1,650; increased the branch network by 40 percent, to 371; and turned a money loser into a moneymaker.
"Ag Bank went bankrupt twice during the 1990's," the chief operating officer, Ben Turnbull, said in the downtown headquarters. Nearby, in the office of the chief executive, J. Peter Morrow, a wall was adorned with a framed copy of a World Bank review that called the bank "irreparably damaged."
The turnaround and privatization of what was once Mongolia's largest government-run bank is part of a larger picture.
"In three to five years, I plan to open Ag Bank branches in China and Japan," the bank's new owner, Hideo Sawada, said in an interview in his 12th-floor office in the chic Shibuya district of Tokyo. Mr. Sawada also owns Japan's second-largest travel business, the H.I.S. Company, and is chairman of Japan's fourth-largest airline, the Skymark Airlines Company.
He said that he expected Japanese tourists to flock soon to Mongolia, a nation nearly four times the size of California with only 2.5 million people.
He is confident that Mongolian officials will agree to his suggestion that visa requirements be dropped for Japanese tourists, and he said he planned to push package tours next spring through his 200 travel agencies around Japan. In May, direct flights started from Tokyo, four hours by jet.
"Mongolia is in the process of moving from socialism to capitalism, there are many opportunities, there are many companies being privatized," Mr. Sawada said. In April, he beat a Japanese group and a Russian group, paying $6.9 million for the Mongolian bank. Mr. Sawada has agreed to inject an additional $13 million into the bank. In December, a consortium from Connecticut and Switzerland won a bidding war to buy the Trade and Development Bank of Mongolia, then the country's largest government-owned bank. The consortium, Gerald Metals of Stamford, Conn., and Banca Commerciale Lugano of Switzerland, paid $12.23 million to the Mongolian government for its 76 percent ownership in the bank. They also agreed to invest an additional $28 million over the next two years. An ING Bank unit is providing management and technical aid.
"There are a lot of opportunities in Mongolia these days," said Jim Dwyer, an investment banker who moved from New York to help Mongolia's government with the bank privatizations.
Over the next two years, the government would like to privatize the national airline, MIAT; the nation's largest insurance company, Mongol Daatgal; the largest cashmere producer, Gobi JSC; the largest petroleum importer, NIC; and the last government bank, the Savings Bank, which has the most branches here in the capital, home to 40 percent of the population.
One potential buyer, Mohammed al-Fayed, the owner of Harrods department store, explored investment possibilities on a three-day visit in mid-October. The owner of Harrods Minerals Mongolia, a major prospecting company, Mr. Al-Fayed told officials that he is considering expanding into cashmere and manufacturing.
In a measure of Mongolia's trust in foreign expertise, the government three years ago handed management of Ag Bank to the United States Agency for International Development, which contracted the turnaround work to Development Alternatives Inc., a Washington consulting firm.
When the Americans arrived three years ago, most of Ag Bank's rural branches did not have electricity. Today many still do not have power, but branch managers follow a modern strategy for making money: denying loans demanded for political reasons and establishing credit responsibility among borrowers. Loans are tied to cash flows, often cashmere shearing or slaughter of livestock. Failure to pay means seizure of collateral, generally livestock in a country where nomadic herders make up a third of the population.
After losing money for four years, Ag Bank turned a profit in 2001. Last year, pretax profits more than doubled, hitting $2.9 million. The number of customers recently reached 500,000. The delinquency rate has fallen below 1 percent.
With a high level of education and an openness to outside ideas, Mongolians are snapping up financial products.
"In financial services, we are unburdened by checks and plastic, and will go straight to cellphone- and Internet-based banking," Mr. Morrow predicted at an investor conference here.
With the percentage of Mongolians with bank accounts jumping to about 33 percent from 5 percent five years ago, the deposits have been used to help fuel the economy. Total bank deposits increased by nearly 50 percent a year in 2001 and 2002.
Today, building cranes dot the skyline of this sprawling low-slung city. After growing by 3.9 percent last year, Mongolia's economy is expected to grow 5 percent this year.
"When you go around Ulan Bator you see how much construction activity there is here, and you wonder where the money is coming from," Mr. Turnbull said, looking out his office window at the construction, which started with his block on Peace Avenue.
Speaking of an economy where banks now overwhelmingly play a capitalist role, he said, "There is a lot of unofficial savings from outside the country that is coming back in, and there is a lot of investment from around the country coming into" the city. Top