STRATEGIC SECTORS LAW: REIMAN DEFEATS ATTEMPT TO INCLUDE

UNCLAS SECTION 01 OF 02 MOSCOW 000893 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EINT ECON TINT ECPS RS SUBJECT: STRATEGIC SECTORS LAW: REIMAN DEFEATS ATTEMPT TO INCLUDE INTERNET AND MOBILE TELECOM REF: A) MOSCOW 821 B) MOSCOW 804 C) MOSCOW 499 D) 07 MOSCOW 517 -------------- Summary -------------- ¶1. (SBU) Communications Minister Reiman beat back an attempt to include all telecommunications, including the internet and mobile phones, as a "strategic sector" under the draft Strategic Sectors Law now making its way through the Duma. The FSB was apparently behind the broad definition. Reiman argued that including telecom would hamper investment in a sector that is booming in Russia, but still in need of significant upgrades. Despite Reiman's intervention, the draft law includes fixed line telecommunications as a strategic sector. This would make the long-discussed privatization of national fixed-line operator Svyazinvest less open to foreign investors. End Summary. -------------- Strategic Sectors Law -------------- ¶2. (U) As reported reftels, on March 21 Russia's State Duma passed in a second reading the long-awaited Strategic Sectors Law (SSL). The draft included five new sectors branded "strategic," including telecommunications. Although the Ministry of Information Technology and Communications (MITC) was unhappy with fixed-line telecoms' inclusion in the draft Law, Minister Leonid Reiman's direct intervention prevented the inclusion of internet service providers and mobile telecoms as well. ¶3. (U) The previous version of the amendment would have required foreign investors wishing to purchase more than 50% of a Russian internet service provider to obtain the approval of the Russian Government. Any company in which a foreign government had a stake would have had to gain GOR permission for a purchase of more than 25% of a Russian telecommunications company. The law would not affect existing ownership, but companies with foreign investors who own more than 5% would have had to inform the government of that fact. -------------- IT vs. FSB -------------- ¶4. (SBU) At a March 6 session, the Duma Committee on Construction and Land (CCL) announced the inclusion of additional strategic sectors in the draft law, including telecommunications and internet service providers. We met shortly after the announcement with Ilya Ponomarev, a member of the Duma IT and Communication Committee (ITCC). Ponomarev told us that the March 6 session "caught everyone by surprise." Members expected to discuss technical issues, not changes in the scope of the draft law. Ponomarev told us members had not received the amended text prior to the meeting. Martin Shakkum, CCL Chairman encouraged the deputies to accept the new version because it was "a directive from the Kremlin." Ponomarev speculated that the Federal Security Bureau (FSB) proposed such changes as an attempt to "flex its muscles." ¶5. (SBU) The new version of SSL also surprised Minister Reiman and the MITC. Ponomarev reported that shortly after the March 6 announcement, Reiman met with the Deputy Head of the Presidential Administration, Vladislav Surkov, to voice his objections. Reiman publicly criticized the amendments, stating that "there is no benefit to any kind of restriction." The MITC warned that the bill would stifle investment in Russia's communications sector, and could impact up to 200 telecoms companies and 10,000 internet service providers. Deputy ITC Minister Aleksandr Maslov stated that "communications companies need investment to continue consolidating their assets...and to install digital lines to replace antiquated Soviet-era equipment." ¶6. (SBU) On March 16, Duma CCL Chairman Martin Shakkum announced removal of the section of the law covering internet service providers. The draft would retain telecommunications, but fixed line only. Russian press reported that president-elect Dmitriy Medvedev made the final decision. -------------- Industry Implications -------------- ¶7. (SBU) The March 21 version of the law excludes internet service providers, and limits telecoms coverage to "major fixed-line companies." The law defines major companies as those "with a significant market share in five or more regions" or in "cities of federal significance" such as Moscow and St. Petersburg, which Rostelecom and Svyazinvest serve. MOSCOW 00000893 002 OF 002 ¶8. (SBU) We discussed the SSL's potential impact with an official of Telenor, the largest foreign investor in Russia's telecoms industry. The Telenor official told us she expects the new law to impact the planned sale of the GOR's stake in national fixed-line operator Svyazinvest. She added, however, that foreign investors had not shown strong interest in the company up to now. Telenor also indicated that although the SSL does not explicity include mobile telecoms, regulators could still consider mobile companies "strategic" under existing Telecom law if they hold a "dominant market position." Telenor reports that two mobile companies, VimpelCom and MTS, currently control over 25 percent of the market, the threshold for "dominant market position." -------------- Comment -------------- ¶9. (SBU) Reiman's vigorous lobbying made the difference in beating back the proposed changes to expand the scope of the draft law. Reiman has significant ownership interests in several of Russia's largest mobile telecoms companies. Regardless of motive, however, his intervention should help keep Russia's IT and telecoms sectors more open to foreign investors. BURNS