Large scale reform of Russian strategic assets law unlikely, lawyers say

06.02.2013

A comprehensive reform of Russia’s byzantine laws on foreign investment in assets that are deemed by the state to be strategic is unlikely in the short term, according to local antitrust lawyers.

Currently, over 40 sectors are deemed to be of strategic importance by the Russian government. This area is primarily regulated by Federal Law 57-FZ "On the Procedure of Making Foreign Investments in Companies of Strategic Importance for National Defence and State Security” and 2011 amendments to this law, according to a note on the subject by Clifford Chance.

“Types of strategic assets are listed in Article 6 of the law. Hence, in order to change these assets, legal actions are required to be done by the parliament and president,” said Anton Panchenkov, head of group in Corporate Practice at Goltsblat BLP, the Russian practice of London-based law firm BLP.

“Despite rhetoric about privatisation and liberalisation, state involvement in the economy and state ownership in many market areas is increasing, rather than decreasing. Hence, the number of strategic assets is unlikely to become less,” Panchenkov said.

Another Moscow-based antitrust lawyer noted that “it is not expected that this [the strategic assets law] would change. The only thing that is expected to be changed is the simplification of the procedure for approving foreign investments into a number of different types of dairy plants and food processing factories.”

However, it is not clear when the change will take place, the lawyer said. It is most likely that the amendment will come into force before summer, he added.

The government also plans to terminate the notification process for those foreign investors which already own more than a 75% stake in a particular strategic asset, said Dmitry Lobachev of Khrenov & Partners. This amendment would mainly apply to those foreign investors who bought stakes in strategic assets before 2008, he added.

Armen Khanyan, head of the FAS Foreign Investments Department, told PARR that FAS has proposed that the government reduce the number of strategic areas that fall under the law.

The Clifford Chance note states that “for the purposes of the Strategic Investment Law, a strategic entity is an entity incorporated in the Russian Federation which performs at least one activity of strategic importance (a Strategic Entity). Article 6 of the Strategic Investment Law lists 42 types of activity that are deemed to be of strategic importance, and these may broadly be split into four categories.”

The four main sectors cited in the note are natural resources, defence, media and monopolies.

Law applied very broadly

The Moscow antitrust lawyer also noted that the government could have considered more sectors when it launched its simplification procedure.

“More areas are under discussion; for example, reforms in the internet and mass media sectors could be introduced. There is a tendency to apply this law very broadly. For example, it is applied in many civil sectors,” said the lawyer. Goltsblat’s Panchenkov added that, from a Russian security perspective, the law largely made sense.

“Overall, this law looks reasonable from the national security point of view, because many sectors listed in Article 6 are strategic and of high importance to the government. But sometimes it goes too far. For example, all banks were included in the list, even private banks. This was because banks have a licence to transmit information protected cryptographically. This licence automatically made its holders strategic,” Panchenkov said. He added that this omission was resolved as part of 2011 amendments to the law.

The Moscow antitrust lawyer, however, added that the relatively restrictive nature of the law did not have that big an impact on inwards investment into Russia. “This law does not significantly impact the number of deals. Yet, it influences the timing. It takes much time to get approvals. For example, there are a number of pending transactions due to this law. They were planned to be approved last autumn and they are likely to be approved only this summer.

by Natalia Lapotko and Oliver Adelman in London

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