Strategic Sector Bill Clears 2nd Reading

The State Duma on Friday passed in a key second reading the government's long-awaited bill limiting foreign investment in a swathe of strategic sectors, ranging from energy and defense to media and fishing.

Deputies said the bill, which sailed through the Duma 355-3, with three abstentions, would guarantee national security by regulating foreigners' participation in areas such as nuclear energy, space exploration and natural monopolies.

"We need this law to defend our national interests, and for the foreigners it would create a level playing field," Deputy Duma Speaker Valery Yazev, an influential gas expert known as a Gazprom lobbyist, told reporters after the vote. "Foreign investors need hard and fast rules to help them to determine what they can and cannot buy in our country."

The bill also reflects efforts to clarify the "rules of the game" for foreign investors.

The list of 42 strategic industries with limited access for foreigners also included aviation, mining and extraction, arms production and sale, and other defense-sensitive industries.

Firms controlled by foreign governments are barred from seeking control over Russian companies on the list.

Foreign firms would also need permission from a committee chaired by the prime minister if they wish to take a 25 percent to 50 percent stake in a firm listed as strategic.

The provisions of the bill will likely formalize the current situation, where Kremlin approval is widely seen as essential for any major business deal inside the country. After President-elect Dmitry Medvedev is inaugurated in May, he has said he will appoint President Vladimir Putin as prime minister.

Fishing remained on the list, as did television, radio and publishing -- sectors whose inclusion has raised eyebrows and worried foreign investors.

Large-circulation newspapers and publishing companies with the capacity to print 200 million pages per month are included, as are periodicals with a circulation of at least 1 million copies.

According to the bill, broadcast media covering at least half the country would be deemed strategic.

This effectively excludes foreigners from holding majority stakes in television stations such as state-controlled Channel One, Rossia and NTV, all of which have nationwide coverage.

As expected, Friday's session accepted the recommendations of the Duma's Construction and Land Use Committee's to exclude telecoms firms, Internet providers and small power distribution grids from the list.

In a significant move, the bill classified major fixed-line telecoms companies as strategic, meaning that any sale in the government's stake in national fixed-line operator Svyazinvest would likely come under government scrutiny.

The inclusion of telecoms companies "with a significant market share in five or more regions" or in "cities of federal significance," a common euphemism for Moscow and St. Petersburg, would in practice mean Rostelecom and Svyazinvest.

While small regional power distribution grids have been excluded, the bill still covers larger grids.

It outlines requirements for concluding any transaction where foreign investors are concerned and specifies a list of business deals that would require government approval.

The decision of the government on any issue can be contested in court by foreign firms, the bill says.

Martin Shakkum, chairman of the Construction and Land Use Committee, which was responsible for drawing up the bill, said the legislation was liberal in comparison with similar regulations in some other countries.

"We should emphasize that limits on the participation of foreign capital in national media exist in many countries," Shakkum said. "As a rule, authorities in other countries impose very tight limits on the stakes in broadcasting companies that foreigners are allowed to own."

Caps on foreign investment in the broadcast media are put at 25 percent in some countries and 20 percent in others, Shakkum said.

"This particular bill would create and safeguard the conditions for the formation of a predictable and transparent investment climate for foreigners," Shakkum said.

Deputies did not say Friday when the bill would come up for its third and final reading, which is usually regarded as a formality. After being passed by the Duma, the bill would require the approval of the Federation Council and the president to become law.