By: Telmen Altanshagai
At the recent Shanghai Cooperation Organization summit, Russia, China, and Mongolia sealed a deal for the long-discussed Power of Siberia-2 (PS-2) pipeline, which is set to deliver 50 billion cubic meters of Russian gas annually to China through Mongolia. The idea of a Mongolian route was first floated as early as 2006 by Vladimir Putin and Hu Jintao, and the PS-2 concept itself was formally introduced in 2014. The 2,600 kilometer pipeline would become the second Russian gas artery to China, supplementing the existing Power of Siberia-1. While most of the global debate has focused on Moscow’s push to redirect exports away from Europe and Beijing’s drive to secure supplies, the country with perhaps the highest stakes as a transit state is Mongolia.
Energy has always been a paradox in Mongolia: the country is richly endowed with coal and minerals yet remains heavily import-dependent for petroleum products and natural gas. Around 85-90% of Mongolia’s transport fuel, including aviation, comes from Russia, and the bilateral trade — despite a 3,485-kilometer border — represents only 10% of Mongolia’s overall turnover. By contrast, China dominates with 72% of Mongolia’s trade and is the sole buyer of its leading export, metallurgical coal, which made up more than half of total exports in 2024. This combination of over-reliance on China for exports and on Russia for energy imports makes the geopolitics of PS-2 particularly consequential for Ulaanbaatar.
For Mongolia, PS-2 offers a set of tangible opportunities. The most immediate is financial: transit revenues could provide a much-needed diversification of the state budget, which today depends disproportionately on the volatile mining sector. In 2023, mining and quarrying generated nearly one-third of government revenue and 28% of GDP. Pipeline fees could reduce fiscal dependence on coal and copper exports and fund long-delayed infrastructure projects. The construction phase of PS-2 also carries the promise of employment generation and knowledge transfer, provided Mongolia ensures that local labor and expertise are incorporated into the project. Beyond the budget, greater infrastructure connectivity could offer Mongolia a chance to reposition itself within the Eurasian economic corridor, moving beyond its role as a supplier of raw commodities.
Another opportunity lies in energy diversification. Mongolia’s current energy system is among the most coal-dependent in the world: coal makes up two-thirds of the energy mix and fuels 90% of electricity and heating needs. The health and environmental consequences are severe, particularly in Ulaanbaatar where air pollution is chronic. Natural gas is still a fossil fuel, but its carbon footprint is lower than coal or oil, and integrating it into Mongolia’s mix could mitigate some of the worst effects of coal reliance. Access to Russian gas, at a discounted rate through PS-2, could thus help Mongolia reduce domestic pollution, improve public health outcomes, and lower the social costs associated with coal. If paired with an expansion of renewable energy, gas imports could serve as a transitional bridge in the country’s longer-term energy strategy.
Yet these opportunities are shadowed by profound risks. Mongolia’s position as a critical transit state places it directly between two major powers with a declared “no-limits” partnership, exposing it to geopolitical vulnerability. PS-2 could deepen Mongolia’s reliance on Russia at a time when the country’s Vision-2050 strategy emphasizes energy independence, while also tying Ulaanbaatar more tightly into China’s orbit as the end-market. Both neighbors have a track record of leveraging economic dependence to secure political concessions, raising pressing questions about sovereignty and strategic autonomy. At the same time, Mongolia could be caught in the cross-currents of global competition: Western sanctions against Russia or intensified U.S.–China rivalry could easily spill over to PS-2, leaving Mongolia squeezed by external pressures.
Beyond geopolitics, technical and environmental challenges also loom large. Mongolia currently lacks natural gas infrastructure, which makes integration of PS-2 both logistically complex and financially burdensome. If the pipeline crosses Ulaanbaatar, it could create significant disruptions in a city already struggling with pollution and congestion. Earlier this year, Russia’s Energy Minister Sergei Tsivilev confirmed that the engineering survey had been completed, while Mongolia was finalizing its environmental assessment. But serious uncertainties remain over the route, operational oversight, and long-term safety measures. The Mongolian government will need robust safeguards — not only to prepare for potential mishaps but also to mitigate broader environmental harm that could emerge from such a mega-project.
The implications of PS-2 for Mongolia are therefore double-edged. The project could provide new revenues, jobs, and energy diversification, while elevating Mongolia’s role in regional energy flows. But it also risks eroding the very sovereignty and strategic autonomy that Ulaanbaatar has sought to preserve through its “Third Neighbor” policy. The choices made in the coming months — on contract terms, labor participation, environmental safeguards, and integration with renewable energy ambitions — will shape whether PS-2 becomes a bridge to a more balanced energy future or another cycle of dependency. For Mongolia, vigilance and foresight will be as important as the pipeline itself.
Telmen Altanshagai is a Fall Intern at ORF America. The author would like to thank Piyush Verma for his feedback on this article.