Expert cautions investors in Russia’s resource sector

Mining can be a high-risk business especially in the former Soviet Union, said Neil MacFarlane who addressed a small group at Queen’s University on Sept. 25, 1992. A study being carried out by him at Queen’s Centre for Resource Studies suggests that investment in Russia’s resource sector at this time may be unwise. Although MacFarlane painted a bleak economic and political picture, he acknowledged that profitable opportunities may exist.

MacFarlane says that reforms in Russia have basically failed, leaving the country on the brink of economic and political disaster. As decentralization of the government is continuing, there is no control on inflation, living standards have decreased, and Russia has failed to attract foreign capital. A growing conservative trend is emerging in Russian politics which may lead to the restoration of central control.

Although mineral exports remain high, Russia is selling its commodities well below production costs, in order to earn hard currency. This in turn is depressing already weakened worldwide metal markets.

With regards to foreign investment, MacFarlane stressed that there are several key points to keep in mind:

— Current investment law has never been tested.

— Expropriation insurance is currently unavailable.

— It is not clear which level of government to deal with.

— Land tenure is uncertain.

— Russia’s mineral statistics are totally unreliable.

Even though the situation looks bleak, MacFarlane does acknowledge that the mining industry is used to high-risk ventures and that profitable opportunities may exist.

Several North American mining companies are pursuing opportunities in various parts of the former Soviet Union.

Newmont Mining has recently announced that it will assist in the development of a gold heap-leaching scheme to treat low-grade mine dumps at the Muruntau mine in Uzbekistan.

Vancouver-based junior Goldbelt Resources is involved with a gold tailings recovery project in Kazakhstan and a copper project in Russia. Asked if it might be wiser at this time to market technology and services, MacFarlane said that the country is so fragmented that markets are very small and localized and there is still a problem with payment.

MacFarlane, a former Rhodes scholar, is a professor specializing in Soviet politics at Queen’s University.