Alexandr Kursky
Full Member of Russian Mining Academy

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rospecting, exploration and miming of minerals in the territory of Russia are regulated by Federal Law ”About Interior” adopted in 1992. The conceptual provisions are as follows:
– public ownership of interior,
– joint disposal of interior sections and management of their use by authorities of the Russian Federation and subjects of the Federation (a principle of "two keys"),
– licensing of interior use according to results of tenders or auctions,
– paid use of interior.
The law made it possible to prevent a legal chaos during the transition of the mining sector to a market economy in 1992-1994. It assigned the right to use interior sections to mining enterprises built at their sites in the Soviet period and set prerequisites for private capital to be attracted. But later on it virtually failed to have any progress. The amendments made to it were either connected with a general legal situation (an adoption of the new Russian Constitution in 1993) or just a response to the most urgent problems.
Meantime a delay in the progress of the federal legislation on interior led to a build-up of conflicts between the practice and the provisions of the law. The general development of civil legal relations in the fuel-gas and mining industries could not but contradict an administrative approach to the regulation of interior use. The law in force is based on public law rules in an absolute majority of provisions.
A serious drawback of the law is that licensing procedures are not transparent. The law does not describe them. They are in more detail depicted in "Regulation of Licensing of Interior Use" adopted in 1992. But this document became irreparably out of date while to introduce any alterations into it is impossible due to its being an act adopted by the resolution of the Russian Supreme Soviet not existing now. It may be only replaced by a new federal law on the whole.
Another drawback is an almost full absence of regulations to control the activity of a mining enterprise. The declarative requirements of the law to the process of geological work, approval of a development and mining project are not supported by the necessary governmental standards. No doubt the state as an interior owner is entitled to control the rational use of its property but only in accordance with law prescriptions. At present in the law a list of reasons for a license to be withdrawn (delayed or limited) is formulated only in general thus leaving a broad space for legal disputes.
In our opinion, in the near future the progress of the Russian interior legislation will depend, on one hand, on intensification of governmental control and centralization of public management and, on the other hand, on competition between mining and oil business. The fact is that, opposite to a majority of countries, Russia does not divide these two rather different economic sectors in legislation, and they will inevitably compete in their fight for as full as possible consideration of their own specificity in the common law. Up to now oil and gas businessmen were more lucky in promoting their interests.
The above tendencies are burdened with an aspiration for larger capitalization due to accumulation of inventories and/or increase in their quality together with a willingness to merger/take-over and/or division/sale in order to reach higher business efficiency. Companies need a guarantee of rights to use interior in complex with a flexible and rapid assignment of right to use a deposit. At the same time the government wishes to effectively control the use of rights already granted and to have an opportunity to rightfully liquidate (or withdraw as non-used or used with substantial violations) licenses with a guarantee not to lose in court. The valid law does not allow these aims to be achieved either by a company or the state.
In 2002 after the mining payments (royalty) set by the law were cancelled with a mineral mining tax controlled by the Tax Code imposed instead, an economic value of the interior law drastically lowered.
In so doing, the reforming of the Russian legislation on interior becomes inevitable.
In June, 2002 a team of parliamentarians introduced a bill of the Russian Interior Code in the State Duma to replace the existing law. The bill was based on the principles of legislative succession with due regard to accumulated practice of interior use in this country. It contained detailed regulations of licensing procedure. The deputies’ initiative received support, and President Vladimir Putin instructed the Government to elaborate a new edition of the law. However, after a year of intensive work, the Government failed to prepare a bill fulfilling the requirements of both federal officials and regional administrators. Major discrepancies became evident at the level of a concept. Now there are actually two bills: one elaborated by the Ministry of Natural Resources (MNR), the other by the Ministry of Economic Development and Trade (MEDT). The deputies’ bill officially introduced is virtually identical with the MNR bill.
Now we shall dwell on the conceptual provisions causing greatest difficulties.
The subject of the dispute is the division of the public property into federal and regional (the property of a subject of the Federation). This conflict dates back to the date when the first edition of the interior law was adopted. The law does not specify whose legal status – that of total joint or total share ownership of the Russian Federation and a subject of the Federation – the public property of interior has.
It must be noted that in federal countries interior and resources contained in it are attributed by constitution either to the federal property, like in Brazil, or to province property, like in Canada. In the US a part of interior sections is attributed to the federal property, a part to the public property, and a third part is owned according to the right of private land property.
Without data on actual characteristics of interior sections, it is impossible to establish a demarcation line between federal and regional public property. An alternative may be the attribution of all, without any exclusion, interior sections to the federal ownership. This is the rule contained in the MEDT bill. So as to eliminate any disputes on this issue between regions and the federal center, the MNR bill especially stresses that the interior property is single and indivisible, that is, not subject to be divided between the Federation and the subjects of the Federation.
From a practical viewpoint, the matter of property of run-of-mine raw materials is much more important. The valid law permits any forms of ownership "in accordance with the terms and conditions of a license", and the MNR bill in fact preserves the same rule. One may also pay attention to Law "About Noble Metals and Precious Stones" (1998), which vested the right of ownership with the interior user "unless otherwise is established by licenses, products sharing agreements, international agreements". As a majority of licenses does not contain similar clauses such a phase made licensees owners of precious stones. The MEDT bill suggests a provision close in meaning. "Minerals and other resources extracted out of interior are the property of the interior user unless otherwise is established by the federal law or an agreement on use of interior section". Such a formulation seems to be optimal in the case of all species of mineral resources, except radioactive raw materials.
The principle of "two keys", a specific rule of the Russian interior legislation, caused the greatest concern.
During the first five to seven years of the law validity, this rule was not questioned. It is understandable because early in the 1990s licenses for the most part only confirmed the rights of the enterprises for the mining of deposits which had been their operating sites since the Soviet period. However with time more and more licenses used to be issued based on the results of tenders and auctions, and then problems arose. Even a small gold placer with a reserve of several tens of kilograms called for the federal center to be involved. On the other hand, the regional administration could block a tender pertaining to a deposit strategically important for the country at large. It can be exemplified by Sukhoy Log – the biggest untouched gold-mining deposit of Eurasia with reserves of over 1,000 tons of gold.
With the system of "two keys" in operation, it is difficult to get a license. But it is also difficult to withdraw a license if the regional administration or the Ministry of Natural Resources (one of "two keys") opposes it. They are the bodies between which the companies that got large deposits without tenders and auctions have to manoeuvre. As often as not they do not use them but avoid to part with them since big reserves increase capitalization.
The MNR bill clearly divides the responsibility and powers of the federal body and a subject of the Federation. The federal body arrange, register and issue licenses for use of interior sections (except sections of local value), and in so doing joint decisions and two signatures (federal and regional) on licenses are eliminated. The subject of the Federation still preserves enough power to have interior at its disposal. Above all, it is coordination of licensing programs. If the subject of the Federation objects to the mining of a particular deposit at this period of time the deposit is excluded from the licensing program. The subject coordinates the terms and conditions of the tender. Its representatives are full members of tender committees.
The MEDT bill is even more radical in respect of the principle of "two keys". A subject of the Federation only preserves the right for "prevailing mineral resources". The licensing of other mineral resources passes into the federal government’s hands.
Obviously the owner of the right to use an interior section must have an opportunity to assign it with a consent of the Government. These opportunities are widened in the bills. The MNR bill suggests the following conditions of transfer of rights between affiliated companies:
– the transition of the right to use interior sections received through tenders or auctions from one subsidiary to another subsidiary, from a subsidiary to a parent company and from a parent company to a subsidiary is permitted;
– in the case of reorganizing a subsidiary through its joining to a main company, a license of the subsidiary for use of an interior sections is re-issued in the name of the main company.
Certain disputes are caused by the mechanism of qualifying tenderers for use of interior sections among competitors. The MNR standing is that there must be a reasonable combination of tenders for engineering of mining projects and auctions for right of mining, depending on how deeply the deposit has been studied and what is its quality. Meanwhile MEDT insists on auction sale of rights because it will bring proceeds to the country’s budget without delay.
Mining companies seek legislative guarantees so that deposits discovered at their own cost would be given to them for mining without additional tender procedures. The valid law permits it but does not oblige the government to issue relevant licenses. Experts are of the opinion that this rule must be established in the new law, and moreover, it should contain a closed list of grounds according to which such license can be refused to be granted.
The MNR bill is based on the licensing principle of access to interior. At least one third of the bill scope is devoted to licensing procedures. The possible application of relations based on agreements differing from products sharing agreements (concessions, labor contracts and lease agreements) is only mentioned, supposing a future development of respective legal tools. To grant interior sections on the basis of civil agreements is supposed to be applied with respect to an undistributed interior fund.
Under the MEDT bill, the licensing system is replaced with civil agreements. Labor contracts for geological survey (exploration and valuation) and prospecting as well as extraction of radioactive minerals, mining agreements (similar to concessions) and service contracts for mining minerals. A labor contract is issued as a governmental contract for supply of products and services for public procurement. Run-of-mine raw materials transit to the property of the interior user only in the case of a mining agreement. Under a labor contract, the geological information obtained and the radioactive material extracted are the public property. In the case of a service contract the interior user is only a "hired miner" and the run-of-mine raw materials belong to the public.
It seems that the attempt to transit from a license system to an agreement one resulted from an understanding that it will take a long time to establish a set of rules for control of mining operations and to fix well-grounded rent payments in licensing. Very likely because of that the MERT bill’s authors suggest to raise the value of negotiating, confirming all important terms and conditions of interior use and payments in the agreement (products sharing agreement, concession or turnkey contract). However this bill does not specify the mechanism of transition from a licensing system to an agreement one.
It would be too risky a venture to replace a licensing system with an agreement one in a short term. The agreement system must be evolutionarily matured in parallel with the existing licensing system, in the same way as the interior use and product sharing modes co-exist now. It is possible, according to the bill submitted by MNR along with the deputies’ bill close to it in context.
Russia enter a season of political activity – in December, 2003 the parliamentary elections will take place, and the term of President’s office will expire in March, 2004. That is why we have any ground to believe that at least till summer of 2004 there will not be radical changes in the interior legislation.