Putin to oversee the Strategic Sectors Law enforcement
Signed into law in the twilight days of Vladimir Putin’s presidency and few days before the inauguration of the new head of state in May, the far-reaching and highly controversial federal law that will henceforth regulate the inflow of foreign investments into the Russian strategic sectors is now set to start performing its direct functions, as all the preliminary legal requirements and other administrative conditions have either been met or are in their final stages of adoption.
One of these conditions is the requirement for the government to set up a special commission — to be headed by the Russian prime minister — which will be tasked with the overall implementation of the law and regulate all the significant foreign investments into the sectors of the domestic economy that fall under the jurisdiction of the new edict and/or meeting the Kremlin’s unilateral definition of “a strategic economic sector.” By calculation or by chance, the post of the Russian premiership is now being held by Putin, and this, according to the law, puts him, rather than the new president, Dmitry Medvedev, in a unique position as the last point of call for foreign investors contemplating on investing into these sectors. In other words, as the chairman of this powerfully influential commission, it, therefore, goes without saying, that Putin will have the final say in deciding the strategic foreign investors deemed eligible — both from the requirements of this new law as well as other issues arising from the Kremlin’s point of view on national security issues and geopolitical considerations — to invest billions of their capital into the Russia’s strategic economic sectors.
It is, however, understood without being expressly stated, that both Medvedev and Putin will coordinate efforts and compare notes on such strategic investors before their applications are approved, or as the case may be, rejected by the commission. What has so far remained unknown in this equation, and more importantly, what foreign investment communities would like to know, is what will happen if the opinions of these two powerful leaders differ on a particular foreign strategic investor’s intentions. This is very important, as one cannot, theoretically speaking, rule out such a remote probability, and how such differences will be resolved, and in whose favor. As the chairman of the commission, Putin is in a pole position to override certain decisions favored by the commission members, who also double as his subordinates in the Cabinet and were his former aides during his eight-year presidency. However, it is not clear whether this will include the president’s position on some of these strategic investment issues, and also whether the president himself has a veto power over the commission and its chairman’s final decisions regarding the approvals and/or disapprovals of certain investment packages from particular foreign individuals, corporations and/or countries wising to invest into these strategic sectors.
“As the chairman of this powerfully influential state commission, it goes without saying that Putin will have the final say in deciding the candidacies of the strategic foreign investors deemed eligible to invest billions into these strategic economic sectors.”
However, judging from the deliberations of the Cabinet Presidium meeting dedicated to the implementation of this new law in June, the overall message from Putin was that he was the one in charge of this policy. “The main aim of this commission is to review the applications of our foreign partners on the acquisition of companies in the strategic sectors of the Russian economy,” he said. In a move to dispel the rising fears and controversies created by the law, especially in the EU states and United States, the prime minister noted that law was directed at simplifying the current investment conditions in Russia for foreign strategic investors. “This law on strategic foreign investments does not in anyway prohibit foreigners’ participation in our economy, but quite the contrary, as it is aimed at creating maximally transparent, clear and understandable procedures for foreign investors in Russia. This is the main goal of the law,” he added. “We welcome all foreign investments, which are growing year-on-year in Russia, and we are very happy with that and shall try all our best to boost this process now and in the future.”
Change in time and fortune for Russia
Time and fortune have really changed, as today’s Russia is starkly different from the situation in just 15 or so years ago, when the Kremlin, with all arms fully stretched out begging for alms in a manner bordering on ‘aggressive panhandling’ from the World Bank and International Monetary Fund and other willing Shylock-styled lenders across the globe, and hence was more than willing to receive any investor willing to funnel his/her capital into the country. Indeed, Russia has become so selective in its choice of strategic investors that the Kremlin has actually set up a special sieve to filter the rising pool of willing foreign investors that it wants to see in its economy, and particularly its so-called strategic sectors. The law contains an exhaustive list of industries, ranging from evidently sensitive sectors, such as defense and nuclear technologies and the backbones of the economy such as energy, metallurgy, etc, to the less obviously evident strategic sectors such as the media. Altogether, there are currently 42 sectors of the Russian economy that meet the government’s definition of a “strategic industry,” where foreigners — wishing to invest or control key industrial assets — will have to go through some highly rigorous approval procedures under Putin’s personal scrutiny.
Our expert on this issue is Dmitry Baranov, a leading expert at Finam Management “In reality, the volume of inbound FDIs is influenced by the actual steps being taken by the government, its enforcement of the laws and the existence of a normal investment climate in the country.”
The official list can be obtained from any of the relevant ministries. Thus, according to the law, a private foreign investor will need the special commission’s approval if he/she wants to acquire over a 50% stake in any of the companies on the strategic sectors list and 10% in any mining and exploration companies. The terms are more stringent for overseas-based companies with foreign governments’ participation. Thus, the limits for such companies are, respectively, 25% and 5%. Foreign companies that are already functioning in these sectors — with at least a 5% stake in companies in these sectors — are now obliged to notify the commission within 180 days. But as the commission has yet to start functioning de-facto, some of these companies and their Russian lawyers are currently at seas over how to meet this deadline, and the implications for failing to meet it, especially for reasons that are outside their control.
Remote possibility of relaxing the law still exits
Some of the concerns of foreign investors from local and international business lobbyist organizations — such as the unprecedented scope of the law and the types industries included on the strategic sectors list — are partly shared by some government officials. One of these top Cabinet officials is Alexei Kudrin, one of Putin’s several deputies and finance minister, mainly seen in and outside the country as a liberal economist, has even hinted on the future possibility of relaxing the stringency of the law, including reducing the number of sectors that come under its jurisdiction. Calling the law a result of a “political consensus” among the Cabinet members, the Kremlin and the legislators, Kudrin said he had hoped to see fewer sectors in the law, but called on the local and global investment communities to give the law a chance to see how it will function in practice in its present form. “If the society, State Duma and the Federation Council agreed on it, then let it operate. Then, we shall see how it works in practice, and, possibly, trim the list. For the time being, let it be a political consensus.”
“Today’s Russia is starkly different from the Russia of 15 or so years ago, when the Kremlin, with all arms fully stretched out, begged for financial aid in a manner bordering on ‘aggressive panhandling’ from the WB, IMF and other willing Shylock-styled financial institutions across the globe.”
However, the finance minister, like Putin and other supporters of the law, also conceded that a law of this nature is needed in today’s Russia to legally formalize the existing quasi-legal procedures of approving foreign investments in the country. “Prior to the adoption of this law, the regulation of foreign investments into the strategic sectors was done tacitly as there were no clear-cut mechanisms,” he said. “Now, this unclear, tacit policy is being replaced, and the whole approval mechanism is being brought in conformity with the law.”
Feeding questions on the law’s possible negative implications for the economy, notably limiting the free flow of foreign investments into Russia, Kudrin conceded that such a possibility exists, though played down the gravity of the negative fallouts as forecast by some foreign lobbyist agencies and local business associations affiliated with foreign businesses. “There are such worries as some foreign investors will not go for a minority stake or less, but the growth and development process of the Russian economy today is so dynamic that there are lots of investors wishing to come over that we will not notice any of these probable negative setbacks from this law.”
More concerns and controversies still remain
While condemning the broadness of the law, and thus its limitations of inbound investments into the country and sideling key foreign strategic investment players from the creme-de-la-creme segments of the Russian economy, some independent experts have, however, hailed the law as capable of introducing long-awaited transparency into the existing rules on foreign investments in the country. Others, however, have noted that law has thrown the Russian investment market into uncertainties. “The law has brought a lot of uncertainties over foreign investments in Russia,” said Michael Harms, chairman of the German-Russian Chamber of Commerce, said. “For instance, some German investors have already approached me to clarify what they now need to do under the new strategic sector investment legislation, how to invest into these sectors, and what type of due diligence now needs to be done to scale up investments into these areas,” he added. Harms, however, noted that there is nothing particularly wrong with the new edict. “Like any other regulatory documents, there is nothing wrong with the law per se, but the only major problem I see might come from its implementation,” he added. “Of course, it is clear that if foreigners want invest into sensitive industries such as defense, they definitely have to deal with the government in one way or the other. The law has come into force, but the implementation mechanism, including the composition of a special commission to be headed by Prime Minister Putin, is not quite clear at the moment. So, I’m afraid that the law will be implemented in the same ‘old Russian highly bureaucratic and non-transparent way”.
“With time, some, if not all the strategic foreign investors will learn not only how to live by this new law, but also how to legally circumvent its more rigorously restrictive procedures through personal connections in and outside the government to secure the required approvals.”
Meanwhile, other experts have counseled all the jittery foreign investors willing to come to Russia to remain calm and learn how to live with the new legal requirements, citing the traditional local proverb, which says “the severity of all Russian laws are always and traditionally seriously diluted by their poor implementations.”
“With time, some, if not all the strategic foreign investors will learn not only how to live by this new law, but also how to legally circumvent its more rigorously restrictive procedures through personal connections in and outside the government to secure the required approvals for their investments into any of these sectors,” an analyst with a Moscow-based foreign investment bank said on condition of anonymity, citing the sensitivity of the topic in general, and his company’s general policy not to comment on controversial government policies in Russia, in particular.
Experts also contend that as most foreign investors are not interested in any other Russian industries outside those listed as “strategic,” and therefore, the limitations in the new law will make Russia less attractive as a lucrative investment destination to foreigners, who most likely will not be interested in investing into other segments of the Russian economy that will require huge capital outlays with questionable recoup possibilities. “The strategic sectors list’s excessive broadness will effectively make Russia unattractive for most, if not all the strategic foreign investors,” Igor Yurgens, a vice president of the Russian Union of Industrialists and Entrepreneurs (or RSPP), a powerful lobbyist umbrella association for the nation’s biggest corporations, said.
Besides, there are also fears that the law could cause a backlash for Russian companies, which are globalizing their operations on the international markets such as the EU and United States — the most vocal advocates against the Russian law — as some foreign governments could adopt a ‘tit-for-tat policy’ against both private and Russian government’s corporations. Some of the companies likely to fall preys to such actions abroad will unavoidably include Gazprom, the huge gas behemoth that is currently on assets-acquisition spree across the world, as well as top private companies, currently busy globalizing their operations on both established and emerging foreign markets.
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