07MOSCOW3886, RUSSIA: NEW STRATEGIC SECTORS LAW GETS NOD FROM

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Reference ID Created Released Classification Origin
07MOSCOW3886 2007-08-08 11:58 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO4576
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #3886/01 2201158
ZNY CCCCC ZZH
P 081158Z AUG 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 2774
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 003886 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/RUS; EEB/ESC 
DOE FOR HARBERT 
DOC FOR 4231/IEP/EUR/JBROUGHER 
NSC FOR MCKIBBEN 
TREASURY FOR BAHER 
 
E.O. 12958: DECL: 08/08/2017 
TAGS: ECON EIND ENRG PREL RS
SUBJECT: RUSSIA: NEW STRATEGIC SECTORS LAW GETS NOD FROM 
PRIVATE SECTOR 
 
REF: MOSCOW 3650 
 
Classified By: ACTING ECON M/C KATHLEEN DOHERTY. REASONS 1.4(b/d) 
 
1. (SBU) SUMMARY.  During a July 14-20 visit to Moscow, a GAO 
(Government Accountability Office) delegation conducted 
meetings with government officials (reftel), business 
associations, and Western companies to survey the GOR's 
review process for foreign direct investment in the country's 
strategic sectors. The delegation met with representatives 
from the Western business community that included: the 
American Chamber of Commerce, the Foreign Investment Advisory 
Council, Alcoa, Dupont, General Motors, BP, and 
ConocoPhillips.  Common themes of all meetings included: GOR 
regulatory institutions are still in their early development 
stages; passage of the Strategic Sectors Law (SSL) would fill 
a legislative vacuum and are viewed in a positive light; the 
law could increase transparency and predictability to the 
process, but it remains to be seen as to how the law will be 
implemented; and the energy sector is only peripherally 
following the SSL because oil and gas have been taken out of 
the SSL and treated separately in amendments to the Sub-soil 
Laws.  These meetings were conducted under GAO's assurances 
of confidentiality to ensure a frank discussion so please 
protect accordingly.  END SUMMARY. 
. 
BACKGROUND 
---------- 
. 
2. (SBU)  The Senate Banking Committee requested that GAO 
provide a descriptive report as to how other countries 
regulate foreign direct investment into "strategic sectors." 
 The report, expected to be published in January 2008, will 
update a 1990 report that surveyed other countries' 
procedures that are similar to our own CFIUS (Committee For 
Foreign Investment in the U.S.) process.  The delegation 
chose to conduct research on 10 countries, which included 
in-country visits to five countries: Canada, China, Germany, 
E.U.(Brussels), and Russia. On July 17, the GOR sent the 
draft Strategic Sectors Law to the Duma. 
. 
BUSINESS ASSOCIATIONS 
--------------------- 
. 
3.  (SBU)  In a July 16 meeting, American Chamber of Commerce 
President Andrew Somers gave the GAO delegation an overview 
of the current investment climate in Russia for foreign 
companies.  Somers' main point was that the GOR was just 
starting to grasp the idea that regulatory environment 
affects foreign investment.  Going through a list of issues 
that AMCham has recently engaged with the GOR, such as work 
permits for foreign workers and disallowing exemptions of 
royalty payments, Somers characterized Russian regulatory 
practices as immature, but improving.  When institutions are 
weak, personalities who head institutions become more 
important and can shape policies and the implementation of 
regulations.  As an example of progress in 
institution-building, he cited improvements in the court 
system.  According to Somers, companies win 70 to 80 percent 
of court cases brought against the government. 
. 
4.  (SBU) Chairman of the Foreign Investment Advisory Council 
(FIAC) Karl Johansson said that FIAC meets on a regular basis 
with the GOR, the PM's office and the Ministry for Economic 
Development and Trade.  According to Johansson, the GOR has 
been extremely open in working with FIAC on issues that 
concern its members.  FIAC members have not had a reason to 
go through a review process so far because most work in the 
retail sector.  In general, FIAC members think the new law 
will provide a process and clarify the rules.  Of course 
there is still uncertainty as to how the law will be 
implemented.  Comparing Russian and Chinese business 
environments, Johansson said that he believes Russian 
companies are more transparent and the rate of return is 
greater in Russia. Since institutions are still, however, 
very weak in Russia companies need to do much of the due 
diligence themselves.  Business associations do not view the 
SSL as a harsh protectionist policy.  The general view is 
that the GOR has the right as any other government to create 
a framework to protect its national security. 
 
MOSCOW 00003886  002 OF 003 
 
 
. 
INVESTMENT IN PRACTICE 
---------------------- 
. 
5.  (C)  In a July 17 meeting, Alcoa Russia President Bill 
O'Rourke said that Alcoa managed to acquire two aluminum 
fabricating facilities that conducted work for the military 
even without a formal SSL to govern the process.  According 
to O'Rourke, the single most important factor as to why Alcoa 
received approval is the company's reputation.  (NOTE: After 
a seven-month process, Alcoa received government approval in 
early 2005 to acquire two rolling/casting facilities in 
Samara and Belaya Kalit
va.  END NOTE.)  Another important 
factor was lobbying by the Ministry of Economic Development 
and Trade (MEDT) in the Kremlin.  Both Minister Gref and 
Deputy Minister Androsov "went out on a limb" to give Alcoa a 
chance to turn these plants around.  During the entire 
approval process, the MEDT and the FAS were Alcoa's main 
points of contact with the government.  When asked about the 
new SSL, O'Rourke said that Russian law is generally very 
good and the SSL would bring some consistency to the process. 
 However, the problem is that the law is inconsistently 
applied. 
. 
6.  (SBU)  GM General Director Heidi McCormick provided a 
broad perspective on the difficulties of "brownfield" 
investments in Russia, i.e., foreign acquisition of existing 
facilities.  In addition to the assets, the foreign owner 
also inherits the liabilities of the former operations, such 
as environmental hazards.  GM operates a joint venture in 
Togliatti with Avtovaz and is building a "greenfield" plant, 
i.e., a new factory built from scratch, in St. Petersburg. 
According to McCormick, whereas GM's current activities would 
not be governed under the pending SSL, the law would help 
improve the current ad hoc nature in which decisions are made 
about foreign investment in the "strategic sectors."  When 
asked about other regulatory measures that affect GM's 
activities, she said that the "greenfield" project required 
certification of the facility and the product. 
. 
7.  (SBU)  Dupont Financial Director Elena Kirisova told us 
that her company's 2005 acquisition of a chemical plant in 
Nizhny Novgorod that produces paint/coating material did not 
undergo any review process.  The new competition law, passed 
last Fall, does not require a review by the FAS if the deal 
does not involve a significant market share.  When asked 
about the pending passage of the SSL, Kirisova said that the 
law should not affect Dupont's business since their main line 
of business, chemical products and fertilizers, are not 
covered under the SSL.  According to Kirisova, business is 
booming and the construction of foreign automobile assembly 
plants in the St. Petersburg region is requiring Dupont to 
open a branch office in St. Petersburg. 
. 
ENERGY IS DIFFERENT 
------------------- 
. 
8.  (SBU) In a July 18 meeting with Petroleum Advisory Forum 
President Vladimir Konovalov, the GAO delegation received a 
good overview of the difficult investment climate for energy 
companies in Russia.  He reviewed the evolution of the 
Kremlin's policy towards foreign energy companies doing 
business in Russia.  In today's environment, Gazprom and 
Rosneft are Kremlin tools with decisions being made by one 
man, i.e., Putin.  The Kremlin has also implicitly given 
these two companies control over the off-shore oil and gas 
reserves.  Oil and gas have been in and out of the SSL, but 
now it seems as if they are out again.  (BEGIN NOTE: In the 
January draft of the SSL, the GOR removed investment in 
"strategic" mineral deposits from the list of activities 
governed by the SSL and put them into separate amendments to 
the Sub-soil legislation.  These amendments are still under 
government review and were not submitted, with the draft law, 
to the Duma on July 17.  END NOTE.) 
. 
9.  (SBU) BP and ConocoPhillips told the GAO delegation that 
they are only peripherally following movement of the SSL 
through the government since the oil and gas sector has been 
taken out of the law.  The general perspective seems to be 
that these laws are secondary in importance to a good working 
 
MOSCOW 00003886  003 OF 003 
 
 
relationship with the Kremlin. 
RUSSELL

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