COVID-19 crisis inspires global tightening of Foreign Investment Screening

Global Publication June 30, 2021

Russia’s Federal Law № 57-FZ “On the Procedure of Making Foreign Investments in Companies of Strategic Importance for National Defence and State Security” (the FSIL) is a consolidated legal framework governing foreign investment in entities carrying on activities of strategic importance (so-called “strategic” entities).

The FSIL enables the Federal Antimonopoly Service (FAS) to invalidate transactions implemented without clearance from the Russian governmental commission responsible for reviewing foreign investments under the FSIL (the Strategic Commission) and to deprive foreign investors and their representatives of voting rights in relation to such entities. A strong record of enforcement action has been established since the law was introduced in 2008. On the whole, actions brought by FAS have been upheld in the Russian courts.

The types of activity defined as being of strategic importance under the FSIL include natural resources, defense, nuclear, telecommunications, media and various natural monopolies such as oil and gas pipelines, rail services and certain airports, ports and other transport terminals. Prior approval of the Strategic Commission is required for transactions that would allow a private foreign investor to obtain “control” over a strategic entity. Stricter rules apply to foreign state-controlled investors and/or to strategic entities engaged in exploration or extraction of natural resources from a hydrocarbon or hard mineral deposit which constitutes a “subsoil deposit of federal importance”. For example:

  • the general “control” test has a voting rights threshold based on holding (directly or indirectly) more than 50 percent of voting rights in a strategic entity, but a lower threshold (25 percent or more of voting rights) applies to a strategic subsoil deposit entity;
  • there is a separate clearance requirement for acquisitions by a foreign state-controlled investor of a direct or indirect ownership interest in a strategic entity of more than 25 percent (or, in the case of a strategic subsoil deposit entity, more than 5 percent);
  • foreign state-controlled investors are prohibited from obtaining “control” over a strategic entity; and
  • under a separate federal law on foreign investments (the Foreign Investments Law), acquisitions by a foreign state-controlled investor of a direct or indirect voting interest of more than 25 percent in any Russian entity (irrespective of whether it is a strategic entity) require a separate clearance in accordance with a simplified procedure under the FSIL.

Since July 2017, the Prime Minister of the Russian Federation (who chairs the Strategic Commission) has had power under the Foreign Investments Law to determine, on national defense and state security grounds, that clearance by the Strategic Commission is required for any transaction by a foreign investor in respect of a Russian business entity, even if the entity is not engaged in “strategic” activities. The potential breadth of this power and the lack of a statutory procedure regulating its exercise have raised concerns about greater uncertainty for foreign inbound investments, although to date the power has only been used sparingly.

The FAS has a three-month application review process to determine that a transaction does not require clearance. Where a transaction is referred to the Strategic Commission, clearance decisions frequently take six to nine months.

The Strategic Commission can impose any conditions on clearance decisions (the FSIL previously contained an exhaustive list of available restrictions). Recently imposed undertakings include requirements to transfer technology, know-how and other IP to Russian entities and certain protective mechanisms in case of introduction of new sanctions.

Overall, the record of clearances of transactions under the FSIL has been very positive. According to statistics published by FAS in December 2020, of the 288 applications considered by the Strategic Commission since the FSIL came into force, clearance was granted in 265 cases and denied in only 23 cases.

In addition to the FSIL and the Foreign Investments Law, other Russian laws restrict or regulate foreign investment in particular sectors including broadcasting and mass media, airlines, banking, insurance and certain digital content services.

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