Barriers Going Up All Over Europe

VedomostiE.On head Wulf Bernotat, left, talking to Gazprom's Alexei Miller beside BASF chairman J?rgen Hambrecht in 2006.
Despite booming investment, lawmakers both in Russia and Europe are preparing to raise barriers for foreign investors.

Germany, Russia's biggest trade partner, wants to expand the government's right to veto foreign investments in strategic sectors.

The State Duma is considering a bill that would require investors in a number of strategic sectors to seek official permission. The bill, in the making since 2005, is expected to be approved in a crucial second reading Wednesday.

Other European countries have similar laws in place, notably France, where a 2005 bill stipulates that foreign investments into 11 sectors, including armaments, need ministerial permission. In the United States, the president can veto any deal perceived to threaten national security.

While some companies warn that growing protectionism will jeopardize trade, others say these laws are not only normal but could increase transparency for investors.

"Debates in Germany and other European countries ... have a strong populist ring," said Michael Harms, head of the German Economic Delegation to Russia.

Open access on both sides is vital, and investors should be welcome regardless of the sources of their money, he said in a recent interview in his office in Moscow.

Foreign policymakers have raised the alarm about sovereign wealth funds, like the Abu Dhabi Investment Authority and China's State Foreign Exchange Investment Corp, which bundle their countries' rapidly growing capital. But when it comes to Russia, Gazprom has also been at the center of the debate.

Even in traditionally free-market Britain, rumors that Gazprom could bid for Centrica, the country's biggest gas distributor, triggered an outcry last summer.

In Germany, which is heavily dependent on Russian energy, Gazprom sparked a minor panic when it cut supplies to Ukraine and Belarus in recent years. Germany's bill granting veto rights to the government was initiated last summer after politicians from Chancellor Angela Merkel's conservative Christian Democratic Union warned that the country could be "bought up" by foreign states.

A draft of the bill, a copy of which was obtained by The Moscow Times, says existing veto powers would be extended from the defense industry to include the energy and telecommunications sectors. A buyer would need to seek permission to acquire 25 percent or more of a firm if the acquisition threatened "law and order or national security." As an example of a national security threat, the bill identifies a possible energy-supply cut.

Like the Duma bill, the German legislation is being held up by competing interests within the government. Negotiations are still ongoing, Charlotte Lauer, a spokeswoman for German Economics Minister Michael Glos, said by telephone from Berlin. She explained that the Labor Ministry was demanding a greater say in the procedures. "Everybody agrees in principle but not on procedures," she said.

Proponents argue, however, that it is only logical to implement such measures.

"In a free market economy, there should be competition among private owners," said Godelieve Quisthoudt-Rowohl, a European Parliament deputy for the German Christian Democrats. If a state-owned company from a former Marxist economy buys a stake in a privatized utility, this overturns the rules of competition and might amount to a renationalization, she said in a telephone interview from Berlin.

The European Parliament is pushing for a directive to protect public sectors like utilities from foreign buyers. In a reference to Gazprom, EU Single Market Commissioner Charlie McCreevy said last month that he did not see any difference between a state-owned enterprise and a sovereign wealth fund, Britain's Guardian reported.

"The guiding principle is not to bar investment but to enhance transparency," Quisthoudt-Rowohl said, adding that European laws are quite moderate in comparison with those in the United States.

Her comments were echoed by Richard Nowinski, a London-based barrister and experienced international lawyer. "The law proposed by the Duma is not exceptional and generally consistent with international law," he said by telephone.

"This is less an attempt to prevent investment and more one to regulate it," Nowinski said.

The difficulty, he said, lies in the complexity of defining the width of each strategic sector. "This will be an administrative challenge," he said.

The Duma legislation was recently extended to include 43 strategic sectors. The inclusion of telecoms, fishing, publishing and the Internet has raised concerns that the definition of what is strategic is being stretched too far.

Nowinski played down such fears, arguing that Western countries also frequently worried about their national champions ending up in foreign hands. He recalled the outcry in France in 2005 when rumors emerged that U.S. food giant PepsiCo wanted to take over local dairy producer Danone.

Although PepsiCo's ambitions were never officially acknowledged, the affair triggered the French strategic sectors bill, dubbed the Danone law. "You could say that France declared yogurt a strategic industry," Nowinski said.

Dorothea Sch?fer, a financial-markets analyst with the German Institute for Economic Research, said European fears were partly justified because sovereign funds have expanded worldwide, and Gazprom has openly used its monopoly power in recent price disputes with Ukraine and Belarus. "There is concern that its market power will be strengthened," she said.

Sch?fer offered a different solution: Instead of barring investors, they should be required to put their money in private equity funds. "By forcing investment into an intermediary institution, it gets more difficult to exert direct leverage," she said.

She added, however, that the principle of reciprocity must be observed: "If [German energy giant] E.On can buy a Russian utility, then Russian energy firms must be able to do the same," she said.

E.On last October bought generating company OGK-4 for $6 billion.

But even if reciprocity is achieved, Russian business is facing image problems in the West that, by all accounts, are not matched by the image of Western investors in Russia. "There is endless prejudice here. People think that Russians always have coffers full of dirty money," said Dimitry Pilschikov, a Russian-born lawyer based in Augsburg, Germany, who advises fellow countrymen wishing to buy company assets.

Investors should expect "a thousand suspicious questions" to be asked both by authorities and prospective partners, he said.