DUMA PASSES STRATEGIC SECTORS LAW

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 000821 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 NSC FOR WARLICK USTR FOR HAFNER E.O. 12958: DECL: 03/25/2018 TAGS: ECON EIND ENRG EPET RS SUBJECT: DUMA PASSES STRATEGIC SECTORS LAW REF: A. MOSCOW 804 ¶B. MOSCOW 499 ¶C. 07 MOSCOW 517 Classified By: Ambassador William J. Burns for Reasons 1.4 (b/d) ¶1. (SBU) Summary: On March 21, the State Duma passed the Strategic Sectors Law (SSL) in its second reading, clearing a path for President Putin to sign the law that will regulate foreign investment into Russia's "strategic sectors." The version passed by the Duma increases the number of sectors considered strategic, including among its 42 sectors large sub-soil deposits of "federal significance," television, radio, print media, and telecommunications. For foreign investment in the non-sub-soil "strategic" sectors, the law kicks in when an investor attempts to acquire more than 50 percent of the Russian company. For companies operating "strategic" sub-soil deposits, GOR review of a foreign deal applies to acquisitions of more than a 10 percent stake. Importantly, the Federal Security Service has not been given veto power over deals. The foreign business community has reacted to calmly to the new legislation, chafing at tighter restrictions but appreciating the greater clarity. End summary. -------------- MORE SECTORS, NO FSB VETO -------------- ¶2. (SBU) The version of the SSL passed in the second reading differs from the draft passed in the Duma's first reading in September 2007 in two important ways. First, the draft law now applies to foreign investment in companies operating large "strategic" sub-soil deposits and lowers the level of investment triggering GOR review to 10 percent. Second, the list now includes companies in the television, radio, print media, and telecommunications (reftel A),and fisheries sectors. Procedures outlining the approval process for foreign companies remain unchanged from the previous draft (reftel C). (NB: A March 24 Moscow Times article incorrectly described the level of foreign investment that triggers a government review in the non-sub-soil sectors as between 25 to 50 percent. We pointed this out to MEDT Deputy Minister Stanislav Voskresenskiy, who promised to issue a correction.) �A;¶3. (SBU) The inclusion of sub-soil deposits of "federal significance" into the draft law generated the most concern from foreign investors, primarily oil and gas companies (reftel B). Amendments to the sub-soil law that were passed along with the SSL define fields of "federal significance" to include oil fields with extractable reserves of more than 70 million tons and gas fields with more than 50 billion cubic meters. The law requires GOR review of any deal involving foreign acquisition of more than a 10 percent stake in a Russian company operating one of these fields. If the company is controlled by a foreign government, the trigger is lowered to a five percent stake. The law does not apply retroactively. ¶4. (SBU) Another worrisome development in the February 21 draft was the inclusion of a Federal Security Service (FSB) veto. Importantly, this authority was subsequently removed from the draft that went to the Duma's second reading. An FSB veto would have allowed the FSB to kill deals before they reached the GOR's inter-ministerial review commission, now they are just one voice among many. In the draft law as passed, a foreign company applies for GOR approval with an authorized federal agency (The law does not specify the agency.). If the authorized agency gives its preliminary approval, it then moves it to an inter-ministerial review commission chaired by the Prime Minister for final approval. ¶5. (SBU) The draft law now groups 42 specific economic activities considered to have strategic significance for the national security of the country. (Embassy Moscow sent a copy of the SSL to the Russia Desk.) In addition to the 39 economic activities from the previous draft, the law now includes television, radio, telecommunications, the print MOSCOW 00000821 002 OF 002 media, and fisheries. Prior to passage, press reports went back and forth with speculation as to whether internet providers would be included on the list. In the end, the draft law specifically excludes internet services from the list, but the Duma is rumored to be considering other legislation to regulate the internet (reftel A). -------------- REACTIONS -------------- ¶6. (SBU) The Duma's second reading was the key obstacle for passage of the SSL with the third reading and Federation Council approval more of a formality before the president's signature. Voskresenskiy told Econ Minister Counselor on March 24 that he expected President Putin would sign the bill into law. Since Putin directed the GOR to pass the law in his 2005 State of the Union address, he wanted the law as part of his legacy. ¶7. (SBU) Many of our GOR contacts speculate the FSB was behind the tighter restrictions and expanded list. Still, the foreign business community seems to be taking these amendments in stride and was pleased to see the FSB's veto authority removed. The American Chamber of Commerce told us that the expansion of the list of "strategic" sectors does not fundamentally change the law and that the clarity the law provides is welcome. Our contacts in the oil and gas sector view the law simply as codifying existing practice ) getting the Kremlin's blessing before any major deal or investment. ¶8. (C) Comment: Implementation is likely to be more important than the law as passed. Modifications may be forthcoming as the government attempts to balance its security concerns and desire for greater foreign investment. BURNS