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. Last Updated: 07/27/2016

Kremlin Delays New Subsoil Investment Law

For MTCentral Bank chairman Sergei Ignatyev shaking hands Monday with Zubkov.
The government has abandoned efforts to pass a new law regulating foreign investment in the strategic natural resources sector, officials said Monday, in a move that looks set to prolong uncertainty in the country's business climate.

"For now, there will be no law. We're going with amendments," said Rinat Gizatullin, a spokesman for the Natural Resources Ministry.

Foreign investors decried the move. "The revised law will fail to attract adequate investment," Neil Duffin, president of ExxonMobil Development, told an investment conference. "Efforts [to pass a new law] have been suspended indefinitely," he said.

In the last year, foreign investors have stepped up calls for a new law regulating subsoil resources use since Shell and TNK-BP lost high-profile battles to hold on to their flagship Russian projects in the face of sustained state pressure.

Moscow has made clear that Russian state-linked firms will hold majority stakes in all large projects but has failed to pass a law codifying the concept.

Meanwhile, President Vladimir Putin urged foreign governments to refrain from passing laws limiting foreign investment in so-called strategic sectors. "It would be harmful for us and our partners," he said during a visit to Wiesbaden, Germany, Bloomberg reported.

The European Union last month unveiled proposals to limit foreign ownership of energy pipelines and power grids, in a move widely seen as aimed at state-run Gazprom.

Russian officials have repeatedly said they hope to see their own law limiting investment in subsoil resources passed by the State Duma this year. The proposal was first floated more than two years ago. Another proposal, backed by the Cabinet earlier this year, would see foreign investment restricted to 49 percent across a total of 39 strategic sectors. Competing ministries have wrangled over what should be defined as strategic, however, and a Duma hearing Monday called for clarification of the definition, raising concerns that that law could also be delayed.

First Deputy Prime Minister Sergei Ivanov, believed to be a leading contender to replace Putin when he steps down in March, said as recently as last month that the Duma would pass the bill by year's end.

Exxon's Duffin also urged state officials, led at the conference by Prime Minister Viktor Zubkov, to make clear which projects would be targeted. "There should also be clear certainty with respect to retroactivity," he said. "No retroactivity in applying new legislation is very important to Russian investment and image."

Investors told the conference, organized by the Federal Investment Advisory Council -- a body that brings together state officials and international CEOs -- that the country still faced vast issues in running an efficient investment playing field.

Arbitrary application of the law, cumbersome customs procedures and failure to respect intellectual property rights were among the issues cited.

Ernst & Young chairman James Turley, a co-chair of the conference, warned that the "continuing hassle factor of doing business in Russia" stopped many new investors from moving into the country.

A survey released at the conference presented a stark contrast in perception between current and potential investors.

Of 51 potential investors surveyed, half said there was "a good chance their company will consider investing in Russia." The survey also included 106 current foreign investors.

The survey showed that only 26 percent of potential investors believed that economic policies and laws to encourage foreign investment were headed in the right direction, compared with 47 percent of current investors. And 59 percent of potential investors believed that risks in Russia would be higher on average than in other emerging markets, as opposed to 39 percent of current investors.

Only 39 percent thought Russia had a chance to become "one of the premier countries in the international market." That compares with 69 percent of current investors.

In the eyes of potential investors, Russia is also lackadaisical about welcoming new investments, with 43 percent saying it undertakes "some efforts" to attract foreign investors and 41 percent saying it "does a great deal." That compares with 26 percent and 66 percent of current investors, respectively.

Arbitrary taxation practices and unprofessional tax inspectorates also hinder new foreign investment, Wolfgang B?chele, president of BASF's fine chemicals division, told the conference.

He warned of an "inflation of bureaucracy" and tax authorities' "aggressive approach toward taxpayers."

"This is not tolerable, especially when combined with a level of arbitrariness," B?chele said. "Tax inspectorates seem to give the impression of being organized like profit centers."

Officials remained upbeat. Zubkov, who chaired the council and presided over the meeting, lauded the country's record foreign investment, which he said reached $60.3 billion in the first half of this year.

"For Russia, this is still an insufficient amount," he said. "The Russian economy can and is able to receive considerably more investment," he said, urging foreign investors to extend their reach into the regions and infrastructure projects. "We do not consider foreign investment an additional financial resource. We understand that technology accompanies those investments and, in general, has a positive impact on the Russian economy and encourages domestic investment," Zubkov said.

Zubkov touted the country's macroeconomic stability, buoyed by sky-high oil prices and deep foreign reserves.

Foreign investors, still reeling from this summer's global credit crunch, urged officials to remain cautious. "Inflation, while certainly something that needs watching, appears to be under control," Ernst & Young's Turley said.

Unilever vice president Antoine de Saint-Affrique said investors were still concerned about corruption and tax complications, which have "a disproportionate resonance outside Russia." He cited "possible restoration of a price control regime" as another worry.

A communique adopted at the end of the meeting said a program to improve the country's investment image should be prepared and implemented if the authorities want to improve the investment climate further.

Increasing purchasing power, growing gross domestic product and a skilled, well-educated labor force are the country's top economic strengths, according to the survey. Corruption and bureaucracy have the most negative impact on the investment climate for the majority of potential and current investors alike.

Most of the council's members chose to focus on positive developments and offered up praise for Putin and Zubkov, who has also been tipped as a possible successor to Putin since his appointment as prime minister last month.

"Putin took a lot of steps to put stability in place," said William O'Rourke, president of Alcoa Russia. He added that he felt "very positive" about Zubkov.

On the downside, excessive bureaucracy does not encourage foreign investors to come and stay in the country, O'Rourke said, pointing out that, like many other foreigners working here, he has to undergo tests for seven diseases, including leprosy, every six months.

"This government is making it harder and harder for me to stay here," O'Rourke said.