Beyond Crisis – Promoting Northern Business Linkages March 9, 2010 Toronto Nikolay Matyash Mining Advisory Council Executive Director Foreign Investments in Russian Mining: Legal Aspects

Federal Law No 57-FZ “On Procedures for Making Foreign Investments into Companies Having Strategic Significance for the Defence and the National Security of the Russian Federation”, dated April 29, 2008;Federal Law No 57-FZ “On Procedures for Making Foreign Investments into Companies Having Strategic Significance for the Defence and the National Security of the Russian Federation”, dated April 29, 2008; Federal Law No 58-FZ “On Amending Certain Legislative Acts of the Russian Federation ( Laws on the Subsoil, the Continental Shelf, Joint Stock Companies and Others) and Invalidating Certain Provisions of Legislative Acts of the Russian Federation in Conjunction with the Enactment of Federal Law ‘On Procedures for Making Foreign Investments into Companies Having Strategic Significance for the Defence and the National Security of the Russian Federation’”, dated April 29, 2008;Federal Law No 58-FZ “On Amending Certain Legislative Acts of the Russian Federation ( Laws on the Subsoil, the Continental Shelf, Joint Stock Companies and Others) and Invalidating Certain Provisions of Legislative Acts of the Russian Federation in Conjunction with the Enactment of Federal Law ‘On Procedures for Making Foreign Investments into Companies Having Strategic Significance for the Defence and the National Security of the Russian Federation’”, dated April 29, 2008; Regimes of Investing into Strategic Industries

Criteria for Classifying Federal Subsoil Plots, which Have Investment Restrictions (1) Subsoil plots situated on Russian territory with confirmed reserves exceeding: 50 tons of hard-rock gold50 tons of hard-rock gold 500 thousand tons of copper500 thousand tons of copper Subsoil plots operation of which involves the use of lands allocated for defence or security purposes (irrespective of the amount of reserves contained therein)

Subsoil plots containing any quantity of the following natural resources: DiamondsBerylliumUranium High-purity quartz Rare earth of yttric group (yttrium, gadolinium, terbium, dysprosium, holmium, erbium, thule, ytterbium, lutecium) NickelCobaltousTantalousNiobiumLithium Platinum group metals (platinum, palladium, rhodium, iridium, ruthenium, osmium) Criteria for Classifying Federal Subsoil Plots, which Have Investment Restrictions (2)

Admissible Users of a Federal Subsoil Plot As a general rule, Russian legal entity Possible restrictions for companies with direct or indirect foreign participation (on decision of the Russian Government) The restrictions enacted by the Law No 57 are not applicable to all the other types of mineral products (e.g. ironstone, placer gold, silver irrespective of the reserves)

Restrictions on Transfer of Mineral Rights for a Federal Subsoil Plot No Federal Subsoil Plot mineral rights may be transferred to a foreign company or to a Russian company if the foreign investor (or the group in which the foreign investor) participates: can directly or indirectly control more than 10% of the total votes of the Russian company, and/orcan directly or indirectly control more than 10% of the total votes of the Russian company, and/or has the right to determine the decisions taken by the given Russian company on the basis of an agreement or on another basis, and/orhas the right to determine the decisions taken by the given Russian company on the basis of an agreement or on another basis, and/or has the right to appoint the CEO and/or more than 10% of the Board of Directorshas the right to appoint the CEO and/or more than 10% of the Board of Directors In exceptional cases the Government of the Russian Federation may permit the transfer of Federal Subsoil Plot mineral rights to such a Russian company.

Other Consequences of Classification of Subsoil Plots as Federal Ones (1) Subsoil plots for which licences were issued before the present restrictions came into force may be declared Federal Subsoil Plots (i.e. retroactive effect) The restrictions for subsoil plots that were granted to subsoil users before the present restrictions came into force concern, in particular, the following matters: transfer of Federal Subsoil Plot mineral rights to another companytransfer of Federal Subsoil Plot mineral rights to another company necessity to obtain a permit from the Russian Government for exploration and extraction of minerals if a deposit is discoverednecessity to obtain a permit from the Russian Government for exploration and extraction of minerals if a deposit is discovered

Other Consequences of Classification of Subsoil Plots as Federal Ones (2) When a mineral deposit is discovered on a subsoil plot which is not considered to be a Federal Subsoil Plot, but matches these criteria, the plot should be included in the list of Federal Subsoil Plots. It is impossible to perform geological surveys and minerals exploration and production activities simultaneously on a Federal Subsoil Plot. Once a subsoil plot is listed as a Federal Subsoil Plot it cannot be de-listed subsequently. A project of the list of Federal Subsoil Plots was drafted by the Ministry of Natural Resources. Currently, more than 1100 Subsoil Plots are included in the list (solid and liquid minerals).

Discovery of Mineral Deposit on a Federal Subsoil Plot Russian & Foreign companies subject to the new restrictions After a geological survey the Russian Government decides on whether exploration and extraction of minerals is permittableAfter a geological survey the Russian Government decides on whether exploration and extraction of minerals is permittable A foreign company subject to the new restrictions If there is a threat to state defence and security, the Russian Government is entitled to:If there is a threat to state defence and security, the Russian Government is entitled to: 1.Cancel the company’s mineral rights for exploration and production of minerals from a discovered deposit (a refusal to issue a production licence) 2.Withdraw the mineral rights to the Federal Subsoil Plot given under a combined licence for geological survey, exploration and production of mineral products In this case the company has the right to: compensation of expenses for geological survey and assessment of a discovered deposit, including a lump-sum payment paid (for the combined licence)compensation of expenses for geological survey and assessment of a discovered deposit, including a lump-sum payment paid (for the combined licence) a reward for the discovery of a deposita reward for the discovery of a deposit

Implementation Practice Generally, favourable attitude and active position of the Federal Antimonopoly Service of Russia in clarification of the provisions of the new laws on investments into strategic industries; Complexity and length of the procedures relating to the approval by the Governmental Commission for Control of Foreign Investments in the Russian Federation.

Measures Proposed to the Russian Authorities by the Mining Advisory Council As opposed to paying a relatively small premium when refusing a foreign investor to develop a strategic mineral deposit, the RF Government could allow the strategic deposit in question to be sold at the prevailing market price or give a foreign investor enough time to attract a Russian majority shareholder for the project. In the event where agreement cannot be reached with a Russian company to become a majority shareholder in the project, then the share may be sold to the state at the market price. To establish a special approval mechanism by the RF Government for specific projects – when a foreign investor applies for an exploration licence regarding what is most likely a strategic deposit, the RF Government investigates the “threat to national security” factor in relation to this deposit (plot) and informs the investor whether restrictions based on the “threat to national security” may be applicable in this particular case.

Measures Proposed to the Russian Authorities by the Mining Advisory Council To reconsider the threshold of 50 tons according to which a hard-rock gold deposit falls under the “strategic” category, as well as reconsider increasing the thresholds set for other metals. To create a more liberal investment regime under which the International Finance Corporation (IFC), or European Bank for Reconstruction and Development (EBRD) takes part in the development of a mineral deposit. Both of these well-known organizations have a good track record in Russia. Therefore the Council believes that they should be granted a simplified investment regime.

Thank you for your attention! The Mining Advisory Council Moscow office: Russia, , Moscow Paveletskaya Sq., 2, build. 3, 2 nd Floor Telephone: 7 (495) Fax: 7 (495) Nikolay Matyash Executive Director