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Overview
Russian Mining
Regulation
Russia ranks among the world’s leading producers of iron ore, nickel,
diamonds, coal, palladium, aluminum, uranium, gold and platinum.
According to some estimates, it accounts for almost 14% of the world’s total
mineral extraction. Russia produces approximately 15% of the world’s iron
ore and over 20% of world’s nickel. Russia is a world leader in both natural
diamond and artificial diamond production. It is currently the sixth largest
gold producer and tenth on the list of world’s largest gold reserves.
May 2012
Legislative Framework
The primary Russian legislation related to activities associated with mining of minerals
is:
• Federal Law “On Subsoil” dated 21 February 1992 (the “Subsoil Law”) and
various ministerial orders and regulations issued pursuant to it regulate the
licensing regime with respect to exploration and production of mineral resources;
• Federal Law “On Precious Metals and Precious Stones” dated 26 March 1998
(the “Precious Metals Law”) which envisages a special regulatory framework
for precious metal mineral and stone deposits, and covers such areas as refining,
certification, precious metal minerals and stones exchanges, state funds of precious
metal minerals and stones, etc.;
• Federal Law “On the Procedure for Making Foreign Investments in Business
Entities of Strategic Importance for the National Defense and Security of the
Russian Federation” dated 7 May 2008 (the “Strategic Investments Law”) which
regulates the access of foreign investors to certain sectors of the Russian economy,
including the development of major gold and copper deposits and other mineral
deposits that fall under the category of “strategic reserves”.
Licensing Regime
In Russia subsoil operations can be conducted under one of the following types of
licenses: (i) an exploration license (granted for five years), (ii) a production license
(granted for as long as required by the feasibility study, but in practice usually for
twenty-five years) or (iii) a combined exploration/production license (granted usually
for twenty-five years). The term of the license may be extended at the request of a
subsoil user for the purposes of completion of exploration of the deposit, or in order to
complete liquidation/conservation activities.
Issuance of Subsoil Licenses
Production and combined licenses are awarded by tender or auction conducted by the
Federal Agency for Subsoil Use (“Rosnedra”). The winner of a tender is the participant
that submits the most technically competent, financially attractive and environmentally
sound proposal. The winner of an auction is the participant that offers the highest
amount of one-time (bonus) payment for the right to develop subsoil resources.
Exploration licenses are generally awarded by a decision of a special commission formed
by Rosnedra (or its regional department) and representatives of certain local authorities.
The holder of an exploration license can obtain a production license in a simplified
procedure (i.e., without any tender or auction) upon discovery of deposits. In order
to proceed with development of the deposit, the subsoil user will also have to provide
for approval by state authorities of its deposit development plan and obtain a mining
allotment.
Under certain limited circumstances, mainly related to reorganization of a license
holder or establishment of its new subsidiary, a license may be transferred (i.e., reissued
in the name of another legal entity without a tender or an auction). Subsoil licenses
become effective upon their registration with Rosnedra.
Obligations under a Subsoil License
The licensee generally undertakes certain commitments under the license, including:
“The winner of a
tender is the participant
that submits the most
technically competent,
financially attractive and
environmentally sound
proposal.”
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• the commitment to meet certain annual production
targets,
• to keep environmental contamination within
specified limits, and
• certain social obligations, such as paying
compensation to local indigenous groups in
respective area and providing other types of
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license; or
• the licensee is liquidated.
If a subsoil license is revoked, all mining facilities in the relevant licensing area,
including underground facilities, must be liquidated or undergo conservation. When the
events or circumstances that have caused suspension or limitation of the right to use
subsoil are eliminated, this right may be fully restored, provided there is no fault on the
part of the license holder. In that case the term of suspension shall not be included in
the general term of the license.
Commonly occurring minerals
support to the local communities.
A failure to comply with the terms of the subsoil license (or with the provisions of
the Subsoil Law or implementing regulations) can lead to the imposition of penalties,
suspension of production or revocation of the subsoil license.
Termination of Subsoil Licenses
A subsoil license may be terminated in case:
• an event envisaged by the licensing agreement occurs;
• the license term expires;
• the license holder decides to discontinue the subsoil use; and
• the license has been re-issued in violation of the Subsoil Law.
A subsoil license may be revoked ahead of schedule, suspended or the rights granted
under the license may be restricted if:
• there is an immediate danger to human health due to the operations in the field;
• there is a violation of the essential terms of the subsoil license;
• there is a state of emergency (natural disasters, military activities);
• the licensee fails to commence operations within the time stated in the subsoil
Pursuant to the Subsoil Law, use of the subsoil and relevant licensing procedures for the
exploration and production of “commonly occurring mineral resources” are set forth by
the regional legislation. The regulations (lists) that define what minerals are deemed to
be “commonly occurring mineral resources” are enacted jointly by the federal regulatory
authority and the relevant regional authorities. Such lists are enacted for each region
on an individual basis. In most cases lists of “commonly occurring mineral resources”
duplicate the model list set out in the recommendations developed by the federal
authorities; however, the recommendations are not binding on the regional authorities.
Model list provides that bitumen, pebble, gypsum, loam and sand, among others, are
“commonly occurring” minerals.
The procedure for obtaining the right to develop a deposit of commonly occurring
minerals is different from the standard licensing procedure described above and usually
requires adoption of a decision by multiple regional and/or municipal authorities
depending on the specific requirements set by regional legislation.
Subsoil users that have obtained a license to explore and
develop the mineral resources (other than commonly
occurring) may extract commonly occurring minerals,
within the limits of their mining allotments, for their needs
without having to obtain a separate license for the commonly
occurring minerals.
Fiscal Regime for Subsoil Use
The fiscal regime for the use of subsoil includes:
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• Bid fee: for participation in a tender or auction;
• Signing bonus: for award of the license;
• One-time payments: due upon the occurrence
of certain events specified in the subsoil license
(e.g. upon reaching certain level of production,
or a discovery of a deposit, or commencement of
exploration of a deposit);
“The prices for precious
stones and rough
diamonds are subject to
state regulation.”
• Regular payments: for the use of subsoil for the purposes other than production
of mineral resources established separately for each stage of geological process
(e.g. for works related to exploration of the deposit, appraisal of the deposit, use of
subsoil for construction of facilities on the deposit, etc.); the regular payments are
paid quarterly in the amount that depends on the size and specific geological and
economic features of the subsoil deposit;
• Tax: on the production of mineral resources (other than commonly occurring
minerals) in addition to other taxes (profit tax, VAT, etc.).
Precious Metals and Precious Stones
General Framework
Under the Precious Metals Law, “precious metals” include gold, silver, platinum
and platinum group metals in any condition or form, including in native and refined
forms, as well as in the form of raw goods, alloys, semi-finished products and industrial
products, chemical compounds, jewelry, coins, scrap and wastes.
“Precious stones” comprise natural diamonds, emeralds, rubies, sapphires and
alexandrite, as well as natural pearls. Unique formations of amber are also categorized
as precious stones.
Mining
Mining of precious metals and stones is subject to licensing in accordance with the
procedure established by the Subsoil Law described above. Extracted precious metals
and stones as well as other products legally produced while developing precious metals
or stones deposits are owned by the user of the deposits unless otherwise stated in the
subsoil license, supply agreements for federal needs or international treaties entered into
by the Russian Federation.
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The Precious Metals Law provides that the management bodies of entities mining
diamonds in Russia should be controlled (i.e., majority voting) by the Russian
Federation, constituent entities of the Russian Federation or organizations established
without participation (direct or indirect) of foreign investors.
Refining
Under the Precious Metals Law, mined and produced precious metals must be delivered
for refinery to one of the specialized companies included in the official list of companies
authorized by the Russian Government. Violation of the above rules may entail
imposition of criminal liability.
Priority Right to Acquire
The state (i.e., its federal or regional authorities) has the preemptive right to purchase
precious metals and stones from subsoil users. The authorized state bodies acquire
precious metals and stones for the State Fund of Precious Metals and Precious
Stones of the Russian Federation or respective funds of constituting entities of the
Russian Federation. In order to exercise such right, state authorities must enter into
a preliminary agreement with a subsoil user at least three months prior to respective
purchase and to provide advance payment therefore.
A failure to enter into a preliminary agreement and/or to provide advance payment
is deemed as a waiver of the preemptive right. In such case, the subsoil user may sell
extracted minerals to other legal entities and individuals, use them for production
purposes, or as a pledge or other financial obligation, as well as export them abroad.
In the absence of preliminary agreements with the authorized state bodies regarding the
sale and transfer of precious metals, they may be sold in the form of mineral raw goods
under sale and purchase agreements prior to refining. The sale and purchase agreements
must be registered with the Ministry of Finance and the Ministry of Economic
Development of the Russian Federation.
Price Regulation
The prices for precious stones and rough diamonds are subject to state regulation.
The Ministry of Finance establishes the procedures and methods of such price
determination. The prices for precious metals are established on the basis of world
market prices for precious metals.
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Foreign Investment in Deposits of Federal Significance
Foreign investments in sectors of strategic importance for the Russian national
defense and security, including into certain subsoil deposits, is subject to a number of
restrictions established by the Strategic Investments Law.
Deposits of Federal Significance
The Strategic Investments Law defines a number of activities that are considered to be
strategically important for Russia, including geological exploration and/or prospecting
and mining of mineral resources within subsoil plots of federal significance (the
“Deposit of Federal Significance”). The Deposits of Federal Significance include the
subsoil deposits that:
• contain uranium, diamonds, especially pure raw quartz or some other metals the
list of which is provided in the Subsoil Law,
• contain gold reserves equal or exceeding 50 tones,
• contain copper reserves equal or exceeding 500,000 tones,
• holds directly or indirectly 25% or more of the votes represented by shares in the
capital of the Strategic Subsoil User;
• are located in internal waters, territorial waters or on the continental shelf of the
Russian Federation, or
• has the right (pursuant to an agreement or otherwise) to determine decisions of the
Strategic Subsoil User, including the terms of its business operations;
• whose use requires the use of land plots designated for state defense purposes.
• has the right to appoint the Strategic Subsoil User’s general director and/or 25% or
more of the members of its management board and/or has an unconditional ability
to procure the election of 25% or more of the members of the Strategic Subsoil
User’s board of directors or other management body; or
The list of Deposits of Federal Significance is officially published and includes
approximately 1000 subsoil deposits. The Deposits of Federal Significance may be used
only by legal entities incorporated in the Russian Federation.
Approval Requirements for Strategic Companies
The Strategic Investment Law sets forth that acquisition of direct or indirect control
over Russian commercial entities that operate in the sectors of strategic importance,
including companies operating on a Deposit of Federal Significance (the “Strategic
Subsoil Users”) is subject to obtaining governmental
“The Deposits of Federal
consent from the Governmental Commission headed
Significance may be used
by the Prime Minister of the Russian Federation.
only by legal entities
Transactions made without obtaining such consent are
deemed void.
incorporated in the
Russian Federation.”
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A person is deemed to control a Strategic Subsoil User when it:
• acts as a management company for the Strategic Subsoil User.
The above mentioned thresholds for acquisition of control over a Strategic Subsoil
User have been significantly increased (from 10 percent to 25 percent) by amendments
to the Strategic Investment Law that entered into force on mid-December 2011 (the
“Amendments”). The Amendments have introduced a number of significant changes
that should ease some of the existing legislative restrictions on foreign investment in
strategic sectors of the Russian economy, as discussed further below.
Special rules apply with respect to investors controlled by foreign states that intend to
invest into a Strategic Subsoil User. In that case a foreign investor must obtain a prior
consent of the Governmental Commission if it acquires more than five percent of shares
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of such a legal entity. While this approval threshold remains the same, the Amendments
raised a ceiling on the extent of “control” that a foreign state or international
organization can acquire. Prior to the Amendments, these entities were prohibited from
acquiring an interest of 10 percent or more. The Amendments have raised the threshold
to 25 percent.
Pursuant to the Amendments, the prior Governmental Commission approval is no
longer required for transactions with international financial institutions in which Russia
holds a membership, or with whom Russia shares treaty obligations. The application
of this exception is, however, dependent on government approval of a list of exempted
international financial institutions.
The Amendments have also introduced an important change which permits acquisitions
by foreign investors that are ultimately owned or controlled by Russian entities or
persons without having to obtain the Governmental Commission approval. Prior to the
Amendments, the notion of a “foreign investor” captured not only purely non-Russian
investment in Russian companies and assets, but also investments by Russian companies
and individuals through the use of offshore investment vehicles.
Specific Restrictions Related to Deposits of Federal Significance
Restrictions on foreign participation in companies taking part in tender/auction
The Russian Government may restrict participation in any auction or tender
with respect to a Deposit of Federal Significance by Russian entities with foreign
participation (whether direct or indirect) in their charter capital. Such restrictions may
be established with respect to companies in which foreign investors have any amount of
equity interest and not only with respect to those companies over which foreign investors
have control in accordance with the Strategic Investments Law.
No geological study licenses
Only advanced exploration and production or
combined (geological study, advanced exploration and
production) licenses may be issued for Deposits of
Federal Significance. Geological study licenses may not
be issued for subsoil deposits that qualify as Deposits of
Federal Significance.
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“Special rules apply
with respect to investors
controlled by foreign
states that intend to
invest into a Strategic
Subsoil User.”
If in the course of geological study, a discovery is made that results in a deposit being
deemed to be a Deposit of Federal Significance, the subsoil user must obtain the
approval of the Russian Government in order to proceed with its development. Should
such approval be denied, the foreign investor will get certain costs of geological study
compensated by the Russian state.
Restrictions related to combined license
Under a combined license, advanced exploration and production operations in
a Deposit of Federal Significance may only commence after the geological study
operations are fully completed on the entire license area, and commencement of
advanced exploration and production in the Deposit of Federal Significance is
authorized by a Russian Government decision. This is different from the general rule
- applicable to other deposits - that advanced exploration and production under a
combined license may be conducted simultaneously with geological study.
Imports and Exports
The import and export of precious metals and raw goods may only be made on the basis
of export licenses issued by the Ministry of Industry and Trade unless export is being
made to a country in the Customs Union (Russia, Kazakhstan and Belarus) where such
restrictions do not apply. Certain products made from precious metals are exempted
from the export license requirements. The export of precious metals and raw goods
extracted and produced by subsoil users is only permitted after the performance of
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contractual obligations on the supply of precious metals to the State Fund of Precious
Metals and Precious Stones of the Russian Federation.
State Secrecy of Reserves
The information with respect to the reserves of platinum, platinum group metals,
silver and natural diamonds in state funds and the Central Bank of Russia, as well as
information on “balance reserves” of strategic natural resources (including oil, gas,
nickel, cobalt, lithium and certain others) and on the production of strategic natural
resources in the Russian Federation as a whole, in any particular Russian region, or with
respect to any major deposit, is subject to state secrecy.
their development and other qualities and characteristics
of subsoil, contained in geological reports, maps and other
materials”. The export of geological information from Russia
in any form is subject to licensing. The licensing requirements
apply to all commercial entities operating in Russia regardless
of their ownership or place of incorporation. Nevertheless,
foreign citizens and/or companies are not to be limited in their
rights to use such information provided they have received the
information in compliance with Russian laws.
In order for a subsoil user and its employees to be able to keep information constituting
a state secret, the subsoil user will be required to obtain a license for dealing with data
constituting state secrets issued by the Federal Security Service. The procedure for the
issuance of such a license requires a special expert review of the subsoil user and a state
certification of the company’s executive management responsible for the protection of
state secrets.
Another issue that is closely linked to state secrecy relates to the export of geological
information. Pursuant to the Subsoil Law, geological information includes “information
on the geological structure of subsoil, mineral resources located in subsoil, terms of
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King & Spalding lawyers
have represented project
sponsors, operators and
financial institutions
on mining and natural
resources projects around
the world and have a deep
understanding of the
political and social issues
related to the ownership
and development of
natural resources.
About King & Spalding
King & Spalding’s global energy practice has handled matters in more than
88 countries across six continents. Our lawyers have represented project
sponsors, operators and financial institutions on mining and natural
resources projects around the world and have a deep understanding of the
political and social issues related to the ownership and development of
natural resources.
Several members of the King & Spalding energy team are resident in
the firm’s Moscow office, which is home to 14 lawyers (many of them
ranked in Chambers Global and Chambers Europe) who serve clients across
a full range of legal services, providing Russian, English and U.S. law
capabilities. They work particularly closely with our extensive transactions
practices in London, the historic legal centre for transactions originating in
Russia, as well as our highly regarded international arbitration practice in
Paris, an important venue for Russian disputes. In addition to the energy
industry, the office offers particular expertise in real estate, life sciences,
financial services, automotive and telecommunications/media/technology.
Contact:
Jennifer A. Josefson
[email protected]
+7 495 228 8502
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