Beyond Crisis – Promoting Northern Business Linkages

March 9, 2010March 9, 2010Toronto Toronto

Nikolay MatyashNikolay MatyashMining Advisory CouncilMining Advisory CouncilExecutive DirectorExecutive Director

Foreign Investments in Russian Foreign Investments in Russian Mining: Legal Aspects Mining: Legal Aspects

• Federal Law No 57-FZ “On Procedures for Making Foreign Federal Law No 57-FZ “On Procedures for Making Foreign Investments into Companies Having Strategic Significance for the Investments into Companies Having Strategic Significance for the Defence and the National Security of the Russian Federation”, Defence and the National Security of the Russian Federation”, dated April 29, 2008; dated April 29, 2008;

• Federal Law No 58-FZ “On Amending Certain Legislative Acts of Federal Law No 58-FZ “On Amending Certain Legislative Acts of the Russian Federation ( Laws on the Subsoil, the Continental the Russian Federation ( Laws on the Subsoil, the Continental Shelf, Joint Stock Companies and Others) and Invalidating Shelf, Joint Stock Companies and Others) and Invalidating Certain Provisions of Legislative Acts of the Russian Federation Certain Provisions of Legislative Acts of the Russian Federation

in Conjunction with the Enactment of Federal Law in Conjunction with the Enactment of Federal Law ‘On ‘On Procedures for Making Foreign Investments into Procedures for Making Foreign Investments into Companies Having Strategic Significance for the Defence Companies Having Strategic Significance for the Defence and the National Security of the Russian Federation’”, dated and the National Security of the Russian Federation’”, dated April 29, 2008; April 29, 2008;

Regimes of Investing into Strategic IndustriesRegimes of Investing into Strategic Industries

Criteria for Classifying Federal Subsoil Plots, Criteria for Classifying Federal Subsoil Plots, which Have Investment Restrictions (1)which Have Investment Restrictions (1)

Subsoil plots situated on Russian territory with confirmed reserves Subsoil plots situated on Russian territory with confirmed reserves exceeding: exceeding:

• 50 tons of hard-rock gold 50 tons of hard-rock gold

• 500 thousand tons of copper 500 thousand tons of copper

Subsoil plots operation of which involves the use of lands Subsoil plots operation of which involves the use of lands allocated for defence or security purposes (irrespective of the allocated for defence or security purposes (irrespective of the amount of reserves contained therein) amount of reserves contained therein)

Subsoil plots containing any quantity of the following natural resources: Subsoil plots containing any quantity of the following natural resources:

DiamondsDiamonds

BerylliumBeryllium

UraniumUranium

High-purity quartzHigh-purity quartz

Rare earth of yttric group (yttrium, gadolinium, terbium,Rare earth of yttric group (yttrium, gadolinium, terbium,dysprosium, holmium, erbium, thule, ytterbium, lutecium)dysprosium, holmium, erbium, thule, ytterbium, lutecium)

Nickel Nickel

CobaltousCobaltous

Tantalous Tantalous

Niobium Niobium

LithiumLithium

Platinum group metals (platinum, palladium, rhodium, iridium, ruthenium, Platinum group metals (platinum, palladium, rhodium, iridium, ruthenium, osmium) osmium)

Criteria for Classifying Federal Subsoil Plots, Criteria for Classifying Federal Subsoil Plots, which Have Investment Restrictions (2)which Have Investment Restrictions (2)

Admissible Users of a Federal Subsoil PlotAdmissible Users of a Federal Subsoil Plot

As a general rule, Russian legal entity As a general rule, Russian legal entity

Possible restrictions for companies with direct or indirect Possible restrictions for companies with direct or indirect foreign participation (on decision of the Russian foreign participation (on decision of the Russian Government) Government)

The restrictions enacted by the Law No 57 are not The restrictions enacted by the Law No 57 are not applicable to all the other types of mineral products (e.g. applicable to all the other types of mineral products (e.g. ironstone, placer gold, silver irrespective of the reserves)ironstone, placer gold, silver irrespective of the reserves)

Restrictions on Transfer of Mineral Rights for a Restrictions on Transfer of Mineral Rights for a Federal Subsoil Plot Federal Subsoil Plot

No Federal Subsoil Plot mineral rights may be transferred to a No Federal Subsoil Plot mineral rights may be transferred to a foreign company or to a Russian company if the foreign investor foreign company or to a Russian company if the foreign investor (or the group in which the foreign investor) participates: (or the group in which the foreign investor) participates:

• can directly or indirectly control more than 10% of the total can directly or indirectly control more than 10% of the total votes of the Russian company, and/or votes of the Russian company, and/or

• has the right to determine the decisions taken by the given has the right to determine the decisions taken by the given Russian company on the basis of an agreement or on Russian company on the basis of an agreement or on another basis, and/or another basis, and/or

• has the right to appoint the CEO and/or more than 10% of has the right to appoint the CEO and/or more than 10% of the Board of Directors the Board of Directors

In exceptional cases the Government of the Russian Federation In exceptional cases the Government of the Russian Federation may permit the transfer of Federal Subsoil Plot mineral rights to may permit the transfer of Federal Subsoil Plot mineral rights to such a Russian company. such a Russian company.

Other Consequences of Classification of Subsoil Other Consequences of Classification of Subsoil Plots as Federal Ones (1) Plots as Federal Ones (1)

Subsoil plots for which licences were issued before the present Subsoil plots for which licences were issued before the present restrictions came into force may be declared Federal Subsoil restrictions came into force may be declared Federal Subsoil Plots (i.e. retroactive effect) Plots (i.e. retroactive effect)

The restrictions for subsoil plots that were granted to subsoil The restrictions for subsoil plots that were granted to subsoil users before the present restrictions came into force concern, users before the present restrictions came into force concern, in particular, the following matters: in particular, the following matters:

• transfer of Federal Subsoil Plot mineral rights to another transfer of Federal Subsoil Plot mineral rights to another company company

• necessity to obtain a permit from the Russian Government necessity to obtain a permit from the Russian Government for exploration and extraction of minerals if a deposit is for exploration and extraction of minerals if a deposit is discovereddiscovered

Other Consequences of Classification of Subsoil Other Consequences of Classification of Subsoil Plots as Federal Ones (2) Plots as Federal Ones (2)

When a mineral deposit is discovered on a subsoil plot which is When a mineral deposit is discovered on a subsoil plot which is not considered to be a Federal Subsoil Plot, but matches these not considered to be a Federal Subsoil Plot, but matches these criteria, the plot should be included in the list of Federal Subsoil criteria, the plot should be included in the list of Federal Subsoil Plots.Plots.

It is impossible to perform geological surveys and minerals It is impossible to perform geological surveys and minerals exploration and production activities simultaneously on a Federal exploration and production activities simultaneously on a Federal Subsoil Plot. Subsoil Plot.

Once a subsoil plot is listed as a Federal Subsoil Plot it cannot Once a subsoil plot is listed as a Federal Subsoil Plot it cannot be de-listed subsequently. be de-listed subsequently.

A project of the list of Federal Subsoil Plots was drafted by the A project of the list of Federal Subsoil Plots was drafted by the Ministry of Natural Resources. Currently, more than 1100 Ministry of Natural Resources. Currently, more than 1100 Subsoil Plots are included in the list (solid and liquid minerals). Subsoil Plots are included in the list (solid and liquid minerals).

Discovery of Mineral Deposit on a Federal Subsoil PlotDiscovery of Mineral Deposit on a Federal Subsoil Plot

Russian & Foreign companies subject to the new restrictionsRussian & Foreign companies subject to the new restrictions

• After a geological survey the Russian Government decides on whether exploration and After a geological survey the Russian Government decides on whether exploration and extraction of minerals is permittable extraction of minerals is permittable

A foreign company subject to the new restrictions A foreign company subject to the new restrictions

• If there is a threat to state defence and security, the Russian Government is entitled to: If there is a threat to state defence and security, the Russian Government is entitled to:

1.1. Cancel the company’s mineral rights for exploration and production of minerals Cancel the company’s mineral rights for exploration and production of minerals from a discovered deposit (a refusal to issue a production licence) from a discovered deposit (a refusal to issue a production licence)

2.2. Withdraw the mineral rights to the Federal Subsoil Plot given under a combined Withdraw the mineral rights to the Federal Subsoil Plot given under a combined licence for geological survey, exploration and production of mineral products licence for geological survey, exploration and production of mineral products

In this case the company has the right to: In this case the company has the right to:

• compensation of expenses for geological survey and assessment of a compensation of expenses for geological survey and assessment of a discovered deposit, including a lump-sum payment paid (for the discovered deposit, including a lump-sum payment paid (for the combined licence)combined licence)

• a reward for the discovery of a deposit a reward for the discovery of a deposit

Implementation Practice

Generally, favourable attitude and active position of the Federal Antimonopoly Service of Russia in clarification of the provisions of the new laws on investments into strategic industries;

Complexity and length of the procedures relating to the approval by the Governmental Commission for Control of Foreign Investments in the Russian Federation.

Measures Proposed to the Russian Authorities by the Mining Advisory Council

• As opposed to paying a relatively small premium when refusing a foreign investor to develop a strategic mineral deposit, the RF Government could allow the strategic deposit in question to be sold at the prevailing market price or give a foreign investor enough time to attract a Russian majority shareholder for the project. In the event where agreement cannot be reached with a Russian company to become a majority shareholder in the project, then the share may be sold to the state at the market price.

• To establish a special approval mechanism by the RF Government for specific projects – when a foreign investor applies for an exploration licence regarding what is most likely a strategic deposit, the RF Government investigates the “threat to national security” factor in relation to this deposit (plot) and informs the investor whether restrictions based on the “threat to national security” may be applicable in this particular case.

Measures Proposed to the Russian Authorities by the Mining Advisory Council

• To reconsider the threshold of 50 tons according to which a hard-rock gold deposit falls under the “strategic” category, as well as reconsider increasing the thresholds set for other metals.

• To create a more liberal investment regime under which the International Finance Corporation (IFC), or European Bank for Reconstruction and Development (EBRD) takes part in the development of a mineral deposit. Both of these well-known organizations have a good track record in Russia. Therefore the Council believes that they should be granted a simplified investment regime.

Thank you for your attention!

The Mining Advisory Council

Moscow office:

Russia, 115054, Moscow

Paveletskaya Sq., 2, build. 3, 2nd Floor

Telephone: 7 (495) 931-9905

Fax: 7 (495) 931-9914

Nikolay Matyash

Executive Director