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. Last Updated: 07/27/2016

Strategic Sectors Bill Goes to Duma

The government said Wednesday that it had sent a long-awaited bill to the State Duma that defines strategic industries and restricts direct foreign investment in them -- two years after President Vladimir Putin called for a clear tightening of the rules.

The bill, however, does not cover the lucrative energy sector, where foreign companies have had to yield to varied means of government pressure and hand over control of major oil and gas projects to state companies.

Prime Minister Mikhail Fradkov earlier this week ordered that the bill be sent to the Duma, the government announced Wednesday. The Duma formally registered the bill Tuesday.

"We think this can be a major positive here, and that is clarification," Andrew Somers, president of the American Chamber of Commerce in Russia, said of the U.S. business community's attitude toward the legislation.

Putin told the government to set firm rules for foreign investment in 2005, but their formulation has spanned two years, partly because Russia closely watched similar proposals in the United States.

Under the bill, a government commission will review applications from foreign investors whenever they want to buy control of a business operating in one of 39 strategic industries grouped in six broad sectors. The government identified these sectors as production of "special" and military equipment, the aerospace and nuclear industries as well as natural monopolies.

The bill names the 39 specific industries, but as of Wednesday evening, the government and the Duma had not published the bill in full. Instead, the Industry and Energy Ministry released a statement Wednesday that outlined its key provisions.

The commission, which will be chaired by the prime minister, will have up to six months to respond to applications and will take into account recommendations from the Federal Security Service, the statement said.

The government can deny a deal if the Russian strategic company holds the right to work with state secrets or can import or export military equipment and other sensitive products and technology. A company's work on state defense contracts in the past five years, or its possession of exclusive copyright on a technology that is essential for national security, can also be the reason for a denial.

"If the company doesn't fall under any of these criteria, permission for a deal must be issued unconditionally," the ministry's statement said.

Should the company have any of these restrictive features, foreign investors can still get the green light for a deal if they agree to take on the obligations that the bill spells out. As one of them, the ministry stated, a foreign investor must agree to put at the helm of the company Russian nationals who have clearance to work with state secrets. In another obligation, a foreign investor must sign up to continue implementing state defense contracts.

A foreign company controlled by a foreign government cannot buy more than a blocking stake of 25 percent plus one share in a strategic company, an approach Somers called "pretty liberal."

State control could mean holding more than 50 percent, but it could mean less than 50 percent if all the other shares are widely dispersed so that there is no other major shareholder, said Jonathan Hines, a partner at law firm LeBoeuf, Lamb, Greene & MacRae, who has closely watched the bill's development.

The announcement of the bill's passage to the Duma, known to back government bills overwhelmingly, came as the newly appointed U.S. undersecretary of state for economic, energy and agricultural affairs, Reuben Jeffery, urged Russia to keep its doors open to foreign investment. Instead of passing legislation that would discourage foreign business, Jeffery called for lighter rules that would "keep Russia open and competitive," Reuters reported.

In Moscow on his first foreign visit since taking office last month, Jeffery said Wednesday that it was understandable that Russia might wish to declare some sensitive sectors as strategic, pointing to controls introduced by Washington in the wake of the Sept. 11 attacks, but said these should not hamper business links. Equivalent legislation on foreign investment has never been used to block Russian acquisitions or deals in the United States, he said.

Over the past two years, the United States has moved to tighten its rules governing foreign investment in strategic companies. A bill that requires the administration to keep Congress informed about potentially controversial investment proposals and allows a presidential veto on them is currently awaiting President George W. Bush's signature.

AmCham in Russia has helped in consultations between Russian government officials and U.S. legal experts during the drawing up of the Russian bill, Somers said. One reason the bill took so long to write was that the U.S. strategic sectors legislation were also being considered, he said. "The Russian government was watching that development very closely to see how restrictive or how liberal the new U.S. law would be," he said, describing the resulting U.S. bill as not restrictive. "It's a pretty good exercise on both countries' parts to find a sensible way to balance national security on the one hand and foreign direct investment benefits on the other."

The maximum six-month waiting period for a government decision contained in the bill appears too long, compared with the U.S. requirement of up to 90 days, Somers said. "In practice, businesses need to make decisions more quickly" than six months, he said.

The inclusion of natural monopolies in the bill means that the government will have to approve investment into oil and gas pipelines, ports, airports and electricity transmission lines, Hines said. "One can expect Russia to have such rules," he said. "Western countries have such restrictions as well, including the United States and all of Western Europe." The new rules would not significantly change the current situation, he said. "Realistically, sophisticated investors and their advisers know that with or without this law the Russian government will find ways to block investment by foreigners that they don't want."

The bill is very difficult to circumvent, having been drawn up "to cover any possible type of transaction, direct or indirect, upside down or inside out, that would give foreigners more than 50 percent control." "It's not the kind of area where you want to fool around," he said.