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. Last Updated: 07/27/2016

Taxes Scare Off Mining Investors

IRKUTSK, Eastern Siberia - Despite its abundance of natural resources, Russia is one of the most expensive and least attractive countries for foreign mining companies, according to a study by the world's largest mining concern.


In a 50-nation cost analysis of a typical gold project, the RTZ group ranked Russia among the least competitive because of high taxes and inadequate laws, according to RTZ attorney Paul Lush.


"I regret to inform you that Russia comes out on the bottom of the scale", Lush told an economic conference here on foreign investment in Eastern Siberia and the Far East.


Lush's comments add to the growing chorus of complaints about Russia's foreign investment climate in virtually all economic sectors, from oil production to retail. Many are even finding that countries with developed economies, such as Britain or Norway, are better for foreign investors than Russia.


Russia levies a tax of 10 percent on the value of gold extracted, which is split between the local municipality, the region and the federal government. The tax, however, is called a temporary one and the government can decide on a different rate for each deposit, adding to the uncertainty.


Miners pay an additional 7. 8 percent tax that is supposed to go toward future exploration.


Foreign investors have questioned this tax because the State Geological Committee, which is supposed to receive the money, is not actually exploring.


"Geocomm is not giving any benefits for the money", said Chris MacNee, managing director of Star Technologies, an Australian company that has invested in a Russian firm with the rights to develop the Sukhoi Log gold deposit.


In some areas, a third tax of between 0. 4 and 1. 2 percent goes to a road fund.


Some of the taxes are deductible, but the total, according to Lush, is about 18. 8 percent of gross sales revenue. That reduces the revenue on an ounce of gold from the current market price of $368. 65 to. $298. 63, before profits are split and further profit taxes are paid.


Since most mineral deals are joint ventures, foreign firms typically split revenues with Russian partners, after which each pays the 32 percent profit tax.


Lush said that the high taxes ultimately work against the Russian government to the extent that they keep foreign firms from investing. If foreign firms were allowed to keep 100 percent of their profits, he said, "that would still be of enormous benefit to Russia. The trouble is, they don't believe that".


More than 160 companies now work in Chile, which has far more favorable mining laws and taxes. Foreign mining concerns have invested almost $2 billion there, a figure greater than the total estimated 1992 foreign investment in all sectors of the Russian economy.


Few foreign firms, however, are lucky enough to get to the stage of actual mining in Russia. Lush explained that this is because Russia, unlike other countries, has no defined legal mechanism to take a film from exploration of a deposit to exploitation.


The Russian government asks for a one-time exploration fee and an annual fee but then will not provide guarantees that once explored, the firm will have development rights. and according to Lush, the most lucrative Russian deposits have yet to be opened to foreigners.


"If they do want to attract foreign investment", Lush said, "they have to be prepared to put their best projects forward".