Russia invites more foreign investments in natural resources sector - Amendments to Russian laws

December 2011

Summary

Russian law on foreign investments in strategic industries has changed. The changes prompt larger foreign investments in natural resources sector and eliminate some of the superfluous requirements revealed by the past practice. The changes are for the benefit of foreign investors in Russian natural resources companies, banks, civilian companies operating with sources of radiation, international financial organisations involving Russia, as well as Russian groups with international holding structures.

What is new in brief

On 17 November 2011 the President of the Russian Federation signed a Federal law amending the Federal law “On Foreign Investments in the Russian Federation” (Foreign Investments Law) and the Federal law “On the Procedure of Foreign Investment in Companies Having Strategic Importance for National Defence and State Security” (Foreign Strategic Investments Law). These amendments (Amendments), which enter into force on 18 December 2011, simplify certain significant investments by foreign investors in Russian strategic companies carrying out exploration and extraction of minerals from subsoil deposits of federal importance, as well as exempt some companies and transactions from the ambit of the Foreign Strategic Investments Law. In addition, certain changes have been made to the approval process. This briefing recaps the key approvals required for foreign investment in Russian companies and explains the effect of the Amendments.

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Key approvals required for foreign investments

The Foreign Strategic Investments Law imposes on a foreign investor, or a group that includes a foreign investor, a requirement to obtain the prior approval of the Russian Governmental commission (the Strategic Commission) for the acquisition of a direct or indirect interest in, or control over a Russian company acting in the natural resources, defence, media or monopolies sectors of the Russian economy which are deemed to be of strategic importance for national defence and state security (a Strategic Company). The approval requirements for investments made in Strategic Companies which carry out geological survey and/or exploration and extraction of minerals from subsoil deposits of federal importance (Subsoil Strategic Companies) and investments in other Strategic Companies differ for investments made by a foreign individual or corporate without state participation (a Private Foreign Investor) and investments made by a foreign state, international organisation and any of their subsidiaries (a Sovereign Foreign Investor).

Private Foreign Investors are not prohibited from acquiring an interest in, or control over Strategic Companies and Subsoil Strategic Companies. However, currently they must obtain a prior approval of the Strategic Commission (Strategic Commission Approval) before they enter into a transaction as a result of which they:

  • acquire the right to dispose of, directly or indirectly, more than 50 per cent of the total voting shares (interests) of a Strategic Company or 10 per cent or more of the total voting shares (interests) of a Subsoil Strategic Company; or
  • are able to determine decisions of a Strategic Company or a Subsoil Strategic Company including its entrepreneurship activities; or
  • are able to appoint or to elect the chief executive officer or more than 50 per cent of the members of the collective executive body or/and members of the board of directors (supervisory board) of a Strategic Company or 10 per cent or more of the members of the collective executive body or the board of directors (supervisory board) of a Subsoil Strategic Company; or
  • are appointed to act as a management company of a Strategic Company or a Subsoil Strategic Company.

Investments by Sovereign Foreign Investors are more restricted. They are not allowed to enter into transactions which may lead to any of the consequences mentioned above or otherwise acquire control over Strategic Companies or Subsoil Strategic Companies. However, Sovereign Foreign Investors may acquire smaller non-controlling interests in such companies, provided that they obtain Strategic Commission Approval before they enter into a transaction as a result of which they:

  • acquire the right to dispose of, directly or indirectly, more than 25 per cent of the total voting shares (interests) of a Strategic Company or to otherwise block decisions of the management bodies of a Strategic Company; and
  • acquire the right to dispose of, directly or indirectly, more than 5 per cent of the total voting shares (interests) of a Subsoil Strategic Company.

In addition, Sovereign Foreign Investors are required to obtain Strategic Commission Approval for the acquisition of the right to dispose of, directly or indirectly, more than 25 per cent of the total voting shares (interests) or to otherwise block decisions of the management bodies of any Russian company (regardless of whether the company is or is not a Strategic Company or a Subsoil Strategic Company).

The approval process is administered by the Federal Antimonopoly Service (FAS), which is responsible for the initial review of applications and onward submission of documents to the Strategic Commission which makes the final decision. The statutory period for processing an application for Strategic Commission Approval is three months, which can be extended for a further three months in exceptional cases.

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Effect of the Amendments

Below is a short summary of what has changed as a result of the Amendments.

More significant foreign investments in Subsoil Strategic Companies do not require Strategic Commission Approval

Now, Strategic Commission Approval is required for the acquisition by a Private Foreign Investor of the right to dispose of, directly or indirectly, 25 per cent or more (as opposed to the previous threshold of 10 per cent or more) of the total voting shares (interests) of a Subsoil Strategic Company and the right to appoint 25 per cent (as opposed to 10 per cent before) of the members of the collective executive body or the board of directors (supervisory board) of a Subsoil Strategic Company.

For Sovereign Foreign Investors, the threshold remains 5 per cent of total voting shares (interests) of a Subsoil Strategic Company (international financial organisations with the Russian Federation as a member or with which the Russian Federation has concluded an international agreement are now exempt - please see below). However, the maximum stake in a Subsoil Strategic Company which a Sovereign Foreign Investor may be permitted to own is increased from under 10 per cent to under 25 per cent and the number of directors it may be permitted to appoint is increased from under 10 per cent to under 25 per cent of the members of the collective executive body or board of directors (supervisory board) of a Subsoil Strategic Company.

International financial organisations involving Russian Federation are exempt

If a Sovereign Foreign Investor is an international financial organisation with the Russian Federation as a member or with which the Russian Federation has concluded an international agreement, transactions in which that international financial organisation “participates” are exempt from the requirement to obtain Strategic Commission Approval. The word “participate” as used in the Amendments is slightly ambiguous and may imply transactions where the international financial organisation acts as a seller or a buyer. However, given the purpose of the Foreign Strategic Investments Law, the most logical interpretation is that Strategic Commission Approval is not required for the international financial organisation itself (ie, when it acts as a buyer).

The list of such organisations is yet to be determined by the Government of the Russian Federation but is likely to include the European Bank of Reconstruction and Development, the International Financial Corporation, the International Bank of Reconstruction and Development, the Multilateral Investment Guarantee Agency, and the Eurasian Bank of Development.

Certain companies are no longer Strategic Companies

The following companies are no longer deemed to be Strategic Companies and foreign investments in these companies do not require the Strategic Commission Approval:

  • companies using sources of radiation in the civilian sector of the economy where such activities do not constitute their core business; and
  • Russian banks that engage in distribution or technical maintenance of encryption devices or provision of services in the area of encryption (except only for the banks in which Russian Federation holds shares/interests).

“Russian to Russian” transactions are exempt

The Amendments also abolish the requirement to obtain Strategic Commission Approval for transactions entered into between companies directly or indirectly controlled by the Russian Federation or by Russian citizens. Before the Amendments, such companies were technically required to obtain an approval if they were acting through their off-shore companies. A recent example was the acquisition of Zenit, a Russian bank, by Tatneft, a Russian group, which had to obtain Strategic Commission Approval merely because Tatneft was using its Swiss subsidiary Tatneft Oil AG for the purchase.

Notably, companies controlled by Russian citizens are exempt only if those Russian citizens are tax residents of the Russian Federation and do not have dual citizenship.

Pro-rata capital increases of a Subsoil Strategic Company by existing shareholders are exempt

The Amendments have clarified that, where a foreign investor owns 25 per cent or more of the shares (interests) of a Subsoil Strategic Company and intends to acquire additional shares of the company, it does not need to obtain Strategic Commission Approval, provided that the total percentage of shares of the Subsoil Strategic Company held by the foreign investor will not increase. This is applicable to a situation where an additional share issue by a Subsoil Strategic Company is made pro-rata to all shareholders, including a foreign shareholder.

Changes in the approval procedure

The Amendments have introduced a few changes in the approval procedure stipulated in the Foreign Strategic Investments Law. The most significant changes are described below.

  • Previously, before the Strategic Commission made its final decision, FAS would be required to obtain an opinion of the Federal Security Service as to whether or not the intended transaction could pose a threat to national defence and state security. Now, a similar opinion is also required from the Ministry of Defence. This, however, does not affect the overall statutory period for obtaining Strategic Commission Approval, which remains three months.
  • The Strategic Commission may give an approval conditional on the foreign investor entering into an agreement with FAS containing commitments by the foreign investor (typically, a commitment to invest, to comply with the business plan, to ensure proper protection of state secrets). The agreement should be signed within thirty days of delivery of the Strategic Commission Approval to FAS (previously the period for reaching an agreement with FAS was twenty days) and this time period may be extended by an additional fourteen days.
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Conclusions

The Amendments signal the clear desire of the Russian Government to attract more foreign investments for large-scale exploration and development projects in the Russian natural resources sector.

Private Foreign Investors may now acquire under 25 per cent (was under 10 per cent) of the voting shares and have the right to appoint under 25 per cent (was under 10 per cent) of the directors of a Subsoil Strategic Company without having to obtain Strategic Commission Approval. At the same time, the Strategic Commission has reserved the right to refuse approval to Private Foreign Investors acquiring larger stakes in Subsoil Strategic Companies that would give them the right to veto certain important corporate decisions.

Sovereign Foreign Investors (except for international financial organisations involving Russia) are still required to obtain Strategic Commission Approval for an acquisition of more than 5 per cent of the voting shares of a Subsoil Strategic Company. However, they may now be permitted to acquire under 25 per cent (was under 10 per cent) of the voting shares and to have the right to appoint under 25 per cent (was under 10 per cent) of the directors of a Subsoil Strategic Company, which allows significantly larger investments from foreign states.

The re-categorisation of civilian companies that use radiation sources as part of their non-core activity as non-strategic is a welcome change. The precise definition of non-core activity is unclear so it remains to be seen who will be able to benefit from this exemption. Potentially, oil-field services companies, medical equipment producers, hospitals and medical centres using equipment that emits radiation will be able to benefit. However, given the uncertainty, each case will need to be carefully considered and reviewed on its own merits.

The re-categorisation of Russian banks using encryption services as non-strategic is also welcome and the Amendments have simplified the regulatory procedures for foreign investors wishing to acquire significant stakes in Russian banks.

Russian tax-resident investors as well as international financial organisations in which the Russian Federation is involved will also welcome the Amendments relevant to them.

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