Resident Scholar  Michael Auslin

While Washington continues to fixate on Iraq, a resurgent Russia is steadily expanding its influence in Eurasia. If the next American president ignores Moscow's inroads, democratic development in Asia will come under threat and the United States may soon be faced with a strategic challenge in one of the world's most resource-rich regions.

Russia's main target of late is Mongolia, one of Asia's most vibrant democracies. Since first holding elections in 1990, Mongolia has developed a stable electoral system with more than 15 political parties and seen two peaceful handovers of power. Mongolians will vote on June 29 to elect a new parliament. Polls suggest the ruling ex-Communist Mongolian People's Revolutionary Party, which regained power in 2000, could lose power to the opposition Democratic Party.

Regardless of the election outcome, Mongolia's relationship with Moscow will take centerstage. Russia's nationalized oil company, Rosneft, supplies more than 90% of Mongolia's oil. Over the past three months, it has increased prices twice--by an average of 20% each time. This comes on top of surging prices that, since 2006, have pushed inflation in Mongolia to over 15% annually. Rosneft recently told Mongolian officials that it would "lower" oil prices if given the rights to "run oil production" in the country. Moscow also wants to build 100 gas stations throughout the country, which would solidify its overwhelming presence there and reduce consumers' energy choices even further.

Similar tactics are afoot in other sectors of Mongolia's economy. Russian enterprises already own 49% of Mongolia's national railway and its largest copper and gold mining companies. An industrial group founded by Russian Prime Minister Vladimir Putin wants to consolidate the Russian-controlled shares of all three companies, effectively giving Mr. Putin's cronies a near-stranglehold on key players in the Mongolian economy. Officially, Mongolian officials express confidence in the benefits of deeper economic relations with Russia. Privately, they admit to feeling pressured into opening up their markets to Moscow, and wish more Western companies would invest.

Despite these misgivings, Mongolian president Nambaryn Enkhbayar visited Moscow last month and agreed to discuss further joint uranium production and nuclear cooperation. New Russian President Dmitry Medvedev stated that bilateral trade will soon exceed $1 billion, cementing Russia's position as Mongolia's largest trading partner after China. If these trends continue, Mongolia may become an economic satellite of Mr. Putin's newly expansive Russia.

The stakes are high for fledgling Asian states, especially democracies, which must balance satisfying Russian demands with proving to their own people that they can protect their independence. If Russia succeeds in blackmailing Mongolia into economic subservience, then it can try to extend this tactic to other Central Asian nations.

Imagine the precedent that would set. China could also decide that painstaking negotiations and diplomacy are a waste of time when it can bring its export and import power to bear. Democratic Japan and South Korea could feel greater pressure to join exclusive trading blocs led by authoritarian regimes. Finally, Mongolia and other states might be asked to make strategic concessions to Russian security forces to "protect" Moscow's investments. In this way, Russia could gain new opportunities to expand its military footprint beyond its own borders.

What can Washington do? First, we must encourage greater U.S. trade with Mongolia. Total trade stood at about $120 million in 2007. We should push beyond our 2004 Trade and Investment Framework Agreement and start negotiations for a full free trade agreement. In addition, the U.S. government-funded Millennium Challenge Corporation should increase its outlay for infrastructure projects in Mongolia far beyond the current total level of $285 million. Mongolians can also help themselves in this regard: Lingering governance problems partly account for slack Western investment.

Second, we should marshal global opinion against Russia's strong-arm tactics and condemn exclusive economic arrangements. Developing states must be assured that no economic leverage will be used against them to secure unfair advantages. So far, the U.S. and other democracies in Asia have stood silently by as Russia has stepped up its bullying of Mongolia.

Third, America can push forward with the Asia-Pacific Democracy Partnership project proposed by President Bush at the 2007 Asia-Pacific Economic Cooperation meeting, and unite Asia's free nations to support democratic values and assist states building liberal systems. Mongolia should feel that the U.S. is committed to linking up democratic nations in the region and addressing common concerns, be they economic or strategic in nature.

Finally, the U.S. and Mongolia can deepen their impressive security cooperation, which includes joint training and peace-keeping exercises. Even without a formal security relationship with the U.S., Mongolia has built a training center for peacekeeping operations and dispatched nearly 200 troops to Iraq. For a young democracy, Mongolia has shown a welcome willingness to look beyond its borders and play a constructive role in the world. When President Bush visited Mongolia in November 2005, he called Mongolia a "brother in the cause of freedom." Now is the time for the U.S. to help protect that freedom from economic and political threats alike.

Michael Auslin is a resident scholar at AEI.