It has been said repeatedly that Russia’s geology sector is in poor condition, cumbersome, with enterprises scattered and badly coordinated. This gave rise to the idea of consolidation and creating a state holding that would combine all of these assets prepared to operate on market principles.

 This idea was first tabled in the fall of 2008 at parliamentary hearings in the Federation Council, but it only became a reality in the summer of 2011, with the signing of a presidential decree to create the state company Russian Geology, or Rosgeologia.

The consolidation process is still under way, but the company has already prepared a development program. The heads of the holding’s units will gather for the first time in late December to discuss the future. On the eve of the meeting, Rosgeologia head Sergei Donskoi shared his thoughts about the future of the holding company.

– What have you managed to accomplish since the decree was signed, how is the consolidation process going, and is there an idea as to the direction in which the new holding will move?

– We have managed to do a fair amount. As far as recent events go, there is the decision on the candidates to the holding’s board of directors. We have asked Gazprom (RTS: GAZP) head Alexei Miller to become chairman of the board. The list of candidates includes Russian Academy of Sciences vice president Nikolai Laverov; OJSC Novatek (RTS: NVTK) board chairman Alexander Natalenko; Vyacheslav Poltavtsev, OJSC MMC Norilsk Nickel (RTS: GMKN) deputy general director and head of government relations and social and compensation policy; VEB deputy chairman Anatoly Ballo; and OJSC Bashneft (RTS: BANE) senior vice president for exploration and production Mikhail Stavsky, as well as your humble servant.

In terms of the global perspective, we are striving to create the country’s largest, highly efficient, world-class geological business that would meet the national interests of the Russian Federation. Rosgeologia will be guided mainly by the provisions of the strategy for the development of the geology sector in the period to 2030, which was approved by the government in 2010.

The correct development strategy and mechanisms for its implementation are fundamentally important to us. Rosgeologia’s mission is to ensure the sustainable growth and renewal of the mineral resource base with new territories and new geological sites. As a result, the company will be able to increase the real value of geological exploration assets, boost the growth of reserves, and expand the resource base of strategic minerals. We are intent on creating platforms for our extractive companies and plan to work comprehensively.

I hope that Rosgeologia will manage to come up with a modern approach to the study, assessment, and prospecting of mineral resources on the basis of a system of so-called centers of competence. These centers are necessary in order to carry out good, modern geological exploration projects. The centers will include representatives of the whole pool of geological exploration professions. This cannot be provided by a single other company. The holding will also be able to support cooperation between the state and the investor. Therefore, in terms of positioning and qualifications, Rosgeologia is a unique company.

– Does that mean you don’t have competitors?

– Considering the specifics, essentially no. But, paradoxically, we would be happy if they emerged, as our main goal is to promote the renewal of the mineral resource base. We intend to create our own instruments for stimulating the development of small and medium business in the area of geological exploration. We are preparing proposals for the country’s leadership to improve taxation, assist in the passage of the corresponding laws.

– How will the company’s work be structured?

– Our program has five areas. The first is participation in work to study, prospect and assess, explore and do follow-up exploration of the mineral resource base on a contractual basis.

The second area involves the formation of alliances or consortiums for high-risk projects to study, prospect and assess, and explore for mineral resources – on the basis of a project principle.

Another area is services. Rosgeologia will also play the role of operator for the implementation of certain government functions within the context of monitoring subsurface resource use in Russia. And the last is aggressive commercialization of all phases and stages of the process of studying, prospecting, assessment and exploration, and here the criterion for success is the growth of the realized value of geological exploration assets.

– What regions are a priority for the company?

– Regions of Russia, the C.I.S. Abroad it will be Asia, Africa, Latin America. In the past year, we have held negotiations with virtually all foreign companies working in Russia; possible alliances were discussed. As for working abroad, it is the regions where Soviet geologists have made substantial inroads, left experience, and where Russia continues to work today. We plan to open several representative offices in countries in these regions. There are plans for Rosgeologia to represent Russia in the context of intergovernmental agreements.

– When will we hear about Rosgeologia’s first project under an intergovernmental agreement?

– It will be very soon, before the end of the year, I hope. I’m referring to a project with a state company in a C.I.S. country. I won’t disclose the details yet.

– Can you tell us more about how Rosgeologia will work with foreign companies in Russia?

– The main trump card of a company with strategic status such as Rosgeologia is the guarantee of its support by the government. We plan to form soon strategic alliances with resource companies, including foreign ones. This will primarily concern the technology market. Foreigners have a direct interest here, as the restrictions of legislation on strategic investments do not apply to the state company. We expect to sign the first documents on the creation of such alliances in the near future.

– Has the Federal Property Management Agency conducted an appraisal of the assets being consolidated into Rosgeologia?

– It’s almost finished. We have done our own internal analysis, which indicates that the combined revenue of the enterprises totaled 7 billion roubles in 2010, tax payments were about 2 billion roubles, the value of fixed assets was 1.7 billion roubles, and the return on assets was 12%. The figures will probably not change much in 2011. A total of

9 000 people work at the enterprises being consolidated in the holding.

– And they are probably interested in their own fate no less than in the renewal of Russia’s mineral resource base?

– Undoubtedly. We don’t intend to lose employees, so the staff issue is one of the most important. The holding’s employees have a right to expect competitive pay, programs to raise wages, and social benefits. Rosgeologia will pay bonuses to employees who are discoverers, those who are directly involved in future discoveries. A list of managers to be included in the incentive program should be approved next year. Also in 2012, the wage payment systems at enterprises and documents regulating the functions of key company managers will be standardized.

– What are the sources of financing for Rosgeologia?

– We are holding negotiations with private banks, and will also raise government financing, though not under budget articles, but, for example, in the area of government guarantees. Of course, most government funds will come in on projects previously contracted with the enterprises being consolidated into the holding.

But we also have new ideas. For example, there are plans to propose to the country’s leadership the creation of a private-public fund for investment in exploration projects abroad. This financial institution would be a launch pad for developing and increasing the competitiveness of Russian business in international projects.

– These plans are global, but they are being implemented gradually. What are the company’s goals for next year?

– Primarily to complete the work of consolidating enterprises, creating a system of corporate governance, and launching geological exploration projects. We also need to develop a company trademark and brand by the end of the year so that we are recognizable.