TRM Original Translation – Strategic Industries Law Implementation to Date

Last week, the Federal Anti-Monopoly Service (FAS) put out a nice analysis of the strategic industries law’s implementation so far. It’s currently only in Russian and, based on the speed by which they translate from Russian to English, I highly doubt we’ll see it in English any time soon. So, I decided to provide a rough translation myself. The analysis is mostly focused on the technical problems with the law’s implementation, though it does touch on some of the other, overarching, issues (e.g., what is ‘control’ under the law?). Most significantly, the authors announce two new legal projects – one regulation and a federal law – that will amend the strategic industries law in consideration of the problems outlined in their article.

One recommendation I can’t help but add here – the authors mention that they received over 100 inquiries asking for interpretations of the law’s often vague provisions. While it is great that investors are able to get answers to their specific questions, perhaps it would help if the FAS actually posted the inquiries and answers on their website. They could easily redact the sensitive/identifying information. One model could be the Opinion Procedure Releases that the U.S. DOJ provides to companies wanting interpretations of the Foreign Corrupt Practices Act. It would also, of course, be helpful to those of us trying to understand this legislation from afar.

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Law No. 57-FZ: First Results of Implementation

Tsyganov, A.G., Levchenko, A.N.

The Federal Law No. 57-FZ “On the Framework for Foreign Investment in Economic Organizations with a Strategic Importance for National Defense and Governmental Security” (‘strategic industries law’) established a series of limitations for foreign investors intending to purchase controlling shares or stakes in strategic enterprises.

The passage of this law was done with the best of intentions: every government strives to guard its strategic spheres from excessive foreign influence. Within the first year of the strategic industries law’s implementation, the FAS received 66 applications and 288 notifications from foreign investors. These applications and notifications provide the first practical results on the law’s implementation, and reveal several problems and outstanding questions.

Background of the Question

The problems of limiting the access of foreign investors to certain sectors of the Russian economy was actively discussed in business circles and the press over the past few years. The result of these discussions was the strategic industries law, which limited foreign investor control over companies in strategic industries for the purposes of national defense and governmental security.

Thus, any transaction that results in a foreign investor obtaining control over a strategic enterprise – including both the acquisition of shares and stakes in the company’s authorized capital – requires preliminary approval and specifically the filing of an application. The understanding of foreign investor control over a strategic enterprise is covered in Article 3 of the law.

The list of transactions, which require preliminary approval are set in Article 7 of the law. The decision on preliminary approval is made by the Governmental Commission, headed by the Chairman of the Government [i.e., the PM].

In the event of acquiring 5+% of the shares/stakes of a strategic enterprise’s authorized capital, foreign investors are obligated to file an application with the authorized organ [i.e., FAS], according to the procedures outlined in RF Governmental Resolution No. 795 of 10/27/2008, “On the Strengthening of Rules for Applications from Foreign Investors Acquiring Shares in Strategic Enterprises.”

The law defines types of activities that possess a strategic character for national defense and security of the government. These activities further fall into several spheres, directly connected with defense and governmental security (e.g., various activities in the areas of nuclear energy; weapons and military technology; space industry), as well as in areas with an indirect influence on governmental security (e.g., the printing industry, if the business in question is capable of producing over 200 million pages per month; the editorial/publishing industry, if the business prints over one million issues).

In the event that, prior to a transaction listed in Art. 7, the issue of whether a foreign investor will gain control is not obvious, the foreign investor is entitled to file an inquiry to the authorized organ on the necessity for approval.

In July 2008, the FAS was given the status as the ‘authorized organ’ under the strategic industries law. This decision could be considered in fully conformity with the law, insofar as the FAS had already developed years of practice on the issue of economic control in commodities markets. The mechanisms from this practice to a certain extent formed the ‘prototype’ for determining control over strategic enterprises.

Measures for Implementing the Law

In order to form an effective practice for implementing the law, the Russian Government passed a series of important normative legal acts that assisted with this task. For example, Government Regulation No. 510 of 07/06/2008, “On the Governmental Commission for the Control Over Foreign Investment in the Russian Federation,” No. 795 of 10/27/2008, “On the Strengthening of the Rules on the Presentation of Information by Foreign Investors Regarding Transactions in Strategic Enterprises,” and others.

Furthermore, the FAS undertook a number of organizational measures, aimed at creating the necessary conditions for the initiation of legal implementation. For example, in the structure of the FAS’ Central Body, a specialized Administration on the Control of Foreign Investment was formed.

In order to realize the functions on information-analytical activities of the Governmental Commission, the FAS created an Interagency Working Group on the Control of Foreign Investment. In accordance with the order set out in the law, the FAS continually works with all federal executive bodies involved in the process of controlling foreign investment in strategic industries.

Along with that, the FAS has worked on and adopted:

  • The form of a business plan for strategic enterprises, which foreign investors must submit in their applications according to Art. 8 of the law (FAS Order No. 308 of 08/13/2008)
  • An exemplar agreement on fulfilling the requirements set out by the Government Commission on foreign investors acquiring shares in strategic enterprises (FAS Order No. 357 of 09/17/2008)

Initial Implementation Outcomes

Unfortunately, it is still too early to conduct a comparative analysis and to discuss tendencies regarding the receipt of applications and notifications, but the overall numbers do reflect an overall shape of the law’s initial implementation.

In total, after the first year of the law’s implementation, the FAS received 66 applications (as of 07/15/2009):

  • 10 applications were examined by the Governmental Commission
  • 8 applications were related to credit organizations that were in conformity with the simplified requirements approved by the Governmental Commission on 10/10/2008
  • 9 applications had their review period extended by the Governmental Commission
  • 23 applications were returned in accordance with part 2 of Art. 9 – based on a finding that the applicants would not obtain control over a strategic enterprise as a result of the proposed transaction
  • 7 applications were returned without review due to the absence of necessary documents
  • 3 applications were sent for review during the Governmental Commissions next sitting
  • 6 applications are currently being reviewed

Furthermore, the FAS also received 288 notifications, submitted by investors from 20 countries. From this total, a large portion of the applications were received from investors from Cyprus, the Netherlands, Austria, and Germany. Of the received notifications, 80 have been reviewed, with the remainder awaiting review.

Most of the notifications were related to transactions in the area of subsoil companies with rights to fields of federal significance and companies in the register of natural monopolies, as indicated in Part 1, Art. 4, Federal Law No. 147-FZ, “On Natural Monopolies.”

In reviewing the applications, the FAS ran into a number of problems, such as incomplete applications. In a number of cases, there was a lack of information on individuals or groups with indirect control over the applicants, and on agreements or planned actions that could constitute influence on a strategic enterprise. There are also cases where the applications did not contain information on the proposed transaction. These and other circumstances required the FAS to reply to inquiries from applicants regarding the necessary documents, and made it impossible to complete the review of each application on time.

In the first year of the strategic industries law’s implementation, the FAS received 101 requests from foreign investors for explanations/interpretations of various Articles in the law. Of these requests, 16 pertained to the need for approval of transactions listed in Art. 7, in the event that before the transactions are carried out the issue of control is still unclear (on the basis of Part 6, Art. 8). The FAS informed the Governmental Commission about all of these inquiries and the answers provided.

The emerging experience with the strategic industries law’s implementation has been analyzed, and has revealed several problems and unanswered questions, which include:

  • gaps in the established procedures for reviewing applications and inspecting strategic enterprises, including in the calculation of the duration of the review period by the FAS after receiving an incomplete or falsified application;
  • the requirements for what documents must be included in an application are not always unambiguous;
  • the method of exercising control over transactions within an organization is debatable;
  • the absence of clear-cut regulations for concluding agreements between the Governmental Commission and foreign investors regarding the latter group’s obligations, as laid out in Art. 12.

In consideration of these and other problems with the strategic industries law, the Governmental Commission has tasked the FAS to work with other executive bodies (i.e., FSB, Min. of Industry and Trade, Min. of Environment, Min. of Econ. Development, Min. of Communications, Min. of Energy, Min. of Defense, Min. of Finance, Min. of Justice, Rosatom, FSTEK, Roskosmos) in preparing a new regulation entitled “On the Establishment of Rules for Obtaining Preliminary Approval of Transactions, Agreements on the Establishment of Control, and the Framework for Reviewing Applications in Areas not Regulated by Federal Law No. 57-FZ,” and the proposed federal law “On the Introduction of Changes to Federal Law of 29 April 2008 No. 57-FZ.”

The proposed regulation has already been presented to the Government of the Russian Federation, and the proposed federal law is currently going through the established stages of approval.

It is our belief that the adoption of these documents will enable the removal of a number of problems and make the process of regulation foreign investment in strategic enterprises more clear and understandable for foreign investors and, therefore, will increase the amount of foreign capital invested in Russia.

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