Herders leave the steppe after losing a fifth of their livestock. Now foreign firms are to exploit Mongolia's vast resources

A lifetime of experience, years of training and a sleepless night of preparation – yet Tsedendamba's stallion, in the fifth and prime year of its racing career, trailed across the finish line in 12th place.

"Last year it came in second. This time we had the dzud, bitter winter conditions, and that's why I didn't push it harder in training. The horse is too thin," said the 61-year-old herder.

Mongolia's national festival of Naadam, which saw contests in the "manly sports" of archery, racing and wrestling across the country last week, dates from before Genghis Khan's time and celebrates the country's fabled nomadic spirit. Almost a third of the population are herders.

But the catastrophic winter has killed millions of animals and left thousands of rural families struggling to survive. It has also exacerbated the country's financial woes, increasing the pressure to exploit its vast but largely untapped mineral resources. Two decades after the collapse of communism, Mongolia may be at another turning point.

Tsedendamba, who like many Mongolians uses only his given name, was experienced enough to foresee the dzud, or "white death". He roamed far across central Övorkhangai province to ensure his livestock fed well despite the summer drought. He prepared fodder for the coming winter and built up their shelter. Others slaughtered the weakest animals to ensure more food for the strongest.

None of it was enough. Temperatures fell to -50C and thick snow buried the grass. By the time it finally melted in May, nearly 9,000 families had seen their entire herds freeze or starve to death. Another 33,000, including Tsedendamba's, lost half their livestock. Almost 10m cattle, sheep, goats, horses, yaks and camels have died, a fifth of the country's total, at a cost of 520bn tögrögs (£250m).

Pregnant animals miscarried and weakened ones are still succumbing to illness. Only the ravens are fat here, gorged on carrion. For many households, their only recent income has been UN payments for burying carcasses.

But beneath the soil could lie a fresh start for the country: gold, copper, uranium, lead, fluorspar and coal.

Poverty and rationing

After years of political wrangling, Mongolia agreed a deal last October for the Oyu Tolgoi copper and gold seams, which should bring $5bn (£3.3bn) of foreign investment – a little more than the country's GDP last year. Analysts at one investment bank have predicted it could unleash an unstoppable transformation and create a "Mongolian wolf" economy.

For its citizens, such prospects are long overdue. The former Soviet satellite has been hailed as a success story of post-communist political transition, moving with relative smoothness to democracy. But its economy has taken it close to disaster in the last two decades. The country lost almost its sole source of aid and trade. Poverty rates soared in the 90s and rationing was in place during the early years of capitalism.

Even after recent annual growth rates of around 8%, the proportion living below the poverty line – 101,600 tögrögs (about £50) a month – appears stubbornly unchanged at more than a third.

Many are clustered in the unlovely capital of this strikingly beautiful country. Six times the size of the UK, Mongolia has just 2.75 million inhabitants, and almost 40% of them live in Ulan Bator. In the last decade, its population swelled from 800,000 to almost 1.1 million, with arrivals peaking in the wake of harsh winters. Tens of thousands more are likely to arrive as the consequences of this winter play out in the next few years. NGOs say destitute herders have already moved to small settlements, just as they did after the last dzud, before realising there was no work and drifting towards the capital.

Some have arrived already. It took 14 days for Erdenebileg's family to drive what remained of their flock the 300 miles from southern Dundgovi province to a bleak hillside in Töv province, close to the city. Once, they enjoyed "a pretty decent life", selling cashmere and spare animals for cash to supplement the meat and milk from their 600-strong herd. Then came the winter.

"Every day we saw our animals dying in front of us. I was devastated," said the 32-year-old, her face etched deep by the wind and worry.

The 80 surviving animals graze close to the family's tent, overlooking a disused concrete factory and rubbish tip. Her husband has been lucky, finding a factory job through relatives. But the couple and their four children will barely scrape by on his 150,000 tögrögs (£75) a month. The government recently withdrew substantial child benefits.

"We hoped things might be easier closer to town, but it's not what I expected. It's much worse," said Erdenebileg. "Our future is uncertain, but we know there's no going back."

Most longer-term migrants are stuck in the crowded ger (yurt) settlements around the capital, where 46% live in poverty. Stray goats pick their way through the mud and children kick at corrugated steel fences separating each plot. Sanitation and services are poor. Many lack the documents to claim benefits – though a registration drive should help – and the skills to find work. Some scrabble over rubbish dumps for plastic or glass to sell to recyclers.

Cheerleaders of the move to exploit the country's natural resources believe it can tackle such entrenched poverty, creating jobs and growth.

Robert Friedland, executive chairman of Ivanhoe, Oyu Tolgoi's Canadian co-developer, boasted recently: "When production begins, Mongolian GDP could rise by 30% and employment by 10% per year for 30 years."

But many observers are concerned that the prospects are being oversold. "Expectations have gone, in my view, way ahead of reality," said Arshad Sayed, country representative of the World Bank. "There is a big danger society faces, because when people's expectations are not met, at some point they will get very upset."

Nomads of the 21st century

Oyu Tolgoi will create 3,000 jobs, but the real question is how the government spends the revenues and whether the mine will kickstart the wider economy. The deal was stalled for years by concerns that foreign firms would not give Mongolia a fair deal and anxiety about the geopolitical implications. Negotiations on the development of Tavan Tolgoi, a massive coal seam, are mired in similar debates.

"[Oyu Tolgoi] may not be the best agreement but I don't think it's the worst either," said Sanjaasuren Oyun, a trained geologist, former foreign minister and one of only three opposition MPs, thanks to Mongolia's grand coalition. "Time is also of the essence. After 20 years of transition, many people's lives are economically no better off than under communism."

Boost health and education spending and Mongolia can diversify its economy and see real development, she said. That is all the more necessary because the winter blizzards precipitated a rural crisis that has been long in the making.

"Forty-four million animals was far beyond [Mongolia's] natural capacity," said Tungalag Ulambayar of the UN development programme, who believes even the surviving livestock population pushes the limits of sustainability.

Tens of thousands of families moved to the countryside in the 90s, when the economic crisis led to food shortages in cities. Some say that contributed to the increase in herd sizes, with new herders unaware of the dangers of overgrazing.

But challenging herders is "very political," Tungalag added, not only because they form a powerful constituency, but because nomadism is identified with the country's very spirit. You can drive for hours across Mongolia without seeing a fence, and permanent buildings are few and far between. On the horizon, dotted about, are the gers, the traditional white, circular, felt tents of herders.

The scene appears timeless. But its inhabitants have been buffeted not only by the weather but by man-made forces arising far beyond the steppes: desertification partly caused by global warming, bad loans and rising interest rates, and volatile commodity prices.

When cashmere prices soared, they bought more goats, which damaged more pastures. Then the financial crisis hit. Wealthy westerners reined in their spending, cashmere prices halved and incomes plummeted.

"Of course you [may be] a nomad – but you are a nomad in the 21st century, and you have to adapt to the market to survive," said Tungalag, who believes herders need training in risk management and new livestock practices.

Yet many are undeterred by the turbulence of the last few years. Lkhagvasuren moved to Ulan Bator when a cruel winter wiped out his livestock three years ago, rebuilding his herd only to see it destroyed again this winter. Now he plans to find labouring work.

"But if I make some money I'll use it to buy more animals," he said as he crouched in his leaking ger. "Mongolia without herders is unimaginable."