Mining Journal, Letter: investing in Russia is not foolish

Mining Journal

Letter: Investing in Russia not foolish

By Sergey Kashuba

24 October 2016, 06:32 BST

MineHutte’s recent exposé on Russia in Mining Journal (courtesy of MineHutte’s mining regulation expert) unfortunately offers a somewhat distorted view of the Russian regulatory framework as currently applicable to the mining industry.

Numerous international and domestic players have been active in Russia’s mining industry for many years. Perhaps they have done so “bravely, brashly or brazenly”, but certainly not “foolish[ly]”, contrary to what MineHutte appears to suggest.

One apparent distortion in MineHutte’s piece concerns the Russian rules for mining strategic deposits. Sergei Diyachenko, a Moscow-based partner at Freshfields Bruckhaus Deringer who heads the firm’s energy and natural resources practice in Russia, said the concept of a strategic deposit in Russia is not all-inclusive.

"It covers only specific types of minerals and some of those are subject to specific minimum reserve threshold," he said.

"This leaves all other types of mineral deposits, such as those of, inter alia, iron ore, silver, coal, bauxite and potash, as well as small to mid-size gold, copper and onshore oil and gas deposits, outside the scope of the Russian rules on strategic deposits, despite their often considerable value."

The Russian rules on strategic deposits are certainly very detailed and that can, indeed, be viewed as burdensome for some investors. However, this additional measure of detail has also significantly increased the clarity and transparency of government regulation and decreased the scope of discretion reserved by the government authorities.

Such clarity helps to prevent, or significantly reduce, the potential for political manipulation and corruption. As a result, existing and prospective investors in Russian strategic deposits have increased visibility of their investments’ legal status at an early stage.

As Diyachenko explains, the detailed rules of the Russian mining code provide investors with a better understanding of “where they stand legally in respect of their potential investments in Russia (and how such investments may best be structured), as well as the prospects and criteria of the likely government action in authorising or rejecting their investment bids".

This greater measure of visibility afforded by the Russian rules on strategic deposits stands in sharp contrast to some of the more mature jurisdictions.

A number of these, which are generally perceived as more investor-friendly than Russia, are often those where the government authorities reserve more discretion in passing judgement on foreign investments in sectors or assets that may be viewed as strategic. Their decisions are often completely unrestricted by any discernible criteria and/or are heavily politically motivated.

Another distortion follows from MineHutte’s assertion that in Russia “the explorer has no right of priority for a mining licence”. This claim is only partially true, or partially false, depending on one’s perspective.

As Diyachenko explains, “Russian rules generally do stipulate that both Russian and foreign explorers who first discover non-strategic deposits have priority for securing extraction rights to such deposits; the same priority is afforded to Russian-only explorers who first discover strategic deposits. However, it is also true that winning extraction rights for strategic deposits may indeed be a challenge for foreign miners, or Russian miners with foreign equity capital, with no extraction rights guaranteed to them as a matter of law even if they were to discover such mineral deposits”.

Since the Russian rules on strategic deposits were first enacted in 2008, this particular restriction on granting extraction rights to foreign investors has put off some foreign-owned miners from investing in Russian exploration projects. This has not gone unnoticed by Russian policy makers, who have made occasional public assurances that steps will be taken to rectify this situation.

With its vast mineral resources, Russia is an exciting investment destination for both domestic and international players. Many mining companies have successfully acquired and operated their assets in the country for almost two decades. Leading Russian gold mining companies, as well as foreign miners producing gold in Russia, are among the most profitable in their international peer group.

A clear, transparent and predictable regulatory framework has become one of the factors underpinning the stability and sustainability of the business environment for the likes of Norilsk Nickel, Rusal, Alrosa, Polyus Gold, Polymetal International, Nordgold, Uralkali as well as their foreign-owned peers Highland Gold Mining, Kinross Gold and Petropavlovsk.

You have to be brave to invest in mining in any part of the world. The need to manage relations with the state as well as local authorities is also not unique to Russia. What Russia offers is clearly defined rules regulating such relations.

Sergey Kashuba is chairman of the union of gold producers of Russia