This briefing regards two new laws that have been introduced in Russia. These are:
(i) a Federal Law ‘On the procedure for effecting foreign investments in commercial entities that have strategic importance for the national defence and security of the Russian Federation’ (the ‘Strategic Investments Law’); and
(ii) a law amending the Federal Law ‘On subsoil’ (the ‘Subsoil Law Amendment’).
These laws have an impact on several sectors including energy, mining, telecommunications and the media. This briefing looks at the impact on the investment in hydrocarbons and other minerals in the Russian Federation.
Pursuant to the new laws, foreign investors acquiring control of Russian companies operating in strategic business sectors will require government consent. This restriction will need to be considered when using offshore vehicles to structure foreign investments, offshore joint ventures, as well as business operations of Russian capital through offshore vehicles. In addition new rules apply to the licensing of certain subsoil fields that are deemed to have federal significance.
Status of the New Laws
The new laws became effective from the date of official publication (7 May 2008). However, the government will need to adopt implementing regulations for the new laws to become fully operational. It is likely that it will not be possible to perform transactions requiring approval under the Strategic Investments Law until the relevant regulations have been adopted.
The new laws do not apply retrospectively, but certain elements of them will impact on existing investments.
Strategic Business Sectors and Strategic Companies
The Strategic Investments Law singles out certain business sectors that are accorded the status of "strategic sectors" of the Russian economy. These include, among others, development of subsoil fields of federal significance, nuclear industry, natural monopolies (e.g. oil and gas pipeline transportation services), the military industrial complex, aviation industry, space activities etc..
A commercial company registered in Russia will be presumed to be a "strategic company" and will fall within the scope of the Strategic Investments Law if it is engaged in at least one of the strategic business sectors.
Pursuant to the new law, if a foreign investor wishes to acquire control (direct or indirect) over a strategic company, that investor will have to obtain prior government consent.
For strategic companies developing subsoil fields of federal significance (see below) a special test for control is established. In particular, control is deemed to be present where a foreign investor:
- controls, directly or indirectly, more than 10% of voting shares/participating interests of a strategic company; or
- is able/has power to appoint more than 10% of members of a board of directors of a strategic company; or
- is entitled to appoint the chief executive officer of a strategic company; or
- is able/has power to determine decisions and other terms of business activities of a strategic company on the basis of an agreement or otherwise; or
- is acting as management company of a strategic company.
These tests are in some respects far more restrictive than for strategic companies active in other strategic business sectors.
The Subsoil Law Amendment
Firstly, the Subsoil Law Amendment establishes the criteria to determine when a subsoil plot is of federal significance (a ‘strategic field’). The following groups of subsoil fields are accorded the status of strategic fields:
- recoverable gas reserves of 50 billion cubic metres or more;
- vein gold recoverable reserves of 50 tonnes or more;
- copper recoverable reserves of 500 thousand tonnes or more;
- containing deposits and occurrences of uranium, diamonds, especially pure quartz raw materials, yttria groups of rare earths, nickel, cobalt, nobium, beryllium, lithium, platinum group metals;
- inland sea waters, territorial sea, continental shelf of the Russian Federation; and
- land the development of which necessitates the use of lands belonging to the defence and security lands category.
Licensing of Strategic Fields
Secondly, the Subsoil Law Amendment introduces new rules for licensing of strategic fields.
The general principle that any entity is entitled to be a holder of a subsoil licence is now subject to limitations. For strategic fields other than those located on the continental shelf, the entity must be a legal entity incorporated in Russia; in addition, the Government may establish restrictions for participation in licence tenders/auctions by Russian companies with foreign investment.
For strategic fields located on the continental shelf not only must it be a Russian legal entity, it must also have at least 5 years experience of development of fields on the continental shelf and the Russian Federation must control over 50% of its voting shares.
Whilst these limitations only apply to the tendering or auction of new licences, existing licence holders of strategic fields in the exploration stage will be affected by the new rules relating to the transition from the exploration stage of the investment to the production stage. Under the Subsoil Law Amendment, in order to proceed to a production stage in respect of a strategic field, a government consent is required. Where a licence holder is a foreign investor or has foreign investment the government consent may be denied, although in such circumstances compensation for expenses incurred in connection with exploration and appraisal should be payable.