Mongolia votes to nationalise former Russian copper mine stake

(Corrects to remove quotation marks in paragraph 12)

By Terrence Edwards

ULAANBAATAR, Feb 16 (Reuters) - Mongolia plans to nationalise a 49 percent stake in a copper mine sold to a domestic private firm last year, bringing one of Asia's biggest copper producers under full control in a move its former Russian owner said could deter foreign investors.

The country's parliament voted to nationalise the Erdenet mine last week after a probe by lawmakers concluded the June 2016, $400 million sale by state-owned Russian holding company Rostec to little-known Mongolian Copper Corp (MCC (HKSE: 1618-OL.HK - news) ) was unconstitutional as it was agreed without lawmakers' approval.

Erdenet, which produces 530,000 tons of ore annually, is one of Asia's biggest copper and molybdenum mines and a top tax contributor to the country's $12 billion economy. The sale to MMC was sanctioned by former prime minister Chimed Saikhanbileg.

The parliament's intervention comes as Mongolia, sandwiched between Russia and China, struggles to take advantage of vast mineral wealth, with investors deterred by inconsistent laws and tax rules. Russia has been involved in the mine since 1978, but sanctions imposed after its annexation of Crimea have encouraged it to liquidate overseas assets.

The country has been involved in a spat with miner Rio Tinto (Hanover: CRA1.HA - news) over the giant Oyu Tolgoi copper deposit. Mongolia was also forced to pay $70 million compensation to Canada's Khan Resources (Frankfurt: KHR.F - news) after international arbitration ruled it had illegally revoked a uranium licence.

A parliamentary working party concluded the sale violated financing laws because of the involvement of multiple shell corporations controlled by Mongolia's largest private lender, Trade and Development Bank (TDB), and its staff.

The working party said the deal placed too much risk on the bank, violating banking laws, and also used borrowed funds from the central bank.

Both MCC and TDB deny wrongdoing.

The bank's chief executive officer Onon Orkhon said it only provided underwriting services, in addition to "partial financing" referring to a $75 million bridge loan to MCC.

M. Munkhbaatar, MCC's chairman, said in a statement emailed to Reuters that no domestic or international laws had been violated during the purchase. The parliament's actions represented "increased state intervention in the economy," he said.

Meanwhile a letter addressed by Sergei Chemezov, the chief executive of Rostec, to the country's prime minister said any decision to intervene in the sell-off could damage Mongolia's reputation, warning any move to challenge his firm's sale could end up in court.

Any efforts to change the deal could result in claims for damages and court costs in the Singapore international commercial court, Chemezov wrote in the letter, dated the day before last week's vote and reviewed by Reuters.

A Rostec spokeswoman would not confirm or deny the veracity of the letter when contacted by Reuters. The spokeswoman said the deal was completed in accordance with international law and the firm had already received payment.

A spokesman with Mongolia's Foreign Affairs Ministry denied knowledge of the letter, adding that a visit to Moscow by foreign minister Tsend Munkh-Orgil this week had no connection with Erdenet. (Reporting by Terrence Edwards in ULAANBAATAR; Additional reporting by Gleb Stolyarov in MOSCOW; Editing by David Stanway and Kenneth Maxwell)