Putin Wants Loopholes Closed

Prime Minister Vladimir Putin on Wednesday ordered the elimination of loopholes that allow foreign entities to flout the government when buying into strategic companies.

The law that requires government permission for such investment went into effect last year, installing the prime minister at the helm of a special commission to review potential deals.

"We need to remove the gaps that allow some of our economic entities to circumvent the law's provisions and evade clearance for deals with strategic assets," Putin said, presiding over the commission's second session Wednesday.

It was unclear whether by using the word "our" Putin meant foreign companies registered by Russian businessmen or any companies that already operate in the country.

Putin also called for amendments that would simplify the rules for "conscientious" investors to make Russia more attractive for foreign money when the global economy bounces back.

"A rather intense rivalry for investment resources will unfold in the period of a post-crisis development and recovery," he said. "And our task is to work actively on creating the most favorable conditions for bringing this investment into our economy."

The work must be quick, open to the public and done in close contact with the business community, Putin said. Nonetheless, the media were deprived of access to the commission's debates on specific proposals to remove the loopholes and make the law more investor friendly.

Putin's call to make Russia more competitive in attracting foreign capital echoed his statements last week in Davos, Switzerland, where he said his country would remain open to foreign investment.

On Wednesday, the commission was going to review "several" potential deals in the areas of space-equipment building, natural resources and transport, Putin said. The commission had not reported on the session's outcome by Wednesday evening.

In an attempt to stress that foreign investors are flocking to Russia despite the global economic crisis, Putin said they had recently filed 45 requests seeking deals with strategic companies.

Putin spokesman Dmitry Peskov was unavailable for comment Wednesday afternoon. Yelena Nagaichuk, a spokeswoman for the Federal Anti-Monopoly Service, which handles foreign investors' requests, declined comment.

Well-known foreign companies are unlikely to take the risks of breaking the law, said Jonathan Hines, a partner at law firm Dewey & LeBoeuf.

"Any big foreign company is going to tread very, very carefully in this area and is not going to do something that might violate the law ... because the consequences of being wrong are just too grave," he said.

A deal done in violation of the law is considered void. In addition, no "serious" company would want bad publicity, Hines said.

"At the same time, there could be other foreign companies that fall within the law, including some companies owned by Russians," he said. "But because these Russians have invested into foreign companies, they need to comply with this law."

Loopholes in the law might include situations where foreigners, without controlling the company through the management or board of directors, have such extensive veto rights that they are in control all the same, Hines said.

Another possible issue is that the law allows two unrelated foreign-controlled companies to hold 30 percent each in a strategic asset, he said.

"What happens if they have a secret shareholder agreement behind the scenes where they agree to vote everything the same way, that they'll control the investment together?" Hines said.

In simplifying the law, the government could allow foreign investors to buy Russian assets from each other if these companies are part of the same larger group, Hines said. There may be an amendment to relieve banks, which are not strategic assets, from falling under the law just because they use encryption devices, he said. The government might also want to raise the 10 percent ceiling for investors in strategic natural resources companies, he said.