Identifier
Created
Classification
Origin
08MOSCOW499
2008-02-22 15:54:00
CONFIDENTIAL
Embassy Moscow
Cable title:  

NEW DRAFT OF STRATEGIC SECTORS LAW WOULD TIGHTEN RESTRICTIONS ON FOREIGN INVESTORS

Tags:  EPET ENRG ECON PREL RS 
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FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 6779
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
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RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 000499 

SIPDIS

SIPDIS

DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT
EUR/CARC, SCA (GALLAGHER, SUMAR)
DOE FOR HARBERT, HEGBORG, EKIMOFF
DOC FOR 4231/IEP/EUR/JBROUGHER
TREASURY FOR TORGERSON

E.O. 12958: DECL: 02/04/2018
TAGS: EPET, ENRG, ECON, PREL, RS
SUBJECT: NEW DRAFT OF STRATEGIC SECTORS LAW WOULD TIGHTEN
RESTRICTIONS ON FOREIGN INVESTORS

Classified By: Ambassador William J. Burns for Reasons 1.4 (b/d)

-------
SUMMARY
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C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 000499

SIPDIS

SIPDIS

DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT
EUR/CARC, SCA (GALLAGHER, SUMAR)
DOE FOR HARBERT, HEGBORG, EKIMOFF
DOC FOR 4231/IEP/EUR/JBROUGHER
TREASURY FOR TORGERSON

E.O. 12958: DECL: 02/04/2018
TAGS: EPET, ENRG, ECON, PREL, RS
SUBJECT: NEW DRAFT OF STRATEGIC SECTORS LAW WOULD TIGHTEN
RESTRICTIONS ON FOREIGN INVESTORS

Classified By: Ambassador William J. Burns for Reasons 1.4 (b/d)

--------------
SUMMARY
--------------

1. (SBU) A new and more restrictive draft of the Strategic
Sectors Law (SSL) and relevant amendments to the Subsoil Law
are circulating and are expected to be considered by the Duma
soon. Most significantly, the new draft would limit to 10%
the unsupervised acquisition by foreigners of entities that
own licenses to develop "strategic subsoil assets."
State-owned enterprises would be exempt from these
restrictions -- a key exemption since Gazprom and Rosneft,
for example, continue to float shares internationally. The
foreign investment community is concerned about the law and
is preparing a coordinated approach to the GOR, which we plan
to help facilitate. End summary.

--------------
NEW DRAFT SSL
--------------

2. (SBU) Ministry of Industry and Energy Legal Chief Vladimir
Taraskin told us February 21st that a revised version of the
SSL and relevant amendments to the Subsoil Law will be
considered by the Duma on March 19th. The new version is
reportedly a Kremlin produced compromise among the various
ministries and factions competing over the law. The
Petroleum Advisory Forum (PAF),the association of western
oil companies in Russia, suggested to us that the bill was
being fast-tracked and could be considered even earlier.
However, PAF added that Duma Deputy Chairman Yazev has said
that Subsoil Law amendments will not pass in the near future
because of continuing disagreements, including over the
leadership of the proposed commission that would adjudicate
foreign investments over the limits, which is still being
contested between the Ministry of Economic Development and
Trade and the FSB.

3. (SBU) The new draft is much more restrictive with regard
to foreign ownership of "strategic subsoil assets" than the
previous version, which had left untouched the curr
ent de
facto limit of less than 50 percent foreign ownership, and
also compares unfavorably with the 50 percent limit that
exists in other strategic sectors (such as space, aviation,
etc.). The new draft specifically limits unsupervised
foreign acquisition of Russian companies that hold licenses
to explore and develop a "strategic" field to 10%. Entities
partly owned by foreign governments would face an even
stricter 5% limit on unsupervised ownership. Foreign
entities seeking a greater share of relevant Russian
companies would need GOR approval from the special
commission.

4. (SBU) The package to be discussed by the Duma will also
include amendments to the Subsoil Law that would define
"strategic fields" as oil fields with extractable reserves of
more than 70 million tons, gas fields with more than 50
billion cubic meters (bcm),and all off-shore fields.
According to PAF and other industry insiders, these limits
are too low and define even relatively small fields as
"strategic."

5. (SBU) Companies of which the GOR is a majority owner, in
particular Gazprom and Rosneft, would be exempt from
limitations on foreign ownership. This key provision
resulted from the unexpected realization during internal GOR
debates that both Gazprom and Rosneft are already more than
10 percent owned by foreigners, since their shares are
publicly traded on foreign exchanges.

--------------
INDUSTRY CONCERNS
--------------

6. (SBU) The foreign investment community has reacted with
concern to the restrictive new draft. PAF has already
expressed its concerns directly to the GOR. AmCham and its

MOSCOW 00000499 002 OF 002


European counterpart, the Association of European Businesses
(AEB) are reviewing the legislation and are considering next
steps. Individual oil companies are doing their own
analyses. PAF is planning to host a roundtable discussion
before the end of February to bring together all interested
parties and to agree on a coordinated approach to the GOR.

7. (C) BP's Russia chief Richard Spies shared some specific
concerns with the Ambassador on February 21st. He said that
BP and TNK-BP are concerned about the "grandfathering"
provision in the new drafts. Although the draft law would
not be applicable retroactively, it is not clear how the
proposed law would affect new discoveries of strategic fields
by existing ventures such as Rosneft-BP (a 51/49 venture on
the Sakhalin shelf) or TNK-BP or ConocoPhillips-Lukoil.
Spies said it was unclear if these joint ventures have to
submit discoveries to the commission for approval in order to
retain the field.

8. (C) Given BP's Sakhalin shelf venture with Rosneft, Spies
said his company was especially concerned about the off-shore
limitation in the Subsoil amendments, which would apply to
all fields regardless of size. According to Spies, the new
proposal is also less clear than previous versions in
defining what "foreign control" means, i.e. how many
foreigners on the board, or on the management committee, and
whether foreigners had effective control over certain
transactions regardless of their level of shareholding. In
that regard, he noted that although Rosneft was the majority
shareholder, the Board of the Rosneft-BP JV was composed of
two representatives from each company.

9. (SBU) In addition, the 10% limitation may become a problem
for non-state-owned oil and gas companies with foreign
owners, according to an analysis TNK-BP shared with us.
TNK-BP pointed out, for example, that brokerages may limit
transactions of oil and gas stocks because of the 10% limit
of the proposed law.

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

10. (C) Despite Kremlin support, it is not clear that the new
laws will pass as quickly as planned. For one thing, the
issue of who heads the commission has been a major stumbling
block in the past and could prove so again. We believe there
is still time for the foreign investment community, with our
support, to voice concerns about the letter and spirit of the
draft laws. As such, we plan to help PAF organize the
proposed roundtable and to encourage European diplomatic
involvement with the goal of agreeing on a unified approach
to the GOR.
BURNS