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. Last Updated: 07/27/2016

BUSINESS AND THE LAW: New Tourism Law Favors Locals

President Boris Yeltsin vetoed proposed amendments Oct. 29 to the federal law "On the Fundamentals of Tourist Activities in the Russian Federation," frustrating what has been a relatively uncontested passage of legislation seeking to exclude foreign investors and nonresident citizens of the Federation from almost all areas of the tourism industry.

Pursuant to the country's Constitution, the legislation was returned to the State Duma, where a two-thirds majority can override the president's veto and put into effect the new provisions.

The amendments were adopted by a majority of the Duma, parliament's lower house, and approved by the Federation Council, the upper house, also by a majority. Given the absence of any formal opposition, the possibility of the Duma overriding the president's veto should not be dismissed.

The amendments raise several issues that should cause concern to both the foreign investment community and citizens of the federation alike. The provisions of the amendments contravene a number of federal laws, foremost among them being the Constitution.

The primary purpose of the amendments is unequivocally to curtail, and in some instances eliminate altogether, foreign investment in the tourism industry.

The amendments divide the tourism industry into three sectors: tour operator, tour agent and excursion activities. Tour operator activities are further divided into internal and external activities. Under the proposed regulations, foreign investors would only be permitted to participate in external tour operator activities, and only as minority shareholders in firms established as closed joint-stock companies or limited liability companies.

Foreign investors are not the only parties that would be excluded from some sectors of the tourism industry under the draft amendments. Russians who are not also permanent residents here would be barred from entrepreneurial activity in many sectors as well.

The amendments seek to regulate not only who may participate in the industry, but also how they participate. The amendments require that permanent resident citizens comprise a majority of all boards of directors (or other executive or supervisory bodies) of organizations involved in external tour operator activities. Permanent resident citizens would also be guaranteed no less than 50 percent of the total number of "top managers" and "experts" in any tourism company. Lastly, only permanent resident citizens would be permitted to render tour guide and interpretation services under the proposed regulations.

Aside from deviating substantially from the principles set forth in the state program on the protection of investors' rights for 1998-99, the proposed amendments violate a number of fundamental constitutional rights, in addition to key provisions of federal investment law.

The Constitution provides that everyone shall have the right to use freely his abilities, property (Art. 34) and labor capabilities (Art. 37) in pursuit of entrepreneurial and professional activities not specifically barred by law. Thus, the constitutional guarantee of equality of the rights and freedoms of man and citizen, regardless, inter alia, of nationality, origin and place of residence (Art.19), would be compromised should the amendments come into force.

Similarly, Russians should be concerned that the amendments would infringe on the equality of all rights and freedoms guaranteed to them pursuant to Art. 6 of the Constitution, in so far as the amendments discriminate against nonresident citizens in favor of permanent resident citizens.

The amendments would also undermine the most fundamental principle of the law "On Foreign Investments in the RSFSR," namely that the "legal status of foreign investments and of the activity of foreign investors connected with them shall not be less favorable than that provided for the property, property rights and investment activity of and businesses of the RSFSR" (Art. 6).

The law "On Investment Activity in the RSFSR" also guarantees that all investors shall have equal rights to conduct investment activity (Art. 5.1). By virtue of this same provision, investors are specifically granted the freedom to determine the volume, areas and amounts of their investments, in addition to with which parties they wish to engage in contractual relations (Art. 5.1). Each and every substantive provision of the proposed amendments is in direct conflict with the principles of this law.

The drastic departure of the spirit of the amendments from the letter of several fundamental constitutional provisions and principles of investment law should provide cause for concern.

Tatiana Kovaleva is a lawyer and Leah Weitzen is a law clerk with Steptoe & Johnson International.