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For most of the last several centuries, Mongolia has been controlled by one of its two superpower neighbours. China ruled Mongolia for more than 200 years, a reign that ended only with the collapse of the Manchu empire in 1911. Just a few years later, a communist government, subservient to the Soviet Union, took over.

So when Mongolia achieved true independence in 1990 as the Soviet Union was collapsing, its new leaders were faced with a quandary, one that remains unresolved today: how best to maintain functional independence sandwiched between China and Russia.

Lately, this question has become even more urgent, as miners have started to unlock Mongolia’s vast mineral wealth. In October 2009, the Mongolian government signed a $5 billion...