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THE FINANCIAL CRISIS IN RUSSIA: RESOURCE NATIONALISM REDEFINED?

Aydin JebrailovAydin JebrailovPartnerPartner CERBA International Mining ConferenceCERBA International Mining Conference

Toronto, March 8, 2010Toronto, March 8, 2010

Macleod Dixon

• International law firm

• Serving clients via offices on four continents

• One of the longest established track records of working in Russia

• Only practice in Russia with first tier Chambers & Partners' ranking in mining

Introduction

Resource nationalism

May 2008 – legislation adopted re subsoil strategic properties is strongest manifestation of Russian resource nationalism since break up of Soviet Union

Russia’s pre-crisis confidence: “Russia will be an island of stability.”(Alexei Kudrin, Russia’s Minister of Finance)

End of 2008 - Russia’s “anti-crisis” measures have no impact on subsoil

Legislative Changes/Remedial Measures

New legislation:

I Enforcing pledges and mortgages

II Bankruptcy

III Shareholders’ agreements recognized

IV Reforms of limited liability companies

V Profit Tax reduced

VI Antimonopoly law amended

VII Possible changes in strategic sector investment restrictions

Enforcing Pledges And Mortgages

• Private Enforcement

• Enforcing security ex-Russian courts was impractical

• Now clarified and usable

• Simplified Foreclosure

• Pledgee may seize from unco-operative pledgor

• Direct access to judicial bailiffs

• But foreclosure on individuals’ housing and state-owned propertyonly through courts

Bankruptcy

• Shareholders’ liability

• Challenging debtor transactions

• Other• Accelerated bankruptcy proceedings

• Stricter definition of debtor's related party

• Creditors' claims due at "observation" instead of “liquidation” stage

• Amendments under consideration

• Consolidating corporate group bankruptcy proceedings

• Cross border bankruptcies

Shareholders’ Agreements Recognized

• Scope of SHA

– to vote in certain manner

– to agree on voting option

– to acquire/dispose of shares at certain price or in certain circumstances

• Remedies

– damages, penalties, compensation

• Outstanding issues

– distributions

– financing options

– management decisions etc.

Reforms Of Limited Liability Companies LLCs)

• Notary public required for transactions in participation interests

• Authority of Board of Directors vs. General Participants' Meeting

Profit Tax Reduced

• Rate of Profits Tax

24%

20%

Antimonopoly Law Amended

$233 mln

$100 mln

$333 mln

$200 mln

$13 mln

$6.5 mln

$13 mln

$6.5 mln

aggregate assets revenue

aggregate assets revenue

• Merger Thresholds Increased

– prior approval by FAS

– notification to FAS

Improvements in strategic sector: consist mostly of words - not action

Outside SSL Within SSL FrameworkEXCLUSIVE NON-EXCLUSIVE (mining

requires government’s approval)

POSSIBLE NOT POSSIBLE

≥ 50% ≥ 10%

A company whose domicile,main activity and managementare in Russia is not a foreigninvestor

Any Russian company having a foreign affiliate is deemed and treated as a foreign investor for SSL purposes

1. Preliminary and equivalent(RF Constitution)

2. Fair market value(RF’s international agreements)

Exploration expenditures pluscertain premiums not corresponding to market or being equivalent in principle

Is not retroactiveunless otherwise stated

Although not stated,effectively retroactive

Possibility to explore afterproduction has started

Definition of Control

Foreign Investor

Compensation incase of requisition

Combined Licence

Major Anomalies of SSL

Effect of Law

Proposed Changes To Strategic Sector Laws

Proposed changes for subsoil strategic properties:

• Apply general regime for strategic type of activity to subsoil strategic properties, in particular increase threshold for acquisition of subsoil strategic properties from 10% to 50%

• Replace state’s right to confiscate newly discovered subsoil strategic properties with right to demand decrease in foreign investor’s ownership to 50% minus one share

• Exempt exploration stage properties from restrictions pertaining to strategic properties

• Abolish requirement to complete all exploration works prior to commencement of production

• Increase “strategic” threshold for gold properties

Other Changes

• establish transparent mechanism securing a subsoil user land rights with respect to subsoil plot in question

• establish clear cut rules for use of subsoil within protective forests and certain other restricted categories of forest land

• provide for possibility to enlarge mining allotment beyond license area, in cases where ore deposit is extended

Conclusion

“Despite introduction of legal improvements, the Russian Government and the Legislator have yet to re-define resource nationalism whereby the rules governing subsoil strategic properties are modified and aligned to match the realities presented by the financial and economical crisis”

Contacts

Macleod Dixon Moscow Office

Tel.: +7495 931 9905Fax: +7495 931 9914

Aydin Jebrailov, Partneraydin.jebrailov@macleoddixon.com

www.macleoddixon.com

Macleod Dixon – Local Depth, International Expertise