The new Federal Law (the law) of the Russian Federation on Foreign Investments in Companies Having Strategic Importance for State Security and Defense, No. 57- FZ, is effective from May 7, 2008. The law establishes a process of approval allowing foreign investors to make acquisitions in Russia’s strategic sectors. The law is part of an overall tightening of restrictions in Russia governing sensitive assets.

This is a new law, which was signed by Vladimir Putin on April 29 just before leaving office as President of Russia. It culminates a long, and long-awaited, process. Numerous bills on the subject of foreign investment in Russia’s strategic sectors have been proposed during the past several years. The current version of the law was introduced in the State Duma, the lower house of the Russian Parliament, last summer. The first of three readings required to pass the State Duma occurred in September 2007, but then there were many debates and arrangements made within the Government, involving the Presidential Administration, the Federal Security Service (FSB), the Federal Anti-Monopoly Service (FAS), the Ministry of Communications and Information Technology, the Ministry of Industry and Energy, the gas monopoly Gazprom, the electrical monopoly RAO UES and others, which resulted in a number of amendments to the bill before it was presented for the second reading in the State Duma in March. This was the decisive reading. The third reading, largely a formality, took place on April 2; the upper house of the Russian Parliament quickly passed the proposed law on April 16; and its signature by Putin on April 29 was almost his final act as President. The law was officially published on May 7 and is now in effect.

1. Brief Description of the Law

1.1. The law specifies 42 activities that have strategic significance for national defense and state security. Basically, they can be grouped into eight main areas:

  • Nuclear materials, devices, waste, etc.;
  • Coding and cryptographic equipment;
  • Weapons and military equipment and technology;
  • Aviation and space;
  • Television and what may be called large scale radio broadcasting and printed mass media;
  • Natural monopolies which are designated as such on the FAS list;
  • Telecoms, but not internet providers; and
  • Geological survey and exploration and development of subsoil areas of federal significance.

1.2. The law defines the thresholds that require approval.

Transactions Subject to Prior Approval: 

  • Acquisition of control (>50 percent), including appointment of >50 of the board of directors or management board, in a strategic company .
  • Acquisition of ≥10 percent, including appointment of >10 of the board of directors or management board, in a company engaged in geological survey or exploration and development of a subsoil area of federal significance.
  • Acquisition of any subsequent stake in a company engaged in geological survey or exploration and development of a subsoil area of federal significance, if that foreign investor or group already controls ≥10 percent in the target.
  • Assumption of managing company functions or any other transactions leading to establishment of control in respect of a strategic company.
  • Acquisition by a foreign state, international organization or organization under their control of >25 percent or other blocking right in a strategic company or >5 percent in a company engaged in geological survey or exploration and development of a subsoil area of federal significance, but in either case the law prohibits a foreign state, international organization or organization under their control from acquiring control of a strategic company.

Exemptions From the Prior Approval Requirement:

  • Transactions completed before enactment of the Strategic Industries Law.
  • Acquisition of control over companies in which a foreign investor or a group already directly or indirectly holds >50 percent. This is not applicable to companies engaged in geological survey or exploration and development of subsoil areas of federal significance.

1.3. The law establishes the approval process for foreign investment in strategic areas.

The applicant is the foreign investor or another person in the foreign investor’s group that joins in the acquisition. The term “foreign investor” also extends to companies under the control of the foreign investor, including companies incorporated in Russia. The governmental entity to that the application is sent is referred to in the law as the Authorized Body. We understand the Authorized Body will be the Federal Anti-Monopoly Service (FAS), but that is not spelled out in the law, and it is possible that some other agency will be the Authorized Body.

The law spells out in considerable detail what has to be included as supporting documentation.

The law provides for confidential treatment of information that is designated as confidential in the application or accompanying documentation.

2. Prior Approval Procedure

The duties of the Authorized Body are to receive and review the application and supporting documents, make a preliminary determination whether approval is required, coordinate the application with the FSB and other governmental bodies who need to have input into the approval process, and present its decision and the supporting documentation to a governmental commission which will be chaired by Putin, as Prime Minister, for the final decision.

The governmental commission’s approval can be conditioned on specific obligations to be assumed by the foreign investor. These obligations would be formalized in two documents: the approval issued by the governmental commission and an investment agreement to be entered into between foreign investor and the Authorized Body.

3. Timing 

The Authorized Body has 14 days to make its initial consideration and circulate the application to the other relevant agencies. Then, there is a 30 day period for the Authorized Body to perform a comprehensive check of the strategic company (i.e. licenses to carry out strategic activities, access rights to state secrets, permits for dual purpose goods, etc.) and for other state agencies to give their input to the Authorized Body before it is required to submit the application to the governmental commission. The commission in turn has another 30 days to issue its decision. The entire process of prior approval is supposed to take not more than three months, but in unspecified special cases, the process can be extended to six months.

4. Appeal

The law provides that a decision by the Authorized Body, or failure by the Authorized Body to act, can be appealed through judicial channels. The governmental commission’s decision can be appealed to the Supreme Arbitration Court.

5. Notification Requirement

The law also requires that foreign investors acquiring 5 percent or more of the shares of a strategic company must report the acquisition to the Authorized Body according to procedures to be adopted by the Authorized Body. A foreign investor which had acquired 5 percent or more of the shares of a strategic company prior to the enactment of the law must notify the Authorized Body of such acquisition within 180 days.

6. Sanctions for Violation of the Law

Sanctions for violation of the law include nullification of the acquisition, loss of voting rights and invalidation of subsequent decisions of the management bodies of and subsequent transactions, of the strategic company.

7. Scope of the Law

The law applies to transactions and agreements executed outside of Russia if they result in the acquisition of control of a strategic company by a foreign investor.

The law operates only prospectively, so that already completed acquisitions are grandfathered, but there is a question whether deals that have been negotiated but not closed are grandfathered.

The law does not cover greenfield projects, but these, if they are in strategic sectors, may require separate licensing.

8. Other Legislative Changes in Connection With the Enactment of the Law

At the time the law was adopted, a number of other laws were amended to conform their provisions to the new law on Foreign Investment in strategic sectors. These other laws include:

  • the Law on the Subsoil;
  • the Law on the Continental Shelf;
  • the Law on Joint Stock Companies;
  • the Law on Limited Liability Companies;
  • the Law on Investigation Activities;
  • the Law on Foreign Investments;
  • the Antimonopoly Law; and
  • the Law on Communications.

Among other things, these amendments define which natural resource deposits are considered to be strategic and which are not.

9. Conclusion

The new Law is receiving a mixed reception. On the one hand, once it is operational, and issues which are not fully defined in the Law have been worked out, it should give clarity to foreign investors seeking to invest in Russia’s strategic sectors. On the other hand, foreign investment in a number of areas once thought to be outside the need to obtain governmental approval, particularly in the telecoms area, are now, or may now, be subject to prior governmental approval. And it remains to be seen whether approvals will in fact be granted, or whether the tendency of the Authorized Body and the governmental commission, given their broad discretion under the Law and the fact that the criteria for approvals are not spelled out in the Law, will be to deny approving foreign investment in Russia’s strategic sectors.