Strategic Industries Law to be Tested Soon

Update: On September 15, the President of Lukoil, Vagit Alekperov, told the media that the first sitting of the governmental Commission on strategic investments will occur in the end of September, and that Deputy PM Igor Shuvalov will preside over the session (instead of PM Putin).

Some updates on the strategic industries law, which I’ve previously blogged about here, here, here, here, and here.

In July, the Federal Anti-Monopoly Service (FAS) was named as the main agency in charge of implementing the law. Specifically, the FAS will be in charge of reviewing applications and making recommendations to the governmental Commission. Analysts reported that the FAS and FSB fought over this position and the FAS’ victory should be a source of relief for investors. The FSB, however, will still conduct investigations (оперативно-розыскные мероприятия) for the FAS with regards to assessing investor applications. The FAS later formed the Foreign Investment Control Administration, currently headed by Svetlana Levchenko, a lifelong bureaucrat who formerly was in charge of the FAS in Perm. When fully staffed, Levchenko’s office will have 17 employees. When asked about how many applications her office has received, Levchenko said that while the number is low, “they show that the law has begun operating.” Levchenko’s office has already started to clarify ambiguities in the law by responding to requests from potential applicants. Also, this month the FAS issued an Order clarifying what should be included in the business plan that a foreign investor must submit with its application (Aricle 8.2.10 of the law simply simply requires a ‘business plan’).

Also in July, the make-up of the governmental Commission – the body that will make the final decision on all applications – was also made public. The members of the Commission include (position in Commission, if any, included in parentheses):

Finally, the Commission will meet for the first time [possibly] in the middle of September to decide at least two applications. Three applications have been filed with Levchenko’s office, but one was returned because it was not filed with a Russian translation. According to news reports, the other two applications are:

  • De Beers – proposed acquisition by its subsidiary, Archangel Diamond Corporation, of a 49.9% stake for $225 million in Arkhangelskgeoldobycha (AGD) (PDF press release here). AGD is currently owned by Russian oil major Lukoil, which will retain ownership over the remaining shares. AGD’s asset of interest is a license to Verkhotina, located approximately 70 miles northeas of Arkhangelsk. In April 2008, De Beers and Lukoil ended a decade long dispute over the ownership of the mine. Essentially, ADC charged Lukoil CEO Vagit Alekperov of devising various contract violations in an attempt to prevent ADC from exercising its rights over the discovery. The proposed acquisition that is the subject of its current application was approved in an out-of-court settlement between the two parties. ADC obtained the settlement after pursuing a multi-prong legal strategy, including arbitration in Sweden and a $3.6 billion breach of contract action in Colorado courts (see the Colorado Supreme Court opinion in the case here). Furthermore, then-President Putin reportedly gave his personal blessing to the settlement.
  • Finmeccanica – proposed acquisition by its subsidiary, Alenia Aeronautica, of a 25% +1 stake of Civil Sukhoi Aircraft (CJSC), maker of the Sukhoi Superjet 100. Alenia stated that it was confident that its purchase would go forward as planned – in January 2008, then-President Putin gave an ad hoc approval of the very same deal (Russian law prohibits foreigners from owning more than 25% of Russian commercial aircraft companies).

These two proposed transactions are interesting test cases for the new law for a few reasons. First, the De Beers deal involves a dispute between a foreign investor and a domestic oligarch who tried to raid the company’s assets. The general consensus is that De Beers was successful in defending itself and that the proposed deal is ‘its’ deal. Thus, if there is any way for Alekperov to influence the FAS or the Commission, he will likely try. This will be a good test of whether the new law provides a superior framework than having Putin personally mediate disputes.

Second, as President, Putin already approved both deals in an ad hoc fashion. In my opinion, this raises a few likelihoods: the companies might have been approached and told to apply first so that Russia could manage the media reaction to the law’s initial implementation; or the companies already had everything prepared so they just happened to be first; or the Commission might just be a rubber stamp for decisions that are made in the old-fashioned way.

Finally, it will be interesting to see if the reaction to the applications is influenced by the South Ossetian conflict. For example, since the identities of the applicants are public, it will be interesting to see if the proposed deals provoke any nationalist actions in the Duma (e.g., non-binding resolutions expressing opposition). More importantly, the Commission might choose to ‘punish’ companies from countries that were too vocal in their opposition to Russia’s actions in South Ossetia/Abkhazia. For example, Russia might want to punish Italy for the EU’s reaction to the crisis, though I doubt it. The EU really hasn’t done anything substantive and Italy’s FM, who apparently predicted Medvedev’s recognition of the two republics, has been especially supportive of Moscow. Also, Italy is arguably Russia’s strongest ally in the EU. British companies, however, need not apply.

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