Russian gold mining sector undergoes major changes

A major world gold producer for many years, Russia now ranks fifth on an international level, behind South Africa, the U.S., Australia and Canada.

Russia produced about 65% of the former Soviet Union’s 1991 gold production; Uzbekistan (25%) and Kazakhstan (5.3%) were the other major producers of the union. The breakup of the Soviet Union has resulted in a reduction in gold production and the reserves.

Prior to the 1991 breakup, production statistics were confidential and, therefore, not published. Gold holdings were a consolidation of all the states, many of which have now become independent. Understandably, the breakup had a considerable impact on the gold reserves; many of the areas retained their own reserves, and these are no longer consolidated into Russian reserves.

In 1914, Russia’s gold production was 64 tonnes (about 2 million oz.) and total reserves were estimated at 1,500 tonnes. The Bolsheviks, after obtaining power in 1917, pursued an aggressive policy to restore the industry, which had suffered a decline during the civil war. By 1928, production was 36 tonnes annually. By 1953, gold reserves were 2,050 tonnes, even after payment of 1,500 tonnes to the U.S. for assistance during the Second World War. Gold production continued to increase between 1955 and 1990. In part, this increase was a result of huge investment programs which created metallurgical plants and associated infrastructure in many areas that are now independent of Russia. The biggest impact has been experienced in gold reserves, which are well below the 1914 level.

Budgets for state geological work have also been severely cut. Last year’s expenditures were only 17% of those in 1990, and staff has been halved and continues to decline. There were no metallic mineral deposits discovered in 1992. New reserves of gold delineated were not sufficient to cover the actual gold production in 1992 and 1993.

Prior to 1992, gold mining was a state monopoly and production was controlled by 10 regional state production associations. These associations retained the ownership rights for the deposits while allowing the actual mining to be undertaken by gold-diggers called artels who leased the property on an annual basis. The artels bid to mine properties on a fixed-cost basis and delivered all the gold they produced to the state.

About 63% of the delineated gold reserves in Russia occurs in underground deposits; the balance occurs in placers. However, the largest volume of gold (80%) is produced from placer deposits, and the balance by 30 underground and open-pit mines.

The mine reserve situation has also declined, such that the main mining areas are estimated to have six or seven years of remaining life. The placer mines are expected to be depleted in 3-5 years.

Another important feature of the industry is that most of the mines in Russia produce gold concentrate that must be shipped thousands of kilometres for further processing in smelters (mainly in the Urals), instead of producing dore at the mine site. In addition to delays in settlements for the gold, caused by the outside processing of concentrate, there is a considerable cost for transportation and smelting which can be as high as 25-35% of the gold price. These factors rendered uneconomic the operations of many low-grade and remote mines.

As a result of the lack of working capital, gold producers in Russia were heavily dependent on the availability of cash advances from the state, which, until recently, retained the monopolistic right to buy gold. The advances were the main source for artels to finance purchase of fuel, materials and supplies necessary to prepare for seasonal mining operations. The final settlements were made with the state on the delivery of gold after the end of the season.

Reforms launched in 1991 created a new economic environment in Russia. The anti-inflationary monetary policy of the government resulted in considerable payment delays from the state to producers for the delivered gold. Continued budget deficits required the state to cease disbursement of cash advances bearing no interest to artels. Hard hit were producers who did not have sufficient working capital.

High-interest, short-term loans from Russian commercial banks could not meet the financing requirements of the industry. This was exacerbated by the lack of interest by Russian banks to lend money to gold-mining companies, the reason being that existing regulations prohibit anyone other than the state from dealing with gold.

To avoid a decline in gold production and improve the investment attractiveness of the industry, the federal authorities introduced major changes in legislation concerning precious metals:

* In January, 1992, the government issued a decree that terminated the state monopoly and allowed all Russian enterprises and citizens to obtain licences for gold deposits;

*n The state gold-mining enterprises were acknowledged to be eligible for privatization, subject to the approval by the Federal authorities. To date, most of the former state gold mining enterprises have been privatized; *n A new pricing system for precious metals was introduced, enabling the producers to receive the world price established on a monthly basis by the Committee on Precious Metals and Gem Stones of Russia (Roskomdragmet). Settlement for delivered gold is now hard currency (25%) and roubles (75%). In November, 1993, the Russian president increased the hard currency portion to 40% to assist those enterprises that wish to modify their operations. These hard currency funds can be used for loan repayment or payment of dividends to a foreign investor.

*n The president’s decree of December, 1993, terminated the monopoly of the state in dealing with gold. At present, producers are obliged to sell only half of their gold to the state; the balance can be sold in the internal market to the authorized Russian commercial banks. The licence allows a bank to buy and sell gold inside Russia and to have its own gold reserve. Gold export and import are still the monopoly of Vneshtorgbank of Russia, which is the agent for the government in international gold trading.

The main federal body controlling the industry is Roskomdragmet. On behalf of the state, Roskomdragmet buys 50% of all gold produced and maintains the gold reserve of Russia. It also participates in developing and improving legislation concerning precious metals and provides overall state control of the gold-mining industry.

Roskomdragmet reports to the Ministry of Finance, which provides funds for the state purchase of gold. The ministry also considers tax privileges and exemptions that can be applied for by an enterprise.

The right to develop a deposit is granted by a joint decision of the Committee of the Russian Federation for Geology and the Use of the Subsurface (Geolkom) together with local authorities (Soviets of People’s Deputies). When a deposit contains fewer than 100 tonnes of gold, regional agencies of Geolkom have the decision-making authority.

Environmental monitoring of mining operations is the responsibility of the Ministry of Environment and its regional agencies.

— Michael Newbury, executive director of the Russian Project Finance Bank, served formerly with Credit Suisse Canada.