The Entrails Bill: Pro & Contra

There are a number of critical facts about Russia’s natural resources that should be understood in order to comprehend the importance of the suggested new laws for entrails usage. Among those facts are:

According to the RF Ministry of Natural Resources, Russian resources compose 50% of global diamond reserves, 30% - natural gas, 25% - nickel, 17% - tin, 11% - coal and almost 10% of global oil reserves;
• Russia exported 0 billion of mineral raw materials in 2004;
• Sale of natural resources provides 56% of the income for the federal budget;
• The extracted raw comprises more than 70% of export;
• Total value of prospected and preliminarily appreciated mineral stocks is about bln (forecasted - 0 bln);
• More than 20 million Russian citizens work in the mineral extraction industry;
• The RF Ministry of Natural Resources issued 13,1 thousand licenses for the extraction of minerals.

Because of that importance, the Ministry of Natural Resources of Russia (MNR) has proposed major modifications to Federal Entrails law. Initial reaction to the proposed law has been mixed. This article describes the major changes to the law and reports on both positive and negative views expressed by some of the key government and business individuals.

Revolutionary Innovations of the Bill

“It’s a revolutionary transition to new legislation on entrails and entrails usage,” declared Jury Trutnev, the RF Minister of Natural Resources, at last November’s parliamentary hearings in the State Duma. “Our purpose is to create an economic model of entrails usage and to pass a law of maximally direct action. The rights and duties of the State and entrail users should be absolutely transparent,” he emphasized. At the same time, Trutnev noted that ”the text of the project is being worked through.” He called on deputies to fully describe their amendments, supplements and remarks to the bill, and to ”not to leave any loop-holes in it and to verify its provisions.”

The legislation is now a comprehensive document, containing 15 chapters of 132 articles, totalling more than 100 pages (current law consists of 7 sections of 60 articles).

The first major change is that the bill proclaims ”all entrails situated throughout the territory of the Russian Federation, including minerals, power and other resources, are federal property.” Currently, entrails of Russia belong to the State.

The bill’s other revolutionary innovations – the property relations arising from usage and protection of entrails – are regulated by the civil legislation, according to provisions of the existing laws.

A right for using a site of entrails is an object of the civil turnover, while the sites of federal property cannot be the objects of such turnover. The bill states that “the property rights for minerals extracted from entrails belongs to the user of the sites.” The bill also introduces a concept of “a contract of using a site of entrails,” that is new in Russian legislation. The bill stipulates limitation of an entrails site usage, if it is necessary for national safety, protection of environment or people’s life and health. Using entrails could be temporarily suspended if military actions or other extreme circumstances occur.

Moreover, the Ministry seems to be trying to avoid public discussion concerning the so-called “principle of two keys,” according to which an agreement between the federal and regional powers is needed for deciding the questions of entrails usage. The governors’ opposition to canceling this principle did not influence the principle views of the law designers.

Instead of the indistinct concept of “joint possession,” the bill offers to legislatively state that “the Russian Federation possesses, uses and disposes entrails together with the RF subjects, in accordance to present federal law.” The governmental bodies of the RF subjects should possess, use and dispose only local entrail sites; and also take part in determining the regional list of prevailing minerals and the list of local sites. Minerals are divided in two categories – strategic and prevailing. Minerals having special value for economic development, defense and safety of the Russian Federation are considered strategic. The RF government has the sole right to determine which minerals fit which category. Jury Trutnev stated in an interview that “from the point of view of economy and safety of the country, many minerals can be attributed to strategic resources: oil, gas, diamonds and some metals”.

Simultaneously, a separate article names 23 prevailing minerals, among which are bitumen, pebble, plaster, clay and limestone. Henceforth, the strategic minerals will be under the federal authorities’ jurisdiction, the prevailing ones – under regional jurisdiction.

Governors and Gold Manufacturers Oppose the Bill

For his part, Trutnev recognized that the regions highly disapprove of cancellation of “the principle of two keys”, but he also stated that “the governors, however, could not give any convincing arguments in favor of its preservation.” Whether or not they convinced Trutnev, the States’ leaders had published clear economical and political objections to the change.

President of Yakutia Vyacheslav Shtyrov called such cancellation “harmful.” “If the RF subjects are discharged of authority in making decisions on minerals, they will simply lose interest in developing the resources. The Federation, however, did not, is not and won’t cope with this task,” he said. Shtyrov is sure that it is “wrong” to transfer licensing only to the federal authorities’ competence. “On the contrary, to raise the social responsibility of businessess, they should be able to make agreements with regional authorities concerning the structure and conditions of manufacturing processes in their regions. These agreements should provide local staff training for basic manufacture, foodstuffs delivery, auxiliary works and also the ways of solving the social problems,” he said. The President of Yakutia also pointed out that in Canada Indians must give local approval or mining companies don’t receive licenses. Valery Brajko, a chairman of the Gold Manufacturers’ Association of Russia, suggested classifying deposits, containing less than 50 tons of gold, 1000 tons of silver or 5 million carats of diamonds, as entrails sites of regional value. He stated that “This decision will satisfy the constitutional rights of the RF subjects, stabilize social-economic position of the regions and promote the middle-sized and small business’ development.”

Trutnev is unshakable in his position, despite all arguments. “We are not going to reconsider the decision on ’two keys.’ The change has already been accepted and has brought considerable benefit to the country,” he noted.

Another basic innovation in the bill, the replacement of bids with  auctions for the allocation of entrails use, has caused ardent objections and criticism. Auctions will be open, and the entitry who offers the largest single payment and a rate of regular payment for use of an entrail wins the auction. The only requirement for admission to the auction is a preliminary payment of 10% of the starting price.The time for consideration of the auction applications is reduced to 45 days (earlier it took 3-6 months).

Article № 6 of the bill alleges that “in order to maintain national safety of the Russian Federation, organizers of the auction put restrictions on participation of the legal persons, created according to the RF legislation and making a group with foreign citizens and (or) persons without citizenship, and (or) foreign legal persons.”

The bill rigidly regulates entrails usage licensing. A license can be cancelled if its conditions are violated or a target date is missed. Revision of the licenses granted before can be made only by mutual consent.

The bill also introduces a new concept of the “combined” (“transparent”) license, thus solving another urgent issue. This license is granted to those who found a deposit through their own or borrowed means. Dinar Dorizo, a lawer at Mackloud Dickson (Canada), expressed confidence that “converting a license of geological analyzes of entrails to a entrails development license will have great value in the future.”

Alexander Beljakov, a First Vice-President of the Duma’s Committee on Natural Resources, at the session of the RF government, spoke out against “any revolutions in management of nature.” “What do you mean saying ‘revolutions’?”, the Prime-Minister Michael Fradkov replied. “Any sharp change will shake the system. A new government should not rewrite the laws,” said Beljakov. “The replacement of licenses with contractual relations is a jump from one extreme measure to another – from the preeminence of administrative law to the exclusiveness of the civil-law relations,” he continued. “The exclusive use of auctions is a search for a panacea, a pursuit of a momentary benefit. It is a deceit, because both competitions and auctions are equally corrupt. Life has proved that”, continued Beljakov. “Abandoning competitions deprives average sized and the small businesses of access to entrails.”

However, Trutnev did not intend to listen to his opponents. The Minister finally forbade using the word “competition” at the morning meetings in MNR. He explained: “The word ’competition‘ is wrong here. In fact, the following happens: An applicant can get rid of another one through the court, because of a trifle, on a day prior to the competition. As a result, he remains in an ’empty field’ with a pair of affiliated structures. The technology is simple, like a drum, but effective enough: we regularly see these games of business.”

Creative Success for Foreign Investors

The Entrails bill is of great interest to foreign investors. “The new law will protect the investors’ rights and attract more investments to the raw materials sector of Russia,” the RF MNR Minister assured. The bill provides that foreign citizens, persons without citizenship, foreign legal persons and international organizations “cannot be the entrails users, if it is not stipulated by the federal law”.

Trutnev emphasized that the bill does not restrict foreign companies from participation in geological prospecting. “For God’s sake, if someone wants to search for deposits of minerals in Russia, I wish them creative success”, he said. The Minister thinks that obligatory registration of foreign investors in Russia is an important requirement. “From the point of view of imposing taxes, we’ll have greater opportunities to supervise foreigners. They will have to open offices here and employ specialists, including Russian ones. That is what we call international cooperation.”

Questions of rational management of nature and economic safety are strictly regulated in the bill. It requires efficient extraction of the basic and surrounding minerals from entrails.

 For the first time, there is also a chapter regulating development of the hydrocarbonic raw deposits.   
Some opponents of the bill, such as Victor Tarakanovsky, Chairman of The Hatters Union of Russia, claim that the new law’s designers failed to address one of the most important issues in entrails usage: Raw-mineral base reproduction.

The parliamentary hearings in the State Duma, initiated by the Committee of Natural Resources and Management of Nature, recommended the government finish the federal Entrails law modification project, taking into consideration continuity of the basic conceptual positions of the existing law. In particular, it concerns the property on entrails (federal) and on extracted production, payment for entrails using, and competitiveness for the right to use entrails (auctions, competitions). It is offered to introduce in a bill an opportunity to delegate a part of the federal center’s powers in sphere of management of nature to a regional level, if it concerns small and middle-sized deposits’ development. Participants of the hearings were for replacement of the effectual tax on extraction of minerals with the differentiated payment depending on natural and geological parameters of mineral raw and the basic conditions of development.

Trutnev’s predicts the Entrails law will be passed in the second half of 2005. “This law is equally necessary for the State and for business circles. It protects the interests of both the State and business circles,” emphasized the Minister.