RUSSIA: STRATEGIC SECTOR LAW MOVING AGAIN, SLOWLY

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 000517

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E.O. 12958: DECL: 02/02/2017
TAGS: ECON EIND ENRG PREL RS
SUBJECT: RUSSIA: STRATEGIC SECTOR LAW MOVING AGAIN, SLOWLY

REF: MOSCOW 00462

Classified By: Econ M/C Quanrud. Reasons 1.4 (b) and (d).


1. (C) Summary. It appears the draft Law on Foreign
Investment in the Strategic Sectors may have legs again. In
a January 31 inter-ministerial meeting, PM Fradkov remitted
the draft Strategic Sectors Law to the Ministry of Industry
and Energy (MIE) for one month to simplify the investment
review process and reclear with the Federal Security
Service's (FSB). Public accounts of the discussion suggests
the process is far from closure: DPM Medvedev is reported to
have called for streamlining the decision process, while DPM
Ivanov suggested including ports and airports on the list of
"strategic" sectors. Despite this, Minister of Economic and
Trade (MEDT) Gref, in a February 1 meeting with the
Ambassador (reftel),was optimistic the law would advance
this year, with passage possible inside six months -- all of
which echoes what our Kremlin contacts tell us. As expected,
provisions designating "strategic" subsoil deposits have been
removed from the draft law and put into draft amendments to
the sub-soil legislation, but the two efforts appear to be on
a parallel and linked passage track. The suggested subsoil
restrictions would align that legislation with the current
practice of prohibiting foreign firms from holding majority
stakes in projects with fields over 510 million barrels of
oil or 50 billion cubic meters of gas. End Summary.


2. (SBU) On January 31, the Russian inter-agency finally sat
down to discuss a MIE draft of the Strategic Sectors Law,
originally submitted to the Government last November. Press
coverage of the meeting highlighted ongoing differences among
government officials about the law. DPM Ivanov, referencing
the 2006 Dubai port debate in the U.S., suggested including
ports and airports to the list of "strategic" sectors,
something Minister Gref, citing Russia's need to attract
foreign expertise, strongly rebuffed. DPM Medvedev called
for streamlining the review process from its current four
layers. PM Fradkov appears to have heeded Medvedev and Gref,
and remitted the draft to MIE Minister Khristenko for
revision and reclearance with the FSB before re-submitting to
the Government by end-February. MIE Legal Affairs Director
Taraskin told us February 1 he expects changes to only affect
review procedures and did not foresee changes in the 39
"strategic" activities or the 50 percent foreign stake
trigger that would initiate the review process.


3. (SBU) President Putin first ordered the government to
draft a law regulating foreign investment in "strategic"
sectors in his 2005 annual address to the Federation Council.
At the time, the press pointed to a deteriorating investment
climate and lack of transparency surrounding GOR
decision-making on foreign investment as the main catalyst
for Putin's directive, although we know that the chaos
surrounding both Alcoa's 2005 investment and Siemen's
on-again off-again investment in Russia had much to do with
the timing. In 2006, differences between economic ministries
and the FSB over which sectors should be considered
"strategic" and the size of permissible foreign stakes held
back consideration of the law. The MIE finally submitted a
draft in November 2006 after an inter-ministerial committee
rejected the FSB's more restrictive recommendations. (Note:
The FSB lobbied to initiate a government review for
transactions in these sectors when foreign ownership stakes
reached 30 percent, instead of 50. End note.)


4. (SBU) In the current draft, government review is triggered
when foreign investors attempt to acquire more than 50
percent of a company in one of 39 specified activities
dealing with nuclear, defense, aviation, space, and
encryption technologies. An authorized GOR agency, probably
the Anti-Monopoly Service, would collect the application and
necessary information on a given transaction, and prepare it
for submission to a review committee composed of
representatives from the security agencies. The Prime
Minister would then make the final determination whether to
allow the transaction, and in extraordinary circumstances,
the president would be the final arbiter. Medvedev appears
to have argued that these decisions need not go to the

MOSCOW 00000517 002 OF 002


President.

SUBSOIL PROVISIONS REMOVED
--------------


5. (SBU) As expected, the current draft no longer attempts
to address "strategic" subsoil deposits. Petroleum Advisory
Forum President, Vlad Konovalov, confirmed to us that the GOR
will regulate foreign investment in the natural resource
sector through the existing Subsoil Law rather than the
Strategic Sectors Law, and that the Ministry of Natural
Resources has abandoned the idea of enacting a new Subsoil
Law. In line with this approach, the GOR at its January 31
meeting, approved amendments to the Subsoil Law limiting
foreigners to minority stakes in fields deemed "strategic."
Following the meeting, Natural Resources Minister Trutnev
announced that any field containing more than 510 million
barrels of oil or 50 billion cubic meters of gas would be
considered "strategic." He indicated that ten oil and 26 gas
fields currently fall into this category. Konovalov said
both the Strategic Sectors Law and the Subsoil Law should be
finalized by the end of the month, re-submitted to the GOR
for consideration, and then submitted to the Duma.

COMMENT
--------------


6. (C) Given the differing opinions apparent at last
Wednesday's discussion, further delays are certainly possible
before the GOR submits the law for Duma consideration. That
said, the day after the meeting, MEDT Minister Gref was
surprisingly upbeat about the law, asserting it would pass
this year, and suggesting that it could pass as early as
July. This tracks with what we have been hearing from our
Kremlin contacts, who suggest that the Strategic Sectors Law
and Subsoil amendments are a bit of unfinished business Putin
wants wrapped up during his Presidency. Passage -- after two
years of lingering in the interagency -- would be another
sign of the on-going shift in GOR thinking about foreign
investment, and would add to a growing body of evidence that
suggests an increasingly engaged approach in 2007 to
investors. Already this year we have seen real enthusiasm
for WTO accession (although that is still a difficult
endeavor),a strong Russian delegation fielded at Davos, and
uncharacteristically earnest efforts to attract attention and
visitors to Russia (including Commerce Secretary Guttierez in
March and the Forbes CEO Forum in May). End comment.
BURNS