07MOSCOW3650, RUSSIA: STRATEGIC SECTOR LAW MOVES TO DUMA

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Reference ID Created Released Classification Origin
07MOSCOW3650 2007-07-26 12:31 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO3068
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #3650/01 2071231
ZNY CCCCC ZZH
O 261231Z JUL 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2388
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHMFISS/DEPT OF JUSTICE WASHINGTON DC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 003650 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND GARVERICK, 
DOE FOR HARBERT, EKIMOFF 
DOC FOR 4231/IEP/EUR/JBROUGHER 
NSC FOR MCKIBBEN 
TREASURY FOR DALY, HAUSER, MEYER, BAKER 
 
E.O. 12958: DECL: 07/25/2017 
TAGS: EINV EIND ENRG PREL ECON RS
SUBJECT: RUSSIA: STRATEGIC SECTOR LAW MOVES TO DUMA 
 
REF: MOSCOW 517 
 
Classified By: ACTING ECON M/C KATHLEEN DOHERTY 
 
1. (SBU) SUMMARY.  On July 17, PM Fradkov sent the draft Law 
on Foreign Investment in the Strategic Sectors (SSL) to the 
State Duma, currently on summer recess and reconvening 
September 3.  The Ministry of Industry and Energy's (MIE) 
revised version streamlines the review process, broadens the 
definition of foreign investor to include other forms of 
foreign control, and includes a paragraph in Article 7 giving 
the federal security services investigative authority to 
determine the extent of foreign control. The GOR appears to 
have put off the decision about the draft amendments to the 
sub-soil legislation, which would spell out which "strategic" 
deposits are off limits to foreign control, until after the 
March presidential elections.  END SUMMARY. 
. 
NEW AND IMPROVED DRAFT 
---------------------- 
. 
2. (SBU) Despite Fradkov's televised criticism of the draft 
SSL law during the government meeting in January (reftel), 
the version he sent to the Duma on Tuesday looks much like 
the law he had earlier sent back to the MIE for rewriting. 
The draft law still lists the same 39 economic activities 
considered "strategic" and maintains the same 50 percent 
ownership/control thresholds that trigger a review.  The 
activities listed in the draft law concern roughly six 
sectors; nuclear, defense, aviation, space, encryption, and 
natural monopolies.  Within these sectors, a review is not 
necessary if the foreign investor seeks to acquire a minority 
or a non-controlling stake in the enterprise.  Restrictions 
to foreign investment in strategic sub-soil deposits were 
taken out of the SSL in January and are treated separately in 
amendments to the Sub-Soil legislation, which are still 
bogged down in government review (reftel).  In all other 
sectors not on the list, the law does not apply.  If the 
foreign company is either owned or controlled by a foreign 
government, the law limits the permissible stake in these 
enterprises to 25 percent.  Along with the SSL, a series of 
amendments to existing laws have been submitted to reconcile 
those laws with the SSL. 
. 
3. (C)  The review process has been streamlined in the 
current version of the draft law.  The previous version 
required three layers of decisions with some cases requiring 
presidential approval.  The process now begins with the 
interested foreign investor informing the authorized 
government body, not specified in the draft law, about the 
proposed transaction and submitting all required 
documentation to it.  The authorized body then has one month 
to forward the application along with its proposal to an 
inter-ministerial commission chaired by the PM.  According to 
a Presidential Administration (PA) expert on the SSL, 
Stanislav Voskresenskiy, although the commission's membership 
is to be determined later by the GOR, he expected it to 
include representatives from the economic and security 
ministries.  The commission will have three months to decide 
on the application from the date of registration with the 
authorized body.  In exceptional cases, the GOR can extend 
the deadline for another three months. 
. 
4. (SBU)  Another change in the draft law is a more flexible 
definition of a foreign investor to take into account other 
corporate structures that might also constitute foreign 
control.  For instance, control could be exercised by a group 
of foreign investors acting in concert or third party 
intermediaries or management acting on their behalf.  Control 
is no longer strictly equated with ownership of 50 percent 
plus one share of the target enterprise's equity. 
. 
5. (SBU) Unlike the previous version, the revised draft law 
includes an explicit role for the GOR's security services. 
Article 7 now includes a paragraph giving security agencies 
investigative authority to determine the control, direct or 
indirect, that a foreign investor would exercise over the 
target enterprise as the result of the transaction under 
consideration.  A July 23 Kommersant article mistakenly 
indicated that the draft law gives the FSB a conditional veto 
 
MOSCOW 00003650  002 OF 002 
 
 
over proposed foreign acquisitions of these enterprises. 
(BEGIN COMMENT: While in practice, the FSB probably could 
derail a proposed foreign acquisition of a strategic 
enterprise through an "adverse finding", the draft only 
spells out their investigative authority.  END COMMENT.) 
. 
COMMENT 
------- 
. 
&#18
2;6. (C) After two years of back and forth between the various 
ministries and agencies that have fought to shape this draft 
law, the SSL seems poised to becoming law.  Our contacts in 
the PA and the MIE have told us that they expect the law to 
pass quickly through the Duma.  In discussions with members 
of the business community who are not involved in the energy 
sector, the consensus seems to be that the SSL fills a 
legislative vacuum and passage would be a positive 
development.  Even then, as the chairman of the Foreign 
Investment Advisory Council pointed out to us, the law would 
apply to only a tiny fraction of actual business deals that 
his members would be interested in.  In the energy sector, 
oil companies do not appear overly concerned that amendments 
to the sub-soil legislation did not accompany the SSL to the 
Duma.  In the words of one oil company analyst, the sub-soil 
amendments will appear once the Kremlin has a firm grip on 
all the strategic deposits. 
. 
7. (SBU) An unofficial translation of the SSL has been sent 
to the Russia desk at State.  END COMMENT. 
RUSSELL

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