China’s Belt and Road is putting pressure on Mongolia to resolve a strategic dilemma. On the one hand, Ulanbaatar is eager to reduce its political and economic dependence on China through its Third Neighbor foreign policy; on the other, Mongolia faces competition from Kazakhstan to reap the potential rewards of becoming a key node in the Belt and Road.
 
The Belt and Road initiative is not a perfect fit with Mongolia’s current economic priorities. Mongolian leaders want to diversify the country’s economy by building a manufacturing base and reducing its near total dependence on the exports of natural resources. Ulaanbaatar also wants to expand its number of trade partners. At present, China is by far Mongolia’s largest trading partner, accounting for 90 percent of Mongolian exports and over 30 percent of its imports, and, as Mongolia’s balance-of-payments crisis last year demonstrated, this economic arrangement invites instability, rather than protects from it.
 
Belt and Road, however, does dovetail with one aspect of Mongolia’s national development strategy, known as the Steppe Road. Launched in 2014, the Steppe Road plan envisions the construction of a modern expressway and rail line that will traverse Mongolia, stretching from the Chinese mainland to Russia. Together with plans to extend other railways, modernize gas and oil lines, and update the electricity grid, the program calls for some $50 billion in investment.
 
The two states recently agreed to align the Steppe Road plan and Belt and Road and elevated their relations to a comprehensive strategic partnership. Together with Russia, they are already collaborating on more than 30 projects, most of them focused on upgrading transport and communications infrastructure.
 
China seems to be offering Mongolia a lot of sweeteners. Beijing has begun to reorganize its rail infrastructure and customs procedures to benefit Mongolia, and last year’s launch of a direct freight service from Mongolia to South Korea via China has cut transport time nearly in half. Mongolia also reportedly received discounted tax rates on one-third of its exports to China, along with a guarantee that it will continue enjoying access to the port of Tianjin, a springboard to more distant markets.
 
Offering such incentives makes lots of sense for Beijing, which sees the transport route via Mongolia as forming the backbone of the China-Mongolia-Russia Economic Corridor – a key route in the Belt and Road network. Accordingly, Beijing expects to channel some $30 billion to related projects in the next five to ten years, with total potential investment reaching as high as $90 billion by 2035.
 
Beijing envisions a trio of parallel northbound transport lines traversing the mainland from Guangdong province on the South China Sea: a highway, a high-speed railway, and a cargo rail line. The government is already encouraging provinces located on this corridor to direct their export routes toward the town of Erenhot on the Chinese-Mongolian border, where a cross-border economic cooperation zone is currently under construction.
 
The Mongolia corridor will augment two traditional trade routes to Russia: one that runs from western China through Central Asia, and another that crosses into Russian territory directly at the Inner Mongolian city of Manzhouli, around 30 miles east of the Mongolian border. The latter is fed by shipping routes running along China’s eastern coast and is sometimes called the Dragon River Silk Road in Chinese documents.
 
The China-Mongolia-Russia route calls for the creation of two free trade zones. The first, on the Sino-Mongolia crossing at Gashuun Sukhait, will facilitate export processing and service Mongolia’s Tavan Tolgoi coal mine. The second, on the Mongolian-Russian border at Altanbulag, is aimed at promoting eco-tourism.
 
The extent to which Mongolia can take advantage of Belt and Road’s possibilities and realize its own economic goals is a big uncertainty. Harmonizing the interests of Chinese firms that are implementing Belt and Road-related projects with those of Mongolian authorities promises to present challenges. Another challenge lies in trying to coordinate priorities among a wide variety of local, provincial and national governing bodies in China, Mongolia and Russia.
 
Mongolian leaders for now seem to be hoping that the development of transport routes will spur the creation of industrial clusters in the country, which are seen as an engine of growth for manufacturing and agribusiness. The realization of that vision would at least help Mongolia make progress toward diversifying its economic base. Meanwhile, Mongolian leaders appear resigned to having to set aside for now the goal of reducing the country’s dependency on China.