The Dalai Lama’s visit to Ulaanbaatar last year caused a major strain in the relationship between China and Mongolia after which Beijing blocked essential food supplies to Mongolia. This compelled Mongolia to warm up to New Delhi, much to Beijing’s displeasure

New Delhi — Mongolia and India are expected to soon start the construction work at Mongolia's first oil refinery as the landlocked country hopes to eliminate its dependency on its neighbors for energy needs. The Engineers India Limited (EIL) has developed the detailed project report (DPR) of the refinery while the Mongolian Oil Refinery will work as the focal agency of the project.

Furthermore, India has provided a line of credit, which includes a $700 million loan for the oil refinery and $264 million for oil pipelines. The loan was announced during Prime Minister Narendra Modi's visit to the East Asian country in 2015. The 20-year loan will have an interest rate of 1.75 percent and principal payments will be waived during the first five years.

The refinery will have a processing capacity of 1.5 million metric tons of oil per year and will annually produce 560,000 tons of gasoline and 670,000 tons of diesel fuel, as well as 107,000 tons of liquefied gas. The refinery could boost Mongolia's gross domestic product by 10 percent. Presently, Mongolia exports crude oil to China while importing petroleum products from the Russian Federation.

"The oil refinery project will help Mongolia to eradicate or reduce the dependency. At the same time, we are very much hoping it would help to save a lot of foreign exchange and reallocate it for other necessities," G Ganbold, the Mongolian ambassador to India, said.

Mongolia is just recovering from a severe economic downturn caused by falling commodities prices, which, in turn, forced the country to renegotiate a $4.2 billion loan from Beijing.