A Country of Champions

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In May, a new law that restricts foreign ownership in industries related to national security went into effect.

These industries can be divided into three main groups: economically significant natural resources; national security sectors, such as weapons production and nuclear power plants; and media and related industries, including publishing and printing enterprises. Although the law is discussed as affecting 42 industries, it in reality limits the activities in approximately a dozen fields.

One of the goals of the law was to clarify the rules for foreign companies by giving them a clearer indication how their business activity will be restricted and in what specific sectors. The objective is understandable and for some sectors acceptable -- even desirable.

The law, however, falls short of that goal, as it leaves too much room for abuse by the authorities. One of the main reasons that the law was rushed through the State Duma at the end of Vladimir Putin's presidency might have been to allow him to consolidate economic and political power as prime minister by creating new national champions.

Unfortunately, the law contains fundamental weaknesses. First, the maximum foreign ownership share in new major oil and natural gas fields is placed at 10 percent. This restriction is not justified even under the most liberal definitions of national security.

Moreover, the restrictions concerning media-related industries run counter to the Kremlin's own statements about the importance of building a civil society. The media ownership restrictions can be used to silence alternative -- and anti-Kremlin -- sources of information.

I believe that we are only seeing the beginning of this process. My guess is that the current foreign ownership restrictions will be extended to new sectors as the country strives to create more national champions. This policy now applies to strategic metals, heavy industry, shipbuilding, aviation and state-of-the-art technologies.

I would not be surprised if, in the future, government-supported national champions would be created in industries such as forestry, pharmaceuticals and logistics.

National champions are created when the government establishes and heavily finances special state corporations. They are also created when the government supports loyal oligarchs with various administrative privileges.

In which sectors does a foreign firm dare to invest in Russia? The answer to this depends on the foreign company's willingness to take risk.

If a foreign company is convinced that it has the necessary political connections on its side, it may dare to partner with an oligarch. The advantage of this partnership is a privileged competitive position, but the downside is the risk that the oligarch could easily fall out favor with the Kremlin. In other words, a foreign partner may have to suffer the consequences of the sins of the oligarch. After all, few of the oligarchs during the era of Boris Yeltsin still remain in key positions. In the end, a system based on personal relationships is more risky than one based on the rule of law.

If the company would like to assume a smaller risk, but also enjoy the benefits of the rapid market growth in Russia, the consumer goods sector is one good option. This sector has its own business risks specific to Russia, to be sure, but the key advantage is that it operates outside of the "political economy," which is to say the strategic sector.

British Prime Minister Winston Churchill said in October 1939: "I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma, but perhaps there is a key. That key is Russian national interest."

Some seven decades later, it is time to evaluate the national interests of a resurgent Russia and to look at how the European Union has responded to these interests.

One should avoid the eternal reciprocity of restrictions between the EU and Russia. Therefore, urgent acts of goodwill are absolutely required from both sides to turn the current vicious circle into a virtuous one.

The environmentally sound Nord Stream gas pipeline running through the Baltic states and Poland might be a good starting point in creating sustainable mutual dependencies and building genuine trust between Russia and the EU. In return, the visa-free policy might be a gesture of goodwill from our side.

Kari Liuhto is a professor and director of the Pan-European Institute in Turku, Finland.