Duma Bill Risks Ruining Stock Market

The business press was reporting last week that foreign investors are excited by the profits that can be made on the Russian stock market. But it was also last week that the stock market took a downturn and the trading of stocks of many companies either slowed or stopped altogether.


The reason for the change in mood was the recent moves by the State Duma to amend the existing law on foreign investment. The law itself is considering provisions for a "grandfather clause," which means that in case new laws or amendments are adopted, and the conditions for a foreign investor worsen, the investor has the right to apply the legal norms that existed when he entered the market. This norm is without question a long-awaited step forward in foreign investment law.


The communists, however, who control the Duma's Economic Committee, managed to introduce two amendments for the first reading of the bill. The first is a list of branches of industry that will be closed off to foreign investment. The second is a similar list forbidding or limiting certain activities by foreign investors.


The draft law on restrictions and bans on foreign investment was originally introduced in the Duma by the government last October. The government had tried to reconcile the interests of various federal ministries and departments and regional interests with the need to attract foreign investment. The government's proposed list of restrictions and bans was far shorter and more logical than the Duma's.


There are 44 items in the list of business activities forbidden to foreigners. These include not only justifiable ones such as a ban on uranium mining, but also restrictions on television and radio broadcasting and real estate. Among the most unpleasant surprises for many people were the bans on foreign investment in certain aspects of electric utilities and telephone and radio communications.


Only 19 of the 44 proposals to prohibit or limit foreign investment were made by the Duma's Economic Committee. But this was enough for the stock market to be affected, especially since blue chip electricity and telecommunications companies such as Rostelekom and United Electricity Systems fall within the bans.


It will be unpleasant for many people when they find out that the list of business activities where foreign capital is restricted includes securities operations; banking, insurance and other financial services; wholesale and retail business; advertising; transporting automobiles; publishing and many other very popular types of business, which now have quite a lot of foreign investment.


While the government-sponsored proposal could allow foreign investors to obtain a license or permission to get involved in these businesses, the bans being put forward by the Duma make their prospects look far more gloomy.


Government officials who are dealing with investment problems in Russia are trying to console investors by saying the list being examined by the Duma is only in its first reading and that future work on the list could lead to its being shortened. It could just as well, however, be expanded. The main thing is that people in the government have underestimated what has happened in the Duma with this list and simply do not understand how serious a threat it poses to the stock market.





Mikhail Berger is economics editor of Izvestia.