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Geological Exploration May Be Put on the Back Burner

02 march 2009

Nikolay Kirillin, Deputy Chairman of the State Geological Committee in the Republic of Sakha (Yakutia) and Honored Geologist of the Republic of Sakha (Yakutia), gave his opinion of the situation in the republic’s diamond mining industry in his interview to the Rough&Polished Agency.

How are geological exploration and diamond mining in the republic going on in the global crisis environment?

As is known, rough or polished diamonds are not essential commodities; they happen to be luxury and accordingly are consumed by well-to-do people who buy them to maintain their image, satisfy their ambitions, and sustain their status in an appropriate society; in other words, polished diamonds as finished goods are bought if there is spare or excessive money. However, today, under the current world financial crisis, which involved both Russia and Yakutia there are no idle funds for production and life activity of the population. Under the circumstances, it is very difficult to find customers, or may be impossible. In this case diamonds are turning into “glassy trinkets” no one needs.

There are serious problems emerging for our diamond mining enterprises: for AK ALROSA (ZAO) along with its subsidiaries OAO ALROSA-Nyurba and OAO Almazy Anabara and for OAO Nizhne-Lenskoye, owned by the republic for one hundred percent, all of which derive their major income from mining and selling natural diamonds, as well as for the republic, whose budget and social and economic situation also depend on the financial health of these companies.

These companies perform geological exploration at their own expense, i.e. they spend quite sizable amounts of their finance on geological survey with appropriate disbursements in all fields including the supply of materials and machinery, equipment, transportation means, geological exploration proper, as well as salaries taxes, etc.

In 2002-2006, diamond-mining companies spent around 7.5 billion roubles for geological exploration, while more than 18.0 billion roubles are scheduled to be allocated for geological exploration in the diamond industry in 2007-2011. For instance, in 2007-2011 AK ALROSA (ZAO) plans to allocate 2,500-3,000 million roubles a year for geological exploration raising the share of spending for geological exploration up to 3.5% of the annual income from diamond output replenishing and building up consumed reserves.

If up to this year our diamond mining companies were successful in meeting this task, there may be problems in further financing geological exploration since geological exploration is in its essence a long-term investment. In the close conditions of scarce funds, when there are current tasks of developing production to be solved, salaries to be paid and capital construction of production facilities (underground mines, new installations) to be maintained, geological exploration may be put on the back burner. And this is fraught with a backlash in the future, when even having enough money there will be no personnel, technical and other resources to restore and continue further business of these companies. It is time for wisdom on the part of managers, who should not be “interim appointees” in their hearts and substance. If the present managers of these companies will prove to be interim appointees, the companies will consequently run into serious problems.

As for their output, it is known already that the companies are correcting their plans for 2009 to decrease their output, as for example is done by OAO Almazy Anabara which is focusing on mining the Mayat diamond field only. This is related to their diamond sales.

The federal government will render support to AK ALROSA (ZAO) and its subsidiaries ordering the Gohran Agency of Russia to buy their produce using funds from the budget of the Russian Federation. OAO Nizhne-Lenskoye is in a more difficult position since it is deprived of such assistance and will have to look for buyers on its own with implied expenses and risks, delayed income and ensuing financial problems.

Last year, OAO Almazy Anabara celebrated its 10th anniversary, while this year OAO Nizhne-Lenskoye will mark its 15th anniversary. What were the political events which preceded the establishment of these enterprises owned by the republic and in the emergence of which you took an active part and what were the aims pursued by this?

In the 1990s, the Republic of Sakha (Yakutia) under the Decree of President of the Russian Federation Boris Yeltsyn No. 277 of 11.12.1991 “On Powers of the Yakut-Sakha SSR to Manage Natural Resources” was authorized to own, use and manage mineral deposits; accordingly it received a certain fair share of payments for using its subsoil and could establish its own enterprises to extract commercial minerals, including diamonds.

As is known, prior to 1990 the mining companies operating in the republic were governed by the USSR ministries and agencies, which were not to report to local authorities; these companies employed manpower coming from all the Soviet Union for “megabucks,” as people used to say then. Their attitude to the natural environment, resources, and local population was appropriate. The local population did not take part in developing commercial deposits due to certain objective reasons or participated but in small numbers. There was a directive sent from the top and a “public opinion” that the “Yakuts were not able to work in industrial production” and it was aimed at not letting the local population to get engaged in the industry with its higher wellbeing than in other fields, as for instance in the agriculture, on the one hand, and there was a negative impact on natural environment, on the other hand.

Mikhail Nikolayev, the first President of the Republic of Sakha (Yakutia), being aware of the negative situation as far as the rational use of natural resources in the mining industry was concerned, called upon local young engineers to establish mining and geological enterprises which would really be expedient and efficient and carefully treating natural environment. In other words, these managers and workers were not only to mine diamonds and gain profit, but to lay the basis for a new technical, technological and ecological attitude towards geological study, exploration and mining for commercial minerals, in our case diamonds, as well as towards an efficient way of using profit for social and economic development of the local territories (uluses) and their population. The workers of OAO Nizhne-Lenskoye and OAO Almazy Anabara by their professional qualities, their attitude to their home environment, i.e. by their technological and ecological mentality are now at a high level, which makes them different from the personnel of other mining and industrial enterprises of Yakutia, including that of AK ALROSA. OAO Nizhne-Lenskoye and OAO Almazy Anabara where 90% of personnel consist of local workforce have fulfilled the targets and tasks set by Mikhail Nikolayev, the first President of the Republic of Sakha (Yakutia).

Under the world crisis conditions, the task of these companies is to survive decreasing inefficient costs to their minimum, including the very high bonuses paid to their management, and efficiently using every rouble to develop against all the odds thus proving the correctness of the decisions taken in the mid-1990s.

When the Nyurba diamond pipes were discovered in the mid-1990s there were certain hopes that they would bring tangible income to the republic’s budget in the form of dividends. How did it come out that today the Republic of Sakha (Yakutia) has no share in this business?

Indeed, when the first diamond pipe, Botuobinskaya, was discovered in 1994 during exploration financed from the republic’s budget; accordingly, all this belonged to the Republic of Sakha (Yakutia) by law. In August 1996, after the Nyurba diamond pipe was discovered Mikhail Nikolayev, the first president of the republic, issued a secret decree to organize a diamond-mining company with interest shared between the Republic of Sakha (Yakutia) and AK Almazy Rossii-Sakha (ZAO), that is 50 to 50. There were different proposals concerning the establishment of this new company coming from the general public and some experts. In particular, our proposals from the “Saidys” Association of Scientists and Experts were as follows: there should be three participants in the company including the Government of the Republic of Sakha (Yakutia) – 33%, AK Almazy Rossii-Sakha (ZAO) – 34% and one of the entities of the Republic of Sakha (Yakutia) – 33%, which could be for instance either the Foundation for Future Generations or Komdragmetall or the “Sakhaalmazprovinvest” Foundation (SAPI), being then a favorite. Our proposals were not heard at that time or were amended. But in December 1996, there were to be elections of the President of the Republic of Sakha (Yakutia) and evidently under the pressure of the diamond lobby Mikhail Nikolayev signed his decree and it was decided to establish a one-hundred-percent subsidiary of AK Almazy Rossii-Sakha (ZAO). After that the Nyurba Ulus headed by Varvara Petrova managed to win a 10-percent share in it, which was later transferred into the property of the republic.

The above-mentioned funds allocated from the republic’s budget for geological exploration in the early 1990s and earmarked for this project were compensated post factum at the suit of the diamond lobby so that the republic would have no legal ground with regard to the property ownership aspect.

Naturally, when the first Nyurba diamond pipes were discovered, besides the official government discussions there were a lot of public discussions and opinions expressed in mass media as to how this wealth should be used in an expedient and efficient way. There were hopes that this project would employ many local specialists and workers. When OAO ALROSA-Nyurba was being set up AK ALROSA even voiced some figures saying that no less than 50% of those employed will be local personnel. However, today the situation with labor force and qualified personnel engaged at Nyurba GOK, a mining and processing complex, proves to the contrary: there are a few local specialists who are graduates of the Yakut State University continued to be employed as workers for several years with no promise of change in the situation.

Nowadays there is a persistent opinion that the property owned by the republic is a burden. One of the visiting politologists even exclaimed after the Yakutugol Company had been sold: “At last the republic has got rid of property!” But the economy is based on property and this is why the whole world is fighting to gain property. It is considered that state property is always inefficient. However, there are other instances as for example the Arab countries where state property personified in their sovereigns is efficiently managed and even invested into the future, or take China which will develop despite the world crisis.

It seems to me that everything depends on stability of the state system and accordingly on the system of management. If there is no stability in the state system, then the system of management has an unstable basis and there is always the mentality of interim appointees acting against reason and logic. This is why the Arab countries aiming at long-term goals will be among the least hit by the world crisis and will overcome the financial and economic crisis sooner than countries with unstable systems of state administration.

Rough&Polished from Yakutsk