Russian Legal Update - Restricting foreign investments

08 May 2008

New laws restricting access for foreign investors in strategic industries in Russia

On 29 April 2008 the President of the Russian Federation signed two new federal laws:

  • No. 57-FZ "On the Procedure for Contributing Foreign Investments in Legal Entities which are of Strategic Importance for the Defence of the Country and Security of the State" dated 29 April 2008 (Law on Foreign Investments in Strategic Companies); and
  • No. 58-FZ "On Amendments to Certain Legislative Acts of the Russian Federation and the Abolition of Certain Provisions of Legislative Acts of the Russian Federation in Connection with the Adoption of the Federal Law", "On the Procedure for Contributing Foreign Investments in Legal Entities which are of Strategic Importance for the Defence of the Country and Security of the State" dated 29 April 2008 (Law on Amendments).

In general, the Law on Foreign Investments in Strategic Companies and the Law on Amendments aspire to protect Russian national interests while at the same time creating a transparent system for the participation of foreign (i.e. non-Russian) investors in Russian strategic companies.

Application

The Law on Foreign Investments in Strategic Companies applies to transactions (either in or outside Russia) which result in a foreign investor establishing control over a Russian strategic company. The Law on Foreign Investments in Strategic Companies and the Law on Amendments came into force on the date of official publication: 7 May 2008.

Strategic company

The Law on Foreign Investments in Strategic Companies defines "strategic company" as a company incorporated in Russia and undertaking at least one of the strategic activities as set out in the Law on Foreign Investments in Strategic Companies. The Law on Foreign Investments in Strategic Companies provides a list of activities having strategic importance for the defence of the country and the security of the state, which includes 42 types of activities including, but not limited to, aviation and space; nuclear; defence technology; production and trade in armaments; the survey, exploration and production of large deposits of oil, gas, gold, copper and of certain other deposits referred to in the Law on Amendments as "deposits of federal importance"; and other activities listed in the Law on Foreign Investments in Strategic Companies.

Deposit of federal importance

A list of deposits of federal importance will be officially published according to a procedure which is being considered by the Russian Government. According to the Law on Amendments, a deposit may be classified as a deposit of federal importance if, inter alia, it is located in Russia and meets and/or exceeds the thresholds mentioned below regarding the size of the reserves as according to the state balance sheet of reserves of mineral resources as of 1 January 2006. The thresholds are as follows:

  • 70 million tonnes of recoverable oil reserves;
  • 50 billion cubic metres of gas reserves;
  • 50 tonnes of vein gold reserves;
  • 500,000 tonnes of copper reserves; etc.


The Law on Foreign Investments in Strategic Companies sets out stricter requirements in relation to those strategic companies which develop deposits of federal importance as compared to other strategic companies.

Prior consent

All transactions establishing control over strategic companies are subject to prior consent by the federal executive body authorised to control foreign investments in the Russian Federation (the Competent Body) (which has not yet been designated) on the basis of a decision made by the governmental commission for controlling foreign investments in the Russian Federation, which is headed by the Prime Minister of Russia.

Prior consent is required for the acquisition by a foreign investor, which is not a non-Russian national company, of a stake of 10 per cent or more in a Russian strategic company developing the deposits of federal importance.

As regards non-Russian national companies, they are required to obtain prior consent for the acquisition of a stake of 5 per cent or more in a Russian strategic company developing the deposits of federal importance. Non-Russian national companies are prohibited from acquiring a stake larger than 10 per cent in a Russian strategic company developing the deposits of federal importance.

According to the Law on Foreign Investments in Strategic Companies the total time for consideration of an application for prior consent must not exceed three months. However, in exceptional cases the term may be extended for an additional three months.

Reporting

The Law on Foreign Investments in Strategic Companies applies to deals made after the law comes into force (i.e. after 7 May 2008). However, within 180 days of the Law on Foreign Investments in Strategic Companies coming into force, each foreign investor (or its group) must report to the Competent Body any shareholding of 5 per cent or more in a strategic company which was acquired prior to the date when the Law on Foreign Investments in Strategic Companies came into force.


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