Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Legislators Take Up Investor Question

Government officials, entrepreneurs, bankers and venture fund managers will descend on the Duma on Tuesday for a public hearing on Russia's poor track record at attracting direct investment into the economy f and Duma deputies, who are proudly touting a pet draft law on foreign investment, are likely to meet a less-than-thrilled response.

Foreign investment in Russia has over the years made up a substantial part of the cash sunk into the industrial sector.

In 1998, foreign investors put $11.7 billion into Russia, of which $3.3 billion was direct investment into enterprises. (The rest was mostly in financial instruments such as corporate stocks or government bonds.) In 1997, foreigners put $12.3 billion into Russia, $5.5 billion in direct investment, and in 1996 they put in just $6.5 billion, $2 billion in direct investment.

That may seem a lot of money, given the 1999 Russian federal budget, which assumes spending of $20 billion yet allocates just $1.87 billion for investments into industrial infrastructure.

But it seems like less when one considers that Russia is the world's largest country and has a potential market of 150 million people f and yet is pulling in far less worldwide investor interest than places like Poland or Peru.

The State Duma's response was to pass a bill on foreign investment in April, after years of debate. The law comes before the Federation Council, parliament's upper house, later this month. If approved by both houses and signed by President Boris Yeltsin, the new law on foreign investment would replace the last such law, passed in 1991.

Lawyers and investors who have studied the 30-page bill say it is welcome enough in that it cleans up some minor confusions about the status of foreign investors here. But no one thought it would be in the slightest influential in bringing in new money. Max Gutbrod, a partner at the law firm Baker&McKenzie, perhaps summed it up best by stating drily, "If this law had been enacted in 1989, it would have been dramatically new."

"This bill is very declarative in nature and lacks any specific mechanisms or guarantees that would effect foreign investment in Russia one way or the other," said Robert Devane, a Moscow-based independent economist. "I doubt that the bill's passage would in of itself cause an influx of foreign investment into Russia."

"There are no surprises in this bill f the good intentions are wrapped in a conceptual muddle, and implementation will depend on further legislation that has not yet been drafted," said John Hammond, a partner at the international law firm Cameron McKenna. "It may be evolutionary, but not revolutionary."

The law would promise foreign investors that their property cannot be nationalized f but since mass nationalizations historically are illegal in nature, it's hard to say what that pledge is worth.

Baker&McKenzie's Gutbrod said the law also guarantees to foreign investors the right to move its revenues and profits into and out of Russia at will, and also lets them do the same with property or information the investor brings with him to Russia.

Cameron McKenna, in an e-mailed response to questions, said a "major achievement" of the bill was that it sets maximum total tax rates that local and federal agencies can pile onto a foreign investor f at least until either the investor recoups his initial investment, or seven years go by from the moment the investor broke Russian ground.

"Here the law does help," Gutbrod agreed.

"If the government of a region f say, Tatarstan f decides to nationalize foreign property or prohibit a foreign entity to re-export some of its business, that will clearly be illegal now," Gutbrod said.

However, as always there are loopholes and caveats. For example, the law may limit the tax burden and guarantee the rights to move revenue and property across borders f but it also includes a provision that says all of this can be superceded by hypothetical changes in legislation undertaken to protect "the constitutional order," public health and morals, national security or even "the rights and lawful interests of other persons."

Obviously all of this f and particularly the "interests of other persons" f remains very open to interpretation.

What's more, the law also makes it easier to deny a foreign investor access to the Russian market. Foreign companies have to register with either local or federal authorities, depending on their size. The new law would make this potentially more problematical f by letting authorities deny such registrations so as to protect "the constitutional order," the public health and morals, and, yes, "the rights and lawful interests of other persons."

Enforcing the law may be difficult, said economist Devane.

"That would require a complex of measures, not the least of which

would be mechanisms that ensure that low-level functionaries throughout Russia follow the law. ? Unfortunately, the culture in Russia is still such that no matter how liberal a law is passed, those charged with performing the vast multitude of tasks that are required for successfully drawing foreign investment into Russia are not very likely to take a proactive stance," Devane said.

"The government and the Duma, in addition to creating legislative and normative documents, need to send a convincing message about their policies and objectives. Otherwise, this law may well be added to the reams of other laws that are ignored in Russia every day."