Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 7 - Evidence
OTTAWA, Wednesday, April 25, 2001
The Standing Senate Committee on Foreign Affairs met this day at 4:10 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, I call the meeting to order. I want to apologize to our two very patient witnesses who have been waiting at least 45 minutes for us to commence.
Mr. Neil McIlveen, Director of Analysis and Modelling Division, Natural Resources Canada: Mr. Chairman, we appreciate the opportunity to provide you with our insights into Russian politics and some work we have done over the years to provide energy policy advice, both to the central government and to some of the regional governments.
That work was done largely through a project that was initially funded by the Department of Foreign Affairs and International Trade in 1992, called the Legislative and Regulatry Initiative, but we all called it the "government-to-government project."
We thought we would talk about that project, and its extension, because it is the core or the spine of the work we have done in Russia on energy, particularly on oil production. It helps to point out some of the lessons that we have learned from that. I do not propose to go through the deck in detail, but you might follow it in terms of its history.
I coordinated this particular initiative between 1992 and1996. The Canadian Institute of Resources Law subsequently took it over and has since expanded and deepened it considerably.
This initiative was developed during the final stages of the collapse of the Soviet regime. Canada and a number of other countries were quite eager to provide advice and assistance to Russia to encourage the reform process. The then minister of my department, the Honourable Jake Epp, announced the initiative in Moscow in 1992. We were asked subsequently to go to Russia to get a better idea of what advice from Canada the Russian officials might be interested in.
We were given formal funding for the project fromthe Department of Foreign Affairs and International Tradein 1993. The idea behind the initiative was that the oil and gas sector was critical to the success of the Russian reforms. As you probably know from your inquiries, oil and gas exports are a major source of foreign exchange earnings for Russia. The numbers vary, but they are approximately 70 to 80 per cent of Russia's total exports. Oil production is quite critical inproviding the wherewithal for reform. In terms of social peace, it is clear that energy, and access to energy by Russian citizens, are critical to that process.
We also thought that there would be quite a number of similarities between the Canadian and Russian oil and gas industries. Both countries are federal states, and, as in Canada, the regions in Russia have control over natural resources, or at least share it with the central government. There is somewhat similar geology. Most of the petroleum resources in both countries are conventional and land based; much of our technology is exportable. Also, ownership of the resources in Russia is vested in the state, which is again similar to the situation in Canada, but quite unlike that in the United States.
We also saw this government assistance as having some commercial implications, as a gentle form of trade promotion. It also gave Canadian companies some access to Russiandecision-makers.
We recognized quite early that all wisdom did not reside in my department, Natural Resources Canada. We felt it was best, in terms of what Canada could offer the Russians, to bring together expertise from a number of organizations, both in the private and public sector. Depending on what the Russians wanted, we would emphasize one or the other in providing that assistance.
We developed an early partnership involving, at times, Natural Resources Canada, Indian and Northern Affairs, the National Energy Board, and the Department of Finance; and on the provincial side, The Alberta Energy Department, as it was called at the time. That department was one of the early, almost "charter" participants in this, as was the Canadian Institute of Resources Law in Calgary.
Over the course of the project, we also involved people from the private sector, including from Petro-Canada and several consulting firms.
The remainder of that deck talks in detail about the projects. I will not go into them much now.
We tried to determine the major areas on which the Russians wanted to focus in reforming their oil and gas management regime. We settled on seven projects, with their agreement. They asked us to review one of the early versions of the Russian oil and gas law, which I believe failed before the Duma eventually.
They were quite interested in the joint management of resources in a federal state. As I said earlier, their law of the subsoil provides that both the central government and the regional government jointly own the resources. Therefore, they arequite interested in systems that we developed to deal with federal-provincial relations in energy, and in particular, how the system works in the offshore of Newfoundland and Nova Scotia.
They were also quite interested in the development of tax systems, fiscal systems, both royalty and income taxes. They were interested in rights management, and the issuing and trading of exploration licences. There was also quite a focus on the development of good oilfield practices. When you visited an oilfield in Russia, you could usually tell where all the gathering lines were from the oil on top of the ground. There is still a critical need for the application of appropriate technologies and rules governing production.
There was also quite an interest, particularly in the northern areas, in the role of Aboriginal groups in resource management. There are several Aboriginal groups along the northern shore of Russia that do have rights to the resource.
Finally, Russian officials were also interested in privitization. At the time, Russia was in the midst of privatizing many of its companies and was quite interested in the Canadian experience, particularly with Petro-Canada.
We put projects together around those topics. It is difficult, given Russian politics at the time, to determine how successful these were. Things were disintegrating in many respects.
At least we laid the groundwork. In the course of putting on these projects and travelling back and forth, we developed close ties with the officials, both in the Russian Ministry of Fuel and Energy and several of the other organizations responsible for policy in that area. As I said, CIRL further developed and deepened the project. From what Ms Keeping will say, you will see that we took some of the more general topics and discussions that we had with the Russian officials and focused them on practical applications for use in their resource management system.
The Chairman: I would like to ask a question related to your testimony. We have a map here. I understand that the main Russian oil-and-gas-producing region is a not very large area along the Arctic Ocean, a peninsula. Is that correct?
Mr. McIlveen: No.
The Chairman: Could you point out to us on the map the area about which we are talking? It might help us focus.
Mr. McIlveen: There are a number of oil-producing regions in Russia. It is still the world's second largest oil producer. The major areas in the region of Khanti-Mansi are around west side of the Urals. I think about 60 per cent of the oil comes from that land-based area.
Senator Bolduc: In Russia itself, not in Kazakhstan?
Mr. McIlveen: Here is Kazakhstan. The area that I am talking about stretches from Tyumen in the south to Komi in the north. There are other producing areas. There is a fairly large production base around the old Volgograd area.
Senator Grafstein: Nothing east of the Urals?
Mr. McIlveen: Pretty much, yes. There are some deposits to the east. They think there is a lot of potential there, but they have not done the exploration. There are two other areas where they know there is oil. It is just a matter of getting it out.
There is some offshore oil in the western Arctic. There is also some land-based oil around Archangel. The other major area known to have oil is near Sakhalin Island. The last time that I checked, there were three large oil projects ongoing approximate ly two to three times the size of Hibernia.
The Chairman: Would the production that is going to Western Europe come essentially from the area about which you are talking?
Mr. McIlveen: Yes.
I have been speaking of oil. If I remember correctly, gas is also present in the same area. There are also some large gas fields that they hope to develop a little farther to the east of the Urals, but they do not have the system in place.
Senator Andreychuk: Is there not some exploration farther north?
Mr. McIlveen: I believe so. There is some exploration going on in Kamchatka.
Senator Grafstein: Could you show us the pipeline projects? There is one going forward from Baku, Azerbaijan, in the Crimea. Is there any pipeline activity that you can draw to our attention in the area west of the Urals?
Mr. McIlveen: I do not think there is any additional major pipeline. There may be some small interconnections, but the pipeline system is actually fairly well developed in that area.
The Chairman: Does that run to Western Europe?
Yes, it does.
Senator Grafstein: Where is the major gas pipeline that now feeds Western Europe?
Mr McIlveen: There are two of them. I do not know the exact route, but one extends down through Hungary.
Senator Grafstein: It might be useful to have those on the map.
The Chairman: I agree, Senator Grafstein. That gives us more of a geographical idea of what we are talking about.
Professor Janet Keeping, Director of Russia Programs, Canadian Institute of Resources Law, University of Calgary: I will pick up chronologically where Mr. McIlveen left off and bring you up to date on what has been done on the extension of the government-to-government project. I will tell you a little about the new project that CIDA has funded, whereby our institute is working with the Southern Alberta Institute of Technology to offer professional development courses in Russia. I will continue then with a few thoughts about the lessons that I think we have learned as a group working on these projects, a little about where I hope this work goes in the future, and a few conclusions.
Although it may sound like the projects we have worked on have addressed technical issues of oil and gas regulation - and that is also true - the most worthwhile work, and where that work began to reach into Russian ways of thinking and into Russian institutions, has been at the broader level of principle. There are technical problems, and somewhere in the world there may be technical solutions to some of the problems, but Russians are both a very abstract people and also believe that everything is connected to everything else.
While our work may sound rather technical, we are engaged in working with Russians on rule of law, the need for an independent judiciary, the development of civil society to protect the broad public interest, and so on.
Although so much of what you read or hear today about Russia is depressing and discouraging, I actually think there is considerable room for optimism. I have been to Russiaover 30 times since late 1992. As a result of those trips, I believe that I have gained an understanding of some aspects of Russian life and that progress is being made. It is not a uniformly dismal picture, and I am fairly realistic about the difficulties.
Our institute applied to CIDA in 1996 for funding for a continuation of the government-to-government work. We became the signatories to contracts with CIDA for the continuation of that work in 1997 and 1998.
We continued much the same work that Mr. McIlveen described to you. We were the lead organization, but we also involved the public sector. We continued to involve people from governmental agencies - the federal government, the provincial government, and the territorial governments. We continued to work, to a certain extent, with the private sector and with NGOs.
The four projects for which we received financing under these two contracts from CIDA were identified in collaboration with our Russian colleagues and were deemed to be high priorities on the Russian agendas. The first project was the entire question of how the Russians classify and estimate oil and gas reserves. A major stumbling block, certainly in negotiations with Russiancompanies, but especially with western companies, was that "apples were being compared with oranges." There needed to be greater harmony of language and concepts on how much oil or gas might be in the ground. Without that, it would not be possible to reach agreement on the development of those resources or on the taxation or royalty levels.
The second project was a continuation of the work on licensing, issuance of oil and gas rights, and the management of their tenure. We went into great depth on the question of, "Would it be advantageous to Russia to allow companies to transfer their oil and gas licences, and if so, why?" You may or may not know that in Canada, it is a major part of the fundraising and corporate strategizing in the oil and gas sector to sell off either the whole interest in an oil and gas licence, or a partial one. It is a crucial strategy because it is the basis for the operations of the industry in Canada.
Russians who were learning of this strategy wanted to know all the details - how it works, how the various interests that are bought and sold are protected, and what institutions are needed to make such a system work. We explored that in considerable depth.
One of the articles that may have been distributed to you from our newsletter Resources was on this question, the "Transfer of Rights to Work Oil and Gas in Russia: The Debate over Legislative Change." I described the parameters of the debate, and I suggested in that article what I said a few minutes ago: While that sounds like a narrow technical question, it is actually connected to an entire set of much broader and more broadly applicable questions about the rule of law in Russia and about the need for an independent judiciary.
The third area that we explored during those years was how to integrate environmental concerns and protection for indigenous people's rights in the management of oil and gas resources.
The fourth project was called the "evaluation of joint ventures." When we applied to CIDA for funding in 1995 and 1996, joint ventures such as oil and gas projects between a Russian company and a western company were experiencing worsening conditions. The tax burden grew, the despair built, and people were threatening to leave Russia for good. The point of that project was to objectively develop the positions of the joint ventures, the problems to be resolved, and suggestions for improvements.
It was not so much that the study covered new ground, but that it seemed to be truly received as being more objective than some of the other information prepared on the same topic. Thus it received a more favourable hearing.
I will turn briefly to some of the lessons that we have learned in these years. Patience and mutual respect are crucial. Meaningful reform towards a more progressive and better society in Russia will be a long process and will take patience.
While it may sound silly, a knowledge of Russian history, culture and language helps. Mr. McIlveen and I had the benefit of a conversation with the Chair before the hearing started this afternoon. I know that he is a firm believer in this position, but there is sometimes a sense that we are talking about technical issues only. Often the problems that arise are unclear: "What is the problem? The licence is issued, why can they not just sell 50 per cent? It is a technical problem, we will offer technical solutions, and just get on with it. Why is this so difficult? "
Even a glance at Russian history helps us appreciate why it is so difficult and how integrated a lot of these major problems are.
Our belief - established along with that of Mr. McIlveen and his colleagues many years ago at the beginning of this work - that there is an important role for the Canadian public and non-profit sectors has been borne out. Many companies have come and gone in the years since we began working on Russian projects.
There is a need for a presence over the long haul that is more compatible with the goals and modus operandi of the non-profit sector. My observations are that Canadian businesses have neither the capacity nor the inclination to carry out the long-term development work that is needed in this sphere.
The third lesson was impressed upon us almost immediately when we got going on these projects. Russia is much more than Moscow. Look at the map. It tells you that. However, people say that approximately 70 per cent to 75 per cent of the outside dollars that have gone to Russia in the last decade have ended up in Moscow. Is it clear? Look at the map. It is a huge part of the earth.
We have been fortunate. Our colleagues in the ministry of energy, which was our major partner from the outset, insisted from the start that we wanted to hear what the Russians had to say. We believed that cooperation with Canadians was essential, but let us take it to all areas of Russia. That is where we spent most of our time.
In preparation for today, I was trying to list the differentplaces in which we had conducted courses or seminars. My count is 20. If we were to roll some of the work in which our institute was not involved into that list, we would be closer to 25.
The world in Russia outside Moscow and St. Petersburg is somewhere else. It is a different world and much more difficult. Attitudes are different. Availability of services and of foreign press is different. You name it, it is totally different. That is where public opinion is formed. The elite is in Moscow, but that mass of people who can make a lot of trouble, whom you want onside if you are trying to develop democratic institutions, is not in Moscow for the most part.
I have made some comments in my written brief about the connection between the development of a modern market economy and a more democratic society. I believe that those two things run hand in hand. There is some good academic work on that. There is some good reading on that point. I think that it is true.
It is sometimes quickly assumed that these are technical problems with technical solutions and that one can easily leave behind the messy business of talking about enhancing human dignity, but I do not think that is true. It is only when the dignity of these people who have suffered so much is fully respected that we get the kind of attitudes necessary for modernization.
We have learned the important lesson that assistance has to be offered at the level of issue identification and application of principles. In our experience as Canadians and westerners, these principles should be applied to solve specific problems. The detailed solutions have to be left to formulation by Russians themselves.
There is no short cut to their ability to develop their own capacity for policy analysis, their own capacity for proper preparation of legislation, and so on. We can only offer the background, and then they must develop the capacity to take that experience and apply it in their own context.
I must say that I have seen a huge expansion in the ability of Russian bureaucrats to do exactly that - to take advice and to work through quickly in their minds how they could apply it. We conducted a seminar this March. People were asking me questions about how we handle different problems. Immediately, they would understand and attempt to figure out how to apply it there. It would not work exactly the same there. They do have the ability to listen to the experience of other jurisdictions, work it through, taking their own experience into account, and come up with some possible directions for the future.
The last of the lessons that I would draw to your attention is that the Russian context matters. All our projects have dealt with have matters of policy, law, and regulation. They are all embedded in a particular culture. We can talk about the principles and explain the logic of the Canadian experience, but they must take it onboard and formulate the solutions that will work in their own cultures. We are thinking about Russia especially. I know that you have a broader focus than just Russia.
I hope that Canadian work in the future will build on the substantial foundation that has been painstakingly developed.Mr. McIlveen and I have talked today about the background that we know of and the projects we have worked on, but there are many other Canadian projects that I know of, and I am sure that you are hearing about, that have been doing some good work.
There are NGOs in Canada, including Aboriginal organizations, with an increasing amount of Russian experience. I know of some exciting young Canadian academics specializing in questions of Russian development, including economic development. They have good training, energy, and imagination. I hope that they will be given a chance to work with Russians in their areas of interest.
I hope that Canadian support will be forthcoming for further training and capacity building, because that is what I see as required in this long-term development work. I have told you that we have been fortunate enough to get CIDA support for a series of professional development courses in cooperation with the Southern Alberta Institute of Technology. We have just begun, and there will be about another four years of that project. We are working hard on that, but the need is huge.
Mr. McIlveen and I have long talked about the need to move beyond supply side questions on Russian energy matters. We would like to work on energy efficiency and perhaps some of the big energy environment issues such as climate change. We all know that in the last few weeks, the American pronouncements on Kyoto have not been supportive. I suppose there is a greater degree of uncertainty now about what will happen, but there is a lot of work to do with the Russians if implementation of the Kyoto agreement goes ahead.
In conclusion, I would say that there are glimmers of optimism. Russians need the support of well-intentioned and well-informed westerners, and only with that support will they keep moving ahead. There is some evidence that progress has been made. They have made progress on substantive legal change. They have made some progress on reform of the judiciary, and certainly on strengthening civil society.
Substantive legal change has covered many things. One of the most meaningful in the energy sector has been production-sharing legislation. We could talk more about that if the committee is interested. There has been some movement to improve the tax situation.
Reform of the judiciary is at the heart of all regulatory reform, and there has been some progress. There is some evidence that the Russian state will put more money and resources into support of the judiciary. It is only when that support is there that judges will be able to develop the necessary independence for a respectable judiciary in the country. Judges have been paid miserably, as have virtually all others except the most elite of the civil servants. Some of that is changing. Judges' salaries are being improved.
For me, the strengthening of the civil society is some of the best news. We have started to work with some environmental NGOs, and particularly closely with one. The level of commit ment, intelligence, and, to some extent, success of some of the environmental NGOs gives one grounds for optimism. There is a lot of intelligence and good training going into protection of environmental values.
In the process, real civil society values, public participation, calls for public participation, sharing of information, demands for greater access to information, are being developed. Many things without which an environmental movement cannot succeed also nurture other values.
Senator Grafstein: I have a few brief questions before we get to the heart of the issues you raised. Is the jurisdiction for energy resources federal or state/provincial? Are there both federal and state public entities for both gas and oil?
Ms Keeping: Onshore oil and gas is a shared jurisdiction. It is said to be "joint." Offshore is almost exclusively federal. Since most of Russia's current oil and gas activity is onshore, it falls within a shared jurisdiction. The division of powers between what are called "subjects of the federation" and the central government is not like Canada's. We do not have anything quite parallel to that division, but it is actually shared. Federal legislation has paramountcy if there is a conflict.
Senator Grafstein: The Russian actors now are all state owned, both federally and regionally?
Ms Keeping: Do you mean the companies? There is still a strong state ownership percentage in virtually all Russian companies. In some cases it is a significant percentage, but most of them have been privatized.
Senator Grafstein: How do the governments control the energy actors? Is it through share ownership, through regulation, through taxation?
Ms Keeping: They have a competitive bidding or tendering system for the issuance of licences, and they aspire to a system that would look quite similar to ours, which is state-owned resources developed by the private sector.
Senator Grafstein: Are state-owned resources given priority when it comes to licensing and so on?
Ms Keeping: All of the subsoil is owned by the state, unlike in Alberta, where it is only 80 per cent. In the north of Canada it is virtually 100 per cent. The only exceptions there are the small amounts of the subsoil, oil and gas and other minerals, owned by indigenous peoples pursuant to land claims agreements.
In Russia the subsoil is all owned by the state. I do not think we will see that change, but it does not make much difference in principle, because in principle that is also the Canadian model.
Senator Grafstein: You made an interesting point about the ineffectiveness of the licences. If someone is seeking a licence to get into business, do they go to Moscow or to the regional authority?
Ms Keeping: It would be correct to say the rights are issued outside Moscow in the regions, but the law provides a "two T" system whereby the administration, which means the government, the executive body of the region, has to agree and the Ministry of Natural Resources has to agree. Many other agencies give advice, opinions, and play roles leading up to that decision, but the actual issuance of the licence has to be agreed to by the relevant regional organization and the federal ministry.
Senator Grafstein: On another topic, 10 years ago, there was a huge contest for delivery of natural gas to Northern Europe. At the time, Canada, which had huge surpluses and continues to have huge surpluses, did not participate. It turned out, if I am correct, that our ability to get to market via sea would have been as cost efficient on a quantitative basis, if not more so, than transporting the gas from Russia. Have you followed that project to see what has happened? That project was built by an international consortium tapping Russian gas resources, and Canada lost out. What happened?
Ms Keeping: I am staggered to think that Canadian gas could have been competitive. The short answer is that I do not know about that.
Mr. McIlveen: I do remember a bit about the project. My recollection is that the per-unit cost was very high. The gas had to be liquefied, transported and then re-gasified. That always has been expensive, and certainly 10 years ago was very costly to do.
I do not know what has happened to that project. I certainly have not heard much about it in recent years.
Senator Grafstein: It would be useful, as a comparison, to show how the Americans and the Europeans got together to do that massive project, while Canada, which had all the expertise and was the world leader in pipeline and exports, was not playing. There have been many reasons why. I have not heard a good one yet, but perhaps it is a time for us to look at it, Mr. Chairman.
Senator Andreychuk: Carrying on with the issue, I am more familiar with the situation in Ukraine than in Russia. Do they have production-sharing agreements, that style of profit sharing and production sharing with non-Russian investors? Is that legislation in place and is it working? Is it restricted to oil and gas, or is it for all natural resources? I am aware that in the Ukraine situation, the production sharing seems to be a good fit, and it was modeled on some of the Canadian "inputs," if I can put it that way, but it is not working as well with other mineral resources. Do you have any comments?
Ms Keeping: I know for sure that the Russian legislation applies more broadly than just to oil and gas. The Russian Parliament has to pass a list, and it has to specifically approve using production sharing in a particular project. The first list of projects which could be developed pursuant to production-sharing legislation included some gold mining projects as well as oil and gas. In fact, only three of the first seven or eight were oil and gas projects. They have oil and gas production-sharing projects that are proceeding with foreign investment; not proceeding very quickly, and there are problems, but they are proceeding.
Senator Andreychuk: Can you elaborate? It is still the case that all projects must go through the Parliament? That situation used to be part of the political problem that you mentioned. If they had the laws and judiciary in place, there would be a certain amount of protection, more of a "hands-off" from the Duma. Is it still a difficulty today, or have they begun to overcome that?
Ms Keeping: I think it is still a difficulty, except to say that in the amendments made to the production-sharing legislation two or three years ago, there was a provision whereby small oil and gas projects - I do not know about other minerals - could automatically be developed on the basis of a production-sharing agreement if that is what the proponents or the investors wanted, but only under a certain volumetric limit. I cannot remember the numbers. The point is, for a certain size of deposits, they were not worrying about the political implications of letting the investors negotiate a production-sharing arrangement, but for anything over that limit, the project still has to be on the list and a statute passed to approve the list.
Mr. McIlveen: I think there are three production-sharing agreements currently more or less in place. I am not sure whether a great deal of work has been done on them yet, but the Sakhalin Island projects were accepted under that production-sharing agreement legislation.
Senator Andreychuk: I understand that many of the oil and gas resources are still state controlled, such as Gazprom, for example, and these are becoming entities in themselves that are reaching beyond the borders of Russia. They are investing into their neighbours and becoming multi-national in some cases. Can you comment on that? Is that a desirable effect, or is it a solidifying of more control in the hands of few in Russia, which has been the trend?
Ms Keeping: We can come to Gazprom in a minute, which is a very special case. Lukoil is one of Russia's biggest oil companies, and they recently bought some gasoline stations in the United States. I am not sure which company's stations they bought, but it was quite a few. It is interesting to think about that. I think it is probably, on balance, a good thing. Lukoil's other attempts to gain respectability and presence in the North American market can only have good effects. For example, for a Russian oil company to have to discipline itself so it can be listed on a stock exchange in North America is important. Just because they clean up their act and file the right documents in New York or Toronto or wherever does not mean everything will be transparent and accountable back home, but it is a big step in the right direction. We were talking about this at a seminar, and I thought that the first time Lukoil's gasoline stations are boycotted in the United States because of something the Russian government has done or something Lukoil has done, they will begin to understand what it really means to be a player on the world scene, which is dealing with benefits and rights and responsibilities.
Senator Bolduc: Are they also in Western Europe?
Ms Keeping: I do not know. I have not heard so.
Mr. McIlveen: The second part of the question was concerning Gazprom. That is a relatively special case. It is becoming an international player, but at the same time, the Russian government has effectively chosen to allow Gazprom to have a virtual monopoly in Russia, both at the production end and the consumption end. There are many reasons for that, and I am not quite sure I want to speculate on them, but it is a difficulty, certainly.
When we talk about the oil industry in Alberta, we mean the oil and gas industry. Oil companies are gas companies. There is no opportunity in Russia at all for a foreign company, or from what I can understand, even another Russian company, to invest in gas resources.
It is an issue. I am unsure whether anything serious is being discussed in the Russian government about what to do about Gazprom.
Ms Keeping: My understanding is that we might be getting close to a kind of showdown between the Russian government and Gazprom. I read recently that some shareholders' meetings were to be held in the next while. This is connected with the whole set of fascinating and important questions in Russia now concerning corporate governance.
Gazprom is such a unique entity that one would not want to generalize from it, but it is of interest that the Russian Federation owns something in the order of 43 per cent of Gazprom, and yet seems to exercise no control whatsoever over it. I think the better view to take now is that it is out of government control, even though a very large percentage of the shares are controlled. For example, the Russian state cannot get proper tax payment out of Gazprom and proper accounting of volumes of gas sold.
We are hearing some very interesting things about a recently created subsidiary which seems to be siphoning off some of Gazprom's production that is not being properly accounted for, and so on.
Senator Andreychuk: You are not drawing the sameconclusion as some other people, that the new President Putin has exercised some influence on Gazprom, and that Gazprom has reached out towards neighbours? I am aware of some of the purchases and the deals in Ukraine, for example. I think it is being read by some that perhaps that is with Putin's blessing or direction, but you seem to be saying it is a Gazprom initiative.
Ms Keeping: I do not think that these things have just one facet to them. There are many different things going on. I know that the Russian state does not have Gazprom under control, otherwise it would not be fighting with them quite so publicly on some of these issues of considerable importance, including tax revenues.
ITERA is an entity that appeared out of nowhere and has vast gas reserves. At the same time, Gazprom's production has gone down by a somewhat proportionate amount. I believe ITERA is based in Florida. It is a mystery. The Russian government cannot want that. I could be wrong. That is not to say that Putin has not influenced some things that have been done.
Senator Corbin: I appreciated the notions advanced to this committee. I am not an economist or a lawyer, so I will not indulge in any questioning or faulting of economists or lawyers, or academics. I am a plain man.
Some Hon. Senators: Oh, oh!
Senator Corbin: I represented ordinary people in the House of Commons, and I hope I do my duty to them in the Senate as well. I certainly appreciated Ms Keeping's comments about the necessity to understand more of Russia's history and its cultures. The language is beyond my capacity, I must admit. I have read and reread all of Anton Chekhov's short stories. They tell me a lot about a pervasive Russian mentality. He wrote in the last century, and I think that mentality persists to this day, if, as you say, you leave Moscow.
Chairman, I have a beef to raise about how we do our work on this committee. We have a country with 11 or 12 time zones, and yet we throw around names of regions, tribes and cultures. We have not done our basic homework.
We ought to bring before this committee a geographer, a sociologist, and an anthropologist. We need to understand more about Russia than we do at this stage. We have all read pieces in various magazines, The Economist and what have you, but that is not an education in itself. We ought to go back to the school bench and be taught certain basic truths about Russia.
I appreciated Ms Keeping's comments about the absolute need, if you want to get along with doing business or entertaining any kind of valid and long-term relationship with Russians, to understand where they come from and who they really are.
You used the term "civil society." That term is the object of current debates in the Senate and other fora these days. What is your understanding of the concept? I thought that I was always part of civil society. I do not think that there are impure or pure or great unwashed masses that do not deserve the title of "civil society." What do you mean by that term when you use it in the context that you did?
Ms Keeping: I use the term "civil society" with a certain trepidation. I thought about it when I trotted it out today because I have been slow to adopt it in my own discussion of these things, but I think that I know what I am saying when I use it.
It is public interest oriented, but not state controlled or an institution of government. What would I count as part of a civil society? Part of the emerging civil society institutions in Russia are environmental NGOs. I would include any citizen-organized, public interest oriented organization in Russia. They did not have any of these because everything had to be party approved and virtually everything was owned by the state.
There was no room for independent, public interest oriented work. We are seeing that develop in Russia. I think that we cannot expect democratic organizations to function without that kind of stratum of society developing. It is developing in Russia out of nothing, virtually nothing.
Senator Corbin: Would you apply the same term in Canada?
Ms Keeping: Yes, but we have had many such things - community organizations, parent-teacher organizations.
Senator Corbin: I do not understand. Perhaps there is a lack of civil society in Russia because of the domination of the party over the years, and previous to that, the czars. However, surely if we are not part of civil society in Canada, we are not part of it for brief periods. Even politicians walk in and out of your so-called "civil society."
Are we not all, as Canadians, part of civil society? We are a great democracy. Why would we make that kind of distinction in that country?
Ms Keeping: Why would we apply it to ourselves?
Senator Corbin: I do not think that it applies in Canada.
Ms Keeping: This is not something in which I have specialized or thought about, but people say that in North America - and most of the writing is about the United States - our institutions of civil society have been deteriorating. People spend less time at the civil society.
There is a book by an American, Putnam, entitled Bowling Alone. I have not read it. I read Making Democracy Work, which I thought was wonderful.
Senator Corbin: I will leave it at that.
The Chairman: I must admit that I do not know what it means either, so I was interested in the conversation. It is the most recent about-to-be cliché. I should like to mention that we have some important business to discuss at the end of this meeting. One issue relates to Senator Corbin's observation or question about Russian experts and knowing more. It has not been as easy to find that information as one might think.
We have an all-day meeting on Monday, with many witnesses. We all agreed, if you remember, to have a full-day meeting, and that day is Monday. I will tell you who will be here at the end of this meeting.
Senator Austin: I hope you have not covered this ground before I arrived. I had another committee to attend, but came as quickly as I could.
I would like to ask you to focus on the mindset of the international investor looking to invest in the resources sector in Russia and the Ukraine. My question is about security of an investment.
We do not have a FIPA, a foreign investment protection agreement, with Russia or Ukraine. It is a standard agreement that Canada has with its trading partners. Russia is not a member of any international organization in which it has multilateral obligations to investors. Therefore, an investor in this sector must look to the individual enterprise, I presume, and negotiate with that enterprise or with an intermediary.
At what would that investor be looking? He is looking at the assets the company controls, how they are managed, who are the managers, and the sanctions if money is put in.
Gazprom is a hard instrument to understand. I know that foreigners invested in it, but it is in the media business. That is a little confusing for investors because it begins to employ its capital in ways that they did not take into account. It changes the rate of return that might be expected.
You said earlier, Professor Keeping, that you had suspicions about the influence of the Russian government on Gazprom. My suspicions are the reverse when I see it make an investment like that. The prevailing image of Gazprom is that it is a kind of economic feudal empire of its own.
It negotiates with the Russian government because if Gazprom refused to perform its economic functions, there would be no Russian economy. They have sanctions and the government has sanctions. They negotiate over taxes and revenues and so on. It is a power struggle between the two.
Gazprom has a number of entities that steal its gas while it is being transported to its official markets. It has losses that cannot be calculated clearly. It parks its assets and revenues, in ways that you mentioned, in Florida and other accounts in otherjurisdictions. That is now being examined by major international lending institutions. I am leading up to a simple question, but the introduction is long.
If you disagree with those facts, I am anxious to know.The rest of the question deals with accounting standards - the accountability to its foreign investors and bondholders: the way in which you use the word "governance"; the way in which it accounts to its so-called "shareholders"; and finally, how management perpetuates itself and its culture. I know that there are only 10 minutes for you to address a question requiring a two-hour answer, but could you both respond initially to the facts? Do you agree with my outline of the facts? How do you see an international investor dealing with those facts?
Ms Keeping: There has been a great deal written and talked about concerning Gazprom. It is a mega-corporation with huge assets. It is a special case because of its importance to the Russian economy. On your general questions about corporate governance and investor security, clearly those are to focus our minds on Western companies investing and doing business in Russia. Those are the big questions.
It is quite obvious that the situation is dismal for many reasons. Our notion of the corporation, with shareholders and shareholder rights that are enforceable in the courts, is virtually a foreign concept to the Russians; it is only just becoming understood. The anecdotes are marvellous, but the situation is dreadful.
There are examples of minority shareholders being locked out of shareholder meetings and of shareholders going to the courts to seek a court order. In one case, a court decided against them for completely spurious, completely fathomless reasons. In another case, they received the order that they wanted and yet they were still locked out. Why? That is because there is no need to pay attention to a court order in Russia.
The problems of the Russian legal system are multi-layered, but it does come right down to enforcement of judicial decisions. Even if they are reasonable decisions, they are often not enforced. The more controversial the context of the issue might be - interest of foreign investor - the more likely it will result in some bizarre decisions, because people do not want to enforce them. There is no consensus on their value, but I am not telling you anything that you do not know.
The situation is difficult, and we have seen some Canadian companies bear the brunt of that. I spent several heart-wrenching hours sitting in the offices of Black Sea, and they were still Black Sea, although they had just lost the licence. I raised that matter with Russian government officials. I could provide you with their reasons, but they simply do not perceive the issues the way that we do, and they do not understand the law the way that we do. Until investors have more security, there will be very little western money invested in Russia. These are not small, technical questions of fixing a little thing here and there, but rather they speak to respect for the rule of law and enforcement mechanisms.
The Chairman: I read in the Financial Times on the weekend that that company is pushing $1 trillion, so we can imagine how powerful that company would be.
Mr. McIlveen: Senator Austin's explanation of why Gazprom is so important and intractable is correct. There is a feudal element in this. Gazprom provides useful political services, as someone mentioned here, when it provides gas to the Ukraine. There is a price to pay, and that price includes a more or less free hand in how they operate and not having to worry too much about providing the tax revenues back to the government. That is not an answer, but it makes it very intractable. Gazprom provides some very useful services to the central government.
Senator Austin: What should the policy of the Western economic community, not national governments, be? I refer to the gaining of leverage over an instrument as large and powerful as Gazprom. If they wanted to become investors in the West they could do that easily, given their cash flows. They could become significant investors in other parts of the world. Should there not be a code of conduct developed by the Western investment community to set the parameters for entering our business territory? Have you heard any discussion of that?
Ms Keeping: If they want to invest in Germany or France or here, they will, because they have control over those institutions. As long as you have assets of theirs that you have control over, the investments can be made. That was the dispute with Aeroflot and the hotel - the airplane was seized in Montreal.
Senator Austin: They will be imprisoned within their own economic sphere and their national boundaries. I am not suggesting that governments should set these rules. The oil industry is a small group of very powerful entities, and if they want investor access to Russia, and Gazprom wants access to the rest of the world, it seems to me that you could do well as legal advisers in the transaction. Thank you very much.
Ms Keeping: I should add, for those of you who areinterested in the gas question, especially the transmission of gas, TransCanada Pipelines has ongoing relationships in Russia. I would expect that the best information available in Canada on natural gas, at least on the transmission of natural gas in and out of Russia, would be available through TransCanada Pipelines.
Senator De Bané: Professor Keeping, as Director of the Russia Programs, Institute of Resources Law at the University of Calgary, you have travelled extensively in Russia. You empha sized today the importance of understanding the values, culture and history of Russia if we wish to have a meaningful dialogue with the people, or develop policies that would have a chance of being successful, et cetera.
Could you briefly give us some examples of the values that are fundamental to understanding Russia? I understand that it will be a lengthy answer, but if you could just give us an idea of why you emphasized that point.
Ms Keeping: That is a fair question. Nevertheless, it is a difficult one to answer. For example, there is a lack of tradition of rule of law - an absence of a tradition respecting the importance of the individual.
The opposite side of that is an emphasis on the collective, the survival and the strength of the group. It is hard for me to put some of these things in a non-pejorative way. If they do not sound very objective, I recognize that.
We have only to think about the kinds of losses of human life which have been sustained in Russia. Look at the last century. Some of it, of course, the Soviet state was not responsible for, but it was responsible for a huge number.
I read an article by John Ralston Saul sometime within the last year. He wrote that by his calculations, the Canadian government has been responsible for something like 150 deaths since Confederation. Sure, we sent people off to war and they never came back, but that was something else. He meant through rebellion and state-supported violence. Let us say 150. It was less than 200, as I remember. Think about the millions that died through the famine, through collectivization, through all the political repressions in Russia, and on. It is millions and millions and millions.
We have a young Russian, a lovely young man, who works on our projects. He is a graduate student at the University of Calgary's Faculty of Law. He said to me, "Why does everyone make such a big fuss about the fact that there might be some environmental problems with Canadian atomic reactors? After all, if something were to go wrong, only a few people would suffer the consequences." I looked at him and said, "But they are people. We would not like to think that we were authorizing the construction of electricity production facilities that might result in a few dozen people being killed." We do not shrug it off like that, but there is a regrettable history in Russia of that kind of writing-off.
That is a very different view of the dignity of the individual. Of course, many of the Russians you and I might meet feel their own worth and dignity, but they know the state does not see them in those terms. One of my best Russian friends has said, "I will believe things have changed in this country when the state exists to serve the interests of the people as opposed to the reverse."
I could go on at great length, but that always encapsulates it for me. The relationship between the citizenry and the state is upside down, and it has had vast repercussions.
Senator Grafstein: Have you given any consideration, since the local judiciary is not working and decisions are not enforceable and so on, to helping Canadian investors, interna tional investors, obtain security through a dispute-resolution mechanism that would be state to state as opposed to local? Have you given any consideration, for instance, to the Canadian government entering into a trade agreement with Russia that provides for private mediation, and in the event the mediation comes to a certain conclusion, it will be enforced state to state?
Ms Keeping: I have to give you a kind of "weaselly" answer. It has not been part of our mandate to enter into trade agreements like that, but there are Canadians who have been working on trade issues with Russians for years now. The people I am most familiar with on that topic are at the law firm of McLeod Dixon, whichhas conducted CIDA-financed projects to help the Russian government accede to the WTO, the World Trade Organization. There are Canadians who may have been working on such things.
The Chairman: Thank you both. We will now go in camera for a few moments.
The committee continued in camera.