Russia to Set Investment Rules

Moscow is ready to OK a new law limiting foreign investment in key sectors. Investors welcome a clear policy but worry about the red tape

The rules for foreign investors in Russia have often been murky. But a landmark new law due to be approved by Russia's parliament on Mar. 22 should at least make matters a little clearer. The Kremlin-backed statute will regulate investment in so-called strategic sectors of the Russian economy, meaning that foreigners will henceforth have to seek government approval if they plan to make significant investments.

The law represents the culmination of a trend in recent years toward greater economic restrictions in Russia. The government has noticeably cooled toward foreign investment in sectors deemed to be of strategic importance—notably the crucial energy and minerals segments. Big companies such as British Petroleum (BP) and Shell (RDSA) have had run-ins with the authorities, (, 4/19/07) who have forced them to sell all or part of their investments in major energy projects to Russian companies linked to the government.

Investment Restrictions in Strategic Sectors

While the tightening is tough, at least the new code lets investors know where they stand and helps their decision-making. "The most interesting thing about the law is that there now will be a law defining the rules of the game," says Andrew Somers, President of the American Chamber of Commerce (AmCham) in Moscow, which represents U.S. investors in Russia. Somers says the law has been watched most intently by investors in the oil and gas sector, who are still eager to get a share of Russia's mammoth energy reserves.

Under the new rules, foreign investors in major mineral, oil, and gas projects will be limited to just a 10% stake, although they will be permitted to acquire a larger shareholding with government approval. For the first time strategic reserves are clearly defined: fields with at least 70 million tons (500 million barrels) of oil or 50 billion cubic meters of gas, and mines with 50 tons (1.6 million ounces) of gold or 500,000 tons of copper.

All told, the law lists around 40 sectors of the economy that are defined as strategic. As well as minerals, oil, and gas, they include sensitive industries such as defense, aerospace, nuclear power, encryption software, and biotechnology. The rules for these sensitive sectors are somewhat more permissive than for raw materials: Investors will have to seek government approval for equity stakes of 25% or more.

Investors Welcome Clarity

Some three years in the making, the new law doesn't come as a major surprise to business leaders. "In principle we are in favor of this law, because we hope it will provide clear rules about the decision-making process," says Frank Schauff, chief executive of the Association of European Businesses in Moscow, which represents European companies investing in Russia.

Schauff emphasizes that the new code "isn't a law against foreign investment: it's a law regulating foreign investment." Whereas other countries often exclude foreign ownership in sensitive sectors outright, he notes that in Russia investors still will be able to invest in such sectors—even acquire controlling stakes—provided they receive government permission first.

Foreign investors also can take comfort from the fact that some key sectors recently added to the law were dropped at the last minute. In February the draft legislation was amended to include telecom companies, Internet providers, printers and publishers—even fishing. The additions caused dismay among some Russian and foreign businesspeople, who feared the list was getting out of hand.

Ambiguities in the Law

But just two days before the law was set to be adopted, it was amended once again to exclude telecom and Internet firms, as well as electricity and gas distribution companies. According to Russian media reports, President-elect Dmitry Medvedev personally intervened to ensure that these sectors were not included in the list of protected industries. That's a welcome sign that Russia's next President is keen to live up to his reputation as an economic liberal, sensitive to the concerns of business (, 3/3/08). (Medvedev is due to be inaugurated in May, when President Vladimir Putin formally steps down).

Despite these positive signs, investors have concerns about the new code. AmCham's Somers notes that energy investors already are resigned to the need to negotiate with Gazprom (GAZP.RTS) and Rosneft (ROSN.RTF), Russia's two state energy companies, to make investments in major energy projects. But they're fearful that deals already hammered out with these state companies will become subject to the new restrictions, requiring further government approvals.

Investors also complain that there remain plenty of ambiguities in the law, which means that the new rules aren't expected to be entirely clear even after they're passed. "If you were a lawyer, you would certainly tell people in very many cases to go through the process of confirmation with the authorities," says Schauff.

Bureaucratic Hurdles Ahead

Unfortunately, that isn't likely to be quick or easy. The law envisages that it will take up to six months to go through all the procedures needed to gain government approval for foreign investment in strategic sectors. This will mean obtaining consent from a range of government bodies, including the Federal Security Service (FSB), Russia's equivalent to the FBI. Even then it's not clear that the authorities will be required to give a definite answer after six months. Schauff notes that in the U.S., the equivalent process takes around two months, and in Germany just one month.

So while it makes the rules somewhat clearer, in practice the law is likely to add to the formidable bureaucracy facing investors in Russia. Given Russia's slow-moving government machine, that could lead to slower investment decisions. And that can't be helpful to Russia's competitiveness on the global stage.

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