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The head of the committee Martin Shakkum made no secret of the fact that the document agreed with the Federal Security Service and approved by Vladimir Putin would not be subjected to any further corrections. The law is supposed to be approved in the second reading on March 19. The previous wording of the bill drawn up by the Ministry of Industry and Energy and approved by the State Duma in the first reading in September 2007 provided for a mild administrative procedure of purchasing controlling stocks of strategic enterprises by foreign investors. “We hope the new provisions of the bill will be no serious obstacle in the way of foreign investments in the economy,” said Vladimir Taraskin, the mover of the first wording of the bill and the Head of the Legal Department of the Ministry of Industry and Energy.
The new wording of the bill differs greatly from the document of the Ministry of Industry and Energy and seems to be more rigid than the restrictions on foreign investments of sovereign funds and state companies currently in force and being discussed in the G7 countries.
The latest wording of the bill obliges foreign investors to submit to approval of an authorized body and obtain an authorization from a governmental commission to purchase over 50% of shares of a strategic enterprise or over 25% of shares if the buyer is a foreign state company. If the company develops a strategic field, the restrictions are even more rigid: purchases of over 10% of shares or over 5% of shares, if the buyer is a foreign state company, are to be submitted to governmental approval. State companies are banned to control over 50% of a strategic enterprise or over 10% of a strategic subsurface user.
The subject of regulation has changed in the latest wording of the bill. The purchase of a controlling stock was the matter of discussion during the first reading. Now the matter concerns the control of a company included into the strategic list. The definition of control given in the law has also been changed. In the previous wording, the control was understood as disposal of over 50% of voting shares. Now the control is defined as holding over 10% of shares. The law stipulates that a foreign investor is obliged to provide information about the acquisition of over 5% of shares of a strategic enterprise to an authorized body. If “the fact of instituting the control over a strategic economic entity by the applicant party is not obvious, the applicant party intending to make the deal has a right to submit an inquiry to the authorized body on whether an approval is required,” the document says. If the deal is carried out without permission, the investor shall be deprived of the right to vote shares, although its right for dividends shall be preserved.
The definition of foreign investors has been changed. Now Russian companies controlled by foreign investors also come within this category. All Russian companies, of which over 10% is controlled by foreigners, may be treated as foreign investors. However, at Gazprom’s request, Russian state companies are excepted from operation of the law. It is said that the law has no retroactive force and does not apply to deals with companies, which controlling stock is already held by foreign investors. At the same time, the law orders all foreigners to provide information about holding over 5% of shares of Russian strategic enterprises within six months.
Several more types of activity were added to the list of 33 strategic activities in defense, space and nuclear sectors proposed by the Ministry of Industry and Energy. The latest wording of the law was supplemented with natural monopolies, namely companies dominating at the market of communication and printing services and publishing activities.
TV and radio-broadcasting, providing of the Internet access services, subsurface geological exploration and catching aquatic bioresources are also reckoned among strategic sectors. Together with the basic law, it is planned to make amendments to the tied laws covering holders of licenses for subsoil blocks of federal importance. Under the amendments to the Subsurface Law, among such blocks are fields of uranium, diamonds, especially pure quartz resources, minerals of the yttrium group, nickel, cobalt, tantalum, niobium, beryllium, lithium and platinum. Fields of oil (over 70 million tons), gas (from 50 billion cubic meters), gold (from 50 tons), copper (from 500 thousand tons) and all fields at the continental shelf are also added to the fields of federal importance. Under the amendments, only Russian state companies are entitled to operate on the shelf. According to one of the latest amendments to the law On Foreign Investments in the Russian Federation, foreign state investors are obliged to submit the acquisition of over 25% of any Russian company to approval in the procedure provided for strategic enterprises.
The implementation of the document scheduled for April or May 2008 will delay any large deals in Russia for several months. The previous wording of the law provided for putting the law into effect on January 1, 2009, after the publication of subordinate acts. The wording to be considered in the State Duma in March stipulates that the law will be put into effect from the date of its official publication. Prior to setting up an authorized body and approving the regulations of a special-purpose governmental commission, any large external deals with shares coming within the operation of the law will be blocked until all subordinate acts are issued. In view of the Cabinet change in May, it may take several months, during which large deals, including deals with shares of oil and gas companies, will be impossible.
Filed by Anita Li under Investment and Competition Policy, Energy and Nuclear Safety