An extract from The Foreign Investment Regulation Review, 8th Edition

Foreign investment regime

The legislation regulating foreign investments can be divided into two groups. The first includes general rules that apply to both Russian and foreign investments. These are contained in the Civil Code of the Russian Federation (the Civil Code), the Federal Law on Limited Liability Companies, the Federal Law on Joint-Stock Companies, the Federal Law on the State Registration of Legal Entities and Sole Proprietors, the Federal Law on the Securities Market and others. These federal laws regulate, inter alia, general procedures for the establishment of legal entities, the purchasing of shares (participatory shares) constituting the authorised capital of legal entities, questions of corporate governance and state registration of legal entities. The first group also includes the antitrust rules contained in the Federal Law on the Protection of Competition (the Competition Law).

The second group of rules solely regulates foreign investments. The principal laws in this group are the Foreign Investments Law and the Strategic Investments Law.

The Foreign Investments Law determines state guarantees of an investor's right to invest, gain income and profit, and the conditions for the commercial activities of foreign investors within Russian territory. This Law is not applicable to making investments of foreign capital into banks and other credit organisations, insurance companies and non-commercial organisations. These areas are subject to regulation under the Federal Law on Banks and Banking Activities (the Banking Law), the Law of the Russian Federation on the Organisation of Insurance Business in the Russian Federation and the Federal Law on Non-Commercial Organisations.

The second principal law is the Strategic Investments Law, which determines the procedures for foreign investments in strategic sectors of the Russian economy. A strategic clearance according to the Strategic Investments Law is required if the target company is incorporated in Russia and is active in one of the specified types of activities listed therein (such as activities in nuclear and radioactive materials, devices and waste; aviation and space; the natural resources sector; exploration and production of minerals on subsoil plots of federal value, and use of subsoil plots of federal value (the oil and gas sector); coding and cryptographic equipment; mass media and telecommunications; use of agents of infectious diseases (except by companies engaged in food production); or with a licence for conducting such an activity (a strategic company). Herewith, holding a licence is not a mandatory condition for a company to be deemed strategic. It is now enough that there are 'other permitting documents' enabling the company to engage in that type of activity.

As a general rule, the list of activities stipulated by the Strategic Investments Law is exhaustive, therefore a foreign investor can check whether a potential target can be considered a strategic company. However, the recent practice of FAS Russia shows a trend for the application of the concept of 'related business activities' to the statutory strategic activities, which are directly listed in the Strategic Investments Law. Therefore, FAS Russia interprets 'strategic activities' rather broadly, especially in the oil and gas sector.

One particularly illustrative example of the application of this concept is the Nabors/Tesco case, in which FAS Russia declared that 'running casing services for drilling' is a type of strategic activity, since such activities, as performed by the Russian company acquired within the planned transaction, constitute an integral part of a technological process for the geological study of subsurface resources, or exploration and mining of mineral resources, or both, in subsoil areas of federal significance. Consequently, FAS Russia concluded that the company had strategic importance, therefore the parties to the transaction were obliged to clear the transaction according to the procedure established by the Strategic Investments Law. However, they had failed to obtain such a clearance decision in advance. In its turn, the court confirmed FAS Russia's position. As a result, the acquirer was fined, and the court then deprived it of its voting rights in this Russian strategic company. In a continuation of this case, the Constitutional Court ruled that organisations providing oilfield services in subsoil areas of federal value are business entities of strategic importance in ensuring the country's defence and state security, therefore again supporting FAS Russia's position.

In addition to broad interpretation of the strategic types of activities, there is a special right of the chair of the Government Commission, at his or her own discretion, to present to the Government Commission for consideration any transaction conducted by foreign investors with respect to practically any Russian business entity, not just a strategic one. First, transactions that might be of interest to the Russian Prime Minister and might be considered by the Government Commission, are transactions in respect of Russian companies not involved in implementing strategic activities, but in implementing activities that might be directly connected with the 47 types of activities of strategic importance. Second, the authorities' spheres of potential interest are large trans-border transactions, involving the transfer of assets or subsidiaries located in Russia, on which the economic defence of Russia might depend (for example, food, the pharmaceutical industry and the defence sector). Finally, the third category of transactions, which might potentially result in the heightened interest of the Russian Prime Minister and might be considered by the Government Commission, are transactions with public investors usually operating in different cultural and legal environments. Pursuant to the Decree of the Government of the Russian Federation on the Government Commission Executing Control over Foreign Investment in the Russian Federation, FAS Russia is the state body responsible for monitoring the foreign investments sector. The Government Commission considers submitted notifications of transactions and decides whether there is a threat to national security and defence.

In the banking sector, the acquisition of 10 per cent or more of the shares in a Russian credit organisation is subject to prior approval by the Central Bank, and acquisition of more than 1 per cent but less than 10 per cent requires a post-transaction notification.

In the insurance sector, a Russian insurance organisation must receive prior approval to increase its authorised capital by means of foreign funds and to assign its shares to a foreign investor. Its shareholders must receive prior approval for the assignment of their shares to foreign investors.

In the mass media sector, foreign investors cannot own more than 20 per cent of shares (participating interests) in the Russian mass media. Moreover, foreign investors and foreign legal entities, Russian citizens with dual citizenship and stateless persons cannot be founders of mass media entities.

In the natural monopolies sector, acquisition of more than 10 per cent of fixed assets of a legal entity operating in the sphere of natural monopolies requires clearance by FAS Russia.