Log gold deposit in a 50/50 partnership with a Russian mining group, Lenzoloto.
But the latter arranged with federal mining officials - one of them a board
member and insider - to cancel the mining right and return it to the state for
an open license auction.
Star lost its investment, and went bankrupt. Lenzoloto was then acquired by
Polyus Gold, but even minority Russian shareholders are still crying foul.
Charges are about to be laid before the London regulator of Polyus, the
Financial Services Authority (FSA). The Sukhoi Log license has still not been
auctioned.
International miners don't dispute that if the Russian government wants to
reserve the right to develop large resource projects for Russian miners, it may
be reasonable to do so, so long as the outcome encourages rather than deters
the capital-raising and
technology applications required for the process. Whatever the intention, the
consensus is that the Putin formula cannot do this.
"What would be fair," said one international, "would be a net present
value-based compensation formula for the asset. That would reward the company
for exploring and thereby encourage the process. It would also get the deposit
into government hands, if that's what is really intended."
Supervising the government's intentions is a commission of ministerial
officials, which was brought into being last April. This is the strategic
foreign investment review commission. Prime Minister Putin is the chairman.
Another 16 officials comprise the commission.
They include most of the cabinet, including Deputy Prime Minister Igor Sechin,
the overseer of the oil and energy sector; Deputy Prime Minister Igor Shuvalov,
who is President Dmitry Medvedev's placeman; Deputy Prime Minister Sergei
Ivanov, the head of the military-industrial complex in cabinet; and Yury
Trutnev, Minister of Natural Resources. Sergey Kirienko, who as head of Rostom
supervises uranium mining and fuel processing, is a member, as is the chief of
the FSB, the state security agency, Alexander Bortnikov. The secretary of the
commission, and the day-to-day chief of the commission's operations, is Igor
Artemiev, who is the head of the Federal Antimonopoly Service (FAS).
The commission has met just twice so far. Once, last October, it approved a
joint venture to mine the Grib diamond pipe, in which ADC and De Beers held a
49.9% stake. But additional conditions and costs were imposed, and the deal
collapsed within three months. The second meeting of the commission, in
February this year, considered an application by the Indian state-owned Oil and
Natural Gas Corporation (ONGC) to buy London-listed Imperial Oil, which holds
development licenses for 17 oil deposits in the Siberian region of Tomsk.
According to data provided by Imperial, proven and probable reserves
(classified P1, P2 in the US, C1 and C2 in Russia) totaled 118 million tonnes,
well over the exclusion threshold. But although relatively concentrated in
geographical terms, Imperial claimed there was no single, geologically
definable deposit larger than 19 million tonnes, far below the threshold.
Imperial also reported possible reserves (P3), but this count was ignored
because they have not been certified by GKZ. If they had been, two of the
fields would rise just above the strategic threshold.
During 2008, Mitvol had attacked Imperial's reserve counts for exaggeration and
share boosting, but he admitted to Asia Times Online that whatever number lay
underground, "I don't think this company's [assets] are strategic." Putin's
commission agreed and allowed ONGC to complete its 1.4 billion pound sterling
takeover. Thus, a prospector can shield its finds from state takeover if it can
make sure the drilling programme allows enough geological ambiguity in
connecting the dots underground.
A veteran Western miner warns that despite all the reserve potential
underground, Russian prospecting and mining will be doomed by the current
rules.
"The minerals law is a major disincentive to exploration as the process is
incredibly long, unless you 'oil the wheels', so to speak. Even well-connected
companies have given up," he said. "Now, with the recession, the slump in
mining activity is dramatic, with drilling across the country almost stopped.
The other nonsense is making any deposit of any size of nickel or platinum
group metals strategic. Why? This seems to be a ploy to generate 'fees' for
obstruction in the state sector.
"Finally, because the legislation treats oil and gas, and hard-rock minerals,
in the same way, mining will always be at a major disadvantage. The lead time
and risk profile for minerals is much greater than for hydrocarbons, and this
is the root of the failure of the Russian sector. As a geologist I can state
categorically that 10 years of modern exploration in Russia would double the
mineral endowment in any sector of the mining industry. The geological
potential is incredible."
There appears to be another catch, which isn't exactly in Russian law or
regulation, and which no one had been expecting until it materialized by
surprise last week. On March 17, during a presentation of Russian defense
spending and military strategy to staff generals, Defense Minister Anatoly
Serdyukov announced that the United States is a strategic threat to Russian
mining interests, outside Russia territory.
According to the text of Serdyukov's speech, and confirmed by his spokesman, he
said: "US aspirations have been aimed at getting access to raw materials,
energy and other resources of the CIS [former Soviet] countries. Active support
was given to the processes aimed at pushing Russia out of the sphere of its
traditional interests."
Serdyukov was asked to say what raw materials and resources he was referring to
and what US threats in what countries. His spokesman was surprised to be asked
but refused to say. The rest of the government was flummoxed. The Minister of
Natural Resources, Yury Trutnev, declined to elaborate. The Prime Ministry said
it would not be commenting on ministerial speeches that aren't the prime
minister's. The Natural Resource Committee of the State Duma said it didn't
have jurisdiction outside Russia, and hadn't caught the defense minister's
drift.
The pro-government United Russia party in parliament and the opposition
Communist Party promised to consider what Serdyukov was aiming at, but haven't
answered.
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
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