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. Last Updated: 07/27/2016

Subsoil Bill Undermining Investment

Political controversy surrounding Russia's so-called strategic deposits is making mining companies take a more pragmatic approach toward Russia and focus more on lower-key projects with a more predictable future.

Russia's draft subsoil law on exploration has seriously alarmed and confused miners. It is unclear which assets will be included on the black list of deposits President Vladimir Putin wants to bar foreign-owned firms from developing.

Foreign majors, including oil company BP and mining giant Rio Tinto, have criticized the law, saying it may hamper their growth in Russia.

Putin's call to curb foreign investment could be an obstacle to resource development in a country that needs Western expertise and cash to make the best out of its vast virgin gold fields in Siberia and expand its oil export capacity, they say.

"Nobody is complaining about it. It's just that ... nobody has clarified what actually the meaning of strategy is," said Peter Hambro, whose London-listed, Russia-focused gold mining company bears his name.

Peter Hambro develops mines in Russia's Far East and wants to expand by buying new ones and teaming up with partners to spread project risk.

Other miners operating in the post-Soviet world agree.

"Being pragmatic and understanding host countries' domestic policies and competitive advantage of homegrown companies is one thing," said Len Homeniuk, CEO of Canada's Centerra Gold, which runs mines in Central Asia and elsewhere.

Analysts say the biggest risk lies ahead, with next year's tender for the potentially strategic gold deposit of Sukhoi Log in Siberia.

But foreign miners, previously keen on Sukhoi Log -- contains more than 1,000 tons of gold -- are now taking a cooler approach.

"It doesn't come into our scale of things. Our aim is to be a million-ounce producer. ... And then we'll go from one to two. But we are doing it step by step," Hambro said.

The new subsoil law, yet to be approved by the State Duma and signed by Putin, is expected to become law as soon as this year and will likely allow foreign companies to take minority interests in developing new strategic deposits.

Some analysts have praised it for having a more innovative and transparent approach to holding tenders.

"Coming from Canada, where the government often intervenes in the economic sphere to protect national interests, I am not surprised," Centerra's Homeniuk said.

But it is still proving hard for investors to swallow the law, and will further mar Russia's investment climate, already hit by the Kremlin's breakup of oil major Yukos.

Russian mining companies themselves are also worried because the foreign participation ban may undermine their ability to cooperate with Western majors when developing Russia's most lucrative -- and costly -- deposits.