Russian government is going to surprise foreign investors

26.12.2011 — Analysis

Russia has widened the channel to facilitate a foreign investment flow into the country's economy. The effect has been given to the amendments to the Law on Strategic Companies, which made it easier to attract foreign funds to the companies essential for country's security. Experts think that the liberalization of the legislation should be continued. Their opinion is shared by foreign entrepreneurs: The representative of the European Bank for Reconstruction and Development has told the RusBusinessNews observer that in their pursuit of the country's security the Russian government authorities stepped out of the reasonable boundaries and extended their control even onto investment in cheese production.

Federal Law No. 57-FZ "On the Procedure for Foreign Investment in Business Entities of Strategic Importance for the Country's Defense and Security" (the Law on Strategic Companies) was adopted in 2008 and immediately stirred up concerns of foreign investors who expected that the law would impede considerably transactions involving mergers and acquisitions.

By that time, a number of foreign companies had prepared extensive programs for making investment in Russian companies through participation in their capital. For example, the European Bank for Reconstruction and Development (EBRD) boosted investment in construction of automobile factories, electric power plants and other large-scale projects. It did not neglect the Russian financial sector, offering substantial long-term loans to banks in exchange for their blocks of shares. In particular, EBRD acquired blocking stakes in the SKB-Bank, Transcapitalbank, KMB-Bank, thus having opened new opportunities for their growth.

The international lending institution as one of the owners of the SKB-Bank boosted the bank's rating in the opinion of Fitch and Moody's agencies. The unheard-of Ursa-Bank that sold 17.6% of the stock to EBRD was able to place credit-linked notes for 100 million euros on Western markets.

The Law on Strategic Companies included lending institutions in the list of strategic companies, which meant that a bank can be purchased by a foreign investor only upon approval of the Government Committee for Supervision over Foreign Investment in the Russian Federation. According to Richard Wallis, the senior communications adviser of the EBRD representative office in Moscow, the new procedure has considerably hampered availability of investment for Russian companies. EBRD is the largest foreign investor in the non-primary sector: In 2010, the amount of its investment totaled 2.3 billion euros; the amount expected for 2011 will be higher. The appointment of the Government Committee suspended many transactions. The long time required for the procedure resulted in a waiting list of prospective investment recipients.

R. Wallis thinks that the new law has seriously impeded the investment process. There were frequent situations when the European Bank agreed to provide funds to some Russian company, but was not able to do that without the Committee's approval. Business having desperate need in money cannot afford to waste months while waiting for a decision of officials. Richard Wallis points out the redundancy of this decision, as all transactions go through the approval process at the EBRD Board of Directors, among the members of which is a representative of the Russian government. The investor does not understand the reason for another supervisor in the form of the Government Committee.

Three years later the alogism of the procedure was realized by Russian legislators. The RF State Duma made amendments to the Law on Strategic Companies, which just recently have taken effect. According to Andrei Tsyganov, the deputy head of the RF Federal Antimonopoly Service, the law has become more liberal. For example, transactions performed by international financial organizations acquiring part of the stock have been excluded from the list of the transactions subject to compulsory approval procedures. The supervision over financial corporations that signed agreements with the RF government (such as EBRD) will be eliminated. In the near future the government will specify and approve the list of such organizations.

Significant changes can be observed in supervision over subsoil use. Earlier, the government's approval was required for purchasing even 10% of the stock in Russian companies - owners of subsoil resources of federal significance. Now, the limit (the equity stake) has been raised to 25%. In the opinion of A. Tsyganov, it will facilitate the flow of investment into the oil-and-gas sector - especially when such instrument as issue of securities is used.

In the meantime, Dmitry Rozhkov, the executive director of the Assistance to Development of Competition in CIS Countries Non-Profit Partnership, has not demonstrated any excitement over the amendments made to the notorious law. He is sure that changes must be more fundamental: The varying interpretations of some concepts (such as "groups of persons of the foreign investor") must be clarified and some activities must be released from the government's control. For example, the list of activities still includes disease generating sources, which means that cheese production using fungi becomes a strategic sector. The country's security is also threatened by investment in Russian clinics quipped with radioactive X-ray apparatus.

Andrei Tsyganov explained to RusBusinessNews that all operations involving causative agents are attributed to strategic activities; thus, business and the government failed to reach consensus in this respect. However, restrictions on investment are temporary and will be removed within the licensing legislation. The Rosatom Corporation promised to clarify which types of radioactive sources are attributed to the civil application.

The deputy head of the RF Federal Antimonopoly Service does not think that the Law on Strategic Companies impedes investment in industries important for the country. Based on his data, over three years investors filed 259 applications - only eight applications were turned down. There were only two reasons for the refusal: submission of incomplete information and opinion of the Federal Security Service, which detected the "ears" of a foreign state behind a private company. In fact, foreign investors have secured their presence in the nuclear engineering industry, oil-and-gas sector, arms and military hardware manufacturing, and in the information encryption sector.

Nevertheless, according to A. Tsyganov, the Law on Strategic Companies is subject to further amendments. The legislators are going to strike out some activities from the strategic list and specify some terminology and procedures. It will be easier to acquire shares of the state-controlled companies. However, investors are going to encounter some surprises: Part of the amendments will be aimed at the fight against dodges used by entrepreneurs to avoid the examination by the Government Committee. For example, officials have found out that some major transactions are split into smaller ones, etc. State experts are thinking about possible counteractions. Therefore, investors should not expect trouble-free life in future.

Vladimir Terletsky