Soil barons

Proposed changes to Russia’s Subsoil Law will bring about overseas investment in the mineral sector, but they are still a way from being finalised. Jon Hines looks at the issues under consideration

A good deal of attention is focused these days on proposed new restrictions on foreign direct investment into Russia’s mineral resource sector.

The political/legal roadblock successfully placed against Chinese state-owned oil company CNOOC’s bid to acquire the US independent Unocal last year , not to mention the current howls of protest over Gazprom’s possible acquisition of UK gas supply company Centrica and other European energy infrastructure assets, has cast Russia’s proposed new foreign investment restrictions in an ambivalent light.

The proposed new restrictive legislation, to be placed into Russia’s Subsoil Law, has not yet been enacted. It has been under debate in Kremlin and Duma corridors for over a year now, in the context of development of a wholly new Subsoil Law (which has been in the works for even longer).

When enacted, the new restrictions may well affect some important existing venture companies such as TNK-BP, as well as some other big new ventures or acquisitions under negotiation or on the drawing board. Indeed, the publicly announced 49 per cent-51 per cent essence of Rio Tinto’s new mining venture with Russian giant Norilsk Nickel may well have been influenced by the spectre of these pending restrictions – even though such a blanket minority-stake approach is not required legally.

The existing rules

The existing Subsoil Law contains no restriction on foreign companies directly or indirectly holding subsoil licence rights. Article 9 of the existing law allows foreign companies as direct licensees, although in practice there are very few examples of this to date (Shell’s Salym Petroleum Development NV in Western Siberia is one together with three operating grandfathered production-sharing agreement project companies: the ExxonMobil-led Sakhalin 1; the Shell-led Sakhalin 2; and the Total/Norsk Hydro-led Kharyaga project).

Furthermore, there is the existing Subsoil Law Article 17.1 restriction on transferring a licence to a joint venture entity. The new entity must be Russian-incorporated and the transferring company must retain at least a 50 per cent share at the moment of transfer.

There is also some support in existing regulations and interpretation for limiting auctions/tenders to Russian company participants, but there is uncertainty as to the legality of this, and thus the current Ministry of Natural Resources (MNR) focus on Subsoil Law changes to solidify the basis for it (with some major new field auctions in the offing).

The new rules

The most recent draft of the new Subsoil Law establishes that only Russian-incorporated companies could be subsoil rights-holders, but that such users could be partly or even wholly owned by foreign companies/individuals, except in specific cases with regard to fields to be defined by the government as restricted (‘strategic’), in which foreigners would not be permitted to control more than 50 per cent or perhaps 50 per cent or more (this basic wording is still not settled) of the voting shares, or otherwise control the management (including by ability to appoint the general director) of the rights-holding company.

There is also a ‘saving provision’, which would provide that the foreigner restriction/prohibition would not apply against Russian rights-holding companies if Russian individuals/companies without the participation of foreign individuals and/or foreign companies have the right directly or indirectly to dispose/control more than 50 per cent of the total number of votes relating to voting shares/interests of each of its (ie the Russian user company’s) foreign company participants.

In this context, the most lively continuing debate revolves around the definition/specification of ‘strategic fields’. On this, MNR Minister Trutnev has floated several variations.

On the one hand, there would be three fixed criteria determining such fields: all reserves of uranium, diamonds, pure quartz and rare earth metals; oil deposits exceeding 150-million tons, gas deposits exceeding one-trillion cubic metres, gold deposits exceeding 700 tons and copper deposits exceeding 10-million tons; and defense-sensitive location of the deposit (ie in a military zone).

Offshore deposits meeting one or more of these criteria would be designated as strategic more sparingly, in recognition of Russia’s special need for foreign investment and technology in this difficult realm. Furthermore, ‘strategic’ status is to be given only to unallocated reserves, with protection afforded to existing licensees (including those controlled by foreigners), who through exploration at their own expense discover what could otherwise be classified as such.

On the other hand, MNR has named a few specific fields that are likely to be so classified: the Titov and Trebs oil fields in Timan-Pechora, the Chayandinskoye gas field in Sakha-Yakutia, and the Sukhoi Log gold deposit (Irkutsk Oblast) and the Udokan copper deposit (Chita Oblast) – a list that, if intended to be complete, might be considerably narrower than what otherwise might have been expected. Here again, informed interpretation/application will have to await further concrete legislative development.

It is further proposed that the mineral resource field restrictions would be treated separately from investments into other ‘strategic sectors’ – the latter apparently to be regulated by a new Law on the Manner of Carrying Out in the Russian Federation Direct Investments in the Charter Capital of Commercial Organizations Having Strategic Importance for the National Security of the Russian Federation.

Jon Hines is a partner at LeBoeuf Lamb Greene & MacRae