Russian gold output slides as costs mount

Russian gold production is on the wane as a result of tension between industry and the government, according to the head of an association of prospectors in the country.

Viktor Tarakanovsky of the Union of Gold Prospectors’ Artels says the decline is being caused by high industry taxes and costs, as well as by a troubled banking sector.

Production slipped to 130 tonnes in 1996 from a post-Communism high of 164.5 tonnes in 1993, and output for the current year is not expected to exceed 110 tonnes. One financial group, Evrozoloto, predicts output could even fall to as low as 95 tonnes.

One of the greatest obstacles facing the industry is a prohibitive tax rate of 45%, says Tarakanovsky.

Operating costs are also high. Diesel fuel, for example, averages US$220 per tonne in the rest of the world but US$350 in Moscow — and two to three times that price in distant areas of Russia. Costs are also high for transport, equipment and machinery.

The high costs and tax rates are a reflection of the country’s nascent market economy, says Michael Newbury, director of Endeavor Capital, which helps broker joint-Venture deals between Russian and Western gold miners. He points out that the duration of a long-Term loan is typically 180 days and that a 5-year loan for mining development is unheard of. “Banks are only now getting into the lending business,” he adds.

Under communist rule, only five major banks operated in Russia. The number has since swollen to more than 2000. “Last year alone, about 500 banks went bankrupt in Russia,” says Newbury. “There is a real problem with getting people to put their money into a bank. There is no public money — it’s in jars or in mattresses.”

With high costs and government inaction, the incentive for Russian companies to develop gold mines is low. “For many Russian companies, the only way to develop projects is with Western juniors,” Newbury says.

— With files from Interfax News Agency.