In an interview with CNBC on 26 March 2010, Alisher Ali Djumanov, chief executive officer of Eurasia Capital, highlighted the fascinating parallels between Mongolia and Western Australia – a vast dimension of landscape, a small population and a substantial endowment of commodities. The key difference, according to Djumanov, is that Mongolia is lagging behind Western Australia by perhaps 30 to 35 years. That implies huge opportunities for investors who can tolerate the risk associated with frontier markets.

After Mongolia declared its independence from China upon the collapse of the Qing Dynasty in 1911, it became a close ally first of Tsarist Russia and then Soviet Russia.

That has naturally complicated the relationship among the three countries. Having been Mongolia’s biggest trading partner and largest foreign investor for more than a decade, China has nevertheless established deep economic and trade roots in the country.

However, concerns have risen that Mongolia could eventually be colonised by China. As it often does, China has so far attempted to maintain a low profile, so as not to risk creating any sovereign disputes and also to avoid rankling Russia, which still maintains a sizable influence over the country.

Chinese Premier Wen Jiabao recently visited Mongolia marking the first official visit of a Chinese Premier to the country in 16 years. Although it remains to be seen whether Premier Wen’s visit will mark a significant change in Beijing’s strategy toward the country, it appears that both sides have begun to acknowledge the mutual benefits of strengthening their economic ties.

During April, Mongolia unveiled a plan to build a 5000 kilometre (km) railroad line to improve its infrastructure. Railway capacity is crucially important in a land locked country with a vast landscape. The Mongolian parliament unanimously passed provisional plans for an east-west rail network, though details of the plan are still being worked out.

China's expertise in railway engineering and construction could prove immensely valuable to Mongolia’s future growth. In its own railway-building boom, China has acquired considerable experience in building networks quickly and at low cost. A portion of China’s $500 million loan to Mongolia recently announced by Premier Wen was allocated for the purchase of Chinese-made locomotives and carriages for the Mongolian railways. Given Mongolia's insufficient technology and engineering expertise, it is very important for them to engage the Chinese in building their railway network. China also needs to expand its railway capacity to and from Mongolia, both to receive commodity shipments as well as export manufactured products to offset part of its trade deficit with the country.

Some Chinese ports on the border have been burdened by Mongolia's existing railway-capacity constraints. According to Xinhua, the cargo volume in Erenhot, the largest port between the two countries, has fallen since 2006 due to low railway capacity, despite a surge in bilateral trade during the same period. In a memo signed between China’s Ministry of Railway and the Government of Inner Mongolia Autonomous Region, China will expand Inner Mongolia’s total railway mileage in operation from less than 10,000 km currently to more than 15,000 km by 2015 – a noteworthy upward revision from the prior target of 14,300 km by 2020 outlined in the previous plan.

The Mongolians are likely to retain majority-control of the country’s mining assets. According to Bloomberg, the Mongolian Minister for Minerals and Energy recently said that a draft bill concerning the ownership of the Tavan Tolgoi deposit – reportedly one of the world’s largest untapped reserves of coking coal and deemed by most Mongolians as the next growth engine after Oyu Tolgoi copper gold project has been submitted to the parliament. The bill suggests that majority ownership should be controlled by a state-run enterprise, while a second tranche could be operated by a group of foreign and other domestic companies. Although that would undoubtedly slow the development's progress, it would also ensure that the Mongolian people participate in the gains from selling state resources.

Ultimately, the currencies of commodity-producing countries should outperform others over the long term.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.