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. Last Updated: 07/27/2016

Recalcitrant Duma Fears Oil 'Sellout'

Crucial amendments to a law that could pave the way for huge foreign investment in Russia's cash-strapped oil industry face a rough ride in the State Duma when deputies decide Friday to approve or reject changes before parliament adjourns for a three-month vacation.

Known as the law on production-sharing agreements, its structure and terms are considered vital by foreign oil investors who want guarantees and clear rules before plowing billions of dollars into Russia.

The debate may represent one of the first major clashes of newly re-elected President Boris Yeltsin's administration, which is anxious to get on with privatization and reforms, and a recalcitrant parliament bent on stopping them.

Most amendments being proposed to an earlier law in an effort to satisfy complaints of investors are expected to cause little stir among the deputies.

But communists and nationalists who dominate the Duma are raising protests over a mandatory list of sites to be covered by the law. The list includes locations of known or likely deposits of oil, gas and other natural resources.

"There are all sorts of deputies attacking the law because they say it will allow a sellout of our natural resources," said Alexei Mikhailov, chairman of the parliament's committee on natural resources. He gave the bill only a "50-50" chance of being approved Friday.

Mikhailov said one of the main opponents of production-sharing legislation in the parliament, Nikolai Ryzhkov, leader of the left-wing Power to the People faction, proposes to reject it on the grounds that the total number of 250 deposits was "too much."

Mikhailov said that if the bill is blocked Friday and further slowed down in October when the parliament reconvenes, "Russia will demonstrate to all of the potential investors that it's not very much interested in all those projects."

But some analysts say Western oil companies that are habitually cautious about strategic investments are likely to remain wary regardless of whether acceptable legislation is passed.

"Foreign investors have already been in Russia for five years, and they're getting used to it -- having to wait," said Peter Houlder, managing director of CentreInvest Securities.

At a recent meeting of the Advisory Council on Foreign Investment chaired by Prime Minister Viktor Chernomyrdin, Western industrialists said they saw the amendments to production-sharing law crucial to unblocking billions of dollars in investments.

A blessing by the Duma to the list of 250 natural-resource deposits, which equals 38 percent of Russia's oil, 7 percent of gas and 18 percent of gold reserves, could encourage overall investment worth $100 billion, Mikhailov said.

A separate bill aims to correct the inconsistencies between the existing production-sharing law and Russia's law on subsoil resources, tax legislation and other so-called normative acts, as well as the supremacy of the civil law over administrative rules.

"If the amendments go through, then it would be quite an amazing transfer of power from administrative sector to the criminal and civil law codes," Houlder said.

The most significant of proposed changes recognizes production-sharing law as the dominant piece of legislation with regard to future legal disputes.

Another change seeks to eliminate a clause requiring Duma approval for each individual production-sharing project in offshore or "strategic" areas. The new bill also would require tax terms to be spelled out in each productions-sharing agreement, or PSA.

"It's the battle between whether the PSA is a complementary factor to the existing oil tax system or is an alternative. That issue has never really been resolved," Houlder said.