A law has been signed to the effect that only Russian persons may use subsurface resources

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Pepeliaev Group advises that the Law[1] was signed and officially published on 28 June 2022. It provides that foreign persons no longer have the right to use subsurface resources in the Russian Federation.

The Law will come into force on 9 July 2022[2]

The purpose of adopting the Law is to safeguard national subsurface development projects from the consequences of foreign investors leaving them and to make the industry more resilient to and independent from external economic pressure[3]

The Law contains the following main provisions:

  1. the right to use subsurface resources may be granted exclusively to Russian legal entities and individual entrepreneurs[4]
  2. foreign persons that are owners of licences for the use of subsurface resources must found Russian companies in the Russian Federation and transfer such licences to the latter[5]
According to the Law, the federal management body of the state fund of subsurface resources (known by Russian acronym “Rosnedra”) must notify foreign users of subsurface resources that they are required to transfer the right to use the subsurface resources to Russian companies within 30 days from the date of entry into force of the Law[6]. After the notice the transfer of the licence becomes compulsory for the licence owner.

Within 90 days from when the specified notice is sent to[7] Rosnedra the following actions must be performed:

  1. the foreign person must found a Russian company to continue operating in the area of the subsurface granted under the licence;
  2. the newly created Russian company, in turn, must file an application with the state authority (the “Authorised Body”)[8] to have the licence transferred from the foreign licence holder to such Russian company.
The Law only points out that the Russian company must be created, but it does not contain any requirements for founding it (except that this must be done within the above period of 90 days). It is obvious that, when the foreign company is created, it must act as a participant/shareholder of the Russian company. The Law, however, does not specify what the minimum membership interest must be.

Please note that Russian Law No. 2395-1 “On the subsurface” dated 21 February 1992 (the “Law on the subsurface”) contains provisions regarding a legal entity transferring to a subsidiary the licence to continue operations within an area of subsurface. These provisions, in general, resemble provisions of the Law relating to a mandatory transfer of licences and, at the same time, provide that the company must own at least 50% of the capital of the subsidiary. These provisions, however, cover situations when a licence is transferred to a subsidiary voluntarily. Therefore, it is open to question whether such provisions apply to the situation of a mandatory transfer.
If the foreign entity that owns the licence has a Russian legal entity among its members/shareholders and the actions described in clauses “a” and “b” were not performed in the specified 90-day period, such a Russian member / shareholder may receive a licence by filing the relevant application with the Authorised Body no later than 180 days after the date on which Rosnedra sends the notice that the licence has to be transferred. 

If the foreign legal entity that uses the subsurface has several such members / shareholders, then the right to obtain the licence is transferred to the member / shareholder that holds the largest portion of the issued capital of the legal entity (the largest number of shares) and if such members / shareholders hold equal portions of the issued capital (numbers of shares) of the legal entity, then such right is transferred to one of the persons with the written consent of the others.

Please note that the Law provides for a special procedure for transferring a licence, including requirements for the content of the application to have the licence reissued and the list of documents that are attached to the licence. Therefore, the Procedure for Reissuing Licences to Use Subsurface Resources in effect since 1 January 2022 (approved by Order No. 751 of the Russian Ministry of Natural Resources and Environment (the “Ministry of Natural Resources”) dated 14 October 2021 and Order No. 10 of Rosnedra dated 14 October 2021)[9], will not be applied if the transfer of a licence is mandatory or will only apply to the extent that it does not contradict the Law (which is an insignificant part of the procedure).

Pursuant to the Law, a foreign legal entity that owns the licence and the Russian company that the licence is transferred to must enter into a contract to transfer the property required for the subsequent use of the subsurface area[10] that is covered by the licence.

The Law does not establish when exactly the agreement must be concluded and at what time the property must be transferred to the Russian company. The law does not contain a requirement for submitting this agreement to the Authorised Body together with the application for the transfer of the licence[11]. Therefore, formally, a failure to sign such an agreement prior to filing the application with the Authorised Body must not block the procedure of transferring the licence. 
It should be noted that, according to the Law, the effect of the licence may be terminated in the event of a failure to perform the obligation of transferring the licence[12]. One such obligation in relation to transferring the licence is the conclusion of the agreement to transfer property. Therefore, the absence of such an agreement after the completion of the transfer of a licence (in other words, after the Russian company has obtained the licence) may serve as the ground for the early termination of the licence.
The Law also states the following: if the parties to the agreement for the transfer of property have not reached an accord on the terms and conditions of the transfer then such conditions are established by the court; in this case the agreement for the transfer of property will be deemed concluded on terms determined by the court[13]. By all appearances, this rule is intended to cover situations when the licence is transferred to a member / shareholder of the owner of the licence.

Failure to perform obligations provided for in the Law and connected with the compulsory transfer of licences is a ground for a licence to be terminated early[14]

What to think about and what to do

We recommend that you study the Law carefully and take account of its provisions when planning activities involving the use of subsurface resources. 

It is critically important for foreign companies to initiate procedures that are provided for in the new Law as soon as possible.

Help from your adviser

Pepeliaev Group’s lawyers are ready to provide legal assistance to companies with respect to issues connected with foreign companies’ licences being re-issued in the name of Russian legal entities. 

[1] Federal Law No. 218-FZ dated 28 June 2022 “On amendments to the Law of the Russian Federation “On the subsurface””.
[2] Article 6 of Federal Law No. 5-FZ “On the procedure for the publication and coming into force of federal constitutional laws, federal laws, acts of chambers of the Federal Assembly” dated 14 June 1994.
[3] Source 1source 2
[4] Subclause а) of article 1(1) of the Law.
[5] Articles 2(3) and 2(10) of the Law.
[6] Articles 2(2) and 2(9) of the Law.
[7] Please note that the term starts running not from the date of receipt, but from the date when the notice was sent.
[8] In relation to licences for the use of subsurface sites of local significance, such a public body is the state executive body of the relevant constituent entity of the Russian Federation. With respect to all other licences such public bodies are Rosnedra and its local subdivisions. Taking account of the current Procedure for Reissuing Licences to Use Subsurface Resources (approved by Order No. 751 of the Ministry of Natural Resources dated 14 October 2021), an application has to be filed with the federal state agency “Rosgeolexpertiza”, which is an institution reporting to Rosnedra (clause 20 of the Procedure for Reissuing Licences).
[9] Please note that the above procedure for reissuing licences has been developed for other situations of reissuing licences (not for mandatory reissuing provided for in the Law), specifically, for situations envisaged in article 17.1(1) of the Law on Subsurface. 
[10] “Property required for a further use of the subsurface” is to be understood, primarily, to be property that is already used in the territory of the corresponding subsurface sites.
[11] At the same time, in the event of a voluntary transfer of licences that are provided for in the Law on the Subsurface, the transfer of property is performed prior to the filing of the application for the licence to be reissued: Order No. 751 of the Ministry of Natural Resources and No. 10 of Rosnedra dated 14 October 2021 “On approving a procedure for reissuing licences to use subsoil resources” provides that copies of documents confirming a transfer of the necessary property have to be attached to the application for reissuing a licence.
[12] Article 1(7) of the Law.
[13] Article 2(7) of the Law. 
[14] Articles 7(1) and 2(12) of the Law.

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