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RUSSIA’S NEW FOREIGN
INVESTMENT LAW: MAKING LIFE HARDER FOR MINING FIRMS?
Article by Gordon Feller
“...[We] remember the time when
we had quite limited economic possibilities, to put it mildly, including in
investment, and we were always being told by others that we should make our
economy as open as possible and provide opportunities for foreign companies to
invest. Now that we have economic possibilities of our own, other countries, our
partners, are taking steps in the opposite direction and are effectively closing
or creating conditions that close their markets to us, at least as far as
investment is concerned. ... Of course, if things continue moving in this
direction, we will be obliged to take steps to protect our own interests.”
President Vladimir Putin,
September 10, 2007
The Russian Government has been
discussing limitations on foreign investment in Russian strategic industries for
several years. Many ministries and governmental institutions have contributed to
the draft bill now before the newly-elected national parliament, the State Duma.
Key questions are still to be resolved during the second reading, and foreign
investors will be watching for signals from the Presidential Administration
concerning what kind of additional restrictions will be placed on foreign
participation in the Russian economy and on the ability of Russian private
businesses to sell their assets to foreigners.
The purpose of the proposed
legislation is to identify sectors or industries considered “strategic” and
thus subject to additional government regulation; to clarify the rules for
foreign investors interested in acquiring control over strategic entities; and
to create an institutional framework for vetting new proposals by foreign
investors and for continually monitoring compliance with agreed-upon investment
obligations.
The proposed legislation requires
that any transactions between “foreign investors” and “Russian commercial
organizations” (later Russian company or companies) must be subject to
preliminary government approval if the transaction meets two criteria
simultaneously:
· The Russian company is
engaged in activity of strategic importance to national security as defined
by the law; and
· The foreign investor’s
transaction will result in direct or indirect control of a Russian strategic
company as defined by law.
The transaction may include
equity acquisition or other agreements resulting in foreign control of a Russian
strategic company. The bill defines control as the “capacity of a foreign
investor (or a group of persons) to determine directly or indirectly decisions
made by a commercial organization of strategic importance.”
A transaction involving a foreign
government-controlled entity has stricter conditions attached: “foreign
governments, foreign public entities, international organizations, and also
other organizations under their control” are barred from acquiring either
directly or indirectly a controlling stake and must seek approval for purchasing
a 25 percent plus one share stake or more. According to the draft law, a
government approval is required if the transaction would result in the right “to
manage directly or indirectly more than 25 percent of outstanding shares and
voting rights”; or the ability to determine decisions made by a Russian
strategic company, including a “capacity to block decisions of the board.”
The proposed legislation covers
both types of companies and identifies 39 types of activity considered of
strategic importance to national security. In addition to defense, energy,
aircraft and aerospace industries, and critical infrastructure -- all of which
have long been deemed as strategic -- the draft law adds private companies with
ties to the defense sector to the list. The activities covered in the first
draft of the law can be grouped into eight broad sectors or industries:
1. Defense industries, including
activities related to weapons and military machinery (except for the production
of side arms, civilian and service arms), ammunition and its components, and
production of explosives for commercial purposes;
2. Cryptographic industry,
including production of cryptographic equipment and its maintenance, as well as
cryptographic services;
3. Security activities concerning
the “design, manufacturing, sales, and purchases for the purpose of selling”
of eavesdropping devices;
4. Aerospace industry, including
launch and management of flights; production and use of space machinery,
materials, technologies, and infrastructure; “international cooperation of the
Russian Federation in the study and use of space”;
5. Aviation industry, including
activities related to securing aviation safety; design, production, repairs, and
tests of aviation machinery, including that for dual use;
6. Nuclear industry and R&D,
including activities related to nuclear and radioactive materials and waste;
production of minerals containing these materials and substances; places of
storage; nuclear devices; expert review of documents substantiating nuclear and
radiation issues;
7. Production and sales of goods
and services related to natural monopolies (as identified in the federal law “About
natural monopolies”) including pipeline delivery of oil, petroleum products or
natural gas, delivery of electricity, power-station operations, railway
transportation, ports and airports;
8. “Production and sales of
metals and alloys having special properties and used in manufacturing arms and
military machinery.”
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