Mongolia's proposed new mineral law threatens foreign investment, warns the country's business council.

The Business Council's 250 members include mining giant Rio Tinto -- whose Oyu Tolgoi copper-gold project is expected to account for about 30 percent of Mongolia's gross domestic product when it reaches full production -- Peabody Energy, General Electric Co. and Mitsubishi Corp.

The council's letter to Mongolian President Tsakhia Elbegdorj's office, obtained by the Financial Times, warns: "The impact of the draft law on the minerals industry will be to halt current minerals exploration and development in Mongolia and greatly discourage any future investment. ... Collateral damage is likely to include all other sectors of supply, including but not limited to the construction and real estate sectors, imposing a significant chain-reaction burden on the banking and financial institutions which they may not be able to withstand and leading to a deepening crisis."

While year-end statistics have not yet been released, just in the first half of 2012, Mongolia's economy grew 13.2 percent, figures from the government show.

Mineral product exports account for more than 90 percent of Mongolia's exports.

Dale Choi, an associate with private equity investment firm Origo Partners MGL, told Bloomberg that the proposed law would make mining projects aligned with the interests of the state. Also, settlements as small as a village would be allowed to decide whether or not to accept prospecting and exploration on land near them, Choi said.

"Nobody expected that the law would be so tough on mining," Choi said, adding that the majority of the population might be in favor of the law, particularly because local people feel they don't directly benefit from mining as does the country as a whole.

The proposed new law is also seen as an attempt to boost support for the re-election of Elbegdorj in the country's presidential elections, slated for June.

In their election campaigns last summer, many members of parliament said they would get tougher on foreign miners. And in the fall, more than 20 parliamentarians had petitioned to rewrite the investment agreement that governs Oyu Tolgoi.

In a report on Mongolia's evolving foreign investment regime for the East Asia Forum, Julian Dierkes, associate professor at the Institute of Asian Research, University of British Columbia, said "where foreign investors see resource nationalism, Mongolians see an attempt to preserve the resource wealth of their country and to reap its benefits for current and future generations."

Still, there is some element of "knee-jerk nationalism" in Mongolia and the Mongolian parliament, "with some leaders ignoring the fact that ownership of mineral resources does not necessarily automatically lead to profit," Dierkes wrote.

"Mongolia needs some of the skills, technologies and capital that foreign investors can provide," he stated.