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. Last Updated: 07/27/2016

Cabinet Backs Investor Limits

The Cabinet on Wednesday gave tentative approval to a long-delayed bill restricting foreign participation across 40 industries that the government deems strategic, including energy and metals.

Investors and analysts cautiously welcomed the proposal, which would for the first time establish the rules under which foreigners will be allowed to invest in strategic projects. Some said more details were required to ensure that the rules were clear.

The Federal Security Service will be one of the agencies that will screen foreign bids.

The government has been stuck on which industries and natural resource deposits should be declared strategic since President Vladimir Putin called for legislation restricting foreign investment in 2005, with liberal opponents of the move arguing that projects should be judged on a case-by-case basis and foreign investors holding off on major commitments, citing a lack of clarity.

The bill would allow the government to reject foreign bids for stakes of more than 50 percent in Russian companies across 40 sectors that have "strategic importance for national security," Industry and Energy Minister Viktor Khristenko told the Cabinet, a version of his comments posted on his ministry's web site said.

The president would retain the right of veto in certain cases, Khristenko said.

The committee would have to make its decisions within three months, or in six months for exceptional cases, Khristenko said.

In certain instances, investors would have to take upon themselves obligations like retaining a certain number of employees at the enterprises in question.

A government spokesman said the bill had been approved in principle, but added that "a number of questions" would have to be cleared up in the next month before the bill goes to the State Duma. The spokesman, who spoke on condition of anonymity, said Prime Minister Mikhail Fradkov, First Deputy Prime Minister Dmitry Medvedev and Defense Minister Sergei Ivanov had "plenty of questions" to put to Khristenko, whose ministry drew up the bill.

The makeup of the government committee that will approve the applications and the procedures for implementing the bill have yet to be hammered out, the spokesman said.

Maria Ushakova, a spokeswoman for the Industry and Energy Ministry, said the committee would comprise representatives of "both the economic and power blocs," without elaborating.

Ushakova said she did not have an exact list of the 40 industries.

Khristenko said the industries were in eight categories, related to military, space and "special" equipment, metals and alloys, aviation, nuclear energy, natural monopolies and significant deposits of mineral resources.

Natural Resources Minister Yury Trutnev said his ministry had identified 10 strategic oil deposits and 26 strategic gas deposits. The Sukhoi Log gold deposit and five copper deposits, including one in Udokan, should also be considered strategic, he said.

A government source said Tuesday that the legislation would define deposits as strategic if they held more than 70 million tons of oil, 50 billion cubic meters of gas, 50 tons of gold or 500,000 tons of copper, Interfax reported.

Trutnev on Wednesday said all offshore oil and gas deposits, as well as those resources used in the defense industry, such as uranium, diamonds and quartz, would be strategic regardless of their size. Deposits close to "defense areas" would also be considered strategic, Trutnev said, without elaborating.

Concerns about the bill were raised by Economic Development and Trade Minister German Gref, who warned fellow ministers that security should not come at the expense of economic growth.

"If we make barriers for investment and the country's economy does not grow at a fast pace, we won't be able to ensure any security," he said in comments carried on state television news.

In his televised comments, Fradkov conjured up colorful images to illustrate his arguments in favor of the restrictions.

"Why give [these sectors] away? One shouldn't be a dog in the manger but we need to know our worth," Fradkov said.

"The government will be able to refuse Citizen X, let's say a British citizen, only when it becomes known that he has acquired a 49 percent stake of such-and-such a company," he said in another sound bite.

The order to draw up a list of strategic industries came in mid-2005, after the country's anti-monopoly authorities rejected Siemens' bid for Power Machines, Russia's largest turbine maker.

By the end of 2006, all the key ministries and bodies except the FSB and the Federal Anti-Monopoly Service had signed off on the proposed bill, Ushakova said, adding that the compromise was reached at a meeting led by Sergei Naryshkin, the government's chief of staff.

Kommersant said Wednesday that the FSB had insisted on the list of 40 industries. Izvestia said all bids would be screened by the FSB before they went to the government committee. Both the government spokesman and Ushakova said they could not confirm that.

The FSB declined comment.

Representatives of the Foreign Investment Advisory Council, or FIAC, a group of foreign investors working in Russia, welcomed the step.

Alexei Grigoryev, corporate relations director at Siemens in Russia, who co-chairs the FIAC working group on industry, construction and high tech, said the FIAC had submitted "very thorough" recommendations to the government in June 2005 but declined to say whether the authorities had heeded them. "We are in a constant dialogue," he said of his group's relations with the Industry and Energy Ministry.

Konstantin Batunin, an oil and gas analyst at Alfa Bank, welcomed the potential clarity offered by the bill. "It would be more difficult to break them or make up new rules depending on the current political situation," he said.

Blanka Kalinova, a senior economist with the Organization for Economic Cooperation and Development, said the restrictions on foreign investment could not be considered a positive sign.

"It's never a welcome development in the international scene," she said by telephone from Paris. She stressed that the sectors should be very well defined and "it should be clear who will decide and how." The number of strategic industries appeared to be unusually high, she added.