RECENT DEVELOPMENTS IN THE RUSSIAN PRODUCTION-SHARING AGREEMENT LAW: MAKING THE LAW WORK

• Published in: UCLA journal of international law and foreign affairs 2001-01, Vol.6 (2), p.365-389
• Main Author: Timokhov, Vitaly
• Format: Article
• Language: English
• ISSN: 1089-2605; 2169-7833

A production sharing agreement, or PSA, is a contract between a State and a private, usually foreign investor, to exploit the State's natural resources and to divide the resultant product in a contractually agreed proportion. First implemented by Indonesia in the 1970s, PSAs quickly became a favorite vehicle for investment in developing countries with unstable or unclear legal regimes. The Russian experiment with the concept of production-sharing began in December 1994 when then-President Boris Yeltsin signed a decree introducing production-sharing to Russian economic life. For the next two years, the decree enjoyed tremendous success and led to massive foreign investment into Sakhalin offshore oil projects. The decree was followed by a Law on Production Sharing Agreements, adopted by the Russian Parliament (Duma) in 1996. The first part of this article reviews the Russian concept of production-sharing. To assist in understanding the reasons for the production-sharing regime's failure to fulfill great expectations and bring multi-billion dollar investments, the article provides a short account of the Law's history and explains the politics behind the adoption of the first version of the Law. It also examines the 1999 amendments to the Law aimed at the elimination of major flaws of the then existing PSA regime, such as the conceptual inconsistencies between a contract-based PSA regime and the fundamental regime of subsoil use imposed by the Russian civil law. The article also examines recent amendments introducing a udirect sharing" model which allows the investor to negotiate a longterm investment contract based on a simple division of extracted minerals between the State and the producer. As a result of the recent amendments, foreign investors have a choice of both "traditional" and "direct" sharing – thus providing the investor with the ability to negotiate a custom-made legal regime for every particular investment in a natural resource project in Russia. Although significant problems remain in the area of international taxation, production sharing in Russia is expected to become a leading investment vehicle for large-scale investments into the Russian natural resource industry.