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Sergei Ivanenko, a Yabloko party leader, gives an inside view
of the taxation difficulties that politicians face when forging
PSA legislation.
Progress towards introducing satisfactory production sharing
legislation for Russia continues to be painfully slow, but another
step along what is becoming a long road has been taken with the
State Duma sending to its committees and commissions the government's
controversial draft special chapter of Russia's Tax Code, regulating
taxation under PSAs.
Now that has to be reconciled with the views from other quarters
before the 'rules of the game' can be established - which Russia's
economic development and trade minister, German Gref, optimistically
hopes may be done in the first half of this year.
But it will not be easy, says pro-PSA Sergei Ivanenko, the first
deputy leader of the liberal Yabloko faction in the State Duma
and chairman of the Duma's commission for legal issues related
to subsoil use on PSA terms.
There is still a wide gulf between government and politicians.
Immediately after the government's suggestions were published,
Mr. Ivanenko spoke at length to Oil & Capital about the difficulties
standing in the way of introducing adequate PSA legislation and
which are denying Russia of the opportunity to attract hundreds
of bill ions of dollars in foreign investment.
"Since the adoption of the framework law (granting the government
the right to negotiate with potential investors), the parliament
has only approved 28 fields as eligible for development on production
sharing terms and none has moved to a PSA regime."
"Russia has only attracted $18bn in direct investment compared
to China, which is using its PSAs to bring in $300bn. China and
other south-east Asian nations are our rivals in the investment
market and the fact that capital is not coming to Russia indicates
that conditions created here are not too favourable."
"There have been lots of proposals for ways out of our deadlock,
aimed at improving the investment climate, creating appropriate
conditions by federal legislation and governmental decisions but
the main problem is the government's lack of strategy for the
development of the country's mining sector in general and oil
sector in particular."
"This explains the lack of clarity about whether or not
we need PSAs. The president stands for PSAs, the prime minister
backs them, and the economic development minister supports the
PSA idea...everyone is saying that PSAs are important and they
are really needed but the practical steps towards improving the
situation have not been made."
"Moreover we have serious doubts that the government's ideas
will contribute. The main problem in creating an investor friendly
climate today is completing the formation of a legislative regulatory
base, primarily on taxation and cost recovery."
"In the last year, the cabinet should have adopted two documents
- sent the State Duma an appropriate draft chapter of the Tax
Code on production sharing and adopted an ordinance regulating
cost recovery issues."
"The state has to define clearly what taxes will have to
be paid over the whole period of field development and which way
costs will be recovered before we can tackle the problem of investors
unwilling to come here - they will not invest billions of dollars
for a long term because no bank will give loans if there is no
clear idea of which way the loan will be repaid, when and on what
terms."
"In my opinion, this lack has been an insurmountable obstacle
to progress on PSAs," Mr. Ivanenko said.
Even though the government's views are out for consideration,
Mr. Ivanenko's committee looking at the legal issues is not happy
with them. "We have very serious objections - the final draft
version remains virtually unchanged from that sent for approval
to various government agencies before it came to the State Duma.
A majority of State Duma members, irrespective of faction membership
and political affiliation, disagree with the concept-we believe
that what the government is proposing - adding 25 new taxes to
four existing taxes - the royalty, profits, value added and social
taxes - undermines production sharing as a replacement for taxes."
"This was confirmed by recommendations at parliamentary
hearings, unanimously approved by all deputies dealing with the
problem - coming from all factions, including Yabloko, the Union
of Right Forces, Homeland, Unity and the Communist Party. I am
convinced that the Duma's position is unanimous and it substantially
differs from that of the cabinet."
"We believe that a totally different document is required.
A year ago a group of deputies, representing various factions,
submitted their own draft to which the government has now proposed
an alternative."
"Our draft is based on a different concept - that a PSA
is a special economic mechanism which should have its own substantial
taxation specifics."
"In fact, the government now proposes a common regime for
the whole economy. It makes no attempt to conceal that it wants
to eliminate what it calls 'preferences' granted under production
sharing agreements."
"The main point of PSAs is that they replace taxes with
production sharing. When production is shared under an agreement,
the country still gets revenues which under a different regime
it gets directly as taxes."
"Common sense says an attempt to both levy taxes and share
production is absurd."
"They should be consistent and repeal the PSA mechanism
and make everyone work under a general licence regime of subsoil
use - but foreign investors would not come because they would
find it unacceptable."
"The chapter of the Tax Code is perhaps the main issue today.
Prospects for attracting investment on PSA terms and for the development
of PSA legislation will, to a great measure, depend on which way
that issue is resolved, especially as rather than issuing a special
government regulation on cost recovery under PSAs, the cabinet
has added related norms to its draft," he said.
The next steps have been charted - first, they will be debated
at plenary meetings in April and after the drafts are considered
in the first reading, one will be dropped, and work will start
to prepare the other for the second reading.
Mr. Ivanenko continued: "The most realistic deadline for
the draft chapter's final adoption is the end of the spring session
of the Duma. So by next summer, perhaps, it will be possible to
say that we are close to reaching a decision."
"In principle, we have agreed that the cost recovery procedure
can be considered in the Tax Code framework but this will certainly
complicate debates because there is a great difference between
a government ordinance - it should have been issued long since
- and a law, especially the Tax Code. If you don't fix something
in the law it is hard to change, unlike a government's ordinance."
"Therefore, a draft law should be prepared that would resolve
existing problems and take account of all the factors. There is
a risk, but deputies are prepared to work. We will have to amend
our draft and add cost recovery regulations to it."
"But much will depend on who is stronger, which point of
view and what interests prevail."
"I am not a forecaster because I am not an impartial sideliner
but the prospects will depend on our position, on our ability
to explain it and unite all those interested in the PSA regime's
progress."
"In my opinion, if the government's variant prevails, we
can forget PSAs in the foreseeable future because their efficiency
will be close to nothing. Only three projects for which PSAs were
signed before the PSA Law took effect will be working-Sakhalin-l,
Sakhalin-2 and Kharyaga."
"But if our viewpoint triumphs, there will be good prospects
of attracting massive investment and it will then be possible
to launch two or three large-scale PSA projects in the near future.
That will not require any special effort, because they are virtually
ready to take off, just waiting for a favourable investment climate
to be put in place."
"Therefore the prospects depend on us and on whether public
opinion understands that it is important," he said.
Mr. Ivanenko's close involvement with the slow progress gives
him a unique insight of the problems. "The problem is that
the government does not have a clear position on the Tax Code's
chapter. I find the draft document unacceptable. Deputies are
already saying 'Let's pass it in the first reading and mend everything
later.' Can this be described as rational?
"Deputies are consolidated enough in understanding the problem.
Unfortunately, when it comes to considering a particular draft
in the Duma, a political and bureaucratic, rather than professional,
approach prevails - a number of factions may get 'appropriate'
instructions. The Duma 'union of four' factions - Unity, Homeland,
People's Deputy and Russian Regions - vote as the government tells
them."
"A serious battle is ahead around the Tax Code's draft chapter.
Still, I would rather not regard it as a political deadlock and
I hope for rapprochement."
That could come through appointing a working group. Which of
the two opposing ideas prevails will determine the substance of
the work of it.
"If deputies find that the government's draft is better,
naturally, the government will not make any concessions when the
working group meets. But it will be different if the government's
draft is rejected or faces strong opposition," he said.
If there was then a problem in drafting, specialists could be
ņalled in to try and create unity. "I cannot is common will,
common leadership and common responsibility in the government
today."
"I cannot cite any country where high-ranking officials
have said their country needs no investment but such statements
have been made officially by the Russian president's economic
aide.
"Nor can I name a country where the government is, in fact,
an extended ministry of finance. The Russian government has not
dealt with any problem recently other than replenishing the budget
and introducing new taxes - instead of establishing stable rules
of the game."
"The finance ministry primary deals with fiscal issues and
there is no one in the government to focus on investment issues.
This explains problems with PSAs, small business and natural monopolies
- all those issues going beyond a balanced budget but, strictly
speaking, it is a problem for the president to deal with, rather
than the government."
Looking beyond the present tussle, Mr. Ivanenko has proposed
creating a special government agency that brings together all
the units in the ministries of economic development, energy and
natural resources and the government's commission led by the deputy
prime minister Viktor Khristenko, to deal with PSAs.
"Unfortunately, our proposals have been put on hold. We
believe an agency like ARKO, for restructuring credit institutions,
could replace Rosneft and Zarubezhneft as the government's representative
in negotiations on PSAs."
"Naturally, the government should decide its strategy, decide
if it can handle this burden on its own - but PSAs is not the
issue for one, two or ten people in the Ministry Development to
deal with."
"It should be a governance system with people having clear
authority and responsibilities. Hundreds, or even thousands, should
be engaged. Besides, there should be a well-considered financing
system. It is a very special job to be done over a long period,"
he added.
See also:
Production
Sharing Agreements
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