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By John Helmer in Moscow

Russia’s new parliament reopens debate on proposed limits on foreign mining.

A new round of debate on proposals to regulate access by foreign mining companies to the Russian resource sector has begun, this time with a set of legislative amendments that were submitted to the newly elected State Duma last week. But there is a catch.

This time, the origin of the amendments leaked to the press is not the federal Ministry of Natural Resources, the agency in charge of drafting the amending measures, and implementing the current mining law. The leaks have also been delivered to the press from a committee of the Duma which has played no role in mining regulation before. These are signs of an intense lobbying effort, most likely to undermine the conditions which have been disclosed, and force fresh changes. According to Russian mining sources, the power behind this lobbying is the oil and gas sector. A high-ranking mining administrator told Mineweb that what is happening now is “a mess”.

The threshold reserve levels, at which foreign mining companies are excluded from operating or equity control, appear to remain the same as Mineweb reported last October:

http://www.mineweb.com/mineweb/view/mineweb/en/page675?oid=38965&sn=Detail

These have been fixed for four resources — oil, gas, gold, and copper.

According to the proposals that have now been disclosed, foreign investors seeking stakes in Russian companies that hold licences to produce oil, gas, copper, and gold at fields, defined as strategic, would require permission from a government commission. This new agency is roughly comparable in design and policy intention to the Committee on Foreign Investment in the United States (CFIUS). This permission would be mandatory for foreign acquisition proposals larger than 5% to 10% of equity; authorization would then be considered on a case by case basis, following the CFIUS practice. The proposed Russian commission will be headed by the prime minister. The time limit for its review will be from 90 to 180 days.

A strategic field has been defined as one that holds more than 70 million tonnes of oil, 50 billion cubic metres of gas, 50 tonnes of gold (1.6 million oz), and 500,000 tonnes of copper.

Newly disclosed is a list of minerals which cannot be mined at all by non-Russian mining companies. The exclusion list includes: diamonds (covered by earlier legislation dating back to the mid-1990s), uranium, quartz, cobalt, nickel, beryllium, lithium, the platinum group metals (PGM), tantalum, and niobium. Norilsk Nickel, the dominant Russian mining company, is especially protected by the exclusions of nickel, PGM, and cobalt; and by the limit on copper. However, Norilsk Nickel’s foreign-owned free float of about 40% is already beyond the proposed threshold.

Also subject to total exclusion, according to the new proposals, are resource deposits offshore on the Russian continental shelf or under inland seas; together with deposits, whose mining might require the use of land deemed vital for national security and defense.

A report by MDM Bank claims that the disclosures represent “no big changes to status quo. It appears, in our view, that despite all the noise surrounding the subsoil law over the last year, not too many things will change. As permission from a government commission will be given on a case by case basis, we believe this leaves room for a wide range of scenarios and does not really alter the current status quo. In addition, the cut-off size of the fields that are considered strategic appears to be much lower than initial estimates (at some point placed at 500-700 mn tons for oil fields), which means that almost all fields of interest to international companies will fall under this category and therefore require government clearance. Overall we do not see any significant benefits or losses for the sector as we do not expect any significant changes. ”

Government sources told Mineweb that the source of the identified amendments is the Ministry of Industry and Energy, which delivered them to the Duma committee on Construction and Land Use. A second reading of the proposals, and a vote by the Duma, has been scheduled for March 19 by the committee chairman, Martin Shakkum. A spokesman for the Industry Ministry told Mineweb he could say nothing about the list of strategic resources, nor predict what will happen next in the Duma. A spokesman for the Ministry of Natural Resources added that he is uncertain what has happened to the amendments drafted by his ministry, and disclosed last December by the Minister of Natural Resources, Yury Trutnev. Shakkum’s committee told Mineweb that he had been the source of the amendments now under review, but refused to say if they had been coordinated between the two government ministries.

The current confusion is not new. When Trutnev was appointed to his ministerial office in the spring of 2004, he was persuaded by the big Russian oil and mining interests – especially by LUKoil chairman, Vagit Alekperov, who had most to do with putting Trutnev where he was – that he could draft amendments to the so-called Sub-Soil Law, and have them enacted by parliament, then signed by the President at top speed. In his first major speech on the subject, in July 2004, Trutnev promised to accelerate the award of licences to major oil, gas, gold and copper deposits within 45 days, instead of six months.

By March 2005, the accelerator hadn’t been enacted. A new obstacle had been drafted instead – definition of a threshold tonnage of mineable reserves or resources, which would make oilfields, gasfields, and mineral deposits strategic for Russia’s economic security, and thus excluded for foreign-owned mining companies. A draft of these provisions was sent to the State Duma on June 17, 2005. For the year that followed, Trutnev’s ministry tried to get other ministries, the Kremlin, and the parliamentary deputies to agree to explicit thresholds for strategic deposits, initially putting the barrier at 150 million tonnes for crude oil deposits; 1 trillion cubic metres for gas; and 10 million tonnes for copper. Above these limits was no-go for foreign companies. By these criteria, just five deposits appeared to be strategic exclusions — the oil deposits of Titov and Trebs; the Chayadinskoye oil and gas deposit; Sukhoi Log gold and Udokan copper.

In mid-2006, Mineweb reported Trutnev’s deputy, Anatoly Potemkin, as confirming the oil threshold, but lowering the one for gas to 75 billion cubic metres. Potemkin didn’t cite the threshold numbers for hard-rock deposits, but he hinted that the target mineral list was being expanded. “We are considering including more natural resources in the [strategic exclusion] list. It may be nickel.”

The country’s chief geologist and a purported personal advisor to Putin, Vladimir Litvinenko, Rector of the St.Petersburg State Mining Institute, also advocated specific project exclusions, as well as reserve thresholds. For example, he said, “the Barents Sea is a special region for our interests.” Referring to Shtokman — the world’s largest undeveloped gasfield with 3.7 trillion cubic metres of reserves – Litvinenko said: “What do we need pressure from foreign companies for? We need to perfect the entire conception of the project, and only then should foreign partners be announced.”

Last October, a brief notice from Trutnev’s ministry revealed that the government had yanked its proposed legislative draft of the strategic thresholds, and was redrafting the language and the numbers. “For now, there will be no law. We’re going with amendments,” said Rinat Gizatullin, Trutnev’s spokesman. He didn’t explain.

A source at the Duma’s Committee on Natural Resources, which then held jurisdiction over the bill, told Mineweb: “I can’t comment on anything, unfortunately. I’ve heard that there are amendments pending in the ministry, but they didn’t show us the new draft version. Currently, the Sub-Soil law doesn’t work. I think they are working on corrections of the 2005 draft. I think they will toughen the part for foreigners. But this is only my guess, so please don’t rely on me.”

A source at Trutnev’s ministry acknowledged: “The problem is that Udokan and Sukhoi Log are not classified as strategic, yet. Formally, we have no strategic deposits. The definition of strategic deposits will be made by a government decree, on the basis of the proposal from the Ministry of Natural Resources. Unfortunately, this mechanism doesn’t work without amendments to the operative legislation. This doesn’t have a definition of strategic deposits or resources. Currently, it is impossible to classify any deposit as strategic, and prohibit foreign investments. If, for example, one wanted to authorize an auction for the licence to mine Sukhoi Log now, there are no legislative ways to limit access to this auction for foreign companies. All announcements of auctions for strategic deposit licences presumes the enactment of the Sub-soil Law amendments beforehand.”

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