Put out the light: what investors will say after the change in subsoil use legislation

In the summer, Ukraine introduced new regulations to control the extraction of mineral resources. The President signed a decree implementing the National Security and Defense Council of Ukraine (the NSDC) decision back in July.  According to the document, the state has put 37 types of minerals under close control. Iryna Suprun, CEO of the Geological Investment Group, corporate and environmental law attorney, told the independent journalistic business portal MIND, how these rules will change the market situation, what they mean for business, and, in particular, how they will affect investors’ willingness to invest in Ukrainian subsoil.

Subsoil development is not only a business, but also a big risk. Therefore, investors are interested in incentives from the state. Using the NSDC decision mechanism, the state has actually changed approaches and rules in the field of subsoil use.

The year 2021 was significant for subsoil users, primarily in terms of legal regulation. We have a new body that shapes the agenda in this area – the NSDC. However, this approach is already quite critical and spontaneous. What does this mean for business?

What does the document prohibit?

The presidential decree that enacted the NSDC decision introduces a number of prohibitions. These include a ban on extending the validity of special permits for subsoil use, the right of the state to suspend and revoke special permits without a court. In addition, it also expands the powers of government agencies to approve business conditions – in particular, the Ministry of Environment and, additionally, the Ministry of Economy and  the Ministry of  Strategic Industries of Ukraine. It also includes stricter conditions for making changes to the work program, fulfilling special conditions for subsoil use, and increasing the responsibility of subsoil users in the process of subsoil use.

Regarding the ban on extending the validity of special permits, I hope that we will at least receive clarification or implementation of the legislation or the Subsoil Code or Resolution 615 that will regulate these issues.

How will the new rules affect business?

The next is the ability to suspend or revoke special permits without a court. This is a critical issue for business. Since a special permit for subsoil use is not just a document, but a property asset, it can only be revoked for two reasons: with the consent of the subsoil user and in the event of liquidation of a legal entity. All other grounds for termination of the right to use subsoil are exclusively judicial, and only the court makes the final decision on whether a subsoil user has the right to use subsoil or not.

As for the additional approvals for business by the Ministry of Economy and  the Ministry of  Strategic Industries of Ukraine, it is currently unknown what exactly these ministries will approve and what additional responsibilities they will put on subsoil users.

Why might the document scare investors?

At the same time, each subsoil use project is unique. Extraction of minerals and creation of a value-added product is a very complex process and it is tied not only to extraction but also to other production links, such as the construction of a factory for processing raw materials. These projects are not like two peas in a pod, so there is no universal program.

For example, the implementation of the NSDC decision resulted in the loss of a special permit for gas extraction at the Stanovske field in Zakarpattia region by Tysagaz LLC. The company’s ultimate beneficiary is the founder of Cub Energy Inc, an American company with assets in Ukraine. The reason is that the latter failed to start extraction within two years after receiving the special extraction permit, even though a special permit was issued to Tysagaz LLC for the period of 2016-2036.

How to implement a course on rare earth metals?

Separately, the government plans to reform the titanium industry using the best international practices to implement investment projects, a full cycle of titanium processing in Ukraine and export support for the production of final products. The ideas are good, but we need to understand how and on the basis of what laws and regulations they will be implemented.

The government has also paid special attention to lithium, namely the development of the Dobra plot. However, it has not yet worked out a mechanism to attract an investor: to put the site up for auction or to take a more difficult route and announce a tender for a production sharing agreement. In order to maximize the benefits of this project, a high-quality mechanism for attracting investors needs to be developed.

How to keep your business running in a legal anarchy?

The legal system in the field of subsoil use is so unstable that the government is questioning the law that was in force five years ago. According to the NSDC, in 2021, the State Service of Geology and Mineral Resources of Ukraine, was to conduct an unscheduled audit of all permits issued to subsoil users since 1994 and return them to the state if they were issued with violations or if violations of the terms of use were detected.

There may be two reasons for the revocation of a special permit for such companies: either the state believes that the company does not extract minerals, or it illegally obtained the right to use subsoil.

The only thing a business can try to do in such circumstances is to:

– not delay the start of extraction;

– pay taxes, even in advance, so that the state sees that it has something to lose.

But even this does not guarantee 100% immunity for businesses. It is still unclear what additional investment obligations the subsoil user will have to fulfill in order to develop the facility and grow the business. The investor does not understand what he will be approached with tomorrow and whether the special permit will be canceled only because the previous government issued it. In fact, the subsoil user finds himself in a situation where today he is within the law, but tomorrow he is not.

This means that the decision of the NSDC is selective, a kind of litmus test: today this decision is applied in the field of subsoil use, and tomorrow it will be applied in another area, because the scheme has been developed. Such decisions are not aimed at business, but at the public: “land to the people” is a very attractive approach that society will support without any questions.

Meanwhile, a draft law on amendments to the Subsoil Code is in the parliament, which could regulate the issue of special permits instead of the manual regime of the NSDC decision. But for some reason, the government is not adopting this law.