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Proceedings of the Standing Senate Committee on
Foreign Affairs

Issue 8 - Evidence (afternoon meeting)

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OTTAWA, Monday, April 30, 2001

The Standing Senate Committee on Foreign Affairs met this day at 1:05 p.m. to examine and report on emerging political, social, economic and security developments in Russia and Ukraine; Canada's policy and interests in the region; and other related matters.

Senator Peter A. Stollery (Chairman) in the Chair.

[English]

The Chairman: Honourable senators, our first witness this afternoon is Mr. Rotzang from Norex Petroleum.

Please proceed, Mr. Rotzang.

Mr. Alex Rotzang, Norex Petroleum Limited: I would like to speak about the problems that Norex Petroleum encounters in Russia. These problems are pretty common for people who do business in Russia.

Norex Petroleum was formed in 1991. In 1992, we took over the oil field located in Western Siberia called Malo-Chernogor field. This was an area of ecological disaster. Basically, it was given back to the state since the company which was operating there before us refused to continue operating. When we took it over, there were 600 people working there. Production was about 300,000 tonnes. To convert that to barrels, you need only multiply that by 7.8.

Senator Bolduc: Where is this field?

Mr. Rotzang: It is about 90 kilometres north of the city of NizhneVartovsk on the Ob River.

The Chairman: The area we are talking about is east of the Urals in what we call West Siberia?

Mr. Rotzang: That is correct. We started operating in 1992. In the beginning of 1992, we brought four airplane loads of equipment from Calgary to NizhneVartovsk, and in 1993 we brought 174 railroad cars of equipment. That was the largest single shipment into Russia after the Second World War.

We managed to turn this oil field around. At its peak, it was producing 500,000 tonnes of crude oil and there were 110 people working. We produce much more oil per worker than any company. In other words, we are the most efficient oil company in Russia. We also pay the highest taxes of any company in Russia per tonne of crude oil. On average, companies pay an average of 25 to 26 rubles per tonne in taxes. We pay 2,500 rubles per tonne of crude, which is quite a large difference.

During ten years of operation, our company has never owed taxes and has never been behind in payment of salaries, which is also an achievement. This year we received several recognitions. In March we were indicted into Russia's business recognition program, together with Rostopovich Ozyolruf who is a Nobel Prizewinner. That was a great recognition and a great testimony to Canadian know-how and to our perseverance. In 1990, about 35 companies from Alberta were working, striving, to do business in Russia. Now, operationally, there are left only two companies, of which we are one.

Despite all the problems, which I will describe shortly, we are planning some expansions. We will build a chemical plant to introduce Canadian oil field chemical technology to Russia and thereby we are placing an order in Alberta for the most sophisticated, super-single drilling rig at a cost of U.S.$4 million. We are still alive and trying to get ahead, despite the problems.

Regarding those problems, I want to give you a taste of what is transpiring there and how business is going. I will give you a few stories.

In 1993, our company lent oil to our partner, Chernogorneft. They were gradually returning that loan of 300,000 tonnes of crude until 1995, then they refused to return any more. We went to court and we won the case. The sheriff came and repossessed 25 and gave it back to us. There was left 17. At that time, a company called TNK appeared on the scene. It is part of the Alpha financial group.

The Chairman: What is Alpha Group?

Mr. Rotzang: Alpha Group is a company whose main assest is the Alpha Bank in Moscow. They have some shareholders in New York. A gentleman by the name of Blavatnik is a part of that company.

I want to give you an idea of what is going on with privatization in Russia. The Alpha Group came in and participated in a tender to buy 40 per cent of Nizhne Vartovskneftegaz and Tyumen oil company. This company was producing, at that time, about 18 million metric tonnes of crude. For an easy calculation, if you multiply that by $200, you get an idea of the revenue of the company.

Alpha group and a company from the United States called Alpha/Renova together offered, for 40 per cent, $810 million, out of which $170 million was supposed to be put in, and $640 million the state was supposed to reinvest into the company. Discussion of the price will come later, but you will understand that for a company that deals in billions of dollars' worth of crude, the price will probably be slightly higher.

Then for the balance of the holdings, the 49.9 per cent, which was held by the state, Alpha offered $270 million, despite the fact that, about six months ago, the government had put in their portion of $640 million. They offered $270 million, of which the government would turn back $180 million into a private-owned company and they will pay $90 million.

That is how the privatization of TNK came about. This matter was in the newspapers several times. Investigations were made into the privatization, but, recently, everything was found to be fine according to the law. The Russian auditor general came to the conclusion that $90 million is really a fair price for an enterprise of this magnitude. That amount probably accounts for their daily production.

As soon as TNK came in, at that time a Canadian company appeared, Black Sea. I do not know whether or not you have heard of it. It was a publicly traded company that was operating in the vicinity. Tyumen Oil Company, which had been privatized, was their partner. They had a joint venture called Tura Petroleum. First, they made a run at the company. In short, they found out that, three years ago, when the mineral rights licence was issued, the government official who signed the licence - even though the investment was worth $80 million - was not authorized to do so. He did not have a power of attorney; his boss was on vacation; and so the deal was null and void. Basically, that was the first business on which TNK preyed on, and the plan went successfully.

Consider the following: The chairman of the board of TNK at that time became a governor of Tyumen, Mr. Rakievsky. In the Russian system, all the judges in Tyumen are appointed by the governor. That means that Tyumen courts are absolutely independent. Their judgments do not depend on any facts; they are completely independent. It makes no difference what you tell them; they are independent.

Next, they went after a well-known company, British Petroleum, which had invested $600 million, more or less, to buy 10 per cent of Sidanco Petroleum. TNK went after their subsidiary, Kont Petroleum.

How did things turn out? IMF was telling Russia for many years: You need to have a bankruptcy law. Suddenly, the Russians yield. They put a bankruptcy law in place. Now I will give you a demonstration of how the bankruptcy law is working.

The people from TNK Company formed a new company which would make agreements either by threats or by intimidation, or by paying off the management of the company. They start running up the debt of the company. For example, if the work-over on a rig should cost $100,000, they would sign a deal for $200,000. I pay you 90 and give a promissory note for 100. Then along comes this company that will pay you 10 for the promissory note. Therefore, as a work-over company, you have got your money and I have got an aside and another $100,000 of debt. In this way, debt mounts very quickly. After that, the company goes to a friendly court in their region and, in one day, the court rules that you are bankrupt and insolvent. They put in an external manager who is absolutely independent, and this guy starts stripping the company like there is no tomorrow. All of the oil would be sold to their controlled company for two or three dollars a barrel, then transferred to Gibraltar, and they would sell it further on.

In the meantime, there were appeals in court. The court ruled that they had no business being in the courtroom. They went to court for a second appeal, then to a federal court, and the federal court decided they needed more investigation. There were about three months between each court appearance. After a year and a half, the company is on its knees because taxes are not being paid, and nothing is paid. They then declare that the company has to be sold. When the company was sold on open tender, guess who won the tender? TNK won the tender. What a surprise!

After they finished with this one, they went after Chernogorneft, which at the time was the most profitable oil company in Russia, and they were my partners. Within several months, they played the same trick. They made the company bankrupt. In the meantime, they also took over another company which owed $28 million, using the same process with the independent manager and so on. They took the company.

We are not talking about small people as the sources of the funds. We are talking about a couple of hundred million dollars. There is the Harvard Endowment Fund, several Middle East investors, and BP. These are the people who invested money into Sidanco. They definitely made a lot of noise.There was even a claim put into the Federal Court in New York. It was called, and I read the proceedings, "unprecedented corporate robbery."

More than a year and a half ago, TNK said, "Okay, we will give back 25 per cent of Sidanco." Suddenly there was a credit from Eximbank for half a billion dollars. It was targeted toward Haliburton, and we know who the chairman was of Haliburton at that time.

The Chairman: Who was the Chairman at that time?

Mr. Rotzang: Mr. Cheney.

Senator Corbin: The Vice-President of the United States?

The Chairman: Dick Cheney, the Vice-President of the United States.

Mr. Rotzang: They got the credit, and they continued going on with their lives. In the meantime, they took over several more companies in the same way, but they were Russian companies and did not have such a resonance.

That is who we were dealing with. When they were taking companies over, and this was in the newspaper, they would intimidate the people by calling late at night and saying, "You have a very nice daughter. I see you taking her every evening to the ballet class. You must be very proud of your family." The next day, they would say, "Your daughter is taking swimming classes, too. Oh, that is nice. That is very good. You must be proud of your family. They are very nice. I saw your wife with your daughter. They are a really nice family." When the guy comes and wants to buy, who would not sell to such nice people who are so happy about your family? This is basically the method that was published in the newspaper many times, and that was the nice people with whom I had the great fortune to tango.

Senator Corbin: And you had no daughter?

Mr. Rotzang: No, I have a daughter.

When they started taking over Chernogorneft, we had a decision of the court that there was 70,000 tonnes of crude remaining. The company is bankrupt, and we are going to pay. While they are bankrupt, we wanted to be put on the list of creditors, because if they would put us on that list, I definitely will be siding with BP, and there will be no bankruptcy because 70,000 tonnes of crude is a lot of money compared to the other debts. They said, "No, according to Russia law, we owe you crude, and we have to give you back crude. That is all there is to it." We tried several times, maybe six or seven times, in different courts, and every time we were unsuccessful.

After they took over Chernogorneft, they took all the debts with all the responsibilities, and then suddenly they came out with a decision from the court that they do not have to return the 70,000 tonnes of crude to us but, instead, must pay us money for it, and at a great price. It is about a dollar and a half or something like that for a barrel, and the price was close to $30. That was approved by the court. We are still in court and tangling with it.

The second case, again with the lending of crude, was NizhneVartovskneftegaz. The amount of 102,000 tonnes of crude was taken. They again played these games with bankruptcy and with the courts, and we were no more ahead than we are in the first case.

Also, it was very interesting that, during this time, they tried to put all kinds of pressure on us. The vice-chairman of the company went to the paper and said, "They will not smarten up, so then we will look into validity of their licence." Sure enough, in three days, the Minister of Natural Resources sent us a commission. When they saw what we did with that, I definitely went to him and told him that I am not Black Sea, my stock is not public, I am not afraid to speak up, and it will be blown to the high skies. They backed off, and it is kind of in suspense.

Another matter concerns our pipeline. We bought a piece of property and built the infrastructure during the old Soviet Union regime. How have we been operating for ten years? We have been getting oil mixed with water and gas. We do the treatment and bring the oil up to about 96 per cent of oil and 4 per cent of water. Then we pump it to a central facility, also used by other companies. It is all mixed together. Chernogorneft would do further cleaning and pump it through. That way, I am involved in a pipeline, and have access to the market.

Last year, they told us we had a bad metering system. We have the most sophisticated metering system available. We had the first micro-motion metering system, which was brought from Canada right at the start. They said "No, we will not give you oil." Then, for six months, they basically were stealing all our oil. We went to the ministry. This was not known, and unprecedented in all of Russia.

On their property they have what is called a topping plant. This is a small type of refinery where you take the light fraction from the crude and all the material that is left over is dumped back into the pipeline. There is then a flow of gas and diesel that you can sell for cash, right on the street.

We know where our crude came from, and for six months we could not move. Moscow, of course, did not want to get involved. Finally, an anti-monopoly committee came in and they ruled against that. They got the previous oil but this year they went to court to sue the anti-monopoly committee. Now they need not adhere to the decision. They still have more than 25 per cent of the oil. That is quite a bit of progress. We are fighting right now with this one.

When Mr. Putin was here, I wrote him a letter asking for help. The Canadian government works on the level of different government committees. Something must be created other than our present legal system. Mr. Putin himself, in his latest address to the nation, said we had a shadow economy and now we must have a shadow justice system. He recognized that the present system does not work. We must develop the position of ombudsman or something to try to help companies who are doing business in Russia.

Senator Austin: Mr. Rotzang, obviously the story is a complex one. Listening to it and reading the note that you provided helps clear up some of the issues.

For our purposes, we would like to know whether you believe that the institutions of the Russian state - in other words, the Ministry of Energy, the Ministry of Anti-monopoly Policy - are acting in what you would call the direction of enforcing contracts and trying to make the system work according to arm's length agreements. Second, it is clear from your notes that the administrative tribunals that are, in the first instance, supposed to make these decisions became part of the monopolistic practice. That is my conclusion; not necessarily yours.

Principally, do you see the Russian system moving to support you as an international investor, or do you see it moving away from what we would consider norms of investor behaviour? Could you give us a pointer in that direction?

Mr. Rotzang: First, my strong opinion is that Russian business is not welcoming to investors. Their understanding is that investment is something like, "Bring your money, get out and never come back again." As far as the state is concerned, they are saying yes, they are promoting investment. They are saying that they are welcoming investors, but I do not see anything in practical terms that is done to even allow investment to function properly.

As far as the ministries are concerned, such as the Ministry of Oil and Gas, there are still some of the old, proud professionals who would like to see the great oil industry that used to be in the Soviet Union prosper. Most of all, I think they are waiting to see what shape it takes. They are definitely trying to help and support whatever they can.

Senator Austin: Apparently, this industry is now spinning off enough capital that domestic owners can afford to buy any technology they need to buy or want to buy from the Western system. They no longer need foreign investors and foreign technical advice supplied from the equity point of view. Is it clear that they now feel quite independent of foreign investment in the oil and gas industry?

Mr. Rotzang: They might feel themselves independent but, as far as technology is concerned, absolutely nothing is happening. I do not see any new technologies coming into Russia in oil and gas. Some people talk about it but nothing happens.

To give you an example, in Russia, to drill a well of about 3,000 metres would take about 25 to 30 days. In Alberta, it takes three to four days. That is a difference in efficiency but I do not see anyone rushing to buy these rigs.

Senator Andreychuk: You are painting a picture that is quite frustrating. Why do you continue to do business in Russia as opposed to elsewhere if it is so difficult?

Mr. Rotzang: The oil business is a business where you cannot relocate fast. You cannot yank your wells; you cannot take your pipelines or your facilities. You build, you invest and you are looking for 20, 25 years to operate. It is short of just walking away, but I am probably too stubborn to walk away.

Senator Bolduc: The way I see it is you built your business over there during the communist period and it was fairly easy to go there and do business, and now it is more and more difficult. Is this what we are talking about here?

Mr. Rotzang: Yes.

Senator Bolduc: That does not sound exactly like the optimism we heard from Dr. Gillies this morning.

The Chairman: We know from the testimony we have heard previously that Russia will be a hugely important source of oil and gas for the European Union and Western Europe and we have talked about Gazprom with its almost billion-dollar operation.

Have Russian interests decided that they want to control the oil and gas business? Other things may happen, but will they be a huge and secure supplier of oil that goes to Western Europe?

Mr. Rotzang: There are new shareholders who hold these great assets which produce a tremendous amount of money, for Gazprom and many others. The oil fields are fairly young. They are still producing oil, with very little input. Yes, for as long as the cash cow is alive and kicking and giving milk, why let anybody else do it? When production starts to go down, we may see a different situation.

As an example, Iran was producing about 10 million barrels a day during the time of the Shah. They are now producing approximately 2.2 million barrels a day, and they are running around like mad, trying to find people and technology to turn their fields around. Five years ago, they were very proud. They would not let anybody come close to their oil fields.

Senator Andreychuk: You stay in Russia because your investment is there. I know a little about the oil business and the competition. It is a curious business, not only in Russia but elsewhere.

Do you believe that, with more effective controls and an expression of interest from President Putin, some of this difficulty that you have gone through might be lessened in the future?

Mr. Rotzang: Absolutely, I believe that. What Putin was doing reminded me very much of what Gorbachev did. Gorbachev tried to rebuild something that could not be rebuilt; he tried to rebuild the communist system. Putin inherited the plutocracy, the greatest ever created, and he is trying to work with it and rebuild it. It cannot be rebuilt; it must be broken. Something new must be built. Does he have the will for it? I believe so. I want to believe so. Can he do it? I do not know. Will he do it? We will see. I think Putin is moving in the proper direction. I am optimistic.

Senator Andreychuk: Do you see movement on the courts? You defined "independence" in a way that I was not taught in law school. Do you believe there is some move to making the courts more effective?

Mr. Rotzang: No. I do not see that yet. There are moves to appoint judges for life and everyone is saying, "Oh my God, now he is there and nothing can remove him." My God, that would be even worse. There should be some kind of review panel whereby a judge could be called to task and asked why he or she ruled in such a manner. Putin is talking about changing the legal system. When he openly states something like that, you know there is something going on.

Senator Grafstein: We seem to be redefining the problem over and over again: In order to invest you need a contract, and the contract must be legally binding and enforceable.

You said two things that were curious, just on this topic. First, you said that someone sought their rights to be adjudicated in a federal court in the United States. You said that there was a federal action. Whoever the parties are, and I was not clear, let us assume that they are successful. What do they do with that judgment? How is that judgment enforced in Russia? Are they seizing assets outside of Russia?

Mr. Rotzang: First of all, they were going after the assets of two companies which were registered in the United States.

Senator Grafstein: They are seeking to seize assets of the partners that were in dispute outside of Russia?

Mr. Rotzang: That is correct. The most successful outcome of a judgment was here in Canada involving IMP. That was beautiful.

Senator Grafstein: You are saying that the only way you can see the system working is if there are assets outside of the jurisdiction of Russia that are subject to the courts and can be seized as an alternative to the subject matter of the dispute?

You said something else I am curious about; that is, if there were political power at the highest levels, some of these problems could be sorted out. Are you suggesting that, until the regime settles down and becomes more consistent with western norms of contract, the best way to do business in Russia is state-to-state?

Mr. Rotzang: Business need not necessarily be conducted state-to-state, but potential partners must always see that Big Brother is right behind, watching over my shoulder. If anything is needed, help must be there. In Russia, all business needs the attention and support of the government. In embassies, SWAT teams are required. To make a presentation at a meeting and then not to follow up does not help. These matters must be addressed every day. Canadian businessmen in Russia would be glad to pay for these things, but we need government support.

Honourable senators may remember the movie, Twins, with Danny DeVito and Arnold Schwarzenegger. We need to be able to send the same message they sent in that movie: You mess with me, you deal with the whole family; you mess with all of Canada. If you give this message, then you can work, and work very successfully. Canada's embassies have excellent people who can do this work.

Senator Grafstein: At one time, the notion of Petro-Canada as a Crown organization, owned by the state, had as one of its objectives, as I recall, to do exactly that; to enter into agreements with other countries to explore these issues.

The idea of a national energy policy and the rest of it has not had much current-day credit in Canada for many different reasons. Are you suggesting that, if we were able to recommend a mechanism of government involvement in some of these issues, it might be more appropriate for Canadian business to participate in that way?

Mr. Rotzang: Absolutely.

Senator Di Nino: Let me follow up on this line of questioning for a moment. The investment of money by you and others is usually preceded by a certain amount of analysis, investigation, et cetera. When you went into Russia, and more specifically, if you have any knowledge of what happens today, did you include the government agencies? Did you determine the different avenues available to an investor abroad through the Government of Canada, through the industry department or foreign department? Did you do that? Did you go and find out what is available to help you evaluate this opportunity?

Mr. Rotzang: I did not examine the avenues to evaluate, but to help to facilitate. I am becoming involved with the embassy. We are always inviting government officials to our place, whenever it is opportune. I would invite all of you, if you were to be visiting in Siberia, to come and see the facilities. I am absolutely sure that you would be proud to see what a Canadian has done there. Whatever is available, we do, and we have done.

Senator Di Nino: Did you find that the assistance or the information provided to you was helpful?

Mr. Rotzang: To a certain extent.

Senator Di Nino: Should the Canadian government be providing other services? Are there things that you think that the Canadian government, particularly in areas like Russia or other countries with problems, should be providing for its citizens before they invest in these places?

Mr. Rotzang: I think that investing is the sole responsibility and decision of the businessman. Germany has a global approach if an investor wants to go into a certain area. For example, we have been promoting Canadian construction. That is a multi-effort, and is done together with government. However, for someone to participate in development of this particular business, I think that the businessman can do it much better than government can do it for him. A good job for the government to do would be to create the conduit and the environment.

Senator Di Nino: To answer the senator's question more specifically, what would you want from the Government of Canada? What do you think that the Canadian government should do for you in that respect?

Mr. Rotzang: I think it must provide, like I said, a SWAT team. If I wrote a letter to Mr. Putin, in a month or so there should be a follow-up meeting demanded by the embassy. The embassy would note that a letter had been written, and check into how the matter was handled. The government should show that they are keeping an eye on it. Russian officials should not be able to send me a letter to get rid of me. They must understand that it will reverberate; that is will be analyzed, and that it is not going away.

It is not a one-time affair because we had an intergovernmental meeting, and that subject was raised during the meeting. No, it is must be addressed every day until the problem is solved.

If it is found out that I am doing something that it is not proper to do, I deserve to lose this business. So be it; I deserve to lose the business. If I am doing everything, and I am a good corporate citizen - paying taxes, giving to charities, and everything in this country - and I get bitten for that, I need some kind of help and protection.

Senator Graham: This is a fascinating tale, to say the least. Is British Petroleum expanding its operations in Russia?

Mr. Rotzang: British Petroleum, Amoco, as it now stands, did not expand their operation. Amoco dropped the deal in the South Preoska oil fields. They walked away. They could not deal with Yukos. BP/Amoco also had something like 9 per cent or 10 per cent of shares of Lukoil. They sold their shares. However, they retained the shares they had in one of the largest gas fields in the world. It is in Russia, just north of China. Amoco has a tremendous interest in China. They bought one of the North China fields.

I think if BP could have dropped this and left gracefully, they would have done it yesterday.

Senator Graham: It is not just a question of the authorities picking on the smaller company?

Mr. Rotzang: It is not the authorities that are picking on the smaller company. It is the oligarchs who have the real power.

Senator Graham: With the blessing of the authorities?

Mr. Rotzang: Yes, with the blessing of the authorities.

Senator Graham: Do you have an estimate of the known oil and gas reserves in Russia? Does anybody?

Mr. Rotzang: No. I could get it, but I just do not remember. It is huge.

Senator Graham: One final question: In your estimation, could a Canadian company make a legally binding contract in Russia? Could it be enforced?

Mr. Rotzang: They can make a legal contract, and then they can enforce it. It depends on who is the enforcer. It would depend on how far you would go to enforce it, but you could enforce it.

Senator Austin: I would like to follow up on the line of questioning relating to support for Canadian companies by the Canadian government. You gave interesting evidence. There are mechanisms that could be used like the Canadian Commercial Corporations Act.

In your view, should we be pursuing with Russia a foreign investment protection act? This is an agreement that we have with many countries that protect the foreign investor. If we pursued such a thing with Russia, would they agree to give the Canadian authorities under that agreement the power to press for enforcement? Do you believe that the Russian system is ready to enter that level of bilateral relationship on trade and investment?

Mr. Rotzang: Recently, this relationship was confirmed with the Germans. They refused initially, and then they confirmed.

Yes, Canada should provide protection only on one condition: if Canadian authorities would empower officials to fight tooth and nail for every dollar they guarantee. If it is just to provide protection and then not follow through, that is no good to anyone. It is a waste of Canadian money, and it will do nothing good for business. It should only come with enforcement.

If you want to play the role of enforcer, yes, it would be a comfort to the investor. However, if you do not want to play the role of enforcer, then do not have such an arrangement.

Senator Austin: As you know, Prime Minister Chrétien has been asked by President Putin to lead a Team Canada trade mission to Russia. We have heard, not only from your evidence but also from the evidence of others, that investment conditions are too primitive to encourage many Canadians to invest in Russia. However, would you encourage investment if the Russians would agree to set up state-to-state investment protection of the kind that we just mentioned?

Mr. Rotzang: Yes. I believe that Canadians and Canadian business have a great deal to contribute. One example of that is energy. In the energy field in Alberta, we outsmarted ourselves out of the jobs, because we are so effective and we have excellent equipment and people. Canadian workers have been trained well and the Canadian government has provided many opportunities for students to receive an education. I know that they were the best. I hired people from around the world, for the area that we are talking about in Russia, and the Canadians are the best. We can give a tremendous boost to our industry and our economy, if we have support. Otherwise, we will have only "heavy duty blood, " and nothing else.

The Chairman: Thank you Mr. Rotzang; it has been fascinating.

Our next witness is Mr. Ron Denom from SNC Lavalin International.

Mr. Ronald Denom, Senior Vice-President, SNC Lavalin International: We at SNC Lavelin International appreciate the opportunity to speak about Russia and Ukraine. I am Senior Vice-president responsible for Eurasia. I take care of business development in the Russian Federation, Belarus, Ukraine, Moldova, all of Central Europe, Southeastern Europe, the Balkans, Greece, Turkey, Israel and through the Caucasus Mountains into Central Asia, including the "'stans."

A paper has been prepared on the Russian Federation and Ukraine. I will highlight several points in the paper and elaborate on those points.

We have been active in the Russian Federation since 1974, when it was the USSR. We worked initially in the Komi region, where we provided drilling equipment and technology for the construction of wells in permafrost regions. Canada boasts excellent technology for working in cold weather, and that has been a tremendous link with the Russians. These days we are preparing refinery modernization work with Lukoil.

We are developing an airport link project linking Sheremetyovo Airport to central Moscow. Here we are working with the city of Moscow and Aeroflot as our partners. We are doing airport construction and modernization studies, principally in the Samara region.We are handling the modernization of sulphuric and phosphoric plants in the fertilizer industry. We are carrying out some technical assistance contracts for the eventual implementation for toll roads, once again in the Samara region. We are developing projects in residential, commercial and institutional buildings using Canadian technology. We are trying to collaborate with CMHC, which has been working for some years on the 10,000 houses program in Russia.

We are developing projects in the port sector. Around the Baltic, there is great interest by the Russians in developing ports around St. Petersburg to replace the ports that were lost when Latvia and Lithuania - the White Russian states - became states, if you wish. We are working on projects in the aluminium sector, principally with Russky Aluminiy, the newly formed aluminium giant in Russia. We are also speaking to some of the smaller aluminium concerns.

We are looking at projects in the gold and silver mining sectors, and especially the nickel sector with Norilsk. We maintain a regional marketing office in Moscow. We have been involved in projects worth in excess of $800 million in Russia.

In Ukraine, we are much less active. Right now, we are only looking at a grain terminal in Odessa. We have examined a number of other possibilities in Ukraine but we have decided not to pursue them.

I presume you have already had presentations on the macroeconomic environment in Russia. I will give you our take on that.

IMF figures show that the Russian Federation will need in excess of $2 trillion of investment over the next 20 years to modernize their production facilities, their infrastructure and their workforce. The principal market of our company is the development of large infrastructure projects. Here in Canada, we are well known for engineering and construction, but overseas we are project developers, project financiers, project managers and, in some cases, long-term operators of the project. The market in infrastructure is one that attracts us. Obviously, we are looking at a huge market in both Russia and Ukraine.

These are not investor-friendly markets. They are populated by powerful oligarchs, huge, unreformed bureaucracies, authoritarian central governments and very powerful competitors coming principally from Western Europe. The Germans are very strong, as are the Americans to some degree, although lately they have been suffering a little bit.

The Chairman: Suffering a little bit from what?

Mr. Denom: Suffering a little bit from the latest administration that seems to take a more confrontational approach to politics between the U.S. and Russia. Of course, this spills over into attitudes in the business community. We detect the formation of a little bit of anti-American sentiment due to the issues in Chechnya, the recent opening of a CIA office in Georgia, and the invitation of the Chechen leadership to have meetings in Washington. These do not play well among the Russian population.

Senator Bolduc: Is that good for us?

Mr. Denom: There might be some short-term gains but, in general, confrontational politics are not good for anyone.

The Chairman: When you say "the new administration in Washington," does any of that wash over to Canada? In other words, are we included in the anti-U.S. feeling?

Mr. Denom: Not to a large degree. Some people do not differentiate between Americans and Canadians, and some people regard Canadians as too highly influenced by the Americans, but there are many more discriminating business and political people in Russia who can tell the difference between the two. However, occasional discrimination does arise.

Because we are doing large infrastructure projects, we are very interested in project financing. These projects require a mixture of equity - that is, direct investment - and debt - that is, a mixture of foreign and local borrowings. Both Russia and Ukraine have problems with their levels of foreign debt. They need to watch them very closely and this represents a certain difficulty in developing business in both countries. I am speaking here particularly of Russia since it is more mature in the sense that it is close to the point of where you can actually do some debt and equity financing.

In the short term, we feel that Russia could meet its debt obligations, but in about 2003 there is a repayment spike that is a little bit ominous. It is hoped that that will not lead to any default or rescheduling of Russian debt but should that arise, it will give us big headaches in trying to finance our projects as international financial institutions tend to back away from providing further debt to Russia.

Russia has announced that it is setting up a new agency to oversee its sovereign debt. This will be very positive in that it will give a comprehensive picture to international financiers of who the borrower is and what the financial situation is in the country, not only at the federal level but also at the regional level. It may eventually open up the possibility of some municipal financing, which is virtually impossible right now. We talk a lot about environmental problems in Russia. Many of them are at the municipal level and immediate funds cannot be found to apply to these problems.

The other irony is that there is a very large requirement for foreign machinery and equipment and, as Russia seeks to acquire this foreign machinery and equipment, debt will increase. They are caught in a balancing act. They need to watch their levels of debt, yet they must acquire the equipment necessary to modernize their industrial base and their infrastructure.

We are watching the negotiations between Germany and Russia in the debt-for-equity swap, which is part of the settlement of the Paris Club debts. Whether this will work or not remains to be seen, but it is an interesting development. If it works, perhaps other countries should consider similar schemes to help Russia deal with its debt load.

From our project point of view, this means that we strive to maximize the Russian content in our projects. We do this by encouraging the transfer of technology - trying to match Canadian technology with Russian firms that are able to manufacture in Russia. Our projects typically are the conduit for many Canadian small and medium-sized enterprises to participate in international markets. Typically, on a large project we will have anywhere from 15 to 40 suppliers riding on our coattails providing services, equipment and transfer of technology to Russian firms. We have actually formed some Russian joint ventures to set up ongoing businesses in the region.

There is a definite problem in the banking sector. Its label is the lack of effective domestic financial sector intermediation in Russia. The banking system in Russia is really just a payment system. Savings do not accumulate in the system because people have lost confidence in it. Money is kept in the mattress or out of the country. The odd situation has developed that the third largest provider of foreign direct investment to Russia is Cyprus, following the U.S. and Germany, but this is all Russian money that was taken out of the country and is now funnelling back. This is the reality in Russia today, strange though it sounds.

With reference to foreign direct investment, or FDI, in 2000 it was only $2.7 billion and that is far short of what they need. To increase the level of foreign direct investment, the investment climate must be improved. They need judicial reform, tax reform, regulatory reform in the bureaucracies. The creation of an investor-friendly environment will attract more money back into Russia.

I would argue that we are now at a turning point. At the beginning, many businesses were taken over by people who were interested in asset-stripping, or at least not in operating the businesses as real businesses. Now, most of the large businesses are in the hands of people who want to run them over the long term. They want to invest in their businesses and make them grow. They recognize that they need foreign direct investment and they recognize that, to get that investment, they need a normal market-economy environment, similar to that of Western Europe. They are driven by the realization that such an environment will double or quadruple the value of their firms.

Mikhail Friedman was talking about his investment in TNK, a company that made about $2 billion last year. He thinks his shares in TNK would sell today for about $4 billion, but if there were a normal market economy in Russia, he thinks he could get about $10 billion for it.

That realization is dawning on most of the oligarchs. Why is Lukoil cleaning up its act? Why is it offering to convert preferred shares to common shares? Why has it adopted international accounting standards? Why has Norilsk Nickel backed away from their latest attempt to dilute shareholders and, instead, engaging the minority shareholders in a proper dialogue on how to manage their shares?

I would say a consensus is being formed now among the oligarchs that it is in their best interests to reform the investment climate and make it similar to the one in Western Europe. They are driven by the simple fact that the value of their firms will skyrocket.

The congruence is very interesting. Mr. Putin has made his first "State of the Union" address emphasizing exactly these main themes. When the federal government is aligned with the oligarchs, in my opinion an unstoppable force is created. The Russian economy will change, and change rapidly. It is important that Canadian business and Canadian government are in there now as part of that change process.

In our opinion, things will move very fast. It is odd to say, but we are very bullish on Russia. I do not know what the other witnesses have said in terms of their appetite, but our view of Russia is very positive.

That being said, we have an almost opposite view of Ukraine, particularly given the developments of last Thursday where, once again, there was congruence between the central government and the oligarchs. Unfortunately, the central government, the oligarchs and the communists have come together to throw out the reformers. Now the opposition has no platform and no leader, so where will it go? We do not have an answer but certainly, from a business viewpoint, that gives us pause.

We were requested to speak a little on how to promote Canadian interests in the region and the role of government support. For some time now there has been talk about setting up a development finance institution here in Canada. It would be the equivalent of OPIC in the United States. I think in Belgium it is called SPI; in Germany it is DEG and KfW together. I am referring to an institution that would fill the critical gap at the beginning of the development of larger projects. It would provide financing and related support on a commercial basis to private-sector ventures in these developing economies. It would also help Canadian industry to develop at home by providing some seed money that is currently not available from CIDA nor from EDC, which come in later in the development cycle.

Right at the beginning of the development cycle, a company does feasibility studies and reports, a bank-able feasibility study. The period between completing the feasibility study and closing the financing in these economies may take one or two years. In that particular period of time, there is no support for Canadian business. Many of our competitors do have support from their home governments at that time. We would argue that that gap should be filled here in Canada to put Canadian industry at the same level as our competitors from Western Europe.

Beyond that, we do appreciate the involvement of ministers in visiting the country. It is perhaps less so in Russia, but in Ukraine and in many other countries, government officials do not understand well how to interact with business. Contact with Canadian government officials, with whom they feel some affinity, with whom they can talk frankly and candidly about how to interact with business, is very valuable.

Second, the government people work closely with us and they give us feedback on what they see going on. We compare notes, ours from the business side and theirs from the government side. We try to understand the environments in which we are operating. We give each other a mutual boost in these countries where we are a small circle of people trying to operate in very large economies.

EDC has made substantial efforts to understand the Russian market. We encourage them to carry on and perhaps even invest greater effort. In an economy that is changing rapidly, it is very important to stay on top of things. We have argued for some time that EDC did not have sufficient appetite for Russian risk because they did not understand it. On the last Pettigrew mission to Russia, EDC representatives came along and I think they came away with a better understanding. Now they have people who travel regularly to Russia. Continued effort in this direction is important and very helpful.

Regarding CIDA, we recognize that CIDA has limited funds that they are focusing on civil society and on environmental issues. Our only remark is, what is missing? Business is missing. Who will pay for environmental clean-up? I would suggest that it is business. It is important to continue to maintain some interface with business in the CIDA mix.

Senator Grafstein: The country that has the most exposure in Russia is Germany. The banks which have the most exposure, as I understand it, are German. The government most directly involved in investment, both debt and equity, is Germany. In fact, you suggested that, when it comes to the Paris Club proposals for debt-swapping, again, Germany seems to be leading the way in terms of actual case establishment.

Have you studied the German model?

Mr. Denom: For debt-for-equity swaps?

Senator Grafstein: The German model on how they go about assisting their investment community in investing in Russia.

Mr. Denom: I have not done a comprehensive study but I have seen some elements of it with which we cannot compete. For instance, KfW are allowed to provide low-rate financing to industries located in the former East Germany. There is no way we can compete with that, so we tend to partner with Germans, in this case, to put Canadian financing together with German financing and go after projects where we can do that. They have an advantage in the area of the development finance institution, where they do have support for the early development activities, whereas we must carry that on our own account, as a business.

Senator Grafstein: You are saying that we should look at the German as opposed to the Canadian model, which seems to be the most proactive. No one is successful, but they are the most exposed for geopolitical reasons as opposed to macroeconomics?

Mr. Denom: They have the former Soviet debt.

Senator Grafstein: They spend more time and attention than most to look at western styles of investment protection, and they are actively engaged there.

Now, you have indicated that the German government and/or its banks seem to be in at an early stage of development, but I am more interested in what happens when you get into a project that could be remunerative. You have suggested a number of projects here which I assume are all project-financing where you are not very exposed. You do the work and get paid for the work that is done.

Mr. Denom: In some of them we will involve equity investment on our part.

Senator Grafstein: The hardest part is to obtain that seed equity capital in order to get these projects going?

Mr. Denom: There are two very tough problems: One is, yes, the seed equity. Beyond that, our projects are typically projects that have a payback in perhaps 10, 15, sometimes 20 years. Finding that long term debt money is also extremely difficult. Right now, no one wants to put in long term money. Money is available short term only, and this puts you into all kinds of gymnastics in order to build a viable financial structure for the project.

Senator Grafstein: Are the Germans still investing both short term and long term?

Mr. Denom: Yes, they are.

Senator Grafstein: It would be interesting to get some German experience here, because they are, from all accounts, the most sizeable, and we might look at their mistakes and their hits and errors.

The Chairman: Senator Grafstein, you are right, and we have been thinking about how we can get around that, because it is an important subject.

Senator Di Nino: Do Germans have a development finance agency or something similar to that kind of vehicle?

Mr. Denom: Yes.

Senator Bolduc: Is that institution publicly or privately financed, or is it private capital from the banks?

Mr. Denom: In Germany, it is a 100 per cent government institution. Let me see if I can find one that is public and private. In the Netherlands, for instance, government ownership is only 51 per cent, while 42 per cent is held by commercial banks and 7 per cent by companies. In Switzerland, the agency is 49 per cent government and 51 per cent private.

Senator Grafstein: Moving to a different topic, there is an inconsistency in what you are telling us with respect to Ukraine. On the one hand, you have told us you have closed down in Ukraine, and on the other hand, on page two of your written testimony, you indicate that the special economic zones, or SEZs, in parts of northwest Ukraine have been particularly successful in terms of their growth rates. You indicate that a certain region in northwest Ukraine has benefited from the leadership and managed growth of 12.2 percent in the year 2000, to the point where this region is generating 20 per cent of Ukraine's GDP. That is based on the well-known theory of establishing special zones.

Mr. Denom: That is right.

Senator Grafstein: Can you tell us anything about that?

Mr. Denom: This is the principle of the "foyer contaminant." In order to assist reform in these economies, one has to pick one's allies carefully, perhaps looking in those special economic zones that do offer a better level of control and perhaps have a better administrative framework. The legal framework is at the country level, but at least it offers the opportunity to find good partners who are dedicated to reform, and who are dedicated to doing business in what we consider to be a proper style and with proper behaviour in a market economy. I would suggest that in difficult economies, these are the places to look.

Northwest Ukraine is a coal mining region. This is an area where you would expect to have a depressed economy. They have managed to turn it around because there is leadership in this area. One has to initially go to these spots where there is leadership and work with those areas.

Senator Andreychuk:It is true that in certain areas it is leadership, and the need for the energy?

Mr. Denom: Yes.

Senator Andreychuk: That was finally, I believe, imprinted on Ukrainians when Chernobyl was closed. Is there no financing at all into Russia, and perhaps Ukraine, of that start-up? When I was in the foreign service, there was start-up money, and I know Lavalin had made use of it in Africa, et cetera. This was seed money at the front end to investigate projects, but I cannot recall all the rules. It was front-end loaded. Nothing like that would fit the Russia situation.

Mr. Denom: That was really aimed at small and medium enterprises, and it typically finances an exploratory visit into a country. It will cover airfare and some expenses. I am talking about projects in the hundreds of millions of dollars where the front-end development is maybe 10 per cent of that value. The development financing institute, typically, would bring something like $10 million to $15 million to the table at the front end of a deal, so it is not the same ball game at all.

Senator Andreychuk: Is this something peculiar that you would want for Russia, or is it something you are saying that the Canadian government should look at beyond Russia and other countries?

Mr. Denom: It goes beyond Russia.

Senator Andreychuk: It is a lack in our system?

Mr. Denom: Yes. Business has changed. We used to be exporters of Canadian expertise and Canadian equipment, and we would export from our base in Canada overseas. Now the market has completely changed. You must bring both the expertise and the money to the table. Otherwise, it is not worth showing up.

Many projects are developed almost from scratch, from an idea. With the wave of restructuring and privatization that we are seeing around the world, the front-end development of these projects, which perhaps used to be handled by the government or by a government agency, is now either shared with a private developer or has to be almost entirely assumed by the private developer. This is the age of public-private infrastructure projects.

Senator Andreychuk: It is very helpful to hear that it is not just Russia. It could be something that Canada should look at broadly.

With last Thursday's move, the political situation is not very promising in Ukraine. Prior to that, there seemed to be some effort at reform. Now we have had this incident with the president and with the behaviour of Parliament towards the government.

Is that giving you the opening for a negative response now, or would you have been more positive prior to that change?

Mr. Denom: I think we would have been more positive. In this entire region - and I am speaking here of as far south as the Balkans - we have economies in every state of development, from very early transition to more advanced, emerging economies. Some of them are virtually European. They are ready for European accession.

The Ukrainian economy lags the Russian economy by, I believe, five to 10 years. Once again, as we see the emergence of reformers and a movement towards reform, we try to identify a few partner firms that we can work with. Our assessment is that in the Ukraine Mr. Kuchma has the power structure. He has a formidable political organization that was not matched by the opposition. We can see, from the ease, almost, with which he dispensed with Mr. Yushchenko, it gives us a feeling that this is not an area in which we want to stake a large amount of risk just yet.

Senator Graham: At the very least, we should congratulate you and your company for your perseverance and your patience in Russia. I note that you made your first venture there in the USSR in 1976. If my memory serves me correctly, at that time SNC and Lavalin had not been merged. Is that correct?

Mr. Denom: That is correct.

Senator Graham: Which company got into Russia?

Mr. Denom: It was Lavalin.

Senator Graham: Are the risks greater now than they were at that time?

Mr. Denom: I would say that we have gone through a period between then and now of quite high risk. The crash in 1998, with the public and private predators that were prowling around the economy during that period, made it a highly risky environment. In our opinion, things have now settled down.

We have always been paid, whether it was under the USSR or the Russian Federation. We have been careful with the partners we select and the clients we deal with. By proceeding prudently, we have been able to manage the risk and, in fact, in our company we place a great amount emphasis on risk management, and assessing and managing the risks.

I would say now the risk might be slightly higher than it was back in the USSR, but the opportunities are also orders of magnitude greater, so the risk is justified.

Senator Graham: What kind of Canadian government assistance would you have used back in 1976?

Mr. Denom: In 1976 we would have used CIDA, obviously, for some of the front-end study work, and then we would have used the Export Credit Agency, EDC Financing, for Canadian goods and services that were sold to Russia.

Senator Graham: You were present for the latter part of the testimony that was given concerning the horror story?

Mr. Denom: I did not hear the horror story but I gather there was a good story there.

Senator Graham: You are obviously confident that you can write a legal contract that is enforceable in Russia.

Mr. Denom: Once again, a contract is a contract. It is important at the outset to know who you are dealing with and, as I say, by being selective about who we are dealing with we have always managed to successfully complete the contracts. I am sure there is negotiation back and forth, but we have always managed to reach agreement.

The enforcement of contracts, I believe, will improve rapidly in Russia. There is legislation being prepared for the Duma to protect investors and shareholders and, I believe, to reform the judiciary, especially in the regions. I believe the Russian federal government is serious when they say that they will enforce the new laws that give this higher level of protection.

I outline some of the reasons for that belief, particularly given the convergence of interest between the central government and the oligarchies. I am confident that contracts will be enforced. There will be difficulties in business. Business is full of surprises, but the climate is improving and, with the right partner, I have no hesitation in going into a contract in Russia.

Senator Graham: In your testimony, you commended Canada for sending ministers to Russia and you thought that this helped the relationship. Would you be prepared to recommend a Team Canada visit to Russia?

Mr. Denom: Actually, I would. Personally, I think that the problem of a Team Canada visit will be in Canada, not in Russia. Team Canada typically has representatives from every province, and I am not sure of the level of interest in every province so there might be a few dropouts. It might be a mini-Team Canada mission, but there is, I believe, sufficient justification and sufficient reason to actually organize one.

When I look at Norilsk Nickel, they have been the bad boys in the past but are seriously cleaning up their act, and they will be investing somewhere between $3 billion and $5 billion in their facilities over the next few years. Who is the leader of nickel in the world? It is Canada. We should not ignore these opportunities that are there and, I believe, very serious.

Senator Setlakwe: You mentioned that you did not think that the contributions of CIDA and EDC were sufficient. Are you suggesting that there should be another attempt by a different organization within the government to provide support?

Mr. Denom: I am saying that the business has changed. CIDA and EDC really kick in later in the project development cycle. At the front end there is little support, except perhaps a bit from CIDA Inc., but CIDA Inc. has limited funding and has taken a strong mandate in the area of civil society and the environment, which we do not have any quarrel with.

Among the scenarios being discussed is one that this new institution actually be a subsidiary of EDC; that setting up a separate Crown corporation is perhaps not justified and would be quite an elaborate process requiring legislation. It falls close to what EDC is doing, but upstream.

Senator Setlakwe: Are you talking only about long-term financing?

Mr. Denom: EDC provides short- and medium-term financing right now.

Senator Setlakwe: Are you talking about longer terms than they are now affording?

Mr. Denom: Not necessarily longer terms but perhaps lower return on equity, a lower rate of return, and being prepared to look at what is nominally a more risky situation. Because you are looking at the front end of projects, the earlier you are looking at a project the more chance there is that the project, for some reason or another, will not materialize, so there is a greater element of risk.

In terms of the financial analysis and the expertise, a great deal of this expertise, I believe, already resides within EDC, so it would modify their mandate to handle some of this upstream work, and it would require some seed money from the government.

I presume this is being looked at by experts within the government.

Senator Setkakwe: I was just wondering if it can be done within its present mandate without legislation.

Mr. Denom: I am out of my depth.

Senator Di Nino: Mr. Chairman, it would probably be easier if I direct the question to you in order to get from the research some of the mandates that agencies of other countries have adopted as a means of assisting business.

I ask the witness to give us, in effect, his definition of what this agency would or should do for Canadian businesses. It would be helpful if he could give us any of the current mandates of some of the other countries. That is, the developing financing agencies that he was talking about.

Mr. Denom: Yes.

The Chairman: I would have thought that the Germans were the most advanced in this area, but maybe I am wrong.

Senator Di Nino: The Germans are an example of a state-owned entity, but others have a combination of state and private. I would like to get an idea of what the others are doing.

Mr. Denom: I am aware of some of the thinking, but I am not up to date.

Senator Di Nino: What is your wish list? What do you think the Canadian agency should provide to Canadian companies?

Mr. Denom: I would say the primary service is to be a source of loan money, of equity, of guarantees, and management and advice at the early stages of projects in these emerging and transitional economies. In other words, it should come in as a participant in the early studies of the projects, and to be an early investor into these projects.

Senator Di Nino: Equity or debt, or both?

Mr. Denom: It would be both, depending on the circumstances, but it would have the ability or the mandate to invest either, or perhaps both, depending on what good financial analysis dictates.

The Chairman: Senator Di Nino, I have been thinking about this situation, because this committee, as we all know, is quite knowledgeable about the European Union and quite a few aspects of it. I will ask our researchers to come up with some information.

At the beginning we discussed the importance of the relationship between Germany and Russia, which is the number one Russian relationship, and we should know something about it. We will do that.

Senator Di Nino: I am happy with that.

Senator Grafstein: To you and to the researcher, while you are looking at the German experience you should also look at the Japanese experience. Japan has been very successful, particularly in Asia, in developing investment potential between Japan and Asian developing countries.

Senator Austin: Just on the subject of asking the researcher, I would like you to keep in mind the dichotomy between investment banking, which is essentially putting the money in once the feasibility can be judged, and taking an equity kicker for some risk and venture capital, which is what my colleagues seem to be talking about, which is buying down the front end of the risk so that you are on the risk. You are not a lender, which EDC is, a banker, but a venture capitalist, and any instruments of international venture capital supported by the state would be a most interesting thing to understand.

The Chairman: I want to explain that Peter Berg is our economic adviser and he is not coming to these meetings because he has other things to do. He will be looking into this. This committee has been following the European experience, in particular, for some years now.

Senator Corbin: Mr. Chairman, I am a little dazzled, befuddled and confused at this moment, but before explaining, I wish to thank Mr. Denom for his contribution this afternoon. He makes some very valuable and positive points.

However, in the overall context of today's hearings, I must say that we are not hearing the same message from repeated witnesses. I quote from the pages of Mr. Denom's presentation, the pages of which are not numbered:

All the major decisions have been taken to move the politico-socio economic system from a communist, centrally controlled regime to a democratic market economy system.

This morning we heard from learned professors from Carleton University that the Russians are resisting that very approach. I appreciate that Mr. Denom comes to us from a particular business economic sector. He does not see the world in the same colours as academics do, obviously. Academics, nevertheless, base their information on scientific polls.

Unless, Mr. Denom, you come to us from a very narrow micro-organistic approach in terms of strictly business, you are not telling us the same thing we heard this morning from other witnesses, to the effect that Russian society is imploding on itself.

You did state that it looks at the rest of the world with some misgivings, especially the United States, and perhaps Canada, but again, we heard opinions to the contrary with respect to Canada this morning, that indeed we are viewed quite differently from the Americans. I wonder if you would elaborate a bit so I can understand your approach?

Mr. Denom: Your remarks are well founded. I do come at it from an angle very different from an academic. I admit that our business is with the larger companies, with the hard currency owners, with the more successful companies, and the people I come into contact with in Russia are the people who are doing relatively well.

I do see many other Russians who are clearly struggling. I do not have the opportunity to talk or interface with them. I certainly have not done polling or any of these academic activities to determine their situation or mood, but they are clearly less well off than those who are working in the larger and more successful industries. I take the optimistic outlook that what I see in the larger industry will eventually trickle down or somehow spill over to help the situation of what might be called the Russian man in the street.

On the other hand, there is wealth in Russia that is not picked up by the statistics. Unfortunately, there is still a grey economy. There is money. Russia is not the only country that is that way. The statistics do not really pick up and convey everything. That Russia is about to implode is, I think, too strong a statement.

Senator Corbin: I mean the Russian soul. I am not talking so much about the Russian economy. It is folding back on itself, if I may clarify further.

Mr. Denom: Tragedy and suffering are part of the Russian soul.

Senator Corbin: May I suggest, as a parting comment, that I think you are in the wrong business. When I look at the list of issues cited by investors, which you say are well documented, and there are seven pages of them, I suggest you should get involved in the business of reforming the Russian bureaucracy.

Mr. Denom: In fact, we are in that business. Take, for example, this rail project that we are developing in Moscow. The amount of regulatory reform and land reform involved is impressive, but we are doing it at the grassroots level. We say, "This paragraph is blocking the project, let's fix it. This condition is blocking the project, let's fix it."

Senator Corbin: You are saying that such things are dealt with on a case-by-case basis; is that correct?

Mr. Denom: Yes, but in many ways, that is the way reform is accomplished; just one rule at a time.

Senator Corbin: It impacts on all future projects.

Mr. Denom: Yes, it does.

Senator Bolduc: Mr. Denom, you have been talking about your business, which is infrastructure, and the business needs that you have encountered. In your dealings with other Canadians doing business in Russia, do the same situations exist for other types of businesses such as manufacturing?

Mr. Denom: Some businesses enjoy a great deal of success; some of them have had a great deal of trouble. Particularly for the smaller businesses that go in, it is a much more hostile environment.

Senator Bolduc: But for major manufacturing concerns, it is all right?

Mr. Denom: For major manufacturing concerns, there are tremendous opportunities there, and they can write a good contract and have it enforced. In fact, international arbitration will be allowed in Russia, by way of the proposed legislation presently before the Duma. If you have international financing involved in the project, you will generally get fair and decent treatment.

Senator Bolduc: Are you familiar with the European Development Bank?

Mr. Denom: We often deal with EBRD.

Senator Bolduc: Are they fairly efficient? I understand that they used to spend more money for apartments for their executive than making loans in Russia.

Mr. Denom: This is true, and they are still terribly slow, but they have given themselves the objective to speed up substantially. Their loan portfolio in Russia has more than doubled in the current year, and they are quite aggressive in the Russian market. In addition, they are absolutely essential to bring in the commercial banks on the bigger deals. Their AB loan structure is really the only one that works on the bigger deals in Russia today.

The Chairman: Thank you very much, Mr. Denom. It has been very interesting. You have given us some interesting things to chew on. On behalf of the senators, I would like to thank you for taking the time to appear.

Honourable senators, our next and last witness is Mr. John Ivany. Mr. Ivany, if you would like to make an opening statement and allow time for questions, please proceed.

Mr. John Ivany, Executive Vice-President, Kinross Gold: Honourable senators, I brought with me some annual reports for Kinross and a brochure that we had done on our Russian operation which I have circulated. The project is described, starting on page 12 of the annual report.

The Chairman: Not to confuse things, but it happens that Senator Andreychuk and I met with President Putin in December, between Parliaments. There were five of us, I believeI think that the governor of Magadan was with him, was he not?

Mr. Ivany: I believe that he was here on a parallel mission.

The Chairman: He was at the meeting with us. He gave us all a booklet regarding Magadan. I got the impression that things there were not too bad.

Mr. Ivany: They are bad. He has not been particularly helpful in -

The Chairman: There you go. Let's get that right.

Senator Di Nino: We are looking forward to your presentation even more now.

Mr. Ivany: I do not know in how much detail you would like me to describe the particular project. We operate the largest gold mine in Russia. It accounts for about 15 per cent of the Russian gold production. It is a rather spectacular deposit in that the ore is of a very high grade, and it is mined by open pit methods, so that the costs are very low.

The bad news that goes along with that, as it always does with these projects, is that this was a capital-intensive project. The original investment was approximately US$240 million and, subsequent to that, another US$20 million of working capital had to be provided to keep things going. The real cost was US$260 million.

Like most gold mines, it had a short life. It had a little over 2 million ounces in reserves, and about a six-year effective life. The risk to this business is that gold prices are cyclical, and unless you have a long enough running mine, you have the risk, as happened with this project, of mining it out during a depressed price cycle.

Making an overall profit on the investment has been difficult. That has been difficult to get across to the Russians because this concept of return on investment is new to them.

Kinross is a mid-sized gold company that finds itself in this position in Russia as a result of a merger that it entered into in 1998 with an American gold company called Amax Gold Corporation. Amax Gold was a subsidiary of a large U.S. copper company, Cyprus-Amax. Cyprus-Amax Minerals Company had started exploring in Russia in the early 1990s when parts of the far east of Russia had been unavailable, before even Russians were allowed to go in and poke around. They were looking principally for copper and stumbled on this deposit. They had a publicly traded gold subsidiary so Cyprus built the mine with financing from OPEC and EBRD, and ABMN World Bank.

Cyprus itself put $40 million into the capital. The Russian shareholders actually put up equity money, but they, in turn, had borrowed that from the regional government. Essentially, all but $40 million of the capital was loan money from one source or another.

After the merger, the Kinross management became responsible for the operation of this mine. I can speak to the experiences we have had operating it. As to building the mine, I could only give you anecdotal evidence from what I have learned from the Cyprus people. Suffice it to say that that was a very difficult project. They were breaking new ground with regard to importing equipment into Russia; they were new at dealing with Russian mining regulations and putting financing arrangements into place on a Russian mining operation. I do not think that there had been any serious development of a Russian mineral property using western financing before this. There were a lot of novel approaches at the time.

The Americans tend to work from a "top-down" mode, or at least Cyprus certainly did. They went to the highest levels of the U.S. government. They actually had Vice-President Gore go to bat for them on several occasions in order to have certain measures introduced into the contractual arrangements. The project in the end was financed because the OPEC and EBRD people took comfort in the fact that both the Russian Prime Minister and President had issued decrees in support of certain commercial aspects of this project. There was a scheme in place as to how the gold was to be sold and how money was to be taken offshore to service these loans.

We felt fairly comfortable when we took over as to all of this happening. We were quite surprised because, although these decrees were in place, none of the underlying legislation that would enable these decrees to be effective had been passed. Even though we had a decree saying we could export gold, there were no customs regulations in place that would allow us to get it through customs. We had issues with the central bank about an offshore bank account that was an integral part of these loan arrangements.

We needed to start from scratch. We found ourselves literally wandering from office to office in Moscow trying to solve the problem of the day. That, in my experience, has been pretty much how we have run this mine in the last three years.

We have been lucky; we have had no serious problems that we were not able to address and overcome, but on almost a daily basis we have run into problems that have no adequate precedent. You just wander around and find somebody that will listen to you. If it requires legislation, you need to go that route. If it requires a regulation, you need to go that route.

The good thing about the Russian bureaucracy, as frustrating as it is to deal with, once you get whatever procedure you are looking for in place, it becomes the set way to do things. The second, third and fourth times that you want to do something are never a problem.

We have been a fairly positive influence in a very depressed region. I do not know what the governor of Magadan told you about Magadan but it is a remote province of Russia. It is in the far east of Russia. In the early 1930s, the city of Magadan was literally created as the administrative headquarters for Stalin's Gulag operation. Most of the non-indigenous residents of Magadan had forebears who went there as prisoners or guards. It is a harsh climate. Quite frankly, every time that we go over, we wonder how, aside from us, people make a living. There does not appear to be any other thriving economic enterprises.

There is a fishing business of sorts, but it is not as robust as the fishing industry in Kamchatka, which is across the bay from Magadan. There are small, local types of farming and brewing businesses. I believe that the actual unemployment rates in Magadan are far in excess of 50 per cent.

Quite frankly, it is a mystery to those of us who go back and forth there regularly as to how these people exist. They do not appear to be starving, they appear to be reasonably dressed for the cold weather, but there is no evidence of how they make an income. I think that much of it has to do with subsistence living. Most of them have small plots of land outside the city where they grow vegetables to last them through most of the year. Otherwise, I believe it is similar to pre-welfare days in the United States: When a neighbour is in trouble, you help them out. It really is quite a desperate situation.

The Chairman: How do you get to Magadan?

Mr. Ivany: When we first began going there, there was a regular Alaska Airlines flight from Anchorage to Petropavlovsk, in Kamchatka, and on to Magadan and Vladivostok. The airplane then turned and retraced its flight path.

In the economic crisis of 1998, Alaska Airlines decided that that was it for them, so they exited. Up until a year ago, a small regional Alaskan carrier flew once every other week to Petropavlovsk and on to Vladivostok, and people would arrive that way. However, that small carrier has since stopped flying that route. Now there is a regional Russian airline that flies from Magadan to Anchorage very irregularly. The alternative to going through Anchorage is to take an eight-hour flight from Magadan to Moscow and depart from there. That amounts to eight hours and eight time zones.

It is a fairly difficult part of the world to access, and we are a heavily taxed enterprise. We paid over US $30 million in taxes, most of which went to the regional governments. I would think that their budget depends on us for at least 50 per cent - and perhaps 60 per cent - of its income.The obvious evidence of this came to light this past winter when, for the first winter in our experience, they did not shut off the electricity for a period of time every day because they had run out of oil for the power plants. The heating in these apartment blocks, which are what people live in, goes off as well as the lights for eight or 10 hours each day. It is quite incredible that this happens, but it does.

I do not know if I have much else that I can tell you. We have had good experiences working with individual Russians; we have almost 500 people on the payroll, and we have only eight expatriates involved in the operation. Most if not all of the Russian employees have a high school education or the equivalent thereof, and more than 50 per cent of them have some post-secondary education, and they are skilled people. The training that we have provided has been aimed at teaching people to operate efficiently and at the lowest cost possible, so that the company can squeak out a profit. That whole mind-set was not inherent to these people.

The location of the mine site itself is so remote that we fly people in and out. They are in for four weeks and then out for two weeks. We have managed to deal with alcoholism, which is a serious problem for people with workforces in that country, by having a dry camp and making it as difficult as possible. We operate on a zero-tolerance basis, and we have not had high incidences of drunkenness on the job.

Also, because the area is so remote, we have not been subjected to the common thuggery that many people encounter in the country.

The Chairman: I noticed, when I met the governor, that Magadan is the administrative centre of, basically, the labour camps. Where do you stay when you are in Magadan?

Mr. Ivany: We have several apartments that are used by our three senior managers - expatriates - who live in Magadan. The rest of the personnel live up at the camp. The company has about six or seven apartments that we keep for visitors to stay in. As well, there are two hotels.

The Chairman: How long will the mine be open?

Mr. Ivany: We will finish mining in 2002, and we will continue to process stockpiled material until the end of 2003, unless we find another ore deposit. As described in the annual report, we have had a modest degree of success with some exploration in the vicinity of the mine. With any degree of good luck, that success will develop into a deposit that could keep this operation going for another five or 10 years.

Senator Graham: Mr. Ivany, you talked about a second development that the company has explored. Could you tell me if that was the one in Birkachan?

The Chairman: That is a good question, because it will be a blow to the local government when your company leaves, as there does not seem to be anything else.

Mr. Ivany: That is right.

Senator Austin: To fill in a little Canadian-related history about Magadan: in 1955, the city was visited for the first time by then Minister of Fisheries and Oceans, James Sinclair. Unfortunately, he fell off a dock, broke his back and had to be flown from Magadan back to Canada.

The Chairman: Why do I think of Magadan from the 20s or 30s?

Senator Graham: Perhaps you are thinking of it as the centre of the Siberian gulag.

The Chairman: Its economy was based on fishing.

Mr. Ivany: Yes, there was a small indigenous population that herded reindeer and there was also a fishing business. However, the beauty of it for the gulags was that they could take prisoners by train across the country to Vladivostok, load them on to a boat and dump them off in Magadan, literally in the middle of nowhere. The town itself was built for that specific purpose, as the administrative centre. There is a small museum in the town, as well, that is quite remarkable.

Senator Graham: There is a road that they used to walk up to the labour camps, called the "Road of Bones," and for good reason.

The Chairman: I happen to own a book that was written in about 1898, called The Paris-New York Railway. It is a description of the survey that was done from Irkutsk to the Bering Strait. There was a scheme to build a railway. The surveyor used dogsleds and snowshoes, and there was a customs cutter to meet him at the Bering Strait, which took him across the strait to the location of the proposed railway. It is interesting because, as he travels far away, he runs into these camps. This was happening in Czarist Russia. It was quite the story.

Senator Austin: Mr. Ivany, in your evidence you defined the differences between your experience in Russia and those of some other Canadian investors. There is a governor in Magadan and a political administration. Have they done anything that has not been "sympathetic" to your investment?

Mr. Ivany: It is interesting. When this operation was first put together, there was a different governor in power in the region, and the Russian shareholders of Omolon, the Russian company, were all friends and supporters in some way, shape or form of the former governor. With the change, our Russian partner, the main one of whom is a fairly influential geologist who has been in the region forever, was able to deal with the local politics and, quite frankly, he sheltered us from a lot of fairly nasty confrontations, particularly on the local level. He has had an ongoing contest with the governor, threatening to run his own candidate against the governor in recent elections.

In the privatization he ended up with interests in a number of deposits in the far east of Russia and it looked like he would do very well by that whole exercise. With the total erosion of prices, particularly on the precious metal side, he has not done very well, and the loan that I mentioned earlier that he got to provide his equity into this project is now coming home to haunt him, and the governor is using it as a hammer to get his way.

For the first time in the last three or four months, we have had to deal head-on with problems created by this governor. Nothing is in the open, and there is nothing blatant about it, but we are getting pressure. We have a prosecutor paging through the original records of the company, challenging the way some of the shares were issued back in 1993 or 1994. Our oil tanks are inspected 80 times a month while no one else in the Oblast has their tanks inspected.

We never have the governor directly dealing with us. We always have people telling us that if we did this or that, life would be a lot easier. The problem with all of that is that you do not know whether these people are authorized to speak for the people they say they are speaking for, or whether what they are telling you is nonsense. We have done the only thing we can: We just go straight ahead and get about our business. We do not make questionable payments to people and so far we have survived. However, it gets increasingly difficult.

Senator Austin: That is where I wanted to lead you. According to your annual report, you are doing step-out drilling, regional exploration within 50 kilometres of your present operation. You have what looks like an interesting property at Birkachan, and if you come to the point where that property justifies capital investment, what business conditions can you expect in order to move that particular development toward a realization?

Mr. Ivany: You do not get title to mineral projects in Russia in the same way as you do in Canada or the United States. Basically, everything is under licence. The licences contain some rights and a number of obligations - more obligations than rights, in most cases.

We have a licence that allows us to explore, and we have a right to get an exploitation licence ahead of everyone else if we find anything as a result of that exploration. The licence is issued by both the federal authorities and the regional authorities. Both have to sign off on it.

We are now in the throes of trying to convert the exploration licence into a longer-term hybrid between exploration and development, just to protect ourselves in an ongoing fashion. Again, we are seeing the fine hand of the local administration in terms of delays in progress with regard to getting necessary changes to that licence. All of this revolves around the fact that the problem of the day for the governor is that he wants our partner to pay back this loan money. He knows our partner does not have any money and he wants us to pay it in his stead. We have been going around in circles on this.

Senator Austin: From where does your power come? Is it independent of any grid? Do you generate your own power?

Mr. Ivany: We generate our own power.

Senator Austin: From where do you buy your oil?

Mr. Ivany: A local Russian distributor.

Senator Austin: Is that a reliable arrangement?

Mr. Ivany: No. The first year there were no problems. Last year, when the prices started to go up, he ripped up the contract. We have to service this mine with a winter road, so we have four or five months in which to get all of our requirements for the year up the road. He had us at that stage of the game, and we ended up paying a new price for oil.

Senator Austin: We have heard, from previous witnesses this afternoon and from yourself, how unrelated to the time value of money or return on investment the experience still is in Russia. These are difficult conditions for foreign investors. The purpose of our inquiry is to determine Canada's interests in the development of Russia and Ukraine, but in your case Russia. There are all of these difficulties there, and so much else of the world is less difficult. Although many parts of the world are still difficult, at least there are rules and Canada has the ability to make representations that affect events.

Do you think Canada should pursue the development of a relationship with Russia aggressively? Should we use taxpayers' money to underwrite risk in order to establish a Canadian presence in the Russian business environment?If your answer to that is yes, how would we justify it?

Mr. Ivany: I do not think Canada can take a lead role in this. The requirements of Russia are huge in terms of rebuilding an economy. There are basically two countries: Moscow and the rest of Russia. The difference between Moscow and anywhere else is really quite remarkable.

Moscow has a veneer of prosperity these days. There is a lot of oil money. Downtown shops are full and people are spending money. They are driving big fancy cars. If you get too far off the beaten track from downtown Moscow, you start to see that not everyone is sharing in that prosperity. If you get outside of Moscow into the countryside, you go back 50 to 100 years. The difference is remarkable. There is real inequity.

When there is that kind of unequal development in a country, it is at risk of coming apart at the seams. It is in the interest of every developed country not to see that happen. There is a reason to participate in saving Russia from itself, if you will, but I do not think Canada can take the lead. I do not think there are Canadian companies that can stand to go in and solely bear the risks of some of these investments. The Canadian banking community refuses to look in any rationale sense at lending to projects in Russia, and I suspect that is because there is such a high degree of risk associated with such projects that they cannot afford to take them into their portfolios.

Canada should participate vigorously through associations such as the World Bank and EBRD, which are the single most visible presence in bringing economic assistance to Russia right now.

Senator Andreychuk: I understand that President Putin has installed some "super-administrators," whatever they may be called, in an attempt to get some control over the regional governors? Has that had any impact?

Mr. Ivany: It has not affected us, and we have been trying without success. The regional governor for our area is in Khabarovsk. We have been trying for three months now and cannot even get a meeting. We have seen no effect. We still have to duke it out with the governor, if you will.

Senator Andreychuk: Will you continue to do business in Russia, although with caution?

Mr. Ivany: I do not think we would make another $250-million investment in Russia at this time. I know we would not because we are not capable of doing it. If we have success in our exploration within a reasonable distance from our processing plant, we would develop any found deposits because the capital required would be much less. It would be just developing the deposit and trucking whatever we find to an existing plant. Yes, we would do that.

We would look at other areas at the exploration level, but we would proceed cautiously at this time. We are in a unique position. I do not know how many of the EBRD's loans in the mining sector in Russia are actually current, but I suspect that, other than ours, there are not too many. We are the "poster boy" for EBRD. They keep bringing up the Kubaka project as an example.

If we wanted to expand, I think we would get the support of EBRD but we would have to think hard about going forward to another level. Over the course of the next year, the gold business in Russia will see an interesting development. The gigantic deposit called Sukhoi Log is reputed to hold in excess of 30 million ounces of gold, already delineated.

The Chairman: Where is that?

Mr. Ivany: It is south of us. Barrick and Placer Dome have been in there. It is about halfway between Magadan and Vladivostok and a little bit west.

The Chairman: Then it is south of Okhotsk, and not too far from you?

Mr. Ivany: Well, distances are deceptive in that part of the world.

The Chairman: It is in the general region.

Mr. Ivany: Yes. It is a billion-dollar development. It is huge. The Russians believe that the mining community is falling over itself to get the licence to develop that property. It will be very interesting to see the actual response when it goes to tender.

Senator Grafstein: I am looking at a phrase on page 12 of your financial statements: "Birkachan could perhaps extend the life of the Kubaka operation." That is brilliant. We could entitle our report "Could Perhaps" and that would sum up the evidence that we have heard today.

When I look at your financial report, it strikes me that you have done quite a magnificent job in terms of controlling your costs. As a quick calculation, your projections are out about $5 million. Your cost savings are $4 million on the project due to lower costs and tight management. I assume it had a lot to do with the Magadan special economic zone structure?

Mr. Ivany: Not really. The Magadan economic zone was a pet project of the governor's. Its effect is to take monies that are being paid anyway and direct more of them locally, rather than to the federal budget. The governor lobbied hard to get this economic zone created prior to Putin's election. Putin got in and became concerned about the autonomy of the governors, and so he challenged this economic zone. For a period of time, we stopped participating in the economic zone and went back to paying regular taxes only. The actual benefit to us of being in that economic zone is about $1.5 million.

Senator Grafstein: Is that in deferred taxes?

Mr. Ivany: No, it is actual taxes paid. We pay a VAT tax on everything we purchase. Notionally, when you sell things, you get a refund of the VAT tax, but there is no VAT tax on gold sales, so we must offset our VAT against other federal taxes. Therefore, the fewer federal taxes we pay, the less chance we have of off-setting that VAT tax. Our benefit may be skewed for that peculiar reason.

Senator Grafstein: It does not work like the economic zones, for instance, in northern Mexico where essentially there was a net benefit to participating?

Mr. Ivany: That is right.

Senator Grafstein: You are really re-deploying your own money. It is not a true cost saving or a true incentive?

Mr. Ivany: It was a modest saving.

Senator Grafstein: Focussing on the idea of a Magadan special economic zone - that is its name, and we have seen that in two or three other regions of Russia in terms of testimony today - is this a way, at least from a Canadian policy standpoint, to present a bilateral set of agreements with Russia whereby if in fact these are established, they are truly special economic zones in the sense that they end up being true incentives to investment by cutting administrative problems and so on.

The fact that you are wandering around Moscow is contrary to what the special economic zone is supposed to do. A zone should, in theory, organize all the administrative strands together in one place. That was done in southern China, in Xinjiang, and it worked very well as, essentially, an extension of Hong Kong. This Russian system is more like mirrors than reality. Rules are applied differently in different zones, and from industry to industry.

Mr. Ivany: Yes. Most of the economic zones that I have experienced are set up to accommodate investment in a manufacturing sector, to actually do manufacturing for export. In a natural resource context, there is not, to my knowledge, a workable model that I could point to as useful.

In terms of the Russian experience, gold still has some mystique in the Russian psyche in terms of its use. More so than others, they view it as a monetary instrument still. The central authority in Russia is loathe to let go of the regulation of the gold business. We are required to offer everything we produce first to the federal government. They can buy it on our established terms. If they do not buy it, we are entitled to export it now, but we did not have that right when we first started. We had to go through remarkable hoops in order to get that right, and there is still a very tight rein on us.

The notion that Russia would create an economic zone and let the gold business go willy-nilly in that zone is not workable.

Senator Grafstein: Some years ago, there were rumours that gold took a dive in part because Russia was quietly putting on the market a large portion of its reserves in order to maintain economic stability. That was counterproductive to your project which was based on a very conservative price objective of $160 per ounce. Now gold is $139 an ounce and between cup and lip is Niagara Falls.

Mr. Ivany: Exactly.

Senator Graham: What is the market value of an ounce of gold today?

Mr. Ivany: US$260 or $265 per ounce.

Senator Graham: You invested $40 million originally, and you put in $20 million working capital for a total of US$260, and what was your return on that investment?

Mr. Ivany: It is negative.

Senator Graham: Was it negative because of the costs?

Mr. Ivany: It was negative because of the price of gold. When this project was conceived, the feasibility study under which it was built envisaged a $380 gold price. Our main problems with this project have nothing to do with Russia and everything to do with the price of gold.

Senator Graham: Apart from the weather and geography, the government and the price of gold, how are things?

Mr. Ivany: The good thing about Russia, for people in my business, is that there are a number of deposits that were thoroughly explored under the Soviet system. Technical risk is minimized when you get involved with these projects. They had work done on them beyond anything you would ever imagine doing in a market-driven economy. The people with whom you work are literate and skilled. It is not like going to parts of Africa where you are dealing with tremendous issues of trying to educate people just to get them up to minimum standards. The basic infrastructure, although it is eroding badly, is at least there. There are cities you can go to across the breadth of the country. There are railroads and airplanes. There are positives for doing business in Russia, but you struggle, and most of the problems are man-made, as they are everywhere, I guess.

Senator Bolduc: You were in a very peculiar situation. You felt as though it was in Russia, but somehow it was not in Russia. You were in a very isolated area, and you came with money, so you could manage to do your own things without much interference by the state?

Mr. Ivany: No, I think we had the normal amount of government oversight. What we did not get was the Mafia bothering us, which is a problem for people investing in regions closer to Moscow, if you will.

Senator Graham: Then the Mafia has not gone that far?

Mr. Ivany: No.

Senator Corbin: Mr. Ivany, in two days' time, at approximately this time of day, you will be in the midst of your annual meeting.

Mr. Ivany: Right.

Senator Corbin: I am sure that, in your 2000 annual report, you did not put in the following comment just to impress the shareholders, and I quote:

Kubaka continues to comply with all of the Russian environmental standards which in many cases are more strict than those required in North America.

I have been going rapidly through this information sheet on the mine, and I am quite impressed, frankly, with the measures you take to protect the environment. Some of it, if not most of it, is due to North American if not Canadian technology applied in Russia. The comment that I am really focussing on is that the standards in many cases are more strict than those required in North America.

Mr. Ivany: It is like a lot of things in Russia: The standards are very strict; the enforcement of the standards is spotty. You will find that many Russian-owned operations operate in total disregard to these standards.

Senator Corbin: That was my next question. Thank you for saying it.

Mr. Ivany: One of the problems that international companies have now going anywhere in the world is that you can run but you cannot hide. The non-governmental organizations follow you from project to project anywhere you go in the world. You cannot try to escape North American-type environmental regulation by going to Timbuktu or to Magadan. If you think you can do that, you quickly get disabused of that when you go there because you are watched very closely by the NGOs. The mechanism that they have found, which is very effective, quite frankly, is that they put political pressure on the EBRDs and the OPECs of this world, and they put you to the test in terms of your environmental performance right in the context of your loan agreement. You have to perform that way. I think most responsible companies would not think of building a project in Magadan any differently than they would build it in Timmins, Ontario, but when you go to Russia, you see some atrocious examples of people who just ignore the system, and the enforcement of the system is very spotty.

The Chairman: Thank you, honourable senators. On your behalf, I once more thank our witness for having given us a very interesting description of the problems of working in an isolated part of the Soviet far east. It is not as I thought it was.

Mr. Ivany: It is all part of Russia now.

The committee adjourned.

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