Case Study 02 (Russian):
Case Study 02: Encouraging Mining Investment in Russia

THE ISSUE: Mining exploration is by definition a high-risk, capital-intensive activity in which few targets ever meet the technical and economic criteria for development. In return for assuming this risk, investors require a degree of certainty on their right to develop any discovery that may result from exploration, and to earn a return on their investment. What steps can mining companies take to work with resource-rich countries to encourage investment in exploration and to promote responsible mineral development – and the rewards for its citizens that follow?

THE KINROSS WAY

Kinross believes that responsible mining can generate value for a broad range of stakeholders and contribute significantly to a nation’s overall wealth. However, a favourable mineral resource endowment alone is not sufficient to attract investment in a competitive global capital market. It must be accompanied by constructive economic policies, a stable socio-political and regulatory environment, and a competitive investment and operating framework. Kinross works with governments and stakeholders to help encourage and attract investment in the mining industry at large, while recognizing that each jurisdiction offers a unique operating environment and varying expectations of responsible mineral development.

Russia is a prime example of a country which has great potential to reap the benefits of its mineral endowment, and is a significant producer of a wide range of mineral commodities, but which is at present considerably under-explored, due in large part to the lack of investment by the global mining industry. As the largest Canadian investor in the Russian federation, and the largest foreign investor in Russia’s mining sector with a history of mine development going back to 1995, Kinross has demonstrated that the Russian economic, legislative and regulatory framework can allow successful foreign investment in the country’s mineral resource sector. But Kinross’ record of sustained investment is the exception rather than the rule. While Russia has potentially the largest concentration of the world’s hard mineral resources, the level of foreign investment in exploration and mine development is significantly lower than in other mining countries such as Canada and Australia. In fact, on the basis of exploration expenditure per unit of land area, Russia is the lowest of the major target destinations for exploration investment.

In 2010, Kinross became the first Canadian company invited to join Russia’s foreign Investment Advisory Council (FIAC), a group of the CEOs of 42 international companies operating in Russia who engage in direct dialogue with the Russian Prime Minister on measures to improve the investment climate in Russia. At the FIAC plenary meeting in October 2010, Prime Minister Vladimir Putin expressed an interest in learning more about Kinross’ views regarding Russia’s opportunity to increase foreign investment in mineral exploration and mining.

In response to the Prime Minister’s request, Kinross undertook a comprehensive study to explore the steps Russia needed to take to attract increased investment. Kinross drew on its extensive experience in the gold mining sector in Russia, as well as an analysis of current practices in Canada and other countries that have been successful in attracting foreign investment in mining. The resulting 72-page White Paper is entitled Fostering Foreign Investment in Mineral Exploration and Development in Russia. It suggests that, with a series of relatively modest adjustments to existing policies and regulations and the provision of greater protection and predictability for investors, Russia can realize its potential to attract levels of investment that would be more in line with its tremendous potential as a global leader in mineral exploration and development.

The report was presented by Kinross President and CEO Tye Burt to Prime Minister Putin at the 2011 FIAC plenary, and has been recognized by government officials, economic analysts, academics, and industry representatives as a valuable contribution to the ongoing dialogue on economic reform in a critical sector of the Russian economy.

According to a review of the paper by Russia’s New Economic School: “We generally agree with the main thrust of the White Paper – to establish clear and predictable rules for the sector and with specific recommendations on the legal and regulatory environment...The White Paper is especially valuable in identifying institutional constraints on foreign investment in the mining business.” Following the presentation of Kinross’ White paper, we have been working actively with other mining companies, legislators, regulators and the Russian Union of Entrepreneurs and Industrialists to continue the policy dialogue that has already yielded some positive reforms in the Sub-Soil regulatory framework. With relevant international research, open dialogue and constructive recommendations, Kinross’ experience demonstrates the potential for productive engagement with government stakeholders in economic and regulatory reforms in Russia.

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