As Russia's major foreign-invested gold project started production, the Kremlin adopted legislation, aimed to limit overseas investments in so-called strategic sectors, including gold mining.

On May 6, Kinross Gold Corporation [TSX:K; NYSE:KGC] announced that its Kupol project, the country's largest foreign-controlled gold mine, started processing ore. We have reached a major milestone at Kupol, as mining continues and milling is now underway, said Tye Burt, Kinross President and CEO.

Kinross controls 75% of Kupol, while Chukotka regional administration holds a remaining 25% interest in the project. The Kinross share of Kupol production for 2008 is expected to be approximately 365,000-390,000 gold equivalent ounces. Kupol's milling rate is due to reach 1,500 tonnes per day in May, and to achieve full production capacity of 3,000 tonnes per day by October 2008.

Following the company's annual general meeting on May 7, Kinross' Burt announced during the conference call that the company was in talks with Russian big gold producers and others, aiming develop major gold deposits.

Burt's announcement of talks with Russian gold miners hardly came as a surprise development. From now on, any new foreign-invested big gold mining projects in Russia may require a partnership with local players, according to new legislation.

Earlier this month, the Kremlin moved to tighten its grip on the country's major deposits. On May 5, outgoing Russian President Vladimir Putin signed into law a bill on foreign investment in strategic sectors. Although the new legislation did not introduce any direct bans, it however required overseas investors to have any strategic acquisition in Russia approved by a special governmental commission.

The bill, passed by the parliament in April, applied to more than forty sectors, including mining. It also determined criteria of strategic deposits of natural resources, including gold fields with reserves of more than 50 tonnes, and copper deposits with reserves of more than 500,000 tonnes.

Meanwhile, Kinross' launch of Kupol project came as yet another effort by Russia's far Eastern Chukotka region to triple its gold production in 2008. This year, Chukotka aims to mine 14 tonnes of gold, up from 4.5 tonnes in 2007, according to the local authorities. Kupol, Mayskoye and Karalveem are the region's major projects. While Kupol started production, Mayskoye and Karalveem mines are due onstream in June this year.

Later this year, one of Russia's major gold producing regions, Chukotka, aims to auction its two last remaining major deposits, Baimskaya and Vodorazdelnaya. Baimskaya's reserves are estimated at 85 tonnes of gold and 5,950 tonnes of silver, while Vodorazdelnaya's reserves are estimated at 65 tonnes of gold and 3,780 tonnes of silver.

Russia's largest gold-producer, OAO Polyus Gold, indicated interest in Baimskaya and Vodorazdelnaya. In April, Russia's OOO Region Ruda moved to take part in the upcoming auction to acquire 25-year licenses to develop Baimskaya and Vodorazdelnaya. Region Ruda is reportedly affiliated with Millhouse Capital, a company said to be closely connected with international tycoon and Chukotka regional governor Roman Abramovich.

Millhouse has already made inroads into Russia's gold mining sector. Earlier this year, Millhouse Capital finalised $400 million deal to acquire a 40% stake in Highland Gold Mining [LSE:HGM]. On May 7, Millhouse Capital CEO Yevgeny Schvidler bought out an 8% stake in HGM for some $79 million. Acquisition of Baimskaya and Vodorazdelnaya deposits would allow Millhouse to emerge as a major player in Russia's gold mining sector.

Therefore, with a background of Russia's latest strategic sectors legislation, Russian companies with strong local connections now appear well-positioned to take over the country's untapped gold deposits.