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

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)



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SUMMARY

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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.



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NEW DRAFT SSL

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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 current 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.



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INDUSTRY CONCERNS

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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



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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

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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