Kudrin Wants Fewer Strategic Sectors

Prime Minister Vladimir Putin praised a new law restricting foreign investment in strategic sectors at a government meeting on Monday, but a senior Cabinet member said the legislation was too strict and might ultimately be relaxed.
Deputy Prime Minister and Finance Minister Alexei Kudrin described the law after the meeting as the result of a “political consensus,” but said he had hoped the list of sectors designated as strategic would contain fewer industries.
Kudrin, one of a small group of economic liberals within the government, has long opposed the new law, but said Monday that it should be given a try as currently written.
“If society, the State Duma and the Federation Council agreed on it, then let it operate. We will see how it works and, possibly, cut it,” he told reporters after the meeting. “Let it be a political consensus.”
While declining to say in which industries in particular he would like to see the restrictions lifted, Kudrin did say the law, designed to clarify the rules in certain sectors, was bound to cause a decline in foreign investment in the country.
“Some [investors] aren’t going to come for a minority stake or less,” said Kudrin. “There are such worries.”
He added, however, that since economic growth was so robust at present, it was likely that any decline because of the bar on investment would go unnoticed.
Putin told the Presidium of the Cabinet on Monday that the legislation was designed to welcome rather than ward off foreign investment.
The new law covers investment in 42 sectors, including space, aviation, nuclear energy, telecoms, media and natural monopolies. Private foreign companies looking to purchase a 50 percent stake or greater in a company in one of the sectors would be required to receive government approval first. State-owned foreign companies are required to receive permission for any stake 25 percent or greater.
Many analysts have said the number of industries the government deemed strategic appeared unusually high and investors complained that the law essentially limits access to the better part of the country’s economy.
Chris Weafer, chief equity strategist at UralSib, said he doubted that the list of strategic sectors would be cut any time soon.
“It is definitely more of a long-term aspiration than a likely occurrence during [Dmitry] Medvedev’s presidency,” he said. “The ideology of the majority of people with real power in government is for a strong state role. I can’t see that changing in the next eight years.”
The subject of the new law came up at Monday’s meeting as Putin called on the Industry and Trade Ministry to propose the composition of the commission charged with reviewing prospective investments.
Kudrin said his ministry would most likely send a representative to the commission, although he himself would not be a member. The Industry and Trade Ministry declined immediate comment on the commission’s structure.
Putin, who will head the commission, will have a final say on access of foreign investors.
“We welcome foreign investment and will support this process in the future in every possible way,” Putin said. “Essentially, that’s what the law is all about,” he said, adding that every developed country had similar legislation.
Putin signed off on the law on May 5th, but industry observers said it would be months before it became operational.
The head of a company that is a member of the Foreign Investment Advisory Council, speaking on condition of anonymity because of the sensitivity of the situation, estimated that it would be at least six months before the law took full effect.
“So far, it is unclear how it will be applied,” the company head said, adding that the firm considered the law a positive development anyway.
A spokesman for another FIAC member said company officials declined to comment because of the current uncertainty surrounding the law, adding that the company “still” hoped the rules would work to its benefit.
Alex Stoljarskij, a member of the Association of European Businesses in Russia and a lawyer at Beiten Burkhardt, said the company had difficulties providing clear answers to its clients about the practical implications of the law.
The law gives foreign companies that own 5 percent or more in strategic Russian entities 180 days to report the fact to the government’s designated agency, but it has yet to be formed, he said.
Andrew Somers, president of the American Chamber of Commerce in Russia, said the companies would have to learn how to live by the new rules, adding that they were not overly severe compared with similar rules in Mexico and Saudi Arabia.
But “it would be good if the aerospace sector were eliminated from this law, because there is some ambiguity about its application,” Somers added.
UralSib’s Weafer said that, so far, the law looked like it would generate more positives than negatives.
“In an ideal world, Kudrin is right; limiting equity participation and setting investment rules in so-called strategic industries does limit foreign investment flows,” he said in e-mailed comments. But “there has been so much uncertainty about the ‘investment rules’ in recent years that foreign investment has been less than it should have been. Now that there is clarity, it will help raise investment in the strategic industries.”