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Russia to open important deposits to 25%-foreign-owned companies

August 07, 2013, 15:33 UTC+3 Alexandrova Lyudmila

MOSCOW, August 7 (Itar-Tass) - The Russian government is to ease rules on allowing partially foreign-owned companies to use subsoil resources in order to promote an influx of direct foreign investment. Russian companies 25%-controlled by foreign entities will be able to get access to subsoil resources of federal importance following government amendments to the law on subsoil reserves.

Amendments stipulate that the right to use subsoil reserves of federal importance may be extended to companies in which foreign investors control up to 25% of the charter capital, in contrast to the previous restriction of 10%.

The measure is expected to draw strategic foreign investment into extracting industries. Also, the government suggests raising from 10% to 25% the cap on the presence of foreign investors’ proxies on the boards of companies that may contest the right to develop exceptionally important Russian reserves.

However, 25%-foreign-owned companies may apply for the right to use subsoil reserves of federal importance only after the military and the security and law enforcement agencies have agreed this will not endanger the country’s security or defenses.

The status of reserves of federal importance is now applied to deposits of more than 70 million tonnes of oil, 500 billion cubic meters of gas, 50 tonnes of gold, and 500,000 tonnes of copper, and also deposits containing uranium, diamonds, nickel, cobalt, lithium, platinum group metals and extra-pure quartz.

The Russian government last May eased some rules of investing into strategic industries, which previously had to be agreed with a special government commission. In part, it is no longer necessary for investors under the control of Russia, Russian regions or Russian citizens to request consent to transactions involving strategic enterprises and deposits. Also, the prior coordination requirement has been lifted from transactions with companies that use strategic deposits if, before the transaction in question, the investors had owned more than 75% of shares.

The government initiative may help attract direct foreign investment, experts say.

“The 10%-percent package was insufficient for companies hoping to control decisions by the subsoil users, play a considerable role in the distribution of profit or have an opportunity to sell one’s stock at a premium,” King&Spadling partner Ilya Rachkov is quoted by the online daily Gazeta.ru as saying.

He believes that in exchange for stakes in strategic deposits, foreign investors may agree to share new technologies, including energy saving and extraction ones.

“A likely increase in the role of foreign investors in running this or that company from 10% to 25% in any case leaves no chance for them to make key decisions, which, in turn, lowers attractiveness to major foreign investors,” says BDO director for Russia Sergei Albu. As follows from what he told Gazeta.ru, the bill in question incorporates none of the amendments concerning comprehensive licenses (for both exploration and production) many businesses would like to see so much. For their part, investors feel no certainty they will be able to obtain a production license should their exploration efforts bear fruit.

Earlier, the Natural Resources Ministry mulled the possibility that companies involving foreign capital might be allowed to automatically convert their exploration licenses into licenses for production if they discover gold reserves greater than 50 tonnes, and also diamond and platinum group metals deposits, something Russian gold producers had been insisting on.The amendments may also affect not only foreign investors but also Russian-owned companies registered abroad - in particular, producers of precious metals that have changed their place of registration from Russia to London or Jersey.

Many smaller oil and gas companies are already 100%-controlled by entities registered in offshore zones - in fact, by foreign companies. Epsilon Energy, which runs several companies operating in Komi is an example, Gazeta.ru quotes Rustam Tankayev, a leading expert of Russia’s Oil and Gas Producers Union as saying.

The share of France’s Total in Novatek is 20%, and Britain’s BP has a 19.75-percent share in the capital of the world’s largest oil company, Rosneft. Tankayev does not rule out that the formal easing of restrictions may stem from plans by large companies to sell part of their assets to foreign shareholders. For instance, Rosneft is currently working on some privatization plans.