GLOBAL MINING UPDATE
SEPTEMBER 1999
Russia: Licensing of Mining Projects
Author:
The Global Mining Group
Western companies looking to invest in Russian mining projects soon encounter an
intimidating, confusing and sometimes contradictory assortment of laws, regulations, decrees
and orders issued by any number of federal and regional governments, authorities,
committees, commissions and administrators. However, some general principles can be
extracted providing an overview of the licensing of Russian mining projects.
Relevant Legislation
Russian mining legislation consists of several principle acts and various decrees, orders and
edicts.
The most important act is Russian Federation Law No. 2395-1, “Law on Subsoil”, which
entered into force in April, 1992 (the “Subsoil Law”). The Subsoil Law provides a general
framework for the licensing of exploration and mining rights. The Subsoil Law was
amended in 1995 to include transfer procedures and a procedure to reissue subsoil licences
and was further amended in February, 1998. Another important act is the Statute “On the
Procedure for Licensing of Subsoil Use” which became effective in August, 1992 (the
“Licensing Statute”). The Licensing Statute established an administration system for
monitoring and enforcing compliance with licence conditions.
One of the more important recent enactments was Russian Federation Law No. 41-FZ,
“Law on Precious Metals and Precious Stones”, which entered into force on April 7, 1998
(the “Precious Metals Law”). As the name implies, the Precious Metals Law regulates the
exploration, mining and processing of gold and silver and precious stones and subsequent
transactions involving those minerals.
Under the Constitution of the Russian Federation, resource matters fall within the joint
jurisdiction of the federal government and the various administrative and territorial divisions
of the Russian Federation (referred to as “subjects”). This adds another layer of regulations,
orders and decrees as well as another level of administrators, committees and agencies. A
mining company may find itself dealing, for example, with the federal offices of the
Committee for Geology and Natural Resources (“Geolkom”) in Moscow as well as a
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regional department of Geolkom in, say, Vladivostok on different aspects of the same
project.
Ownership of mining resources
Minerals in the ground, or “subsoil resources”, may be owned only by the State – there is no
concept of private ownership of minerals in the Russian Federation. Indeed, subsoil
resources are characterized as “State-owned property” and, by law, cannot be privatized. In
addition, resources, and the rights to use those resources, cannot be traded, pledged or freely
assigned (except for certain limited circumstances, such as production sharing).
Again complicating the issue, the Constitution of the Russian Federation divides the
ownership of minerals in the ground between the federal State and the regional subjects.
The ownership of the minerals, once extracted, depends on the identity of the mineral being
extracted. The Precious Metals Law provides that, once mined, gold and silver (along with
any minerals extracted at the same time) are owned by the licenceholders. For other metals,
the position is less clear. Under general Russian law, extracted minerals belong to the
licenceholder while the amended Subsoil Law provides that ownership is to be dealt with in
the particular subsoil licence.
Types of mining rights
Generally, the following types of licences are available:
·Geological survey licences: These licences are granted for terms of up to 5 years.
However, these licences are normally not exclusive and do not give the holder any priority
right to a development licence.
·Development licences: These licences are issued for a maximum term of 20 years.
Development licences give the holder the exclusive right to explore and develop a deposit.
·Where the development of a mining allotment requires further geological surveying, a
combined licence may be issued for a maximum term of 25 years.
Although the practical effect is still unclear, the Precious Metals Law introduced the
requirement to obtain “general licences” to conduct operations in particular “spheres” of the
gold, silver and precious stones sectors. For example, if the project includes the
“processing” of gold and silver ore (eg, refining gold and silver from concentrates), a
separate general licence may be required.
Granting of mining rights
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Subsoil licences are normally issued by way of tender or auction. Two issues to be aware of
are whether the particular agency conducting the tender or auction has the jurisdiction or
delegated authority to do so and whether the proper formalities have been observed. A lack
of authority or non-compliance with the tender requirements could invalidate any licence.
Arguably, the Subsoil Law prohibits the granting of a single subsoil licence to more than one
entity. Therefore, traditional western joint ventures should probably be structured as
shareholder agreements with the joint venturers holding shares or interests in the Russian
entity which will hold the subsoil licence. In establishing the Russian licenceholding entity,
the following matters will need to be kept in mind:
· Because of the foreign investment aspect, licences will need to be registered with the
Moscow office of Geolkom even if the tender was conducted by a regional department.
· The Precious Metals Law requires that a licenceholder develop the deposit with its own
facilities, manpower and other resources. This places a limit on the ability of the
licenceholding entity to “contract-out” for mining services.
The investors will also be subject to Russian legislation including, among others, the RF Law
“On Foreign Investments”, the RF Law “On the Securities Markets” and the RF Law “On
Production Sharing Agreements”.
Taxation
Of course, Russian tax legislation (both federal, regional and local) will have a major,
perhaps determinative, impact on any investment decision. Taxes on mining projects
include profits and income tax, value added tax, property tax, customs duties and excise
taxes, payments for natural resource use (akin to a royalty), road use tax and many others.
Gold sales
The Precious Metals Law provides that the State Fund for Precious Metals and Precious
Stones of the Russian Federation (“Gokhran Russia”) has a pre-emptive right to purchase
gold production provided that, among other things, Gokhran Russia concludes a preliminary
sale and purchase agreement with the mining company. The local or regional level of
Gokhran has a second-ranking pre-emptive right. If Gokhran Russia, and Gokhran at the
local level, declines to purchase the gold or silver, the holder of the subsoil licence may sell it
to the Central Bank of the Russian Federation or to an authorized commercial bank.
Conclusions
It is an unavoidable cliché that the Russian legal system is in a state of flux. New
regulations, decrees and orders are frequently proposed and, occasionally, enacted.
Sometimes these enactments are in conflict with earlier regulations and it is not always clear
which is to prevail. Adding to the confusion are the following complicating factors:
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· The various administrative agencies often develop their own interpretations which are not
necessarily consistent between agencies.
· The regional and local authorities have joint jurisdiction with the federal authorities and,
from time-to-time, enact legislation or issue decrees complementary to, but often conflicting
with, the federal regulations.
· Sometimes copies of regulations, orders or decrees are simply not available.
· It is often unclear whether regional departments of the various committees had the
jurisdiction or delegated authority to grant the licences or permits issued by them.
A complete overhaul of Russian investment and mining laws would be desirable. For the
foreseeable future, any such reforms must obviously take a back seat to dealing with the
country’s political and economic crises. In the meantime, it is possible to work through the
various laws and agencies and with hard work and persistence obtain the necessary licences,
permits and approvals to explore and develop Russian’s mineral potential.