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. Last Updated: 07/27/2016

Khristenko Promises Clarity for Investors

Foreign investors will either get a definitive list of strategic sectors where their participation is restricted, or a clear set of case-by-case guidelines, Industry and Energy Minister Viktor Khristenko told a Cabinet meeting Thursday.

"The main goal of the bill is to limit the restrictions on foreign capital in Russian companies," Khristenko said, adding that his proposals would be submitted to the government by Sept. 20.

Khristenko's comments received a cautious welcome from investors, but some warned that whatever rules the government decided upon, it should honor them.

"Whatever the strategy might be, the government should stick to it and not invite foreigners first and tell them later that they are a potential danger to national security," said Gregor Kursell, spokesman for EADS, the European aerospace giant. EADS is in talks to buy up to 10 percent in Irkut Corp., which makes Russia's bestselling fighter plane, the Su-30.

Foreign companies, EADS included, have long lobbied for clarity from the authorities on foreign investments.

Companies have often complained that the government has brushed aside their property rights, despite claiming to want investments from abroad.

Most recently, the lack of explicit legislation on foreign investment was instrumental in thwarting a bid by German engineering giant Siemens for a controlling stake in Siloviye Mashiny, or Power Machines.

The bid was turned down on the grounds that Russia's largest power-turbine maker also produced generators for submarines and components for intercontinental ballistic missiles.

After the Siemens deal fell through, President Vladimir Putin in May called on his government to "formalize ... criteria to determine the limitations on foreign participation in [strategic] sectors of the economy" and to draw up a list of strategic industries and projects "which shall not be extended or broadly interpreted."

Putin told the Cabinet to come up with a final proposal on foreign investment rules by Nov. 1.

Citing a leaked draft from the Industry and Energy Ministry, Vedomosti on Thursday reported that the fate of foreign investments would be decided on a case-by-case basis and would be subject to approval by the Federal Security Service, the Defense Ministry and the Security Council.

The powerful agencies, commonly known as the siloviki, have for the last few years been actively seeking control over the country's strategic industries.

When contacted, the Industry and Energy Ministry refused to discuss the newspaper's report. But a source in the ministry said on condition of anonymity that it was more of "a collection of bits and pieces from a number of proposals" than a document as such.

During Thursday's Cabinet meeting, Natural Resources Minister Yury Trutnev said a separate bill on foreign participation in natural resource projects was being prepared.

In April, the Federal Subsoil Resource Use Agency canceled a series of auctions for oil and gas development. A number of foreign companies have been forced to give up investments even after having poured money into projects.

In 2003, EADS subsidiary Eurocopter sold its 33 percent stake in a longstanding joint venture to build Mi-38 helicopters with two Russian helicopter makers, after failing to persuade the government to repeal a 1998 law limiting foreign stakes in aerospace companies to 25 percent.

Eurocopter was also blocked from sharing the intellectual property rights to the Mi-38, despite having helped design the cockpit and avionics.

Also in 2003, Connecticut-based United Technologies Corp. cut its stakes in two Russian aviation firms to below 25 percent for fear that the companies would lose their licenses.

"The best approach to the question of foreign investment in defense-related enterprises is to have the government conduct an ad hoc review of each potential deal that may affect national security," said Richard Brody, president of international operations at UTC. A similar system has "worked effectively" in the United States, Brody said.

Christopher Granville, chief strategist at United Financial Group, said that both options being considered by the Industry and Energy Ministry "would represent progress from the present state of affairs."

A definitive and final list of industries where foreign ownership would be subject to approval would be the better option, Granville said, as it would reduce uncertainty and remove the opportunity for arbitrary decisions.

Rory MacFarquhar, an economist at Goldman Sachs, said that even clear guidelines for reviewing foreign investment proposals on a case-by-case basis would be better than the current situation, as they would create "an understandable procedure -- a predictable unpredictability."