Russia Mining Report Q2 2008

In March the long-discussed bill on foreign investments in strategic industries was approved on its second reading in the State Duma. The bill was designed to identify what types of assets will be off-limits for foreign investors. In its latest version it would apply only to future concessions, and not be retroactively applied to existing deals. The draft listed 42 sectors where foreign investment would be limited, including nuclear energy, natural monopolies, and exploration for strategic mineral deposits. Companies owned by foreign governments would be prevented from acquiring control of Russian firms, and any foreign company would need a proposed takeover of a Russian entity to be approved by a special authority.

'Control' of a Russian company operating in the strategic mineral sector was defined in the draft very widely, to mean holding 10% or more of the equity. Foreign critics of the draft said it could effectively be interpreted as excluding foreign investment in roughly half of Russia's GDP.

In terms of both area as well as the sheer variety of endowments, Russia figures as a major mining nation of the world. It is home to an array of minerals and metals including nickel, platinum, bauxite, cobalt, coal and tin. Siberia hosts the bulk of Russia's nickel, platinum and diamond deposits, and despite harsh geography and weather conditions, remains an attractive destination for mining players from around the world. Russia-based Norilsk Nickel, Alrosa and Polyus Gold are some of the major local mining players that have established a strong presence.

Prospects for the Russian mining industry appear bright with a number of promising diamond deposits being discovered in the country. Further, the government also plans to offer 35 gold and diamond fields for prospecting purposes. In order to leverage these opportunities fully, Russia needs to improve its stance on certain parameters. Topping the list are bureaucratic delays and corruption that substantially escalate the costs of doing business. On the mining front, safety issues and environmental standards continue to challenge the industry, in spite of the government's efforts to review mines for compliance with technological documentation, estimated project capacity and safety regulations.

The Russian state holds rights over all mineral endowments. Historically, mineral resources have been auctioned to mining companies for development. However, a new methodology is on the anvil, whereby the decision to grant licences will be based on the applicant's processing capacity. As mentioned above, the government also plans to stiffen regulations concerning foreign participation in the mining industry.

Industry Forecast Owing to its large metal and mineral base, Russia can continue to derive benefits from the boom in the global metal prices. Diamond mining augers a healthy outlook for the Russian mining industry.

According to this report, the domestic mining industry is forecast to register an average growth of 7.7% a year over 2008-2012, reaching a total value of US$216.1bn.