Russia's state rail monopoly signed a deal potentially totalling $7 billion on Wednesday to upgrade Mongolia's rail network and improve access to untapped deposits of uranium, coal and other minerals in the Gobi desert.

Mongolian Prime Minister Sanj Bayar also proposed a separate partnership to extract uranium, offering Russia access to its deposits of the metal as the Kremlin seeks to position itself as a major supplier to the growing nuclear fuel industry.

We should switch to new technologies, improve management and approach new metal and coking coal deposits, Russian Prime Minister Vladimir Putin said during an official visit to the Mongolian capital.

And to raise the attractiveness of Mongolia, transport should of course be modernised.

Mongolia, with annual per capita income of about $1,200, hopes its vast reserves of uranium, coal, copper and gold will help pull its 3 million people out of poverty.

But as the value of these metals has dropped, cutting export revenues, it has turned to nearly $1 billion in foreign loans.

Russian Railways agreed to form a joint venture with Mongolia's national rail company, MTZ, and state-owned mining company Erdenes MGL. The Russian company will spend $1 million on an initial feasibility study.

The whole project is expected to cost around $7 billion, depending on the feasibility study, Russian Railways President Vladimir Yakunin told reporters.

He said the upgrade would improve access to Tavan Tolgoi, where estimated coal reserves of 6.5 billion tonnes rank it as the world's largest untapped deposit of the type of coal used by steel makers in their blast furnaces.

Mongolia has hired JPMorgan and Deutsche Bank to sell up to 49 percent of the project. Russian firms have expressed interest, as well as coal giant China Shenhua, U.S. miner Peabody Energy and BHP Billiton.


Russia has already agreed to extend a $300 million loan to support the agricultural sector in Mongolia, which employs 37 percent of the population.

Mongolia also appears keen to accelerate work on mining its uranium. Prime Minister Bayar told Putin: We should speed up the work on a joint venture to develop uranium deposits.

Putin said state nuclear corporation Rosatom would represent Russian interest in the project. Asked when a deal might be signed, he said: It is a matter of weeks.

Neither Putin nor Bayar gave further details of the project.

Moscow has been trying to break into the prosperous nuclear markets of the United States and European Union, and has been eyeing possible alliances in the world market.

Russia holds more than 10 percent of the world's uranium reserves. It is also among the world's biggest providers of enrichment services and has ventured abroad to seek additional raw materials.

Australia, which holds 40 percent of the world's known uranium reserves, signed an agreement in 2007 to expand sales to Russia, but Canberra has since put the deal on hold due to concerns Moscow might not honour non-proliferation obligations. (Writing by Robin Paxton and Amie Ferris-Rotman in Moscow, editing by Anthony Barker)