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.