Russia struggles with mine funding proposals

Proposals to restructure government financing deals for Russian gold producers in 1999 are meeting with resistance from other state agencies and miners themselves.

Gokhran, a branch of the ministry of finance and the only Russian agency involved in buying gold directly from miners, proposed that ministry securities, backed by 50 tonnes of gold, be sold to either the Central Bank of Russia (CBR) or the European Bank for Reconstruction and Development (EBRD) to finance production. Russia’s parliament has already passed a resolution endorsing the plan. According to officials at the finance ministry, the deal will provide financing for up to 80 tonnes of gold in 1999, out of an expected total of 100 tonnes.

However, officials at the Union of Gold Industrialists, which represents Russia’s largest mining companies, point out that a similar plan in 1998 proved disastrous for miners. The ministry, which has the right of first refusal in the purchase of Russian-produced gold, intended to buy 60 tonnes from miners in 1998 but, as of Oct. 1, had purchased only 13 tonnes.

The CBR has also rejected the financing plan, denouncing as illegal the securities transaction between the two government agencies. The CBR is also concerned that the price of the metal, if it remains low, will diminish its chance of recouping its investment. The EBRD is the only financial institution negotiating with Gokhran to finance gold production in Russia under the securities scheme.

However, the CBR has proposed an alternative plan for financing next year’s production — namely, that commercial banks be allowed to lend money to producers. However, this too is meeting with resistance. According to the Association of Russian Banks, financial institutions in the country do not have sufficient funds and, consequently, financings will drop in 1999. This year, banks bought about 70 tonnes of gold from producers. According to figures released by the ministry of economy, gold production between January and August dropped seven tonnes, to 58 tonnes, compared with the first eight months of 1997. The decrease could be as much as 15 tonnes by the end of the year.

The CBR has offered to lend some money to commercial banks, adding that state-owned lending institutions Sberbank and Vneshtorgbank could provide the bulk of the funding.

But while Gokhran pushes the securities scheme in Moscow, it has loosened its purse strings for producers in the Magadan region. The agency has offered cash advances to miners in Russia’s most prolific gold region, equivalent to half of 1999’s anticipated production. Gokhran states that it also has received offers from a foreign bank to finance 25% of gold production, as well as offers from a private Russian bank.