Strategic Sectors Law Update – Third Commission Meeting of 2012

On November 28, 2012, PM Medvedev chaired a session of the Commission on Foreign Investment, the third time the Commission has met this year.

Changes to Russia’s Business Environment

In his prepared remarks, Medvedev noted Russia’s recent improvement in the World Bank’s Doing Business rankings, which evaluate the ease of doing business with respect to several areas (e.g., trading across borders, construction). Russia was ranked 112th out of 185 countries this year, rising from 118th place last year. As Medvedev himself noted, “[i]t’s modest growth, but growth all the same.”

Medvedev highlighted changes to Russia’s tax system, where Russia displayed particularly significant improvement over the past year, moving up 30 spots on this measure alone. Russia also improved modestly in the area of dealing with construction permits, where it has performed remarkably poorly ever since the rankings started keeping track.

Unfortunately, Russia’s rankings fell in the categories for trading across borders and protecting investors. The fall in trading across borders may be a side-effect of changes to the customs code over the past year, and resulting hiccups related to implementation. The negative trend for protecting investors, however, is more concerning especially because this is one of the highest-profile problem areas with Russia’s business environment, both for domestic and foreign investors. Also worth noting is the lack of change in Russia’s ranking for getting electricity, where it ranks at an abysmal 184/185. Russia’s laughably complicated construction and electricity procedures are especially frustrating in light of the frequent accidents related to violations of safety standards. The poor rankings also illustrate that many of the deficiencies of Russia’s business environment are ‘low-hanging fruit’ that can in principle be fixed with minimal legal and regulatory disruption.

Proposed Strategic Sectors Law (SSL) Amendments

After the meeting, FAS Head Igor Artemyev summarized several proposed amendments to the SSL. Specifically, the amendments include the following changes:

  •  Bacteriological Food Products: in the past, there have been some major foreign investments in Russian manufacturers of dairy products (e.g., Coca-Cola purchase of Nidan, Danone purchase of Unimilk). These deals required approval from the Commission because Art. 6.3 of the SSL included “activities connected with the use of infectious disease pathogens” (i.e., including bacteria cultures used in production of dairy products like yogurt). Foreign investors will no longer be required to obtain the Commission’s approval for companies involved in the use of “Third and Fourth hazard category” bacteria (the least dangerous categories).
  • Offshore Rule Expanded to Regions: the recently adopted federal rule – which was a part of the 2011 amendments to the SSL – excludes from the SSL’s scope any foreign investments made by offshore entities (i.e., non-Russian legal entities) that are controlled by “tax residents of the Russian Federation” (TRM’s analysis of this provision, here).
  • 75 Percent Rule: foreign investors already owning 75+ percent of a strategic enterprise will no longer have to apply for approval from the Commission if they wish to increase their stake up to and including 100 percent.
  • Permit Extension: foreign investors that have already been issued a permit (typically with a 2-year term) to invest in a strategic enterprise, may at the end of the term request that the permit be extended from 2 to 5 years without obtaining approval from the Commission (it appears that the extension is requested from and granted by FAS directly).
  • “Coordinated Actions” Principle Eliminated: as the SSL was drafted by FAS – the regulator responsible for enforcing Russian antimonopoly law – it originally contained various references to the principle of “coordinated actions” (согласованные действии), from Art. 8 of the Law on Competition. Coordinated actions are essentially analogous to collusion – e.g., an agreement between one or more companies to set a price floor for goods that they all sell. The confusion arose from Art. 8.8 of the SSL, which required applications for foreign investments to include details on coordinated actions having “substantial influence on the activity of a strategic enterprise.” Also, Art. 13.6 of the SSL permitted FSB investigators to evaluate “coordinated actions” by a foreign investor and third parties, specifically to see whether they are aimed at establishing control over a strategic enterprise. Including these references to coordinated actions implied that control over a strategic enterprise under the SSL could be obtained by a foreign investor acting in a mutually beneficial way with a third party. Naturally, such a principle could lead to absurd results where a Russia co-investor’s ownership would be imputed to the foreign investor simply because the two act in a collaborative manner in relation to the strategic enterprise.

According to Artemyev, the government expects the new SSL amendments to be introduced into the Duma within the next few weeks, and adopted and signed into law within the next six months.

Deals Reviewed at the Commission Meeting (as of publication)

  • Pacific Andes: at the last meeting in August, the Commission took note of Pacific Andes Int’l Holdings Ltd., a HK/PRC company, which allegedly obtained control over several Russian fishery companies (specifically, those harvesting Pollock). At the August meeting, the Commission instructed unspecified “ministries and governmental agencies” to undertake “certain measures to bring operations of these companies in line with the current law of the Russian Federation.” At the meeting on November 28, the Commission determined that Pacific Andes’ acquisitions were illegal because they were made in noncompliance with the SSL (Pacific Andes did not apply for Commission approval).
  • Telenor-Vimpelcom: the Commission recognized the validity of all deals involving Norwegian telecom Telenor’s acquisition of shares in Russian telecom Vimpelcom. Telenor originally raised its stake in Vimpelcom from 25 percent to 36.6 percent, making it the company’s largest shareholder. It later raised its stake to 39.5 percent through an option with JP Morgan, and then 42.9 percent through an option with Weather Investments. Altimo – the telecom division of Russian conglomerate Alfa Group – complained that Telenor’s exercise of its options violated shareholder agreements, while FAS went to court claiming that the share purchases resulted in Telenor’s acquisition of control over Vimpelcom, and thus should have been approved by the Commission. The Commission and FAS later conditioned retroactive approval of Telenor’s share purchases on there being parity between the Russian and foreign Vimpelcom shareholders. In November 2012, Altimo purchased an additional 5.95 percent of Vimpelcom shares, bringing its total to 47.85 percent, at which point the FAS withdrew its claims against Telenor.
  • Gharysh Sapary: the Commission approved the acquisition of 23 percent of Kosmotras (Космотрас) by a Kazakhstan state-owned company, Gharysh Sapary (Гарыш Сапары), which is working on a joint Russian-Kazakh-Ukrainian project, Dnepr (Днепр).
  • Russian Sea: the Commission approved the acquisition of OAO “Arkhangelsky Tralovy Flot” (ATF) (Архангельский траловый флот) by OOO “Russian Fishing Company” (Русская рыбная компания), which is a subsidiary of Group of Companies “Russian Sea” (ГК “Русское море”). The deal, which came about through a privatization auction, was approved because the shareholders of Russian Fishing Company are Russian citizens.

As always, we end the post with some video from the meeting:

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