Extractive Industries (EI)
Russia has the most mineral and natural gas resources of any country in the world. It possesses 60 billion barrels of proven oil reserves as of January 2008 and as much as half of the world’s coal reserves.* Extractive industries can pose risks for Russia’s rich ecological landscape and for the communities and indigenous groups of Siberia. BIC works with local and international NGOs to monitor extractive projects, contract and revenue transparency, and the environmental and social effects of IFI-financed activities.
*Data from U.S. Department of Energy, Energy Information Statistics (DOE website); Russia Country Brief 2008, World Bank (WB website)
EI Transparency Issues
Russia has not been as eager to endorse the Extractive Industries Transparency Initiative (EITI) as its oil-rich, Central Asian neighbors. Russia signed onto EITI principles through the 2003 G-8 Summit declaration, Fighting Corruption and Improving Transparency, followed by the 2007 G-8 Heiligendamn declaration and the Statement of the G-8 Finance Ministers Meeting in 2008, both of which explicitly support EITI. However, despite Russia’s G-8 role, these EITI commitments remain at the back-end of Russian reforms, as no steps have been made to implement EITI.
Fighting Corruption and Improving Transparency, G-8, 2003 (G-8 website)
Heiligendamn Declaration, G-8, 2007 (G-8 website, Acrobat pdf)
Statement of the G-8 Finance Ministers Meeting, G-8, June 14, 2008 (G-8 Finance website, Acrobat pdf)
In terms of transparency in Russia, the IFIs have largely focused on improving borrowers’ corporate governance. This marks a broader shift toward the private sector. For example, EBRD’s equity investment project in Irkutsk Oil and Gas Company and the IFC’s Aricom and Vostok projects require the companies to publish their payments to the Russian government. Reforms in the public sector have not been entirely neglected, but IFI emphasis is moving toward private companies and drawing on market trends, such as the acceptance of EITI by international corporations.
EITI is also endorsed in various IFI country strategies. For example, the EBRD Strategy for the Russian Federation states:
“Consistent with the Bank’s recently approved Energy Operations Policy, the Bank will encourage endorsement by the Russian authorities of the EITI (Extractive Industries Transparency Initiative) basic principles, namely that all revenue flows from oil, gas companies to the government be disclosed to the public and reconciled by an independent third party.” (p. 34)
However, despite such references to transparency, Russia’s slow pace of reform calls to question the effectiveness of IFI commitments to EITI.
Strategy for the Russian Federation, by EBRD, July 25, 2006 (EBRD website, Acrobat pdf)
Irkutsk Oil and Gas Company, World Bank, 2008 (WB website)
Quick Reference Guide to Extractive Industries’ Revenue and Contract Transparency at the International Financial Institutions (Acrobat pdf, 76 KB)
EI and Project Developments
BIC monitors projects and other developments in the extractive industry sector, paying particular attention to civil society concerns.
Problem Projects
BIC identifies projects posing significant risks and eliciting local concern as “problem projects.” A complete list of these projects, not only in the extractive industries, can be found in BIC's Problem Projects section. One such project is summarized below.
Project: Sakhalin II
Bank: EBRD, JBIC
Description: Sakhalin II involves oil and gas extraction in the far eastern island of Sakhalin. The first phase, disclosed in 1997, received EBRD financing for oil and gas development in the Piltun-Astokhskoye field. The EBRD considered funding the second phase but withdrew its consideration in 2007, after Gazprom acquired a majority stake in Sakhalin Energy, the consortium developing Sakhalin II. However, in June 2008, the Japanese Bank for International Cooperation (JBIC) signed a $3.7 billion loan agreement with Sakhalin Energy. With an additional $1.6 billion in commercial loans, the second phase is set to move forward.
Civil Society Concerns: Sakhalin II has aroused criticism from around the world, as the project threatens area whale populations, the island’s ecology, and indigenous people groups. Civil society organizations have emphatically campaigned against Sakhalin II, winning a major victory when the EBRD decided against funding the project. JBIC’s decision to finance the second phase raises serious environmental and social concerns.
More details are available on BIC’s Sakhalin II page.
Projects Under Watch
Besides problem projects, BIC also follows IFI activities or possible activities, which concern civil society actors but either have not been financed by an IFI or whose risks have not been adequately explored. These projects are listed below.
Pechora Energy
Date: August 8, 2008
Total Cost: $125 million
Bank Funding: EBRD, up to $50 million
Description: The project will use existing infrastructure to further develop the Luzskoye oil field in the Komi Republic.
Concerns: Since it relies largely on existing infrastructure, the project was screened as B/1. However, the aim is to increase oil exploitation at the field, which carries environmental risks. The oil province is being heavily developed, and civil society is already concerned with pollution in the Pechora River from Lukoil’s operations in the region. As an EBRD investment, Pechora Energy must publish its payments to the Russian government. BIC is monitoring EBRD and company compliance to this commitment.
Pechora Energy LLP (EBRD website)
Irkutsk Oil and Gas Company
Date: March 13, 2008
Total Cost: $500 million
Bank Funding: EBRD, $85 million equity investment
Description: The investment in INK Capital (Irkutsk Oil and Gas Company) will aid oil and gas exploration and development in Eastern Siberia. It is intended to support the private sector and encourage corporate governance principles.
Concerns: Civil society is concerned by the project’s C categorization, which implies minimal risks and does not require the more extensive environmental assessments of Category A projects. Such extractive development also threatens Siberia’s fragile habitat and land used by indigenous peoples. BIC is monitoring Irkutsk Oil and Gas Company’s obligation to publish its payments to the Russian government.
Irkutsk Oil and Gas Project (EBRD website)
Vostok Energy
Date: December 19, 2007 (Invested)
Total Cost: $150 million
Bank Funding: IFC, up to $50 million
Description: The IFC project assists Vostok Energy Limited, an oil and gas company in Saratov oblast, to finance drilling of new wells and the construction of a gas processing plant, as well as other infrastructural and extractive activities in the Bortovoe block. The completion of the gas processing plant would enable production at three sites, Karpenskoye, Zhanovskoye, and Mokrousovskoye, where discoveries have already been made. Vostok operates through its subsidiary, Diall Alliance. The project is intended to increase private sector involvement in natural gas, decreasing Gazprom’s dominance in the industry.
Civil Society Concerns: The project’s risks include air and gas emissions, hazardous waste, and contamination, as well as effects on the local community and socio-economic structures. Transparency and revenue management are also areas of concern. As an IFC-sponsored project, the company should comply with public reporting standards outlined in the IFC’s Policy on Social and Environmental Sustainability.
Summary of Proposed Investment - Vostok (IFC website)
Aricom
Date: May 31, 2007 (Invested)
Total Cost: $275 million
Bank Funding: IFC, $20 million equity investment
Description: The project will assist Aricom in its exploration and development of iron ore resources in the Amur and Evreskaya Autonomous oblasts. Iron mining in this part of Far East Russia is intended to supply steel manufacturing plants in China.
Civil Society Concerns: The IFC states that the project’s future impacts are unknown, since it is financing exploration and feasibility studies. Although it is hoped the project will increase employment and economic conditions in the regions, mining also entails environmental risks, such as air emissions, hazardous waste and materials, and pollution. It also risks harm in the form of mining accidents, altered land use, and disrupted reindeer patterns. In compliance with IFC policy, Aricom is supposed to publish its revenue payments to the government. Concerns have also been raised about the treatment of local indigenous peoples.
Summary of Proposed Investment - Aricom (IFC website)
Novatek Gas
Date: June 9, 2005 (Invested)
Total Cost: $282 million
Bank Funding: IFC, $35 million (up to $80 million proposed)
Description: The project funds the expansion of a natural gas field on the Tazov Peninsula, located in Western Siberia in the region of Yamalo-Nenets Autonomous Region in the Arctic Circle. Operated by Novatek’s subsidiary, Yurkharovneftegaz (YNG), the Yurkharovskoye field contains 208 billion cubic meters of gas and 106 million barrels of condensate. In 2005, Novatek was the largest private gas producer in Russia, and this project marked the first financing of a private natural gas company in the country.
Civil Society Concerns: Besides the normal risks associated with natural gas extraction, the field lies in the fragile Arctic Circle environment with indigenous groups relying on the land for reindeer herding and fishing. The IFC committed to monitoring the project’s employment impacts, assistance to indigenous peoples, and company payments to the local and federal governments.
Summary of Project Information - Novatek (IFC website)
Timan Bauxite Mine
Date: July 2, 2007 (Invested)
Total Cost: $321 million
Bank Funding: IFC and EBRD, $150 million (two $45 million A loans, two $30 million B loans)
Description: The project involves expanding the Middle-Timan bauxite mine and conducting an appraisal study of an aluminum refinery, as the first phase of the Komi Aluminum Project. The mine is being developed by OAO Bauxite Timana, owned by SUAL Group (80%) and the Komi Republic government (20%). The aluminum side also involves ZAO Komi Aluminum, a subsidiary of SUAL Group, Russia’s second largest aluminum producing company.
Civil Society Concerns: The first phase is screened as a category A project, meaning there are significant environmental risks. Concerns include the project’s impact on a local indigenous group. Two further phases will involve refinery and smelter construction. BIC intends to closely monitor this project, along with its Russian partners.
Summary of Project Information - Timan (IFC website)
Project Summary Document - Bauxite Mining (EBRD website)
Environmental Assessment Documentation, prepared by CSIR Environmentek, December 8, 2003 (IFC website, Acrobat pdf)
Environmental Analysis, Early Works Assessment, prepared by CSIR Environmentek, April 2004 (EBRD website, Acrobat pdf)
Country Strategies
World Bank Group
The latest Country Partnership Strategy for Russia covers the years 2007-2009. It outlines the focus of the World Bank Group during this period. Noteworthy is the World Bank Group’s continued emphasis on the private sector through IFC lending and on public sector reforms, including anti-corruption measures. Other pillars include reducing energy dependence and improving social services.
Russia Country Partnership Strategy 2007-2009, by World Bank Group, November 20, 2006 (World Bank website, Acrobat pdf 12.54 MB)
European Bank for Reconstruction and Development
The latest country strategy reveals EBRD’s desire to increase its investments in the Russian Federation. Priorities include infrastructure, energy efficiency, governance, and economic diversification. The EBRD estimates investments in natural resources will form 5-10% of annual business volume. With these investments, transparency is an important aspect of EBRD activities. The strategy mentions transparency more than twenty times, including references to EITI.
Strategy for the Russian Federation, by EBRD, July 25, 2006 (EBRD website, Acrobat pdf)