Russia: a land of opportunities and risks

In our April 27-May 3/09 issue, we wrote about Russia’s new strategic sectors law, and about the Canada-Russia Mining Conference, organized by the Canada Eurasia Russia Business Association (CERBA) and held in Toronto in March. This week, we’ll hear more about the opportunities and risks of working in Russia.

The majority of presenters at the Canada-Russia Mining Conference expressed positive views on the mining scene in Russia.

They included officers of Western companies that have seen success in Russia, the most visible of which is probably Kinross Gold, which holds the 75%-owned Kupol gold mine, in Chukotka province. Lou Naumovski, vice-president commercial and general director for Russia at Kinross, called Kupol “our prized asset in Russia,” and said the company is “very satisfied” with its projects there. Kinross is currently reviewing the Nezhdaninskoye project in the Sakha republic.

Wes Hanson, vice-president of mine development for exploration company Silver Bear Resources, said that rather than finding a difficult regulatory and bureaucratic regime in Russia, the company has found it easy to deal with officials and receive exploration permits. Silver Bear is exploring the Mangazeisky silver project in the Sakha republic, in Russia’s Far East.

The company recently released an inferred resource estimate for the project, which is 500 km northeast of Yakutsk on a winter road, totalling 1.9 million tonnes grading 508 grams silver per tonne for 31 million oz. Alfa Group, a Russian company, holds a 19.5% stake in Mangazeisky.

Others who touted Russia’s potential included Roman Schetinsky, head of research at consultants NBL Gold, and Nikolay Matyash, executive director at the Mining Advisory Council of Russia. Schetinsky said that there are good geological assets available for sale in Russia right now, adding that this is the time to buy and urging delegates not to miss the opportunity.

Matyash gave an example of the number and scope of projects available in Russia, explaining that the Urals state corporation currently holds 21 projects ready for development in the mineral-rich region. Since infrastructure in the northern part of the Urals is limited, the government is building a railroad to the region, as well as power stations and an electrical grid.

Delegates also heard about opportunities for foreign technology and service companies, one example being geophysics exploration technology, although all imported equipment must be licensed in advance by the Russian Customs service.

And Alex Gordine, principal at consulting engineers Golder Associates pointed out differences between engineering practices in Russia and internationally, including environmental assessment standards, rock mechanics, pit design and arsenic disposal.

Concerns

While the official session focused on the opportunities and success stories, delegates used an after-session of the conference – a meeting of the Canada-Russia working group on the mining industry, part of the Canada Russia Intergovernmental Economic Commission – to raise concerns about working in Russia.

Co-chaired by Denis Khramov, director at Russia’s Ministry of Natural Resources, and Leonard Surges, senior adviser at the Department of Natural Resources in Ottawa, the working group heard worries about jurisdiction, bureaucracy and the threat of expropriation.

One delegate warned about a problem that could arise when a regional law violates a federal law. In this scenario, a company could be granted a licence from a regional government, only to have it overturned by the federal government, which controls the country’s resources.

Another issue can arise when a discovery extends beyond the area of the original licence. The exploration company cannot automatically extend the licence to cover the new discovery, and a government auction could be held for the discovery.

Several attendees complained about bureaucratic problems, such as excessive reporting requirements, and the many steps that are required to convert an exploration licence to a production licence. One delegate criticized the length of time that the Federal Antimonopoly Service (FAS) can take to approve a foreign investment, six months being considered too lengthy.

Another issue that seemed to be shared by many was raised by a delegate who was unhappy about the prospect of expropriation of strategic deposits (T. N. M., April 27-May 3/09). He suggested that in such cases, the market should be allowed to set the price, rather than the government.

To that, Khramov replied: “We need to handle our resources very carefully.”

Khramov agreed that, for resources not deemed strategic, regulations are excessive: “We understand this system needs to be improved.” He said that the government might simplify procedures in the near future.

What the experts say

 
Echoing the concerns of delegates are the comments of Russia experts who were not at the conference.

Russia-watcher Aurel Braun, professor of political science and international relations at the University of Toronto, has a decidedly negative view on the business environment awaiting foreign investors in Russia.

Corruption, lack of transparency, and concentration of power in the hands of the federal government are all red flags that should make investors wary of the validity of regional agreements, he says.

“It doesn’t really matter what your local agreements are,” Braun says.

“Local government has no substantive power.”

Braun says another problem lies in the weak enforceability of contracts. The government can change contracts at will, and if the case is adjudicated, it will come before an incompetent, corrupt judiciary that is not independent.

Meanwhile, senior political risk analyst Andrew Bennett, of the Export Development Corp. (EDC), says that lack of security of land tenure, and the need to partner with Russian firms to exploit mineral resources, can expose investors to corruption and greater risk of expropriation. Since the resource sector is viewed as strategic, it is subject to interference by the state.

In a March research note, Bennett writes: “In Russia, there is often little or no distinction between commercial and political interests. The Kremlin and associated political elites involve themselves actively in commercial dealings, especially in strategic sectors. There have been numerous cases in which the government has intervened in (strategic) sectors.”

As for the new strategic sectors law, Bennett considers it a double-edged sword. Although it provides much greater clarity and signals that the government wants to encourage foreign direct investment, particularly in sectors such as mining where there is a deficit of infrastructure and equipment, it is also quite restrictive. Moreover, since the new law was only enacted a year ago, it is still unclear how the central government and the regions will implement it in practice.

One of the challenges mining ventures face is what Bennett calls “poor administrative capacity,” especially in the remote, mineral-rich regions. Often, it is difficult for local administrations to implement central government regulations, resulting in administrative delays and lack of clarity as to exactly which regulations mining operations are subject to.

Bennett advises that foreign investors do their homework and know whom they are working with in Russia. “If you are entering into a joint-venture agreement with a Russian company, you need to be very clear as to who your Russian partners are. You need to have an understanding of what sort of connection they might have to the state, or to any other state body. You also have to be very clear as to what type of title or right they have to a deposit or (a project.)”

CERBA is holding a Toronto seminar: Russia, Risks and Opportunities, on May 22, with presentations by the EDC.

The association has also announced a conference in Moscow, the Canada-Russia Business Summit, on June 22-23, including a meeting of the Canada-Russia Intergovernmental Economic Commission.

Underlining the importance that the Russian government attaches to the commission, in April, Prime Minister Vladimir Putin appointed Viktor Zubkov, his first deputy, as a co-chairman of the commission.