Strategic Sectors Law Update – First Commission Meeting of 2012

Last month, then-PM Vladimir Putin chaired his final meeting of the Commission on Foreign Investment Oversight (at least until 2024 barring any change to the makeup of the Commission). Indeed, the Commission meeting was one of the final significant acts by PM Putin, at least judging by his public calendar. There is a certain degree of historical symmetry to timing of the meeting: then-Pres. Putin signed the Strategic Sectors Law in the last three days of his presidency in May 2008. Perhaps because this was his final meeting – or perhaps due to the lack of applications to discuss – Putin opened the meeting with some general remarks on the application of the law over the past four years:

“As a matter of fact, a new mechanism has been created and tested for attracting foreign investment and granting foreign companies access to operate in strategic sectors of the Russian economy. Since it was formed four years ago, the commission has considered more than 140 applications from foreign companies and investors. An overwhelming majority of those applications has been approved.”

In some ways, Putin’s observations are correct. The SSL did fill a legal/regulatory void that existed prior to its enactment, which meant that ‘strategic’ investments were subjected to informal negotiations and political interference (the Siemens-Power Machines case being the most famous example). On the other hand, Putin’s comments are premised on a belief that the list of strategic industries is as narrow as possible. Surely more foreign companies would invest in Russia’s media and fishing industries if they were not deemed ‘strategic’. Moreover, based on media reports of Commission meetings, we know that many – if not most – of the applications reviewed by the Commission have in fact been submitted by offshore entities controlled by Russian oligarchs (including Putin friends Timchenko et al). Thus, to say that the SSL is a mechanism for attracting foreign investment is a bit of a stretch, and Russia still has a lot of ground to cover in improving its investment climate.

Some other interesting statistics on the Commission’s work over the past four years:

  • 140 applications have been considered by the Commission
  • 132 applications received preliminary approvals, 26 included preliminary obligations
  • 8 applications were denied, and 26 applications were abandoned by the applicants
  • 38% of applications related to the extractive industries sector
  • 21% of applications related to companies with encryption licenses
  • 11% of applications related to natural monopolies
  • 10% of applications related to companies that work with infectious agents
  • 9% of applications related to media companies
  • 6% of applications related to companies active in the defense sector

Applications Reviewed at the Meeting

Below are several of the deals that have been publicly reported so far.

  • Changi Airport Group (CAG) - the Commission approved the Singaporean CAG’s acquisition of 30 percent of the shares of Sochi International Airport (Международный Аэропорт Сочи), Krasnodar International Airport (Международный Аэропорт Краснодар), and Anapa Airport (Аэропорт Анапа) from Oleg Deripaska’s holding company, Basic Element (Базовой Элемент). Interestingly, the approval was subject to several obligations on the part of CAG to maintain the secrecy of certain airport operations and to immediately comply with any orders in the event martial law is declared. Indeed, the Russian Ministry of Defense came out in opposition to CAG’s acquisition of shares in the Sochi and Anapa airports because they are used for defense purposes, in addition to civil aviation.
  • AgustaWestland – the Commission approved AgustaWestland’s (Italy) acquisition of 50 percent of the shares of Helivert (Хеливерт), a Russian helicopter company. The purpose of the deal is to form a joint venture for the production of AW139 civilian helicopters in Podmoskovye, Russia.
  • Others – the Commission also reportedly approved Norilsk Nickel’s acquisition of Taymyr Gaz (Таймыргаз) and “a number of deals by TNK-BP”, although the details of these transactions are not available.
More recently, the Russian government announced plans to include internet companies (e.g., Yandex) in the list of ‘strategic’ companies, thereby requiring government approval of acquisitions of shares in those companies by foreigners. Naturally, such a move will not be not only draw the ire of foreign investors but also raise eyebrows considering the role the internet has played in recent opposition protests (not to mention that it is coinciding with a movement among like-minded countries to ‘regulate’ the internet via a UN entity).
As always, we end the post with VVP’s opening remarks to the Commission meeting:

Update: as expected, PM Medvedev will chair the Commission going forward, according to Order No. 888-r issued today. The members of the Commission will be as follows (new members in bold):

  • PM Dmitry Medvedev (Chairman of Commission)
  • First Dep. PM Igor Shuvalov (Dep. Chairman of Commission)
  • Igor Artemyev, Head of FAS (Secretary of Commission)
  • Andrey Belousov, Minister of Economic Development
  • Alexander Bortnikov, Head of FSB
  • Arkady Dvorkovich, Dep. PM
  • Sergey Donskoy, Minister of Natural Resources
  • Sergey Kiriyenko, General Director of Rosatom
  • Alexander Konovalov, Minister of Justice
  • Denis Manturov, Minister of Industry and Trade
  • Nikolai Nikiforov, Minister of Communications
  • Alexander Novak, Minister of Energy (previously on Commission as Dep. Min. of Finance)
  • Vladimir Popovkin, Head of Roskosmos
  • Dmitry Rogozin, Dep. PM
  • Vladimir Selin, Head of Federal Service for Technical and Export Control
  • Anatoly Serdyukov, Minister of Defense
  • Anton Siluanov, Minister of Finance
  • Maxim Sokolov, Minister of Transportation
  • Vladislav Surkov, Dep. PM

I don’t recommend reading too much into this, but it’s worth pointing out that the new members of the Commission are 9 out of the 19 (i.e., not a majority). Also, there are now 19 members of the Commission, versus 18 under PM Putin. This is accounted for by the addition of Maxim Sokolov, Minister of Transportation, to the list. All things considered, the new members belong to the vaguely-defined ‘pro-investment’ crowd, notably Dvorkovich and Siluanov.

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2 Responses to Strategic Sectors Law Update – First Commission Meeting of 2012

  1. John Cass says:

    Russia is best left alone unless you are a huge multinational and even then. My experience is that you should not buy shares in any Western Company operating in Russia. The bureaucracy and political involvement is phenomenal. I am just a small private investor and a few years back I bought into a small extractive industry company operating in eastern Russia. The company had made a good “metals in the ground” discovery and applied for for a license to mine. As I say that was several years ago and the license is still outstanding and there is now the suggestion that the license will be witheld just long enough for the company to go broke. This will allow the licence to be granted to a Russian company on the cheap. Needless to say my investment is now virtually worthless. Beware!

  2. Kawshik says:

    I agree with John! NEVER invest in a western company operating in Russia. The country is not safe for foreign investments. It takes ages to get some simple papers done ….
    Crap Crap Crap! :(

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