Foreign Investment in Russia's Strategic and Defense Sectors

Glenn Kolleeny

Russia, as a sovereign state, has the right and even the duty to protect its strategic assets and safeguard its national defense and security. On May 7, 2008, Russia adopted the law "On Foreign Investments in Companies of Strategic Importance for National Defence and Security of the Russian Federation" No. 57-FZ ("Law on Foreign Investment in Strategic Companies") along with related amendments to existing laws.

Other countries have also adopted similar laws. For example, the US Foreign Investment and National Security Act of 2007, authorizes the Committee on Foreign Investment in the United States (CFIUS) to review mergers, acquisitions and takeovers by foreign companies, to determine their effects on the national security. Foreign entities must file with CFIUS if transactions involve critical infrastructure (including energy assets); entities controlled by foreign governments, or foreign citizens complying with any boycott of Israel; organisations designated by the Secretary of State as foreign terrorist organisations.

Randy Bregman

Since the implementation of the Law on Foreign Investment In Strategic Companies several elements have emerged that signal difficulties for further foreign investment.

First there is the RF Government Decree of July 6, 2008, No. 510 "On the Governmental Commission for Control of the Implementation of Foreign Investment in the RF." The commission consists of politicians, which will likely lead to delays and politicization of the review process. However, there is hope that over time the committee will be handed over to professional technical experts.

In addition, foreign investment in Russia has dropped from the record levels achieved in 2007. On August 14, the Ministry of Natural Resources released a list of Strategic Fields, including 160 onshore hydrocarbon fields and 40 offshore fields. The concept of a strategic hydrocarbon field has tripled since late 2006, when Minister Trutnev stated that only 30 oil fields and 40 gas fields were likely to be classified as "strategic." Since Russian oil production is stagnating, Russia should consider measures to stimulate foreign investment in this critical sector rather than focusing solely on tax breaks.

But it's not just natural resources that are being protected under the new law. The recently published list of technologies critical to national security, raises real concerns about protectionism. The list consists of broad categories of technology covering everything from weather forecasting to "processing, storage, transfer and protection of information" technology. The majority of Russian companies have technology that could be considered "critical."

National legislatures have an obligation to create laws that provide for protection against foreign control of assets vital to national security. Unfortunately, the recent steps taken in Russia to implement the Law on Foreign Investment in Strategic Companies seem designed to lead to protectionism, a decrease in foreign investment, and competition.