Finishing touches on the draft law

The government will meet this Thursday to discuss the draft law on foreigners in Russian strategic industries. Who won the war of concepts (the liberal Economic Development Ministry or Industry and Fuel Ministry) remains to be seen.

Ministries and departments will be putting finishing touches on the draft law all week. According to what information is available at this point, potential investors cannot expect anything good from the provisions of the documents already agreed upon.

The work on the draft law took almost a year. Everything began last May when the president in his Message to the Federal Assembly demanded that the government set exact rules for foreigners’ access to strategic industries. The Cabinet was supposed to forward the document to the Duma by November 1, 2005, which it never did. Its officials proved unable to come up with a draft document everybody accepted and agreed with.

Three ministries (Industry and Fuel Ministry, Economic Development Ministry, and Natural Resources Ministry) were put in charge of the draft law. Yuri Trutnev’s, the latter one, was the first to complete its work. The Natural Resources Ministry came up with three categories of strategic nature of the interior. First, the land plot is considered strategic if rare minerals are mined there – Uranium, diamonds, pure quartz, and something of the yttrium group. Second, when there is an enterprise of the military-industrial complex built on it. Third, if there are reserves of strategic mineral wealth present (say, more than 150 million tons of oil, over 1 trillion cubic meters of gas, more than 10 million tons of copper, etc.). The Natural Resources Ministry suggested the status of strategic for five deposits – Titov and Trebs oil fields, Chayanda oil and gas field, Sukhoi Log gold field, Udokan copper field.

Suggestions made by the Natural Resources Ministry branded as subjective. They did not, however, generate a lot of debates. Heated debates began over the principal matters viewed by the Industry and Fuel Ministry and Economic Development Ministry differently.

Deal permission procedures became a moot point. Economic Development Minister German Gref has always stood for officials’ minimum involvement. Shortly speaking, what his ministry insisted on came down to this: no dealings at all between foreigners and state officials. There are exact criteria that make an enterprise strategic, and foreigners’ access to it is restricted by default. Viktor Khristenko’s Industry and Fuel Ministry suggested a more versatile approach. Strategic industries are determined and listed but when a foreigner aspires for more than 50% of a strategic enterprise, he is supposed to make a formal appeal to a duly authorized body. The question of access to the enterprise is then decided at the government level. According to what information is available, it was the presidential administration (its Legal Department, to be more exact) that did not find the Industry and Fuel Ministry’s concept to its liking. It wanted a government decision for all deals whenever involvement “permits to block any decision”, i.e. 25%.

The Economic Development Ministry was forced to give ground in the principal matter of the so-called permissive access. The decision of foreigners’ access to a strategic industry is to be made by the Cabinet within three months. Whoever will have the last say on the subject is another problem. At first, the Industry and Fuel Ministry wanted the last say from the prime minister. Somebody, however, suggested the president. It is probably the president who will have the last say indeed.

Defeated in the matter of permissive access, the Economic Development Ministry intends to put up a fight and have the list of strategic industries shortened. “We are convinced that the list must be short,” Arkady Dvorkovich of the Presidential Expert Directorate said, last week. At this point, the potential list includes 39 industries ranging from aviation to military hardware production and utilization of the industries connected with exploitation of nuclear reactors to production and deployment of spacecraft to production of industrial explosives. As far as Dvorkovich is concerned, the state in the matter of restrictions imposed on foreign companies should forget formalism and only bear in mind their real clout with Russian companies. “Formally, foreign shareholders may own less than a controlling interest, but the charter puts them in charge of a joint venture all the same,” he said. The principle of definition of actual management is quite vague. That is why the president and government may turn down the investor aspiring, say, for 10% only because state officials “have reasons to suspect” that the investor in question will end up with 50% through the use of various corporate arrangements.

Experts say that all this red tape in the decision making is not going to attract investors. “If they come up with some general aspects only and leave a lot of things to discretion in every particular case, then the decision-making will be truly unpredictable,” Yaroslav Lisovolik of the United Financial Group said. “Wielding clout with the process, state officials will certainly throw the principle of equality and non-discrimination out the nearest window.”