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