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Interview

with Nathan Hunt, Chairman of the National Board, CERBA

01.02.2010 / Energyboardroom

Unlike other chambers of commerce and business associations that operate in Russia, CERBA also includes the Eurasian region in its sphere of operations, aiming to facilitate business relations not just between Canada and Russia, but also Kazakhstan, Ukraine and Azerbaijan. Why was this decision taken?

CERBA started off as four separate, very distinct business clubs, based in Calgary, Toronto, Montreal, and Moscow. The Canadian based groups wanted to open offices in Moscow and St. Petersburg, and at the same time the Moscow club was thinking about opening offices in Canada. We thought, why not just merge all of these business clubs and be done with it, and that’s what we did in 2004. It was an excellent idea, and CERBA can now claim with authority to be the voice of Canadian business in Russia.

Eurasia is more important to some constituents of the organisation than it is to others. Some CERBA members are focused exclusively on Russia, whereas others, for various reasons, are interested in Kazakhstan, Ukraine, and other countries of the Former Soviet Union (FSU). Early in the creation of CERBA, we realised that the association would need more than a simple Russian focus in order to accommodate the needs and wishes of all members.

CERBA unites almost all Canadian business interests in Russia, and to some extent in the Eurasian region. Our penetration in Eurasia has been less, because the association began by focusing its development in Russia, but we are turning our attention in that direction now. We do not have, for instance, an official presence in Kazakhstan yet, but as chairman of the board, one of my goals has been to get a Kazakh chapter up and running. A non-CERBA group has been operating for several years now, but we would like to get a formal chapter organised and opened, so that we can claim to have an official active presence in that market.

On a daily basis, how would you describe CERBA’s role in advancing the interests of Canadian companies here in Russia, and in Eurasia?

Firstly, we are very active in doing the things that business associations usually do, such as arranging events on topics that are of interest to our members. These events might be sector focused, or of general interest to Canadian investors, for instance, covering topics such as the expected changes to the tax regime. Secondly, we provide information on topics that are of interest to Canadian individuals living in Russia, such as income tax issues for Canadians living abroad. The chapters in Calgary, Montreal and Toronto are focused on other issues, such as incoming delegations and sector-focused events. If a major business or government figure were in town from Russia, they would almost always organise an event around that person’s visit. A third activity is organization of large-scale business summits designed to bring key decision makers together in both the private and the public sector.

Different chapters tend to focus on different aspects of the business relationship. In Toronto, for instance, the construction, financial and banking sectors are important; in Montreal transportation and energy issues are key. Energy and agriculture form a major part of the work of the Calgary office which also covers companies based in Saskatchewan and Manitoba. The Canada-based chapters are less interested in social events because the members there are not foreigners living abroad, whereas in the Moscow chapter we have a social agenda in addition to the commercial one.

All of CERBA’s chapters, whether they are based in Canada or Russia, have a lobbying function, which we did not have when we were four distinct business clubs. We have excellent relations with the Canadian Department of Foreign Affairs and International Trade, the Russian Ministry of Foreign Affairs, and the Russian Union of Industrialists and Entrepreneurs. Together with them we help plan and receive government to government delegations and consult on issues of importance to our members, such as WTO accession and bilateral trade issues concerning quotas or tariff rates that need to be changed.

What would you highlight as some of the major achievements that you have accomplished with this lobbying?

We rarely take credit single-handedly for solving any of these problems, as most of what we do is in tandem with government and the efforts of other private companies. We had a hand in resolving some of the veterinary issues that were impeding Canadian meat exports to Russia for some time. We’re not 100% out of the woods, but we’ve played a significant role in advancing the cause of Canadian pork and beef exporters into Russia.

We also played a strong role in resolving a misunderstanding that had taken place between the Canadian and Russian governments regarding the issuance of visas. The Russians believed that the visa process for Russians wanting to visit Canada was not transparent and was taking too long, and they responded with a mandatory three-week waiting period for any Canadians that wanted to get a visa to Russia. For about a year, this was a real impediment to trade and travel. The problem was one of communication. When the relevant officials got together for talks (an effort we helped to facilitate), both understood that neither side was causing delays on purpose – they were simply due to the requirements of the legal system in each of the countries. Eventually we found a resolution acceptable to both sides.

How do you find working with Russian branches of government and Russian commercial institutions? Is it an easy task?

I’ve been living in Russia for 18 years, and so have learnt over time. By far the most important factor in Russian relationships, both commercial and political, is personal contact. For this reason, I applauded Quebec Premier Jean Charest for heading a delegation of high level businessmen and government officials in December 2009, because the Russians, more than in any other market, need personal contact in order to feel respect and to feel that Canada understands the importance of this market. When they feel that personal interest, when they see face-to-face contact and people shaking hands and forming personal relationships then they themselves become focused on Canadian trade and the Canadian relationship.

The Vancouver Olympics are happening in February 2010, and the next games will be held in Sochi in 2014. What specific opportunities does this lend to increasing Canadian business participation in Russia, and what kind of role is your association playing in helping that to happen?

CERBA is putting together an executive business summit, which will take place on February 25th. We are inviting CEOs from the top echelon of both business communities to a closed meeting, which is to be chaired by high level Canadian and Russian government figures. We are expecting an impressive turnout for the summit, with the exact numbers and participants to be confirmed closer to the date.

It seems that the biggest cause of conflict between Russia and Canada at the moment is hockey. However, there have been some grumblings over the Arctic region, which is something that seems to rear its head from time to time. What implications would you say this has for the business community, and business relations between Canada and Russia, and what does it mean for your members?

Firstly I would say that the hockey relationship is a great rivalry, not a conflict! As far as other cooperation in the North is concerned, Canada and Russia and the other countries of the circumpolar region need to get together and determine what the rules are for exploitation of natural resources in the Arctic region. Russia has forced the issue by making some claims that it believes are justified based on the position of its underwater shelf. We know that not all circumpolar countries are in agreement with Russia’s position, but if all interested parties sit down to the negotiating table, there is nothing that cannot be resolved. The rather surprising act by the Russians two years ago focused everybody’s attention on this issue, and maybe this new focus will allow the parties involved to hammer out some rules that will be equitable and binding on all participants going forward. Right now, there is no hint that the Russians are not willing to do so; they simply want the issue to be discussed.

We need to remember that the issue was not on anyone’s front burner until a few years ago. Russia, by making claims to certain resources in the Arctic region, has obviously upped the ante, but complete resolution will take time. People have realised that we need rules to govern the use of these resources, but until concrete steps are taken towards their actual exploitation or extraction, the issue will not be at the top of anyone’s agenda. It may take several years to resolve this.

Countries such as Norway are already taking steps towards exploiting the potential of Arctic Russia, especially in the energy sector, and the service industry that surrounds it. Is that something that your members are looking towards?

Absolutely. Some Canadian companies are considering exploration and production ventures in the Russian offshore regions and these may or may not materialise. In any case Canada will play a major role in the Russian Arctic by supporting other companies that are operating in the area. This could be by providing drilling equipment or pumps, by servicing the fields, or organising support for offshore activities, including ice control and navigation. There are literally hundreds of small to medium sized enterprises that have very specific solutions for issues and problems that offshore production facilities run into. Because Canada has greater experience in this area than Russia, we have a homegrown industry that can resolve many of these issues. As Russia develops its offshore industry, they will, almost by natural design, be coming to Canada for resolutions to many of the issues that they will encounter.

First of all, Russians and Canadians are very similar people. They’re northern people with a survivor mentality, and that will serve both countries well in the establishment of future business relations. The second reason is that Canada has significant experience in offshore oil extraction on its own shelf and elsewhere in the world, which will be key to Russia as it begins to develop these resources. Politically, it’s easier for Russia to deal with Canada than with other countries in North America. Canada has historically been able to separate politics from business and the Russians value that tremendously.

The Canadian oil and gas industry is renowned for the excellent quality of its service providers, and also for a high number of independent junior companies that do very well in Canada, and in many other countries around the world. Why are these companies not as present in Russia as in other parts of the world?

There is great potential in Russia for junior developers, but the legislative framework today is not conducive to their activity. The Russians recently passed a new law on subsoil resources which did some good things, clearing up misunderstandings and adding clarity to several issues that required it. However, in our view, it was too restrictive on the rewards that a foreign investor can reap if and when the investor discovers a serious deposit on Russian soil. As we know, in mining and in the oil/gas sector, junior companies play a major role in exploration in the West. These companies are able to go to capital markets and attract high-risk financing on the premise that if the bet pays off, there will be a significant return to the investor. If however, as is required by the new Russian law, a foreign investor must secure government approval in order to exploit any strategic reserves discovered, then there is a chance that these junior companies will not be able to capitalise on whatever they find. It doesn’t matter whether or not that actually is the case: what matters is how the law is perceived. Because of the perception today, junior exploration companies are not playing as serious a role in the extraction industries here as they should be.

There are ways to modify the legislation that still take into account the interests of the Russian Federation. Nobody can really fault Russia for wanting to take control of its natural resources – every country wants to do that. Right now there is a major misconception that the new law prevents foreigners from owning more than 10% of a strategic deposit. The truth, however, is that the government must simply approve any ownership stakes by foreign investors over 10%. There are several cases to date of that approval being received without great difficulty.

Since the investor can never be 100% certain of that approval in advance, however, there should be some mechanism to ensure that if an exploitation license is denied, then the investor will be compensated. And not just for costs – currently the law says that the government will cover the costs plus a 30% profit margin, but the capital required to power the junior exploration industry requires profit margins much higher than that. The Russian government isn’t going to guarantee anybody a 200% return, but they could, for instance, guarantee compensation on the basis of the market value of whatever is discovered. That value could be determined based on a set of assumptions and formulas clearly outlined in the legislation. This would significantly improve the current environment, which is not really conducive to junior companies coming here and doing the work that they should be doing, like they are in other parts of the world.

How would you describe your expectations for the development of Canadian-Russian relations, in the oil and gas sector, but also on a more general level?

On a general level, we are very optimistic. In the last two years, Canada has made great strides in showing the Russians that we value their relationship and are willing to send senior people here to engage their Russian counterparts on specific issues of importance to both countries. The Canadian government is functioning well in this regard and the Russian government is reciprocating. There are no major issues now that can’t be resolved through negotiation and engagement; we simply need to stay the course and ensure that both governments remain focused on developing the relationship.

In the oil and gas sector specifically, Russia will not see significant investment, except in large-scale state-sponsored projects such as Shtokman, until the uncertainty on subsoil resources is resolved. Of course, there will always be opportunities for Canadian equipment and service companies, for logistics companies, and for those niche companies I referred to earlier. They will always have a market here and CERBA’s key task now is to make sure that they find the Russian partners who could and should be demanding their services.

In the long term, we would like to see major investments from Canada in the Russian extraction industry. We would like to see junior companies come over here and make some bets, and see those bets pay off in a big way for the venture capital supporting that industry. I think we are a few years away from getting the clarity necessary for that to happen.

What would you like your final message to be to the readers of Oil and Gas Financial Journal about CERBA, and about your members in the oil and gas sector?

It would be useful to hear from readers about goods or services they are looking for, because one of the biggest challenges for us as a business association is identifying useful and relevant contacts for our members. We are constantly expanding our network, seeking out companies who should be demanding the products and services of our members. We all know the huge Russian majors, but very often there are small or medium sized companies that we’re not focused on when we should be, or perhaps divisions of the big companies that should be interested in partnership with Canada. So please contact us and we will do everything in our power to make the connections between Canada and Russia that will be beneficial and profitable for oil & gas operators in both countries.

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