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#22 - JRL 2007-27 - JRL Home
RIA Novosti
Febreuary 2, 2007
New rules for foreign investors

MOSCOW. (RIA Novosti political commentator Alexander Yurov) - On Wednesday, January 31, the government approved a draft law on foreign access to the capital of Russian companies in strategic sectors of the Russian economy.

The remaining issues will be finalized within a month. However, the essence of the bill is unlikely to change, and soon those foreign investors who will want to control more than 50% in a strategic company will have to apply to the Russian authorities for a special permit.

First Deputy Prime Minister Dmitry Medvedev said all transactions involving foreign shareholders in Russian strategic organizations will be approved on four levels: by a relevant authorized federal agent, the governmental commission on foreign investment, the government and the president. The governmental commission will approve transactions within three months. The government will be responsible for official denials if it sees that an investor may pose a threat to national security. An investor can be vested with additional commitments related to the protection of state secrets.

The draft law includes a list of Russian strategic sectors. The bill imposes limitations on those investors whose activities are aimed at participation in the capital of national producers of armaments, and special and aviation equipment. In addition, there are limitations on foreign access to Russian natural monopolies, companies processing and using nuclear materials and federal mineral resources.

Although the Cabinet suggested that the Russian Industry and Energy Ministry finalize the document in a month, its underlying principles are unlikely to change. Among other things, the minimum purchasing limit for shares requiring an official approval and coordinating procedures may be altered.

The novelties related to the use of mineral resources coincide with amendments to the law on mineral resources. The amendments specify the fields where foreigners will not be able to gain control, such as uranium and diamond fields, and large gold and copper deposits. Nor will foreign investors be able to control the development of offshore deposits and oil and gas fields with reserves exceeding 70 million metric tons and 50 million cubic meters, respectively. These amendments are likely to be submitted to parliament in two weeks.

The draft law also stipulates other limitations. Foreign investors will have to obtain the government's approval for the resale or transfer of shares in a Russian company, and for the transfer of shares to beneficial owners.

The bill was initiated about two years ago, when Siemens was seeking a large stake in a Russian producer of electric equipment for the power sector. Although the two companies' executives unanimously approved the deal, legislators staged a protest suspecting that it may pose a threat to national interests. Parliament pointed to the fact that apart from civilian industry products, such as equipment for power plants, the company also produced electrical items for military hardware. As a result, the deal was never realized.

However, many national and foreign observers were convinced that what had prevented the Russian and foreign businessmen from working together were outdated stereotypes. The Russian company was allegedly deprived of developing through the participation of foreign partners.

Parliamentarians were evidently guided by patriotic considerations. However, a bitter aftertaste remained. To clear up the situation and prevent similar misunderstanding in the future, the Industry and Energy Ministry worked out a draft law to regulate the rights and responsibilities of foreign investors in Russia and those of the Russian authorities.

The bill submitted to the Cabinet on the whole serves the purpose. It is based on the so-called licensing concept, under which foreign investors have to coordinate their deals in advance. If the law is adopted, it will not be applied retroactively, and its provisions will only cover deals involving foreign investors and concluded after the law comes into effect.

Many foreign investors, active or planning to work in Russia, approve of the bill, which sets strict rules of the game. However, there was heated debate about the draft law at a government meeting. Russian Economic Development and Trade Minister German Gref said that the bill would impede the influx of foreign investment in the Russian economy, as it sets specific limitations for investment in infrastructure facilities.

In turn, Russian Natural Resources Minister Yury Trutnev said that the lack of law hampered the holding of auctions to issue licenses for the development of strategic deposits. However, the minister stressed that if the Industry and Energy Ministry's draft law and amendments to the law on mineral resources were discussed separately, the work on the two documents could proceed faster.