Global Health Nexus: Mongolia

Oh, dear reader:

Consider for a moment, if you may, immense, stretched between Russia and China, 2 years after the 800th anniversary of the establishment of the Mongol empire by Genghis Kahn in 1206, and 18 years after the 1990 Democratic Revolution marked the end of 70 years of "socialism" and alignment with the former Soviet Union - the lovely country of Mongolia, the most sparsely populated country in the world:

Mongolia has a population of 2,996,081 (est. 2007) with a median age of 24.6 for males and 25.3 for females It ranks 114 out of 177 countries according to the UNDP's Human Development Index ("The HDI provides a composite measure of three dimensions of human development: living a long and healthy life (measured by life expectancy), being educated (measured by adult literacy and enrolment at the primary, secondary and tertiary level) and having a decent standard of living (measured by purchasing power parity, PPP, income"); with a GDP of $8.542 billion (est. 2007) - which is a per capita of $ 2 900. It has a "labour force" of 1.042 billion, and unemployment rate of 3%, with 36.1 % of the people living below the poverty line (although I think that some of the statistics may be suspect, especially the unemployment numbers as I got them from the CIA). It ranks 102 out of 180 according to Transparency International's Corruption Perception Index (2008). And just for good measure, Mongolia ranks 74 out of 169 according to Reporters without Borders World Wide Press Freedom Index, the capital city is Ulan Bataar, and reviews of its "top ten restaurants" (according to IgoUgo) can be read - here. With the UB Deli, apparently, being the "coolest".

And then consider Mongolia's bountiful resources:

In more than 680 places in Mongolia, deposits of copper, gold, silver, iron ore, phosphor and zinc are hidden below the grassland. Up to 150 billion tonnes of high quality coal are said to be waiting to be mined.
Mongolia has the biggest known coal reserves in the world, the second largest reserves of uranium after Russia and one of the largest occurrences of silver. Its gold reserves are estimated to amount to 3,000 tonnes, copper reserves to over 30 million tonnes.

As the global fight for natural resources intensifies, Mongolia's strategic importance is growing.

So in light of the above - you could say that the recent political and economic history of Mongolia has very much been about attempting to find the right balance between the rights, demands and expectations of the former consideration with all the potential and the pressures that come with the latter. Given that Mongolians generally acknowledge (from what I've read) that they cannot develop their natural resources on their own - they have been forced to find the best regime for legislating on Foreign Direct Investment (FDI) in their country amidst massive political and cultural upheavals and dislocations and great swings in the international prices of those same precious commodities. What to do with this "people's wealth"? How much to the Mongolian government and how - in the hope that it results in the optimum development for the people and how much for foreign investors?

The Mongolian People's Revolutionary Party (MPRP) "is claimed to have been Mongolia's first real political party" as they were the vehicle formed 1921 for the Soviet style communism that ruled Mongolia for the next seventy years, but they were also the party to win the democratic elections in 1990 and 1992 and "remained in office until 1996 when the Mongolian Democratic Union won power.

This great article from Euraisanet.org - Mongolia in the 1990's: from Commissars to Capitalists? by Morris Rossabi - picks up the story from there beginning in 1990:

Economic shock therapy, 1990-92
The new government, which remained in power for about two years, vigorously pursued reform but, partly due to factors beyond its control, became a scapegoat for the precipitous economic decline that afflicted the country. It tolerated other political parties and recruited opposition experts, specifically economists, for leading positions in the administration. It also prepared and enacted a new constitution that guaranteed human and economic rights and established a framework for truly representative institutions. Government controls on the media were relaxed, and the new leadership appointed a commission to investigate and report on the crimes committed during the period of purges. With the support of the young and somewhat inexperienced economists, the government launched a wide-ranging program of privatization.

The economic reformers themselves made a colossal error, engaging in speculation that resulted in the loss of more than 80% of the country's foreign currency reserves.

The Soviet withdrawal of economic and military aid truly undermined the government's efforts. The sudden cessation of such assistance, which amounted to more than 30% of the country's gross domestic product, exerted enormous pressure on the government and society. Severe fuel shortages idled factories, and unemployment rose dramatically while production declined. Consumer goods were in short supply, and the resulting inflation battered the native currency, the tughrik. The economic disarray led even to rationing of meat in the cities, as hoarding, poor distribution and transport, and scant incentives for herders to market their animals created these shortages.
Such dislocations alienated the Mongol population, which blamed the privatization, the market economy, and the attendant changes for the growing economic woes of the country. The old MPRP leadership fueled the criticism with attacks on the economic shock therapy engineered by the government. With the number of poor families increasing, real wages declining by more than 50%, successful enterprises evading taxes, government expenditures on public works and social services dropping, and output, imports, and exports all slumping, the government was vulnerable. Without the support of donor nations and international organizations, it would have faced even greater reversals.

Attempts at stability, 1992-96
The economic crises and the unfulfilled expectations toppled the government in 1992 during the first parliamentary elections under the new constitution. Representing the critics of the new policies, the MPRP won 71 of the 76 places in the Hural, though it received only 60% of the popular vote. Nonetheless, the succeeding government slowed down the transition to a market economy and privatization. It curtailed the economic shock therapy of the previous regime and emphasized stability. Its principal economic goal was to compensate for the losses incurred as a result of the withdrawal of Soviet aid. Assisted over the next three years by rising prices for copper and cashmere, two principal exports, the government stabilized the economy. Inflation was reduced from 320% in 1992 to about 70% in 1994; the gross domestic product rebounded from losses in the period 1990-1992 to modest gains by 1994; consumer goods were more readily available, and most rationing of products was abandoned, though prices on such essentials as meat and flour increased; privatization of small-scale enterprises persisted, but privatization of large companies lagged somewhat; and entrepreneurial herders, aware of the high prices for cashmere, expanded the size of their herds from 25 million in 1991 to 27 million in 1994, with increases in the number of goats to satisfy the demand for cashmere. Grants of aid from Japan and the U.S. and credits from Russia also benefited the government.
The government's political policies appeared to be less draconian in this period than during the era of the one-party system. Government reaction to a hunger strike in April of 1994 revealed its toleration of differing opinions. Prime Minister Jasrai did not send troops to remove the strikers from the main square in the capital. Instead the government negotiated with the strikers and pledged to investigate cases of government corruption, to offer dissidents and other political parties more access to the media, and to amend the election law to make it truly reflect the popular vote. Similarly, the government sought to defuse, rather than to suppress, a teachers' strike in 1995. It granted a 40% raise to the teachers, ending what could have been an even more tumultuous crisis.

Yet the government did not cope effectively with several serious problems. Real wages had not kept up with inflation, and unemployment had continued to rise. Officials estimated unemployment at 7% of the labor force, but more realistic appraisals pegged the rate at 20% or more. Another critical problem was government revenue, which an International Monetary Fund report succinctly described: "growing private sector economic activity in agriculture, trade and services, and the informal sector largely escaped taxation."4 The resulting revenue shortfalls led to sharp reductions in budgetary allocations for educational, medical, and social services. These services, which had been the pride of the Communist era in Mongolia, declined. Medicines were in short supply, the rate of infant mortality rose, and at least 15% of children 8 to 15 years of age were not attending schools, partly because of inadequate classroom facilities and teachers and partly because of newly-imposed costs for enrollment. With declining government revenues, the social net for the elderly, the poor, widows, and orphans began to disintegrate. As one foreign observer noted early in 1995, "the country lacks a coherent and broad-based social policy to address these and other important issues such as health care and education."5 Corruption and a banking scandal in which nepotism and favoritism led bank officials to make unsecured loans damaged the image of the government.

By 1996, the government faced a grave crisis. Corruption, inefficiency, and mismanagement plagued the economy, and the government did not levy and collect sufficient revenue to fulfill its responsibilities. Erosion of social services, deterioration in the status of women, intellectuals, and students, and crumbling facilities for medical and scientific research also contributed to disillusionment with the MPRP. Unrest and social fragmentation, attested to by the growing numbers of abandoned children, a higher incidence of crime and prostitution, and a dramatic increase in unemployment, afflicted the towns and cities, which endured most of these hardships. Herders in the steppelands appear not to have been as devastated, though the disarray in the urban areas gradually filtered into the less settled regions as well.
Despite these manifold problems, most observers confidently predicted that the MPRP would emerge victorious in the June 1996 parliamentary election. However, a growing segment of the electorate had become disgruntled. The Sant Maral Foundation, a conductor of surveys, discovered a slippage of confidence in the MPRP. Only about 30-35% of those surveyed believed that the MPRP was the most competent of the parties to cope with unemployment and the decline in living standards and to bolster the economy and education. The survey concluded that "practically all the parties have lost a substantial part of their former electorate but in absolute figures MPRP has suffered the heaviest losses since 1992."6 Yet most leaders believed that the MPRP's victory was a foregone conclusion. The two principal opposition parties, lacking confidence in their ability to gain sufficient electoral support to defeat the MPRP, joined together in a Democratic Union to have greater leverage in dealing with the projected majority party.

The ouster of the MPRP, June 1996
The overwhelming victory of the Democratic Union in the election confounded observers and perhaps surprised the leaders of the coalition. The two parties and several minor ones wound up with 50 seats, while MPRP representation decreased from 71 to 25 seats. The Democratic Union's success may be attributed to the activities of domestic and foreign nongovernmental organizations, including the Konrad Adenauer Stiftung, which initiated a Voter Education Project and promoted efforts to get out the vote. The International Republican Institute, an agency in Washington, D.C., provided assistance in campaign strategy, "to convince squabbling oppostition forces to form a coalition"7 and to devise a "Contract with the Mongolian Voter," a document similar to the Republican Party's 1994 "Contract with America."
The transition from MPRP to Democratic Union proved to be peaceful and smooth, an important step toward democracy. The new government rapidly initiated its goal of moving toward a market economy, through shock therapy, if necessary. Privatization of enterprises, land, and housing would be among its principal objectives, and it would seek to enact laws to facilitate this shift in rights to property. Government leaders also emphasized the creation of a fairer and more broad-based tax structure and the rooting out of corruption in the tax system. R. Gonchigdorj, the Chairman of the Mongolian Social Democratic Party and the newly-elected Chairman of the Hural, asserted that the main task of the government was to generate a favorable environment for business; D. Ganbold, a member of the Hural and one of the architects of the policy of market economy, added that the government needed to focus on the economy, perhaps to the detriment of the social sector.8 The state ought to foster economic growth, which might mean temporary but substantial declines in expenditures on educational, health, and other social services.

Under the leadership of Prime Minister M. Enksaikhan, the government sought to implement its vision. It removed controls on energy prices, leading to a 50% rise in the cost of fuel and electricity. It closed down two of the several poorly-managed and possibly corruptly-run banks, which were among the largest in the country but which were associated with the MPRP opposition (giving rise to rumors that such closings were politically motivated). Accelerating the privatization of large state enterprises, it also enacted laws facilitating privatization of housing and lands in urban areas. It planned to adjust the levels of pensions and perhaps to reduce them. Yet the government faced daunting problems. Prices for cashmere and copper, two of the country's most important exports, declined; unemployment continued to soar; and by one estimate 36% of the population lived below the poverty line. Forest fires devastated northern Mongolia in Spring of 1996, and plague and cholera epidemics afflicted the country in summer. However, the government resolutely pursued its economic shock therapy and publicly acknowledged that its policies would cause considerable pain and dislocation. The May 1997 victory of the MPRP leader N. Bagabandi in the presidential elections may reflect some of the public's uneasiness with the effects of the Democratic Union policies.

Not surprisingly, this re-emergence of the MPRP coincided with the first Mining Law in "modern Mongolia" that was designed to regulate and legislate on all the growing foreign direct investmentthat was moving into the country - the 1997 Minerals Law. Now I have tried to find something, anything - an article, editorial, press release - that could describe the 1997 Minerals Law of Mongolia in a way that could make it understandable for lay people like you and I dear reader, but have so far been unable to come up with much. Its not difficult, however, to deduce that the law was considered advantageous to international mining conglomerates just as they were beginning to fully discover the vast riches the legendary Mongolian steppes had in store. As Canadian business columnist Diane Francis writing in the Financial Post in 2006 wrote:

What was unique about Mongolia was its business-like approach to attracting exploration. Its Mining Act was drawn from similar laws in Australia, Canada and the United States and offered great incentives for companies to explore and promised to reward success. It was the most generous regime in the world -- necessary to attract activity to a hostile, cold, landlocked and remote country.
I visited the country last August and its officials sounded convincing. "Mongolia looks forward to becoming a mining powerhouse," said Mongolia's minister in charge of resources, Lursanvandan Bold, in an interview in his office in Ulaan Bataar. He spoke flawless English and German to a group of European money managers assembled to learn about the country's mining regime.

"Last year, 4% of all exploration dollars spent around the world were invested here," he said. "We are now one of the top 10 exploration destinations in the world and the only Asian country in that list."

There are 6,000 licences for exploration and mining granted to 800 companies. Nearly one-third of its total land mass, which is three times bigger than France, has been licensed for exploration.

Before the 1997 Minerals Act, the country's mining industry consisted of a handful of foreign explorers and a few inefficient Russian mines in operation.

This July 2007 corporate press release - Energy Law 360 from the international law firm of Chadbourne and Park LLP describes the 1997 law thusly:

During the late 1990s and early 2000s, Mongolia concentrated its efforts on wooing international investors. A 1997 Minerals Law aimed to do just that and to ensure that the country’s mining sector would be competitive at an international level. The 1997 law applied to all mineral resources except water, petroleum and natural gas and aimed to provide for a fully transparent system for the processing of exploration and mining license applications, security of tenure in respect of the licensees’ land utilization and for a reduction in the taxation and royalty burden on all investors. In 2002, royalty payments for all types of minerals were reduced to 2.5% of gross sales and gold mining royalties were reduced from 12.5% to 7.5% for both hard rock and placer deposits. Since then, the political climate has shifted.

Did it ever.

Perhaps caught up in the wave of Economic Nationalism that was sweeping not only Mongolia but emerging economies all over the world, inspired by an unforeseen rise in commodity prices and a perceived failure of governments to equitably and adequately address a myriad of social problems, or perhaps even in reaction to all the economic austerity measures of the 1990's which were perceived to have exacerbated unemployment, and even, maybe a public perception, however justified or unjustified, that foreign mining companies were locking into Mongolia's economic future some of the sweetest long term deals imaginable - in 2006 the Mongolian Parliment's approved a massive windfall profit tax to the tune of 68%:

In May 2006, the Parliament approved a windfall profit tax on copper and gold exports that requires companies that export copper and gold to pay a tax at a rate of 68% when the copper price exceeds $2600 per metric ton and the gold price reaches $500 per troy ounce on the London Metal Exchange. The windfall tax law would be deposited into the Mongolia Development Fund. A draft law on how to spend the Fund's money was under consideration by the Parliament. Local citizens petitioned the Constitution Court, arguing the the windfall profit tax imposed on mining companies violates the Constitution because the Government appointed the Mongol Bank to determine the tax rate. The Court decided, however, that the windfall tax does not breach the Constitution. In November 2006, a draft bill to increase the windfall tax on gold to $650 from $500 per troy ounce was submitted to the Parliament for discussion.

(read the entire law - here)

"Notably", the good attorneys at Chadbourne and Park dryly pointed out, "these thresholds are significantly below the current spot price for both gold and copper.", before proceeding:

The passing of this law prompted a unanimous outcry from resident (largely foreign-owned) mining companies. The announcement caused the share prices of many of the resident mining companies to plummet initially. There have been numerous calls for this new law to be abolished. On July 8, 2006, a revised version of the 1997 law was adopted by the Mongolian parliament that was much less encouraging to foreign investors. The revised law requires all applicants for mining licenses to be legal persons duly established and operating under the laws of Mongolia and be Mongolian taxpayers, although this does not stop an international investor from setting up a wholly-owned subsidiary in Mongolia. More significantly, the revised law has also modified the licensing requirements and license transfer procedures. Most notably, it gives the Mongolian government the right to hold a stake of up to 34% in strategic mineral deposits found by privately-funded explorations (i.e., deposits that may have an effect on national security, the economic and social development of the country,or that produce or have the potential to produce more than 5% of the country’s GDP in any given year). It is for the Mongolian parliament to determine what constitutes a deposit of “strategic importance.” The revised law also increased royalty rates from 2.5% to 5.0%, although it is anticipated that this may be balanced at some point against a corresponding decrease in corporate taxes and VAT. While these developments generated some alarmist headlines in the international press, international mining companies, including Ivanhoe, have done much to play down the significance, stressing that the government only has the option of acquiring “up to” 34% of such mineral deposits discovered without the use of state funds and that, even if the Mongolian government did exercise such an option, it would likely only do so through investment by means of equity participation and by the purchasing of shares or, alternatively, in conjunction with tax concessions. This, in turn, has led to some dissatisfaction among local inter-Mongolia interest groups who argue that the revised law does not go far enough and does not provide a proper mechanism for state participation and investment in strategic deposits. Under the revised law, state participation and investment in strategic deposits would be effected by means of an acquisition agreement between the investor and the government. Local interest groups are lobbying for a further overhaul of Mongolian mining legislation.

The reaction from the business press was fast and furious. Francis again in 2006 immediately after the legislation passed:

Mongolia will be kicked into the economic dark ages if its President signs a draconian law passed last week that virtually confiscates all mining operations through a heavy-handed tax.
And the Canadian government should get involved. Ottawa should issue a stern rebuke given the damage that will be caused to Canadian companies and their investors who have poured millions into Mongolian exploration and operations in good faith.

Canada's mining industry dominates exploration and development in Mongolia. Canadian companies, led by Ivanhoe Mines Ltd. and Centerra Gold, will be hurt by the law that abrogates agreements made with the industry since the collapse of communism there in the early 1990s.

Ivanhoe shares alone fell 20% Monday on news of the new tax.

"The problem with Mongolia is that there is a lot of government there, but no leadership," said mining consultant Terry Ortslan with TSO & Associates in Montreal. "This will look bad on them and if the President [of Mongolia] signs this legislation, mining activity will dry up."

The proposed windfall profits tax would allow government to grab 68% of the prices above levels not seen in years. For instance, the government would take 68% of copper prices above US$1.18 a pound. It's currently trading as high as US$4 a pound. It would take 68% of gold prices above US$500 an ounce. Gold is currently above US$700 an ounce.

The centerpiece and reluctant symbol of all this had to be the giant gold and copper mine - Oyu Tolgoi in the Gobi desert in southern Mongolia, developed in 'strategic partnership' by the Canadian firm Ivanhoe and Australian company Rio Tinto. According to Francis, Ivanhoe had discovered and was developing it to the tune of '10 million dollars a day' when the Mongolian Parliament brought in the windfall profit tax. Estimates as to what Oyu Tolgoi is actually worth have run as high as fifty billion dollars.

Here's a youtube video (with commentary in what I believe is 'Mongolian' for my vast Mongolian readership) of Oyu Tolgoi:

And now for the last two years the whole issue has become a political football in Mongolia, with a definitive Mineral Law, languishing in the Parliament, and yet to be voted into law, and Oyu Tolgoi yet to enter into commercial production. The Central Caucasus Institute explains:

A key electoral issue during the campaign was government plans to develop the country’s massive but largely untapped mineral wealth, and how much percentage the government should seek of foreign ventures. The DP sought support by promising each Mongolian a one million tugrik ($884) “share of treasure;” the MPRP upped the ante, subsequently promising that each Mongolian’s "country's profit" share would be 1.5 million tugriks, no small consideration in a country where the World Bank last year estimated annual income at $880. The Irgenii Zorig Nam (Civic Will Party) coalition chairman Galbasuren Batzandan said, "We support foreign investors, but our platform says the Mongolian state needs to keep a controlling stake, at least 51 percent."
For foreign investors the Ivanhoe Mines and Rio Tinto Oyu Tolgoi (“Turquoise Hill”) concession, discovered in 2001, is the bell weather case. A definitive Mineral Law delineating investment issues has languished in parliament for years as amendments over foreign participation and governmental ownership are repeatedly introduced, debated and revised yet again. The current legislation gives the state either a 34 percent stake or a controlling 51 percent stake in mining projects, depending on whether the site was discovered with governmental or foreign investor resources.

Ivanhoe and Rio Tinto have touted Oyu Togloi, in the Gobi desert 50 miles from the Chinese border, as the world’s largest undeveloped copper project, with the potential of an average of 440,000 tons of copper and 320,000 ounces of gold annually over the next 35 years, and maintain that Oyu Tolgoi’s revenues alone could increase Mongolia's GDP by more than a third.
In 2007, Ivanhoe agreed to a draft investment providing the Mongolian government a 34 percent stake in Oyu Tolgoi, but the government withdrew the offer earlier this year in the wake of opposition from smaller parties in the coalition government.

The foreign investment community favors taxation over direct government percentage ownership, and their view is supported by Mongolian National Mining Association president D. Ganbold, who said, "Participation through taxation yields the most effective outcome because there are taxes that have to be paid even at times production goes down."

Here too however, foreign investors are unhappy; in 2006, the Mongolian Parliament enacted a windfall profits tax. It has a top rate of 68 percent under conditions set by world market mineral prices, when gold exceeds $500/oz or copper more than $2,600 per ton. While the government made concessions on negotiating the windfall tax rate on mining projects, Oyu Tolgoi’s output would face substantial royalties if the ores were not refined in Mongolia. Analysts suggested that Ivanhoe and Rio Tinto could exempt their project from the windfall profits tax regime by building a 100,000-300,000-ton smelter and refinery complex. What investors dream of for Mongolia is a 15 percent flat tax regime similar to Russia’s or China’s.

Ivanhoe has enlisted some heavy political support for its case. When Canadian Trade Minister David Emerson visited Ulaan Baatar in January he said, "the fundamental rationale for going to Mongolia is that we have a substantial number of Canadian mining companies that are involved in Mongolia,” adding in a moment of understatement, “There are legal and regulatory issues there."
What foreign investors have yet to appreciate fully is the Mongolian electorate’s desire for an improved standard of living not beholden to foreigners. Mongolia is far from economic autarchy; Russia supplies over 90 percent of its oil imports and massive volumes of wheat, while China, which takes over 70 percent of Mongolia’s exports, also provides substantial grain and produce imports.

Mining issues and their revenue potential are not likely to go away as a political issue anytime soon. According to the Asian Development Bank, in 2007 foreign direct investment in Mongolia was $500 million, of which nearly two-thirds was in the mining sector, while the World Bank estimated that mining accounted for about 20 percent of Mongolia’s GDP, 56 percent of gross industrial output, 69 percent of exports, and 36 percent of the government’s revenue. Given the pattern of foreign investment, such percentages will only grow over time.

If final parliamentary approval takes place this year, Oyu Tolgoi could begin commercial production by mid-2010. The foreign investment community was hoping that the June elections would provide a clear mandate to the MPRP, allowing the country to sidestep the instability that followed the 2004 election of a hung parliament, when the MPRP and the DP were forced to share power, as each had won 36 seats.

And on it goes. Parliament is back in session this month with The Mining Law still on the agenda, and still being debated.

So now perhaps it would best to close by bringing the whole story back to the human dimension, with an issue that captures perfectly this story of human desperation, desire and hope, cultural dislocation and rapid change that is the Mongolia, the Mongolians and their mining future - the struggle of the people who have come to be known as Mongolia's Ninja Miners:

As Jonathan Watt explains in The Guardian:

Ogoomor is Mongolia's wild west, a dusty, thrown-together town of miners and nomads, tents and wooden shacks, karaoke discos, internet cafes and police cells. From Ulan Bator, it is a seven-hour drive across vast plains inhabited only by a few nomads and their herds of sheep and goats. According to locals, the town did not exist 20 years ago and it was only recently that it was given a name. But reports of giant nuggets in the nearby hills has sparked a gold rush that attracted several thousand prospectors - legal and illegal.
The area around Ogoomor has been called a Mongolian El Dorado. The town is located in the Zaamar valley, where geologists estimate, there are gold reserves of at least 100 tonnes. At today's price of $23,000 (£11,315) a kilo, that means the land contains $2.3bn of wealth - more than Mongolia's entire GDP last year. Russian and local firms have bought up concessions to mine the land. In the nearby hills, their giant draglines clear the top soil, while their screeching dredges sift through the earth, spewing out giant heaps of dirt.

Until recently, thousands of Mongolians scavenged illegally through these mounds for small fragments of gold missed by the giant machines. To pan the dirt, they used green plastic bowls, which they carry on their backs like a shell. This appearance gives them their nickname - "ninja" - after the Teenage Mutant Ninja Turtles cartoon.

Many were former nomads, but as the gold rush gathered pace, students, vets and taxi drivers from Ulan Bator joined the ninjas, not just in Ogoomor but in other gold towns across the country. Today, estimates of their numbers range from 30,000 to 100,000. This created a huge black market for gold - most of it thought to be smuggled across Mongolia's 3,000 mile border with China.

For years, the ninja were tolerated. With three-quarters of the 2.9m population living on less than $2 a day, scavenging and small-scale mining were seen as a way to ease poverty and unemployment.

But a Russian mining company asked for new security measures last year after thousands of ninja invaded one of its mines, beat the guards, destroyed equipment and stole gold. A huge ditch was dug around the perimeter of the town, troops and police were moved in to beef up the security presence and checkpoints were set up on the roads into the community.

Arbitrary arrests are now common, local people say. "We live in constant fear of being taken away," says Amarjargal, who says she has been a resident of the town for five years. "We can't even take a green bowl onto the street or we will be picked up. Even if we have dirty clothes, or muddy shoes, it is used as an excuse to arrest us."

Since the crackdown began last year, the locals guess 500 of the 3,000 residents have been detained. "It is hard to find any family that hasn't had someone arrested," said an elderly woman called Sunjee (most Mongolians only use one name). "The police have taken people younger than 16 and older than 60. There is a woman in detention now who is 66 years old."

Al Jazeera English:

Witness: Mongolian "Ninjas": Part 1: