Source: https://www.scribd.com/doc/86932831/41-2-Heath
Timestamp: 2018-03-17 20:39:07
Document Index: 196405595

Matched Legal Cases: ['art.150', 'art.156', 'art. 1995', 'art. 165', 'art. 178', 'art. 185', 'art.\n6', 'art.188', 'art.194', 'art. 193', 'art.249', 'art.261', 'art. 260', 'art.269']

41-2-Heath | Foreign Direct Investment | Financial Crisis Of 2007–2008
41-2-Heath
Uploaded by Justas Šireika
\\server05\productn\J\JLE\41-2\JLE208.
STRATEGIC PROTECTIONISM? NATIONAL SECURITY AND FOREIGN INVESTMENT IN THE RUSSIAN FEDERATION Jesse Heath*
Russia recently joined the growing list of nations that formally control foreign investment in “strategic” industries. The new law regulating foreign investment generated mixed reviews, ranging from harsh criticism in the media to restrained optimism from investors. This Note will argue that the new Strategic Sectors Law, though not perfect, is less restrictive than critics claim and helps establish the “rules of the game” for foreign investors in sensitive industries. Most importantly, the law is generally consistent with standards promoted by the Organisation for Economic Co-operation and Development and will likely help promote foreign investment in Russia.
Some commentators have criticized Russia’s new law1 regulating foreign investment in its strategic sectors.2 This Note will argue that the law is less restrictive than it seems and will likely encourage foreign investment by making the rules in Russia more transparent and predictable. More importantly, the law generally complies with Russia’s goals of encouraging the growth of foreign investment and meets criteria for such legislation proposed by the Organisation for Economic Co-operation and Development (OECD).3 Finally, based on these criteria and the initial evidence
* J.D. 2009, The George Washington University Law School; B.A 2005, Lawrence University. I would like to thank Christina Giffin, Kaitlin Dunne, Lyndon Allin, and Alex Stoljarskij for their invaluable help with this Note. 1. Federal’nyi Zakon O Poryadke Osushchestvleniya Inistrannykh Investij v Khozyaijstvennye Obshchestva, Imeyushchie Strategichesoe Znachenie dlya Natsional’noi Bezopasnosti Rossiiskoi Federatsii [Federal Law on the Framework for the Realization of Foreign Investment in Economic Organizations Having a Strategic Significance for the National Security of the Russian Federation], Ros. gaz., Apr. 29, 2008, available at http:// www.rg.ru/2008/05/07/investicii-fz-dok.html [hereinafter Strategic Sectors Law]. 2. See, e.g., Natalya Alyakrinskaya, New Bill Bars Foreigners from Strategic Sectors, MOSCOW NEWS (Russ.), Aug. 16, 2007, http://mnweekly.rian.ru/business/20070816/55268300. html. 3. ORG. FOR ECON. CO-OPERATION & DEV. [OECD], OECD ROUNDTABLE: FREEDOM OF INVESTMENT, NATIONAL SECURITY AND “STRATEGIC” INDUSTRIES 5 (2006) [hereinafter OECD, ROUNDTABLE].
\\server05\productn\J\JLE\41-2\JLE208.txt
of the law’s implementation, this Note will critically assess how well the law compares to the “ideal” and identify areas where the law should be modified or amended. A. Russia’s Economic Recovery, the Growth of Investment, and Legal Gaps
Since its recovery from the 1998 ruble devaluation and the rise in world oil and gas prices, Russia has enjoyed robust economic growth.4 From 2000 to 2007, the influx of foreign direct investment (FDI) increased by approximately 800 percent.5 The level of FDI as a percentage of gross domestic product (GDP), however, is still low compared to other developed economies.6 Indeed, the Russian government has made it a priority to encourage FDI, not only as a source of capital, but also for necessary technology and knowledge transfers to Russian enterprises.7 More importantly, weaknesses in Russia’s economy related to underinvestment exacerbated the impact of the 2008 global financial crisis.8 At the same time, concerns over foreign acquisition of domestic corporations and gaps in the existing legal framework have led the Russian government to consider laws restricting FDI in certain sectors.9 ThenRussian President Vladimir Putin first spoke to the need for such a law in his annual address to the Federal Assembly in 2005.10 The State Duma and Federation Council passed the final draft of the Strategic Sectors Law in April 2008, and President Putin signed it into law on May 5, 2008.11 The Strategic Sectors Law restricts the
4. See Central Intelligence Agency, The World Factbook - Russia, https://www.cia. gov/library/publications/the-world-factbook/geos/rs.html (last visited Mar. 26, 2009) (noting that increases in consumer demand and investment has replaced the initial role of the ruble devaluation and rise in oil prices as the main drivers of growth). 5. See ECONOMIST INTELLIGENCE UNIT, WORLD INVESTMENT PROSPECTS TO 2011, at 173 (2007) (“FDI inflows averaged a paltry U.S. $3 [billion] per year in 1998-2002, before picking up markedly . . . to an estimated U.S. $24 [billion] in the first half of 2007.”). 6. See id. 7. See President Welcomes Foreign Investment, ST. PETERSBURG TIMES (Russ.), Sept. 25, 2007, available at http://www.sptimes.ru/index.php?action_id=2&story_id=23087. President Putin has stated “[w]e expect that private investors will play an increasingly noticeable and leading role in the large-scale modernization of the economy.” Id. 8. See generally Peter Rutland, The Impact of the Global Financial Crisis on Russia, 48 RUSS. ANALYTICAL DIG. 2 (2008). 9. See Russia to Restrict Foreign Investment in Strategic Sectors, RUSSIA TODAY, Sept. 17, 2007, http://www.russiatoday.ru/business/news/14263. 10. Vladimir Putin, President, Russ., Annual Address to the Federal Assembly of the Russian Federation (Apr. 25, 2005), available at http://kremlin.ru/eng/speeches/2005/ 04/25/2031_type70029type82912_87086.shtml. 11. Russia’s Putin Signs Foreign Investment Law, REUTERS, May 5, 2008, http://www. reuters.com/article/reutersEdge/idUSL0514680420080505. The literal translation of the
Strategic Protectionism?
level of foreign investment in forty-two different types of businesses, establishes procedures to approve such investments, and defines the rights and obligations of foreign investors.12 The law also shares many characteristics with similarly-focused laws in a majority of developed countries.13 Indeed, in recent years, several Western European countries and the United States have adopted or amended laws that regulate foreign investment in certain economic sectors, at least partially due to concern over acquisitions of domestic companies by foreign state-owned companies.14 B. Taxonomy of Foreign Investment
In Russia, there are three categories of foreign investment: FDI, foreign portfolio investment (FPI), and other foreign investment.15 FPI “includes purchase of shares, bonds or other securities of Russian enterprises, at levels below 10 percent of the equity capital.”16 The other foreign investment category is a mixed bag of various types of credits, including direct lending from foreign banks.17 FDI generally “occurs when a foreign investor exerts direct control over domestic assets.”18 This happens in one of two ways: (1) foreign investors start a new business or increase the amount of their ownership in an existing firm; or (2) foreign investors acquire ownership over an existing business.19 This Note is only concerned with the second type of investment—acquisitions over existing
law’s title—“On the Framework for the Realization of Foreign Investment in Economic Communities Having a Strategic Meaning for the National Security of the Russian Federation”—is lengthy, leading most commentators to adopt their own title. This Note simply refers to the law as the “strategic sectors law.” 12. See Russian Law to Limit Investment, BBC NEWS, May 5, 2008, http://news.bbc.co. uk/2/hi/business/7384358.stm. 13. See generally OECD, ROUNDTABLE, supra note 3 (discussing the general increase in the regulation of strategic industries in developed countries). 14. See Nikolaus von Twickel, Barriers Going Up All Over Europe, ST. PETERSBURG TIMES (Russ.), Mar. 14, 2008, available at http://www.sptimes.ru/index.php?action_id=2&story_ id=25316. Many policymakers in developed countries are alarmed by the advent of sovereign wealth funds—state-controlled pools of capital used for strategic investments abroad. Often, legitimate security concerns along with populist sentiments cause politicians to oppose takeovers of domestic companies. 15. See STANISLAV M. MENSHIKOV, THE ANATOMY OF RUSSIAN CAPITALISM 335 (2007). 16. Id. 17. See id. 18. EDWARD M. GRAHAM & DAVID M. MARCHICK, U.S. NATIONAL SECURITY AND FOREIGN DIRECT INVESTMENT 2 (2006). 19. See id. This distinction is often referred to as “greenfield” investment versus “mergers and acquisitions.” See, e.g., Christiana Ochoa, From Odious Debt to Odious Finance: Avoiding the Externalities of a Functional Odious Debt Doctrine, 49 HARV. INT’L L.J. 109, 136 (2008). The definition of FDI under Russian law will be discussed below.
20. 21.txt unknown Seq: 4 4-NOV-10 11:16 468 The Geo. the number of unemployed rose to five million. Int’l L. and favorable 20. Polosa Bezdokhodnosti. .6 pct y/y in Nov-Ifax. A. REUTERS. available at http://www2. BACKGROUND & DISCUSSION Foreign Investment in Russia after the Global Financial Crisis The Russian economy had enjoyed robust growth for seven years until the abrupt crash in economic activity that occurred in 2008.pdf. (Russ. Dec. RUSSIAN FEDERATION – COUNTRY BRIEF 2008 (2008).reuters. From 2000 to 2007.com/ideas/brics/book/BRICs-Chapter2. 2008.ng. GDP growth slowed to 1. 2008.shtml. Rev. and suggests improvements or amendments. Toni Vorobyova. Dec. and wages have risen eightfold. 24.25 and industrial production fell 10 percent in one month. Section five analyzes whether the law conforms to OECD’s proposed criteria. http://www.rbcnews. when real wages fell by 2.24 These gains halted in late 2008. http://www. 22.com/free/20080825103359. tight fiscal policy. http://in. RORY MACFARQUHAR. Dec.rbcnews. banking. labor. Russian GDP grew approximately 6. household consumption 115 percent. available at http://businessneweurope. and. This Note has five sections: Section two describes the growth and importance of FDI in the Russian economy. NEW EUROPE. Dec. Russia Enjoys High GDP Growth Rate. Russia 2009: Paused before a Rally. Section three examines the existing legislative and regulatory framework regarding foreign investment. 22.5 percent.21 By November 2008. Mikhail Sergeev. http://www. Wash. and land codes). II. Russia’s Industrial Production Down in November. assesses the law’s recent implementation. including a “devalued ruble. 15. See Ben Aris. ROSBUSINESSCONSULTING (Russ. 22. 26.com/free/20081215183857. RUSSIA: A SMOOTH POLITICAL TRANSITION 29 (2007). 25. 23. 41 enterprises—which is the subject matter of the Strategic Sectors Law. implementation of key economic reforms (tax.).).com/article/asiaCompanyAndMarkets/idINLM39976220 081222. lastly.23 In the past eight years. WORLD BANK. economic output has grown 70 percent. Section four examines the Strategic Sectors Law. Aug. 2008. 2008.shtml.6 percent22 and 2009 forecasts averaged around 2.\\server05\productn\J\JLE\41-2\JLE208. BUS.5 percent in the first quarter of 2008.eu/story1414/RUSSIA_2009_Paused_before_a_rally (assuming the price of oil to be $50 per barrel).).goldmansachs. 25. 2008. however. NEZAVISIMAYA GAZ. [Vol. ROSBUSINESSCONSULTING (Russ.ru/printed/220335. Russia GDP Growth Slows to 1.5 percent20 and came to 8.5 percent.26 A variety of factors fueled Russia’s economic recovery.
Department of State. STATE STATISTICS SERV. 36.rbcnews. 2. http://www. . however. 34. 2008.exe/Stg/d030/ 14-06.30 The decline in FDI during 2008 was “mainly due to a drop of FDI in extraction industries. thanks to the country’s extensive Soviet-era infrastructure and underutilized capacity.9 percent of GDP in 2007. before the financial crisis erupted and oil prices imploded. at 34. R R R .state. Id. (stating “the volume of investment is not sufficient and it is excessively concentrated in a few branches of the economy”). growing from an average three billion dollars per year from 1998 to 200228 to approximately twenty-eight billion dollars in 2007. supra note 5. at 221 (table summarizing inward FDI as a percent of GDP of world economies. Russia’s initial recovery primarily was fueled by a cheap ruble and high oil and gas prices.). FOREIGN INVESTMENTS IN THE ECONOMY OF RUSSIAN BY TYPES (2008). supra note 5. . 31. Foreign Investment in Russia Shrinks. 33. See id. at 173 (using “transition region” to refer to Eastern Europe). at 12 (2008).org/INTRUSSIANFEDERATION/Resources/rer17_eng. Russia’s continuing growth and development is an investmentfueled expansion.htm. Economic Growth Remains Surprisingly High.gks. http:/ /www. Russia’s economic recovery has been largely “investment-free . See id. 3 (2008).ru/bgd/regl/b08_06/IssWWW. 32. Pekka Sutela. when FDI fell 2. MACFARQUHAR. this trend reversed.”35 Nonetheless.htm (last visited Mar. at 173. 38 RUSS. ROSBUSINESSCONSULTING (Russ. FDI still plays a relatively small role in Russia’s economy. ANALYTICAL DIG. including those of Brazil. 19. 37.”36 Much of the FDI entering Russia is limited to certain sectors and certain partners. accounting for about half of FDI in 2007. 35.29 In late 2008. 26. investment has in recent years “join[ed] consumption as a pillar of growth. RUSSIAN ECONOMIC REPORT NO. ECONOMIST INTELLIGENCE UNIT. 28.”27 The chief sources of Russia’s acute sensitivity to the 2008 crisis will be discussed below.37 For example..worldbank. FDI inflows to the Russian economy also have accelerated.3 percent to $19. 30. See id. 17. Out of Date Background Notes . WORLD BANK. available at http:// siteresources. and accumulated FDI comprised only 10. See ECONOMIST INTELLIGENCE UNIT. supra note 24.S. FED.”31 Significantly.33 Russia’s cumulative FDI inflows from 1990-2006 are near the bottom of “all 28 countries of the transition region.com/free/20081119104816.Russia (09/07). 2009). India.32 Even after the recent increases.”34 Indeed.gov/outofdate/bgn/r/92546. 29. Nevertheless.shtml. and China). which likely results from domestic 27. 49 percent of Russia’s FDI inflow is into the mining and quarrying sectors and two-thirds is from Cyprus and the Netherlands.txt unknown Seq: 5 4-NOV-10 11:16 2009] Strategic Protectionism? 469 commodities prices. available at http://www. the drop in FDI to extractive industries began in the first half of 2008.pdf.2 billion.\\server05\productn\J\JLE\41-2\JLE208. U. Nov.
2006 COLUM. Int’l L. 15. NEW EUROPE. the recent growth in FDI “does not necessarily reflect a radical change in investors’ perceptions of the business climate.org/INTRUSSIANFEDERATION/Resources/rer15_En. gazeta. THE RUSSIAN INVESTMENT CLIMATE: INVESTOR PERCEPTIONS IN LONDON.txt unknown Seq: 6 4-NOV-10 11:16 470 The Geo. including lack of confidence in the rule of law. REV. Comparing the Legal Foundations of Foreign Direct Investment in India and China: Law and the Rule of Law in the Indian Foreign Direct Investment Context. many argue that “[m]ore international investment is needed to support Russia’s economic development and diversification.eu/articles/89405.8 billion reported by the government.”44 38. [Vol. Rev. AND MOSCOW 16 (2005) (reporting that surveyed investors expressed a number of common concerns. at 10. http://www. OECD INVESTMENT POLICY REVIEWS – RUSSIAN FEDERATION: ENHANCING POLICY TRANSPARENCY 17 (2006) [hereinafter OECD.worldbank. and uncertainty as regards the future. its existing productive capacity will become overtaxed and its need for investment will grow. MACFARQUHAR.5 billion—much less than the $27. 39. 17576 (2006) (describing the process through which Chinese companies “export capital to their subsidiaries in Hong Kong or Macao. Russian Tycoons are Russia’s Largest Foreign Investors. See id.38 If these dubious “foreign” investments are discounted. 2008.pdf. and trade. 43. which then “re-invest” that Chinese capital back into China in order to benefit from tax breaks and other financial incentives accorded only to foreign investors. leaving only $5. BUS.”). Investment will increase productivity not only through increases in the physical productive capacity.”41 And while Russia’s investment climate has not improved. RUSSIAN ECONOMIC REPORT – NO. construction.”42 The productivity gains experienced in the recovery period were mostly based on under-utilized capacity and increased investment will be necessary to raise productivity levels in the future.shtml. bureaucracy and corruption. lack of administrative uniformity and predictability.\\server05\productn\J\JLE\41-2\JLE208. Vladimir Milov. known as “round tripping. This phenomenon.php. 44. NAT’L COUNCIL ON CORPORATE GOVERNANCE.”40 Indeed. infrastructure bottlenecks have begun to appear.RU (Russ.g.ru/column/milov/2755333. “there is widespread apprehension.).39 Also. CO-OPERATION & DEV. ORG. 25. 41 firms reinvesting their own capital that is held abroad. 167. L. Rohit Sachdev. available at http:/ /siteresources. WORLD BANK. available at http://www. See Kari Liuhto. 42. Russia’s inward FDI in 2007 was $9. OECD. Bum.. financial services. among direct investors.ver. 2008. e. GAZETA. Milov adds that $4 billion of the truly “foreign” FDI went into real estate. FOR ECON. 41. Kotorogo Net. 40. As Russia reaches and surpasses its pre-collapse level of gross domestic product (GDP).5 billion for FDI in the modernization of production capacities and infrastructure. [OECD].” is a common way for domestic investors to take advantage of tax and other incentives intended for foreign investors. at 34. June 16. RUSSIAN INVESTMENT POLICY.neurope. Id. Wash. supra note 24.43 As Russia’s economy “has returned to its pre-transition magnitude in real terms . See. supra note 40. a 2005 survey found that. . RUSSIAN INVESTMENT POLICY]. . and an uncertain policy environment). R R . in key areas of the operating environment. at 13 (2007). Note. but also through the introduction of new technologies and management methods that increase labor efficiency. Aug. NEW YORK.
See id. to fund major expansions.html. 23. 48. “other” investments and FPI dropped 17. See Foreign Investment in Russia Shrinks. Geopolitical Diary: Russia’s Stock Market Woes. 7. html (noting that private sector foreign debt grew 56 percent from 2006 to 2007 and amounts to a little over half of total private sector debt). RIA NOVOSTI (Russ. STATE STATISTICS SERV. http://en. MENSHIKOV.51 Most importantly. Oct.2 percent and 16. itself 70-80 percent foreign-owned. available at http:// www. BANK OF FINLAND INST.. WALL ST.rbc. STRATFOR.stratfor.fi/NR/rdonlyres/DA323 62B-4168-4CC8-93D7-56E5AA0D4B7E/0/brf208. See Paul Whitfield.pdf. Russia’s economy “continues to require sizeable investments for purposes of diversification and post-Soviet modernization of infrastructure.48 In 2007. supra note 15. . See Owen Matthews. DEAL NEWSWEEKLY. NEWSWEEK. ROSBUSINESSCONSULTING (Russ. Sept. Nov.9. 2008.). . 14. Russia’s exposure to the crisis was not due to a lack of foreign investment overall. 50. The stock market crash affected companies that secured their debt with share prices. 21. This argument holds true even though the crisis affected virtually every country. Dec.com/newsweekly/features/on-the-qt. tbl. 2008.bof. accord Russia’s Foreign Debt Grows 48% to $460 bln in 2007.47 Indeed. many foreign lenders were able to call in these loans early due to the incredible drop in the Russian stock market. BOFIT FORECAST RUSSIA 2008-2010. See id. 2008. Out of Pocket. 51. 49. Apr.com/id/166913.txt unknown Seq: 7 4-NOV-10 11:16 2009] Strategic Protectionism? 471 Although investment has increased substantially over the past eight years.”45 The 2008 global financial crisis highlighted some key flaws in Russia’s current economic development path and confirmed the need for more FDI. supra note 29. More Economic Gloom Predicted. 24. in 2008.shtml?/ news/english/2008/10/23/23133623_bod. See Greg White. http://top. FOR ECONOMIES IN TRANSITION [BOFIT]. when foreign portfolio investors fled the Russian stock market.wsj. Thus. supra note 29. available at http://www.49 By 2008. FOR R R . at 335.com/article/SB122969551132221545. FED.”50 Ironically. 2008.ru/russia/20080407/103938437. 17. but from overexposure to “other” foreign credits and FPI. 2008. “other” credits and FPI constituted 77 percent of all foreign investment entering Russia. The Russian Economy is Turned Inside Out. Nov. including those with high levels of FDI. 2008. available at http://online. 46.php. 52.46 The first major flaw is Russian firms’ overreliance on foreign credit to finance their growth. available at http://www. at 1 (2008).com/memberships/123838/geopolitical_diary/20080916_geopolitic al_diary_russias_stock_market_woes. the resulting declines in share prices triggered contractual options in the loan agreements that allowed the same foreign investors to call in their loans.3 percent respectively.52 45. while FDI fell only 2. Why these types of foreign investment are worse than FDI will be discussed later in the Note. On the QT.shtml.3 percent..ru/english/index.). 47.rian. newsweek.thedeal. 1. available at http://www.\\server05\productn\J\JLE\41-2\JLE208. Russian firms had taken advantage of over $272 billion in foreign loans and other credits as “the primary means . J.
diversified economy. BUS.html (“Russia doesn’t have much to show for its meteoritic economic rise and fall. 56. and. SEATTLE TIMES. it must be pointed out that Russia’s overreliance on foreign credits was the intended result of a specific policy. http://www. The issue is relevant here because it demonstrates how foreign investment policies can dramatically impact the economy. the Russian government was too focused on accumulating reserves and too confident in the stability of high oil prices. Rev. raising Russia’s credit rating due to the accumulation of those reserves. lending of funds by Western institutions to Russian enterprises. 19. Id. Russia’s Economic Crisis Could Have Been Avoided. 54.nationalinterest. NAT’L INTEREST ONLINE. NEW EUROPE. 57. 58. for example.57 This reveals the second flaw in Russia’s development model: the excessive reliance on commodities prices. 6. 30.nwsource. Putin’s Third Way. See Yuri Mamchur.aspx?id=20496. Gaddy & Barry W. Comment: Looking Beyond the Credit Crisis. Wash.eu/story1412/COMMENT_Looking_beyond_the_ credit_crisis. in effect. . 2009. the money did not end up in the high-impact areas that could have provided a foundation for a more modern. (explaining further that “Russia was. See Clifford G.businessneweurope. entrepreneurship and leadership.com/html/opinion/2008573115_ opin31mamchur. with oil and gas alone constituting 25 percent of GDP and 75 percent of exports. unless you count Moscow’s empty nightclubs that used to charge $40. even if the Western lenders actually made wiser allocations.53 The policy consisted of: onerously taxing the foreign (for instance.”54 The Russian government’s reasons for this circuitous method were the insufficient domestic banking system. See id.\\server05\productn\J\JLE\41-2\JLE208. paying the West to provide a service”). Ickes.58 When the global financial crisis spread to the real world economy.txt unknown Seq: 8 4-NOV-10 11:16 472 The Geo. despite ambitious plans. lending those tax revenues to Western governments through the purchase of. lack of trust in the ability of Russian enterprises to allocate capital efficiently. 2008. and infrastructure—went largely untouched by Western banks and. Id.”55 Unfortunately.org/Article.000 for table service. “including those that had earned them in the first place. 41 For the purposes of this Note. Dec. Dec. available at http://seattletimes. available at http://www.”). [Vol. Western) sales of Russian oil producers. small business. it crip- 53. Int’l L.56 These areas—science and innovation. and the assumption that Western banks could provide “financial intermediation on the basis of market principles rather than connections and corrupt practices. 2008. Jan. 55. based on that credit rating. treasury bills. in this case negatively.
540. Russian Manufacturing and the Threat of “Dutch Disease” 7 (OECD Econ. this does not mean that FDI will proportionately increase. when commodity prices collapsed in fall 2008.html. ASSOCIATED PRESS. See id. But see Social Spending a Priority Despite Crisis. 2008.”62 Thus. “other” foreign investment and FPI immediately fled Russia after the crisis began.. 60. 22. “[g]reater reliance on primary resource sectors is associated with greater volatility of growth.wsj. 2008. and volatility of growth tends to be associated with lower rates of long-run growth.). ROSBUSINESSCONSULTING (Russ.msn. and prices fell dramatically. education. While it is theoretically “easy” to limit other forms of foreign investment (i. . 12. See id. One possible policy for this goal would be to promote FDI over other forms of foreign investment and into industries other than natural resource extraction. WORLD BANK. Dec.64 The 2008 crisis’ severe impact on Russia underscores the country’s need to address the flaws in its development path. 17 (2008). very strict capital controls).65 As described above. See Gregory L. WALL ST. ANALYTICAL DIG. that undermine[s] the growth of all industries except for those in the resource sector. supra note 58.rbcnews.txt unknown Seq: 9 4-NOV-10 11:16 2009] Strategic Protectionism? 473 pled demand for oil. See Comment: Looking Beyond the Credit Crisis.66 In contrast. Even more difficult is how a state is supposed to steer FDI into desired industries without limiting the freedom demanded by foreign investors.63 While this loss of income will force the delay of desperately-needed investments in health. 61.59 And even though Russia possesses sufficient foreign currency and other reserves to prevent a fiscal crisis. the loss of stability could weaken the social bases for economic growth. Rudiger Ahrend. the Russian Economy May Be Losing Steam.msnbc. 48 RUSS. Oct. Dec. 18. available at http://ideas. Russia lost both a source of income for social investments as well as a source of stability for foreign investors and the general population.com/komment/komment. See As Demand Outlook Dims. and goal-seeking behaviors that characterize an innovative and dynamic society.org/p/oec/ecoaaa/540-en. creativity. J. After 10 Years of Growth. 63.repec. FDI inflows slowed modestly and 59. Vladimir Popov. Greater exchange rate volatility also presents risks that discourage long-term foreign investment.”60 Russia is also showing signs of “Dutch Disease”—“a dramatic appreciation of the real exchange rate of the ruble . and compounded the problem by crashing the stock market and pushing down the ruble.html.”61 In addition to the exchange rate issue. lower oil prices “will affect investments quite dramatically. . Working Paper No.com/id/12400801. at 10-11. 66.com/article/SB122428427371546367. 62. and transportation. Oil’s Drag on Russian Growth Poses Test for Putin. http://www. at 21.\\server05\productn\J\JLE\41-2\JLE208... 65. White.e. 15. The panic and uncertainty that accompany such a sudden economic reversal might negatively influence the calculated risk-taking. 2006). supra note 31. 2008. available at http://online. 64. Donato de Rosa & William Tompson.shtml?2008/12/19/322501 53. Dep’t. R R . Oil Slides. available at http://www.
Maria Antonova. For example.\\server05\productn\J\JLE\41-2\JLE208. and a situation in which foreign investors have truly long-term interests in the recipient country.67 Indeed. A. just as if some new investor arrived to the country and made an initial investment. 73. IN TRANSITION. 68. to a lesser extent. scholars have expressed skepticism over FDI’s alleged benefits. after national savings. Navoi. ECON. Rev. the trend is that FDI is significantly more stable than FPI and other foreign investments. Wash.html.”70 Navoi further argues that for several East European countries. TX). FOR THE ECON. Though FDI generally remains a popular idea in the West and. Russia should perhaps attempt to promote FDI and even limit foreign lending and FPI.txt unknown Seq: 10 4-NOV-10 11:16 474 The Geo. 69.69 In this way. 2007. Navoi asserts that the majority of real FDI is in the form of acquisitions.72 In the context of a profitable firm. Id. See.”71 Navoi also takes issue with the international practice of “reinvesting” profits from a foreign direct investment into a business and recording them as “new” FDI. LETTER (Fed. TRANSITION 81. ECON. MOSCOW TIMES. Does Foreign Direct Investment Help Emerging Economies?.com/articles/detail. e. the experience with FDI caused them “to lose a considerable share of their economic sovereignty and to become ‘assembly shops’ for major European concerns. . Those earnings are automatically reinvested and treated as an influx of FDI. 83 (2008). with regards to foreign investment.iet. RUSSIAN ECONOMY IN 2007: TRENDS AND OUTLOOKS 52 (2008). Russia.ru/en/russian-economy-in-2007-trendsand-outlooks-issue-29-2. the use of FDI predominantly for innovation purposes. Foreign Direct Investment: An Indirect Path to the Economy. 41 existing FDI projects continued to work. Anil Kumar. the 2008 crisis dramatically illustrated why. even though the money never leaves the firm’s balance sheet. See INST. [Vol. some observers point to the fact that the benefits of FDI are relative to the presence of certain factors. Medvedev Warms Up at GM Plant Opening.org/research/eclett/2007/el0701. available at http://www. which are “often used by large multinational corpora67. available at http://www. Nov. dallasfed. at 3.themoscowtimes. Reserve Bank of Dallas. 51 PROBS.pdf.php?ID=3722 14&pr. 10. Jan. available at http://www. Id.68 FDI could help Russia diversify its economy and reduce its reliance on commodity prices if that investment increases the share of non-extraction industries and enhances the role of technology and the high-tech sector. Int’l L. 70. 72. 2008.73 Also. Dallas. at 87.. Id. such as “the utilization of international capital as a secondary source of enterprise capital formation. 71.g. this practice yields earnings to the foreign investor.
79. at 88. however.twq. 881. Winter 2006-07. debates over strategic policies pit economic nationalists from the security services against economic internationalists from the economics and finance ministries.” Id. albeit not at any cost. at 882. 80. Camilla Jensen found that the findings are ambiguous regarding the link between FDI and economic growth.75 A similar review of FDI in post-communist countries also found that the benefits are not apparent. Jensen also observed that “FDI rarely produces a negative outcome for economic growth on its own. Id. Id. 75. 77. 58 EUR. This is similar to how Russia viewed the use of foreign lenders before the current crisis. at 95 (describing “effectiveness” as “the share of foreign investment to be earmarked for modernization of the controlled enterprise’s fixed assets. and that some countries develop a “dual economy structure characterized by a strong dependence on foreign capital but weak indigenous efforts.78 As if to mirror the academic debate over foreign investment. changes in labor productivity . Western commentators. . . 39 Steps Down for the Cabinet’s Liberal Faction?. at 897. prioritize certain sectors. members of Russia’s ruling elite similarly disagree about what policy the country should pursue. but to get rid of a competitor. and promotes FDI as its official policy. July 20. Id. Id.pdf. See President Welcomes Foreign Investment. 78. This is particularly a feature of governments that “expected FDI to do most of the job of getting their country on the road to prosperity. See Ian Bremmer & Samuel Charap.79 Nonetheless. Q.-ASIA STUD. Those from the security services are known as siloviki (literally. Tim Gosling. 89.txt unknown Seq: 11 4-NOV-10 11:16 2009] Strategic Protectionism? 475 tions not in order to expand business in the country in question. available at http://www.\\server05\productn\J\JLE\41-2\JLE208. e.”74 As a response to these issues.”76 In her broad survey of the literature on FDI.g. WASH. See. at 895.org/page. See id. especially that which results in foreign control of large Russian companies. 881 (2006). Navoi suggests that “there is an urgent need to devise a specialpurpose program to monitor FDI” that seeks to attract FDI.php?pageid= business&articleid=A1184930779.com/07winter/docs/ 07winter_bremmer. the power people) and are arguably opposed to most forms of foreign investment. supra note 7. the state of competition in the sector. R . and analyze the effectiveness of FDI. Foreign Direct Investment and Economic Transition: Panacea or Pain Killer?. tend to exaggerate the power of the siloviki and diminish the influence of economic liberals in the Russian government.77 Still. available at http://www. the current Russian government recognizes the need for foreign investment. Usually.russiaprofile. 76.” and that the policy efforts associated with promoting FDI are inherently beneficial for the host country..80 74. NEW EUROPE. Camilla Jensen. The Siloviki in Putin’s Russia: Who They Are and What They Want. 2007. BUS. and the share of profit to be sent abroad”). at 83..
Sec.86 Also.85 Indeed.nytimes.000 81. Infrastructure. See id. Id. http://en. education. Nikolai Patrushev. 10.rian.8675965. 2007. See Medvedev Seen as Friendly to Business in Russia. Russia’s power grid was administered by the state monopoly. Int’l L. which controlled “580.). which is a false choice. state and public security. strategic stability and equitable strategic partnership”).5 times .. Feb. ecology and the rational management of natural resources.html.\\server05\productn\J\JLE\41-2\JLE208. 86. at 47.shtml. Medvedev’s goal is not so much to try and balance between embracing foreign investment and promoting national security. technology. public health and culture. rather than compete with. as its recent growth has pushed Soviet-era infrastructure to the limit. See generally ANDERS ASLUND & ANDREW KUCHINS.txt unknown Seq: 12 4-NOV-10 11:16 476 The Geo. as discussed above.87 One example of an area where Russia desperately needs investment—both foreign and domestic—is in its power grid.kremlin. Russ. 15. 87.81 President Medvedev has stressed that Russia’s development strategy should be guided by the “four I’s”—”Institutions. Fed. INT’L HERALD TRIB. Investment. 24. . Rev.html. (observing that such priorities “include national defence. 82. “productivity would have to increase by 2. his objective is to devise and follow a strategy under which several national priorities will complement. and spending on research and development increase” 300 percent by 2020. economic growth. Innovation. See id.84 Regardless of FDI’s role. 85. as well as the constant improvement of people’s quality of life. Dec.”83 In other words. THE RUSSIA BALANCE SHEET 42-43 (2009). See Medvedev Says ‘Four I’s Key’ to Russia’s Economic Program. 83.ru/eng/text/speeches/2009/03/24/2056_type82913_214288. Russia lacks many of the technical and social elements necessary to support the innovative economy envisioned by President Medvedev’s security strategy.com/2007/12/10/business/worldbusiness/10ihttestrtrruble11. Serv. one another. 2008. . Sec’y. available at http://www. science. RIA NOVOSTI (Russ. to achieve the improvements in living standards envisioned by the 2020 strategy. Unified Energy System (UES). 84. .”82 Of even greater significance is that Russia’s new 2020 National Security Strategy—which Putin started and Medvedev finished—is explicitly based on the assumption that “stable national development and the provision of national security are interlinked. Russia is rapidly approaching a ceiling of economic expansion. 41 Russian President Dmitry Medvedev falls into the economic globalist school to an even greater extent than Prime Minister Putin. at 43. Wash. the energy intensity of production decline by 55 to 60 percent. Rather. . Speech at Beginning of Meeting with Security Council on National Security Strategy of the Russian Federation Through to 2020 and Measures Necessary to Implement It (Mar. 2009) (transcript available at http://www. [Vol.ru/russia/20080215/99277106. Until recently.
96.org/SGG4WO6750 (last visited Mar. [and now there] is an urgent need to restructure the rail system . Sept. Feb.htm.oilandgaseurasia. 27. See Pat Davis Szymczak. WK. 94. 440 power stations. BUS.93 This UES example likely is similar to the situation with the rest of Russia’s infrastructure. and 2 million miles of power lines. Bush. and “UES is selling all of its assets to raise funds for a $125 billion overhaul of Russia’s power systems and to open the sector to free competition for the first time. Russian Grid Companies to List Shares this Year. 91.worldbank. electricity.ru/business/20071004/55280527. including pipelines. 22.html.businessweek.”88 Despite these impressive resources. it needs big investment to grow its production and to transport that production reliably to market”). http://go. Mar. 2006.mnweekly. http://www. 2008.89 For this reason. the country has a pressing “need to attract massive amounts of foreign investment—around $100 billion between [2007] and 2010— to renovate Russia’s crumbling electricity infrastructure.rian. The company itself—a household name in Russia for the last sixteen years—actually ceased to exist as of July 2008. the hope is not only to obtain access to money. See id. 4. See id. 2007. . 95. http://www. 92.”).). EDF. TransNeftServis-S to acquire UES’s OGK-1 utility. This fact alone is undoubtedly a huge draw for investors looking to upgrade its aging airports and bring the existing infrastructure there in line with global aviation standards.97 Some Russian officials have argued that inadequate infrastructure has contributed to the overheating of the economy because the demand from new enterprises placed on. Jason Bush. http://en.”92 The strategy appears to be working—in March 2008.”91 Reform is currently underway.ru/russia/20060905/53517839. exceeds the supply available 88.com/ articles/p/9/article/167 (arguing that “whether Russia looks East or West. “but also [to] promote economic efficiency and transparency. reuters. Electricite de France ´ and a Russian partner announced plans to acquire one of UES’s major utilities. for example.96 and airports.txt unknown Seq: 13 4-NOV-10 11:16 2009] Strategic Protectionism? 477 workers. MOSCOW NEWS. FORBES. even in the city of Moscow. 22.”). . R . See id. . which faced a huge energy deficit in the cold winter of 2006.94 railways. See Bojan Soc. See Moscow Mayor Says Winter Energy Deficit Could Reach 20%.com/globalbiz/content/mar2007/gb20070322_230020. June 2006. available at http:// www. Alfred Kueppers. 89.forbes. . RIA NOVOSTI (Russ.”90 Furthermore. Id. 26. the company was unable to meet increasing demand. REUTERS. & Vlad Konstanza. 97. OIL & GAS EURASIA. . Russia Gas Tap Turns to China. available at http://www. supra note 88. See World Bank. The utility is reportedly worth $7 billion. Electric Shock in Russia. http://www. Mar. 2007. Transport – Russia.com/afxnewslimited/feeds/afx/2008/03/27/afx4819887.com/article/rbssIndustryMaterialsUtilitiesNews/idUSL2244716520080222. Apr. 90. 93.html (“A recent survey by AT Kearney found that Russia’s air traffic will grow at an annual rate of more than 6 percent.95 seaports. MAI: Ulan Ude Airport Holds Huge Potential. 2010) (“The Russian economy is more rail-dependant than any other large country in the world . 2008. 5. html.. Sergei Korobov.\\server05\productn\J\JLE\41-2\JLE208.
investopedia. foreign organizations that are not judicial persons (for example. 2010). National treatment means that a foreign investor is treated the same as a domestic investor.rbcnews. 2008. 26. international organizations. 160-FZ.101 The law is the “core legislation governing the national regime of foreign investments in Russia. 106. See National Treatment. PETER B. capital of a commercial organization.99 In Russia’s case. . WILLIAM BURNHAM. com.”100 B. limited liability partnerships).pdf. Wash.). .com/index. 1999 [hereinafter 1999 Foreign Investment Law]. available at http://globeasia. 104. av available at http://www.com/free/20080331125526. See Lack of Infrastructure Causes Economy to Overheat.fi/NR/rdonlyres/29C2BCE9-5A3B-4B27-9DAD-78A52DA3002 3/0/focus0707e. 2. in the . for repairing deficiencies in infrastructure. Rev. Investment Climate in Russia.\\server05\productn\J\JLE\41-2\JLE208. 102. 41 from the power grid.98 Indeed. HELI SIMOLA. 31. Overheating (which is most immediately evidenced by inflation) generally occurs when a quickly-expanding economy’s productive capacity is unable to keep pace with demand. 1999 Foreign Investment Law. No. corporations). except when the law provides otherwise. DANILENKO. because an “economy depends on infrastructure to facilitate the flow of goods. GLOBE ASIA MAG.”104 FDI is defined as “the acquisition by a foreign investor of at least 10 per cent stake . Mar. 2007. .103 Article 2 also defines foreign investment as the “contribution of foreign capital in an object of entrepreneurial activity on the territory of the Russian Federation.com/terms/n/nationaltreatment. RECORDER. MAGGS & GENNADY M. 103. 100.106 legal 98. RUSSIAN ECONOMIC GROWTH CALLS FOR INVESTMENT 1 (2007). . “investment is needed . See Vitaly Glinkin.asp (last visited Mar. 26. 2.”102 Article 2 of the law includes five entities under the definition of “foreign investor”—foreign citizens. [Vol. 105. shtml. .”105 Articles 4 through 15 of the law define the various guarantees for foreign investors. supra note 103.” poor infrastructure can increase costs and cripple the economy. people. R . which include national treatment (except when federal law provides otherwise). 2008. stateless persons residing outside of Russia. BUS. Investopedia. 99. information and energy. art.php?module=columnist&action=detail&id_ selected=78. 101.bof. http://www. Int’l L. In Praise of Private Infrastructure. Deputy PM Says. Existing Legal and Regulatory Framework The major law governing the rights and protections of foreign investors in Russia is entitled “On Foreign Investment in the Russian Federation” of July 1999. . Id. See id. Hanke. July 9. foreign judicial persons (for example. June 11.txt unknown Seq: 14 4-NOV-10 11:16 478 The Geo.. http://www. and foreign states. Mar. Steven H. LAW AND LEGAL SYSTEM OF THE RUSSIAN FEDERATION 452-53 (2004). ROSBUSINESSCONSULTING (Russ. Law on Foreign Investment in the Russian Federation art.
html. The New Russian Foreign Investment Law: Old Wine in New Bottles?. banking taxation. “[i]nformal barriers to foreign investment in Russia are still considered to be a serious impediment to new 107. See 1999 Foreign Investment Law. monopolies. “there are many restrictions on foreign investment in the armaments industry .114 C. the guarantee of compensation in the event of nationalization. morality. RUSS. 113. . the ability to transfer rights and duties to another party. while “Russia has made an effort to establish the basic elements of a relatively liberal investment regime. 4-15.russianamericanchamber. CHAMBER COM. 2. Vecchio & Peter Chessick. Mark S. R R R . health. supra note 103. 108. Id. Regulatory Environment in Practice Russia’s liberal foreign investment law and pronouncements in support of FDI often contrast with the policy environment in practice.”109 The law’s provisions granting national treatment and the right to transfer out capital make for a liberal legal framework for foreign investment in Russia. arts. environmental protection. at 451. “the 1999 Law is little more than a broad statement of principles.” an uncertain legal and regulatory environment still hinders the growth of FDI. Generally. transportation and ownership of land. Section 2) provide for restrictions based on the “protection of fundamental constitutional principles. the Civil Code.”111 A multitude of other laws often supplement the Foreign Investment Law in regulating the activity of investors. See 1999 Foreign Investment Law. Id.\\server05\productn\J\JLE\41-2\JLE208. supra note 104. land and natural resources. right to effectuate investment.112 Lastly. 110. securities. exploration and exploitation of certain natural resources. 4-15. 112. supra note 103. See id. or to provide for the defense of the country and security of the state. however. at 464. foreign exchange. privatization.”108 When the law was passed. 111. 109. . 8. or the rights and legal interests of others. and laws on “stock companies. arts.107 Significantly. Id. available at http://www. MAGGS & DANILENKO. NEWSLETTER. labor.”113 Thus. some observers raised concerns with these caveats and indicated that “it remains to be seen how the Russian government might use such broad ‘Public Policy Grounds’ to erode the protections that Foreign Investors presently enjoy. at 454.org/newsletter/new_russian_investment_law. several provisions (for example.txt unknown Seq: 15 4-NOV-10 11:16 2009] Strategic Protectionism? 479 protections. and the right to transfer out earnings and profits. (referring to particularly the Law on Investment Activity in the Russian Soviet Federative Socialist Republic (RSFSR). 114. Article 4. AM. BURNHAM. 1999. Sept.110 In many respects. foreign trade and export control”).
123. 118. FOREIGN Investment in Russia: Reform and Re-Regulation (2006). GUARDIAN (U. Apr. to cede control of Russia’s third-largest oil producer to state-backed Rosneft or Gazprom before long. http://www. “[c]orruption. bureaucracy . Rev.117 With regard to the court system. an investor must complete fifty-four procedures over a period of 704 days.com/article/ousivMolt/idUSL0 251333720080402.g.com/stories/2008/04/11/002. TNK-BP Woes Might Be Inside Job.\\server05\productn\J\JLE\41-2\JLE208. at 27. agents from the Federal Security Service (FSB) raided British Petroleum’s (BP’s) Moscow offices.119 For example.html. 121. .. Apr. See WORLD BANK.”122 Although most investors did not think that the Russian government would expropriate TNK-BP. See Conor Sweeney & Dmitry Zhdannikov. there have also been growing concerns regarding undue interference from the security services in Russian business. e.com/fiacsurvey2006/2006_FullReport_Eng. available at http:// www.121 Analysts interpreted the raid “and the subsequent arrest of an employee of TNK-BP on suspicion of industrial espionage. foreign firms “are mainly dissatisfied with a perceived lack of uniformity and impartiality and especially with the insufficient rapidity and effectiveness” of the courts. MOSCOW TIMES. 2008. RUSSIA: LOST IN TRANSITION 102 (2007) (“Corruption and criminal activity by representatives of the Interior Ministry. 119. RUSSIA INVESTMENT DESTINATION 2006. 41 investments.”).reuters. 4.. in order to obtain a license to build a warehouse. and the prosecutor’s office beggar belief. See id. ROBERT SATROM & DMITRY ZHDANOV. 116. HOGAN & HARTSON LLP MOSCOW. LILIA SHEVTSOVA. the state-owned natural gas monopoly.themoscowtimes. See Miriam Elder. the Tax Department. reporting suggested that the “flurry of negative activity” resulted from a feud between the Russian billionaires who own 50 percent of the joint venture.”115 Indeed. PBN CO. .K. and selective interpretation of laws continue to cast a dark shadow on Russia’s investment climate and its global competitiveness. DOING BUSINESS 2008: RUSSIA 12 (2007). Tom Bergin. the [Federal Security Service] (FSB). at 7 (2006). Later. 117. See id. . OECD. Apr. the FSB’s role clearly was not benign. REUTERS. Id. See id. . in March 2008. 11. R . . In either case. many concluded that the pressure on the company “may force [TNK-BP] . supra note 40. 2008. Wash.txt unknown Seq: 16 4-NOV-10 11:16 480 The Geo. BP May Have to Give Up Control of Russia Venture. See id. 120. com/files/attachments/0000/0630/foreign_investment. RUSSIAN INVESTMENT POLICY.. See. Int’l L. as a sign the Kremlin is stepping up pressure on TNK-BP and its owners.120 The agents were reportedly searching for documents pertaining to Gazprom. available at http:// www.pbnco. red tape .118 Recently.pdf.”123 Most recently. . 2.). [Vol.”116 A recent World Bank study found that.doc.. Agents ‘Hunted Gazprom Documents’ in BP Russian Raids. available at http://barentsnova. since TNK-BP CEO Robert Dudley was forced to leave Russia after authorities denied his visa 115. It is the single largest British investment in Russia. 2008. TNK-BP is the joint venture between British Petroleum (BP) and several Russian billionaires. 122. A tax evasion investigation was also opened. administrative barriers.
2006. TNK-BP CEO Alleges Abuse of Power. N.). 2006. Nov. 27.wsj. 129. evidently. he accused various government agencies of abusing their power in dealing with the company.125 In March 2006. TIMES. 1. “when the German corporation Siemens attempted to buy a major stake in Russia’s Silovye Mashiny [Power Machines]. 2006. Alexander Yurov. Oct. Id.com/2006/06/14/world/europe/ 14russia. 131. See Steven Lee Myers. the authorities reported that the 50. available at http://www. 24.txt unknown Seq: 17 4-NOV-10 11:16 2009] Strategic Protectionism? 481 application.html.rian.. http://en. Andrew E.iht. See id.Y. WALL ST.nytimes.0825russia. Aug.124 Another example of the erratic investment environment in Russia that received much media attention was the case of Motorola’s missing phones. 25.000 handsets had been “destroyed.html. N. Kremlin to Limit Foreigners’ Access to Strategic Industries.\\server05\productn\J\JLE\41-2\JLE208.”127 The ministry later returned 117. 127.nytimes. See id. Kramer.html?pagewanted=all. then a health hazard and finally evidence in a criminal corruption case that has.com/articles/2006/08/25/news/ web.com/2006/10/24/business/worldbusiness/24phone.126 The ministry “provided a series of shifting reasons. INT’L HERALD TRIB. . since been dropped. Mobile Phones Seized by Russia Returned to Motorola. TIMES.Y. saying first that the phones were counterfeit. See Will Bland.” though investigators began to look into whether they actually had been sold on the black market. See Steven Lee Myers. 126. A New Twist in a Russian Cellphone Caper.. available at http://online.519 phones without an explanation for the seizure or what happened to the other 50. html. available http://www. the Interior Ministry of Russia seized 167. 23.130 D. Aug.php.” which revealed a gap in the Russian legislation governing foreign investors. 130. J. available at http://www. RIA NOVOSTI (Russ. then contraband. 125.ru/analysis/20061127/56037837.131 The Siemens fiasco began in 2004-2005 when that company sought to acquire Russian company Interros’s shares of Power Machines.128 Eventually.000 phones.com/article/SB121944911068065267.000 mobile phones from Motorola at the Sheremetyevo Airport in Moscow. June 16. which would have given Siemens a 74 percent share in 124. The Strategic Sectors Law Why a Strategic Sectors Law? Russian authorities first suggested the Strategic Sectors Law in 2005. 2006. 128. Phone Seizure Seen as Example of Russian Corruption.129 Commentators argued that the Motorola ordeal was symptomatic of the general level of corruption and unfairness afflicting businesses operating in Russia. 2008.
Apr. Wash.fas. Basic Element—a corporation owned by Russian billionaire and Kremlin insider Oleg Deripaska—applied to purchase the same stock of Power Machines as Siemens. and to date no single piece of legislation has applied ‘national security’ across the board as an overriding criteria for the approval or disapproval of a particular investment. In his annual address to the Federal Assembly on April 25. Id. though these limitations are not legally formalized. Federal’naya Antimonopol’naya Sluzhba Otklonila Khodaistvo Kompanii Siemens o Priobretenii OAO Silovye Mashiny. “[T]he main thing . 41 the company.gov. Viktor Khristenko. 137. R . Press-sluzhba FAS Rossii.txt unknown Seq: 18 4-NOV-10 11:16 482 The Geo. Int’l L. See id. (referring to the failure of current foreign investment law to speak to national security concerns or limit foreign investment on this basis). days after—the Siemens affair. available at http://www.133 Soon thereafter. . See Renata Yambaeva. . is the absence of the legal base for the deal. 2005. officials publicly came out against the deal and the State Duma adopted a proposal “which said that the sale of [Power Machines] is threatening the defense and economic security of the country. commented on the situation at the time saying.\\server05\productn\J\JLE\41-2\JLE208.”134 The Duma deputies based their resolution on Power Machines’ status as a main producer of turbine engines used in military vehicles.”). Natalia Grib & Alyona Kornysheva.”137 Specifically.shtml. Id. 2005.com/p570014/Siemens_ Is_Not_Ready_For_Defense_/. 14.ru/news/n_1859. however. investors sometimes face all kinds of limitations. 135. Id. http://kommersant. KOMMERSANT (Russ. see also Satrom & Zhdanov.). Apr. 2005. 138. Putin spoke about foreign investors as follows: In practice. Id. including some that are explained by national security reasons. 12.”138 The FAS noted that “in the framework of the existing legislation it is impossible to solve problems related to . This uncertainty creates problems for the state and investors.”139 In the aftermath of—literally. Rev. the FAS found that the proposed deal would violate the law “On Competition and the Limitation of Monopolistic Activity on Commodity Markets. It is time we 132. . President Putin addressed the need for a law regulating Russia’s strategic sectors for the first time ever. supra note 115. Siemens is Not Ready for Defense. 136.”136 The Federal Anti-Monopoly Service (FAS) ultimately denied Siemens’ application on the grounds that the deal’s approval “would lead to limitation of competition in the markets of electric power equipment.135 The Minister of Industrial Power. the participation of foreign companies in the manufacture of military goods. 139. Id. 133. [Vol. at 2 (“There is no single statute or code unifying the treatment of investments across all Russian economic sectors. . 134.132 In December 2004.
available at http://www. R . 455348-4. The first group comprises businesses owned or controlled by foreign 140. May 5. REUTERS.145 Finally. The Strategic Sectors Law’s Status Although Putin first proposed the idea of a Strategic Sectors Law in 2005. duma. See generally Konstitutsiia Rossiiskoi Federatsii [Konst. .144 The second reading of the legislation.txt unknown Seq: 19 4-NOV-10 11:16 2009] Strategic Protectionism? 483 clearly determined the economic sectors where the interests of bolstering Russia’s independence and security call for predominant control by national. reuters. Russia Passes Foreign Investment Law on 2nd Reading. 2008. . Mar. 144.reuters. but in November.146 3. the legislation passed its third reading on April 2.140 Thus. if not become law. http://www. 2008. MOSCOW TIMES. Senate. the Strategic Sectors Law arose as a response to the lack of a legal framework for investment in strategically significant Russian companies. We should draft and legally formalize a system of criteria to determine the limitations on foreign participation in such sectors of the economy. 142. Perechen’ Dokumentov dlya Zakonproekta No. various committees reviewed and finalized the bill for its first reading by the Duma on September 13. REUTERS. .com/article/reutersEdge/idUSL0514680420080505. GUARDIAN (U. 2007. 2. 9. passed the State Duma on March 21. 2008. See Denis Dyomkin. Simultaneously a corresponding list of industries or facilities will be determined that shall not be extended or receive extended interpretation. Id.themoscowtimes.com/stories/2007/11/09/041.uk/feedarticle?id=7402505. Who is Regulated? The Strategic Sectors Law regulates two groups of investors.S. 21.\\server05\productn\J\JLE\41-2\JLE208. 2. available at http://www. 145. RF] [Constitution] arts. 95. which included many changes. it passed the Federation Council a few weeks later. Putin. capital .141 During the summer of 2007. The Federation Council is the upper house of the Russian Duma—roughly equivalent to the U. 143.gov.142 Lawmakers and observers had expected the bill to pass its second reading. 105.143 The delay was likely due to the Duma elections in December 2007 and the Presidential election in March 2008. 2007.co. 141.K.). 2010). and President Putin signed it into law on May 5. available at http://www. In other words. Campaigning Starts in Russian Presidential Election.html. 2008. Feb. http://www.com/article/worldNews/idUSL3011403920080202. 13. Nov. Strategic Sectors Bill Off Until 2008.jsp?c=455348-4 (last visited Sept. 2008. Putin advocated a law that would limit the criteria considered and industries affected so that foreign investment would not be subordinated to the whims of the political process. including state.guardian. supra note 10. 146. See Russia’s Putin Signs Foreign Investment Law.ru/faces/lawsearch/gointer. work on the bill did not start until July 2007. See Anatoly Medetsky. See Gleb Bryanski. 2008. before the end of 2007. its progress was delayed until the spring of 2008.
3. 152. ¶ 3. 3. the right to name 10 percent of the company’s board of directors. See id. Int’l L.. ¶ 1. Strategic Sectors Law. See.152 Specifically. The industries include: the hydrometeorological processes and phenomena industry. or the ability to block decisions of the directors of either type of company. art.g.\\server05\productn\J\JLE\41-2\JLE208.151 The law defines control as the ability of a foreign investor to make decisions for the business through various means. What is Regulated? Perhaps the most controversial feature of the Strategic Sectors Law is the list of industries falling under the law’s regulations. R R R R . See id. art. supra note 1.155 Many categories are duplicative and redundant. 3. art. See id. The law applies to foreign investors who exercise control either directly or through third parties. art. foreign citizens. subsec. which results in a list that appears larger than it is in reality. See id. 3. Rev. the geophysical processes and phenomena industry. the 147. See id. art. The regulated industries can actually be divided into fifteen spheres.154 4. art. subsec. Gosling. the right to name 50 percent of the company’s board of directors. The ability to block decisions is defined as the ability to command three-fourths of the votes of directors. 151. 3. See id. or the right of the foreign investor to make decisions for the company or exercise management powers. ¶ 3. 2. 149. 2. art. supra note 103. art.150 The Foreign Investment Law’s definition of foreign investor includes foreign entities that are entitled under the legislation of their home state to invest in Russia.148 The second group includes organizations controlled by foreign investors that wish to acquire control of a strategic business or subsoil company.147 Significantly. 155. ¶ 1. 5.149 The definition of foreign investor is regulated by the existing law on foreign investment. See id. and people without citizenship. 150. See Strategic Sectors Law. 3 (defining “control” by a foreign business). 5. 148. 5. supra note 79. Wash. ¶ 2. art. ¶ 1. or the right to make management decisions. 1999 Foreign Investment Law. these public companies are generally forbidden from acquiring control over any of the types of businesses covered by the legislation. subsec. ¶ 2. e. supra note 1. ¶ 1. [Vol. 2. 41 states or international organizations that wish to acquire 25 percent of the shares of a strategic business. 153.153 In the case of subsoil companies. 154. the indicators that a foreign investor has control include 50 percent ownership of the company’s shares.txt unknown Seq: 20 4-NOV-10 11:16 484 The Geo. 5 percent of strategic subsoil companies having “federal significance” (subsoil companies). control includes ownership of 10 percent of the company’s shares.
5. html. 17.165 Some commentators also criticized the inclusion of telecommunications companies on the list.. Gref was replaced during a cabinet shakeup in September 2007. 6. services at sea and airports. art. See id. rail transportation. publishing companies. art.156 The television and radio stations covered in the law consist of those that reach at least half of the population.163 Then-Minister of Economics German Gref strongly resisted the inclusion of natural monopolies due to the extreme need for investment in those sectors. See Strategic Sectors Law.\\server05\productn\J\JLE\41-2\JLE208. See id. See id. ¶ 41. 147-FZ. 6.rg. 6. natural monopolies. and the electricity and heating grids. art. ¶ 36. the space industry. art. 1995. fisheries.” See id. 164. gaz. Gosling. 159. At a February 2007 cabinet meeting. television and radio stations. President Putin himself has stressed the need for more foreign investment in infrastructure and has pledged to liberalize those sectors. See Strategic Sectors Law. ¶ 42.158 Regulated publishing companies are also limited to those capable of printing 200 million reproductions per month159 and periodicals with a distribution of one million copies. Ros. ¶ 36. art. 165.160 Perhaps the most controversial aspect of the list is the inclusion of natural monopolies. the defense industry. 157. “It is wrong to stoop to restricting investments in infrastructure. available at http:/ /base. Strategic Sectors Law. art. the production of metals and alloys used in military technologies.162 This legislation exempted several categories of natural monopolies—electricity.161 Natural monopolies are defined in an existing law and include pipelines. 2006. See id. supra note 7. 163. ¶ 1. 162. July 26. 6.ru/2006/07/27/zaschita-konkurencii. See Law on Natural Monopolies art. supra note 1. 6 (referring to various industries in enumerated paragraphs). 161. 4. art. available at http://www. 158. See id. the nuclear industry. Gref reportedly said. telecommunications providers.ru/10104442. No. 6. the surveillance and encryption industry. R R R R R . and the study and extraction of subsoil resources. supra note 79. See Federal’nyi Zakon O Zashchite Konkurentsii art.garant.txt unknown Seq: 21 4-NOV-10 11:16 2009] Strategic Protectionism? 485 infectious diseases and pathogens industry. supra note 1.htm. Aug. 6. and postal services. See President Welcomes Foreign Investment. heating. ¶¶ 34-35.157 The telecommunications providers that the law regulates include those that occupy a “dominant position” in their respective industries. A company holds a “dominant position” in an industry if it possesses a 50 percent market share or if the Federal Anti-Monopoly Service has designated it as holding such a position. arguing that this would “hamper investment on [sic] the communications market and will no doubt cause stag156..164 Indeed. supra note 1. the aviation industry. ¶ 37. 160.
according to Article 6 of the law. the proposed deal. Strategic Sectors Bill Clears 2nd Reading. the FAS ended up as the lead agency. 2008. art. See id. information on the members of the investor group or company. 171. The investor’s application consists of several elements.168 The government’s mechanism for evaluating applications involves two state entities—the Representative Body and the Government Commission on Foreign Investment (Commission). 144-FZ. a proposed deal. constituent documents if the applicant is a legal entity (that is. examination of documents. 167.). PETERSBURG TIMES (Russ. the proposed business plan of the strategic commercial organization. available at http://base. and proof of the applicant’s registration in Russia.”167 5. FOREIGN INVESTMENT IN RUSSIAN STRATEGIC INDUSTRIES: DUMA APPROVES BILL 2 (2008). supra note 1. information on the business activities of the applicant. art. may include interrogation. R R .txt unknown Seq: 22 4-NOV-10 11:16 486 The Geo. including the details of the proposed deal. bugging of telephone conversations. Wash. What Are the Procedures? The Strategic Sectors Law defines the procedures by which an investor can apply for. Mar.garant. Int’l L.htm.php?story_ id=25434&action_id=2. The Russian phrase used—“operativno-rozysknye meropriyatiya”—does not translate well. information on the purchasing and target companies.com/eng/files/PolicyMatters_April 2008. Rev. ru/10104229.170 The law also defines the FSB’s right to conduct “operational search measures” in order to determine whether an investor has control over a strategic business. and information on the applicant’s share of the company at the time of the application.moscowtimes. ST.sptimes.”).\\server05\productn\J\JLE\41-2\JLE208. 41 nation in the industry. [Vol. Telecoms to Be Included as a Strategic Sector.171 The Representative Body’s main functions include: registering the application. 25. While not stated explicitly in the legislation. 1995. publishers. establishing whether the appli166.pdf (“The FSB and [the Federal Anti-Monopoly Service] FAS waged a battle for the role of lead government agency with jurisdiction over foreign investor applications seeking Russian government approval. 170. the FAS emerged from the bureaucratic turf battle as the chief regulatory body on strategic sector issues. Alexander Maslov).pbnco. information on the person or entity controlling the applicant and the nature of that control. Id. and fisheries to the list similarly “raised eyebrows and worried foreign investors.ru/article/1009/42/360857. ¶ 2. See PBN CO. July 12. Mar. 169. available at http://www. See Strategic Sectors Law. 2008.”166 Lastly. The required information includes: a statement of the proposed deal. available at http://www. 8. supra note 1. available at http://www.. Taj Adelaja & Natalia Krainova. and so forth. 7. 168.ru/index. a document showing that the investor is registered with the government. Anatoly Medetsky & Tai Adelaja. ¶ 6.169 Although the law simply says the Representative Body will be an executive organ. Strategic Sectors Law. the inclusion of newspapers. 13. MOSCOW TIMES. It is essentially spying in the context of law enforcement and. a corporate charter).htm (quoting the Deputy IT and Communications Minister. and the government can examine. It is defined and regulated by the Law on Operational Search Measures.
179 172. Id. The Russian court system consists of three branches: the courts of general jurisdiction. The definition of “threat to national security” is based upon the “totality of the circumstances” that create danger to “the individual. ¶ 2. and (or) the state.176 The Strategic Sectors Law establishes consequences for non-compliance and the right of judicial review. See id. See id.174 The Commission can decline a deal if the applicant refuses to accept the obligations set forth in the legislation. 176.173 The Commission makes the final decision regarding a proposed deal on the basis of the Representative Body’s recommendation. art. at 50. 15. ¶¶ 1-2. and.172 Furthermore. ¶ 1. ¶ 1. 12. which hear commercial disputes. though in exceptional circumstances. art. R R . which decides matters that interpret the Russian Constitution. determining whether allowing a deal would be a threat to Russia’s national security. art. art. Id. 11. then it is obliged to return the application to the applicant within three days and inform the Commission. which hear ordinary civil and criminal cases. within fourteen days. See id. supra note 1. art. See id.txt unknown Seq: 23 4-NOV-10 11:16 2009] Strategic Protectionism? 487 cant will gain control of a strategic company as a result of the proposed deal. See Strategic Sectors Law. Kathryn Hendley. The Supreme Arbitrazh Court is essentially the court of final appeal for all commercial disputes in the country. 11. See id. ¶ 7. ¶ 7. supra note 104. Deals completed in violation of the law have no legal effect and investors who violate the law or who materially or repeatedly fail to comply with their obligations under the law lose their voting rights in shareholder meetings.\\server05\productn\J\JLE\41-2\JLE208. the investor must appeal to the Supreme Arbitrazh Court of the Russian Federation. 366 (2006). ¶ 2. 3. MAGGS & DANILENKO. 14 CARDOZO J. 10. art. Interestingly. 174. 9. verifying the information in the application. society. The characteristics upon which the threat assessment is based will be discussed in the next section. art. and the Constitutional Court.177 Finally. 11. sending the materials with a recommendation to the Commission. See BURNHAM.175 The entire application process takes three months. Assessing the Rule of Law in Russia. art. the arbitrazh courts. 179. ¶ 4. an investor can appeal in the courts either if the Representative Body fails to examine the application178 or if the Commission issues a denial. See id.” which is in contrast to the general pessimism about the Russian court system noted above. In this case. 175. 347. ¶ 1. art. 178. it may be extended by three months through the Russian government’s decision.” Id. if the Representative Body determines that the applicant will not gain control of the company. INT’L & COMP. 9. Id. 173. one researcher’s findings “demonstrate[d] that the [arbitrazh] courts are both useable and are actually being used by firms. 177. L.
Specifically. The criteria include: work within the industries listed in Article 6. 182. supra note 1. Int’l L. ¶ 4. 10. art. art. 185. See id. [Vol. right to exclusive intellectual property rights in areas of critical technology.181 If the organization has any of the listed features. 12. 15. R . registration as a natural monopoly. and Scientific Technology held a hearing on the Strategic Sectors Law after it passed its first reading. the right to work on strategic subsoil deposits. to not decrease the number of middle-payroll workers during a period established in the approval of the deal. the Committee on Industry.\\server05\productn\J\JLE\41-2\JLE208. Rekomendatsii Parlamentskikh Slushanij v Gosudartvennoi Dume na Temu “O Zakonodatel’nom Regulirovanii Uhastiya Inostrannykh Investorov v Strategicheskikh Otraslyakh Promyshlennosti Rossii. any obligations that are placed on the investor should be included in the Commission’s decision. 184. ¶ 1. export-controlled products. to continue delivering goods and services for defense contracts and to work in support of national military mobilization. See Strategic Sectors Law. Oct. See id. 41 6. 12. to immediately accept and plan concrete measures aimed at preventing the rise of national security threats of a military or emergency nature. 183. the existence of an agreement with the government to exploit water resources. Rev. Id. work with controlled technologies. mostly relating to work with military secrets. ¶ 1. to support compliance with tariffs. and a license to provide services in the television or radio spheres. 2007 [hereinafter Rekomendatsii Parlamentskikh Slushanij]. then the deal may be allowed only in the absence of threats to national security and with the applicant’s agreement to adhere to certain obligations. art. the FSB) investigates these various characteristics and provides its conclusions to the Representative Body. Wash. work in the export of military products.184 7. work on government defense contracts in the past five years.180 A law enforcement agency (for example. registration as having a “dominant position” in its market.txt unknown Seq: 24 4-NOV-10 11:16 488 The Geo. and to continue work on strategic subsoil deposits. Id.185 The Committee’s report 180. The Duma Committee’s Recommendations In October 2007. How are Applications Judged? The Strategic Sectors Law also defines the criteria for determining whether a deal threatens Russia’s national security. 181. and military contracts. a license to work with state secrets. The obligations include: to form procedures to ensure protection and reporting of secrets. Construction. Id. there are twelve possible characteristics of a commercial organization that are relevant to this question.182 Obligations that the Commission may impose on the foreign investor generally include ensuring the protection of secrets and implementing plans to ward off threats to Russia’s national security. Stroitel’stvu I Naukoenmkim Tekhnologiyam.” Komitet po Promyshlennosti.183 Finally. ¶ 3. 10. Id. to follow the business plan included in the application. art.
6.190 The sectors that were added to the second draft of the law include major television stations. 195. including the “very difficult” process for approving a deal and the vagueness of certain definitions. art.188 The recommendations the committee made to the government included: clarifying the position of the Commission. art. beryllium. Id. Strategic natural resource deposits also include offshore deposits. See id. providing clearer definitions of “threat to national security” and “control” over an enterprise. ¶ 39. as well as deposits with recoverable reserves of more than 70 R . Id.\\server05\productn\J\JLE\41-2\JLE208. nickel. ¶ 41. Id. 197. The list of subsoil resources deemed strategic includes “deposits of uranium. 8. pure quartz. listing the technologies that are critical for ensuring the national security of Russia. the number of sectors deemed strategic. a separate bill was planned to regulate strategic 186. the second draft of the legislation added strategic subsoil resources to its list of covered industries. art. art.194 the fishing industry. supra note 1. some rare-earth metals. art. its members. See Strategic Sectors Law. ¶ 42. and the method of examining the applications. and thus falling within the legislation. and defining the instances where “operational-search” methods are used. ¶ 35. 187.txt unknown Seq: 25 4-NOV-10 11:16 2009] Strategic Protectionism? 489 expressed concern over several aspects of the law. 196. 190. and perhaps most significantly. cobalt. 6. niobium. 191. art. 193. See id. 188. Id. tantalum.195 and the telecommunications industries. 6. lithium. Major Differences Between the First and Second Drafts The second—and final—draft of the Strategic Sectors Law introduced several major changes from the draft passed in the first reading. 6. and platinum-group metals.192 large printing193 and publishing houses.186 The Committee concluded with several recommendations to both the State Duma and the government. 6.196 Second.197 Originally. Id. 6. ¶ 40. art. diamonds. some of the committee’s recommendations were incorporated into the final draft—such as including subsoil companies—while others were not—such as defining instances where operation-search methods may be used. and more clearly defining the Representative Body.191 major radio stations. Id. Id.187 The most important recommendations it made to the Duma included adding natural resource deposits to the list of regulated industries. Id. 6. 194. expanded. 192. ¶ 34.189 Ultimately. 6. Id. First. art. ¶ 37. 189.
14. Based on the date that Putin signed the bill into law. [Vol. the second draft requires investors to inform the Representative Body any time they acquire 5 percent or more of a strategic company’s shares in the future. 205. 201. 41 subsoil resources. ¶ 3. See Anatoly Medetsky.” PBN CO. MOSCOW TIMES.ru/content/governmentactivity/rfgov ernmentdecisions/archive/2008/07/06/6811793.206 Specifically. 204. 20. the government issued a decree establishing the administrative framework for the law’s enforcement. ¶ 3. No. See Medetsky. 200.000 tons of copper. heating.htm [hereinafter Postanovlenie]. something that was left undefined in the law. electricity. art. art. ¶ 36. Initial Implementation of the Strategic Sectors Law Since its passage. ¶ 4. and postal services—were exempted from some of the law’s requirements in the second draft. the decree provided that the Commission’s final decisions on an application will be decided by a simple million tons of oil. and to set out a foreign investor’s obligations under the law. Wash. See id.themoscowtimes. Test Run for Strategic Sectors Law. Postanovlenie Pravitel’tva Rossiiskoi Federatsii O Pravitel’stvennoi Kommissii po Kontroliu za Osushchestvleniem Inostrannykh Investitsii v Rossiiskoi Federatsii. and more than 500. 198. 6. 16. at 3. See id. 206. available at http://www.\\server05\productn\J\JLE\41-2\JLE208.201 Lastly. Int’l L. the Russian government has fully implemented the Strategic Sectors Law and begun examining applications from foreign investors.199 Furthermore. this deadline would be July 24. supra note 143. ¶ 7.207 Also.204 The decree explicitly named the FAS as the Representative Organ. supra note 170.202 9. July 6. the second draft requires foreign investors who own 5 percent or more of a strategic company’s shares to notify the Representative Body within 180 days of the law’s enactment. 202. more than 50 tons of gold.200 Additionally. 510. the decree gave the Commission the power to examine applications. 2008. 203.htm. 199. 207. Id. Aug. the second draft tasked the Supreme Arbitrazh Court with hearing appeals from foreign investors whose applications the Commission denied. art. art. Id. 11. Id. more than 50 billion cubic meters of natural gas..ru/article/600/42/370010. certain natural monopolies—specifically.203 On July 6. but it was ultimately incorporated into the Strategic Sectors Law. Rev.txt unknown Seq: 26 4-NOV-10 11:16 490 The Geo. See id. available at http://www. supra note 1. Strategic Sectors Law. 2008.205 The decree also established the Commission and detailed its functions.government.198 Although the law does not apply to previous deals. to make decisions regarding the approval or denial of applications. 2008. R R R . 2008. even if the acquisition does not result in the investor obtaining control of the company.
fas.html. 210. the FAS has received tens of applications and hundreds of declarations pursuant to the law. 21.209 The Commission’s most important members are Prime Minister Vladimir Putin (Chairman). Ob Informirovanii Inostrannykh Investorov o Neobkhodimosti Podachi Uvedomlenij (Mar.html.1 million. From May to December 2008. Oct. Section 3.gov. available at http://www. 2009. Gleb Stolyarov & Aleksei Nikol’skij.9 percent stake in the Arkhangelskoye Geologodobychnoe Predpriyatie (AGP) from Lukoil.txt unknown Seq: 27 4-NOV-10 11:16 2009] Strategic Protectionism? 491 majority vote. VZGLYAD.vedomosti. AFX NEWS LTD. and Head of the FAS. First Deputy Prime Minister Igor Shuvalov (Deputy Chairman). 212.208 Finally. http:// www. 2008. 209. 213. Rasporiazhenie Pravitel’stva Rossiiskoi Federatsii Sostav Pravitel’stvennoi Komissii po Kontroliu za Osushchestvleniem Innostrannykh Investitsii v Rossiiskoi Federatsii. 216.izvestia. available at http://www. supra note 213. Id. July 6.forbes. ¶ 9.php?id=97. Alenia Preletela.rg. Bashkortostanskoe UFAS Rossii. Two Hundred twenty-four of those were made under the “notification” requirement of Article 16. Ros. 214. 2009. 8. 12. the Commission also approved Archangel Diamond Corporation’s (ADC) acquisition of a 49.vz. the FAS processed 234 filings pursuant to the Strategic Sectors Law.html.. Pravitel’stvennaya Komissiya Rassmotrit Zayavleniya o Pokupke Aktivov v RF. a Canadian subsidiary of the De Beers Group. had 208. See Press Release.216 ADC. Savinykh. 2008. R . Investorov Puskayut Parami.shtml?2009/04/08/190076.211 and the Commission currently has approximately twenty cases on its docket for its second session of 2009. 13.214 It should be noted. while ten were made under the “acquisition” provision of Article 14. Igor Artemyev (Secretary).621 shares for a total of $183.com/feeds/afx/2008/01/14/afx4526790. the Alenia purchased 254. 2009.213 All told.html [hereinafter Rasporiazhenie].ru/2008/07/11/komissiya-dok. Apr. and the deal was completed in April 2009 without any scandal or politics.ru/news. http://www.ru/news/2009/4/21/278842. In October 2008. Anastasiya Savinykh. 211. a government regulation from the same day established the membership of the Commission. that the AleniaSukhoi deal was given ad hoc approval by then-President Putin in January 2008.ru/economic/article3121497/index. VEDOMOSTI.ru/newspaper/article..210 In the first year since its passage. http://www.\\server05\productn\J\JLE\41-2\JLE208. the Commission approved the acquisition of Sukhoi Civil Aircraft by the Italian company Alenia Aeronautica. 14. Jan.215 In October 2008. available at http://bash. The other fourteen members consist of the heads of various government ministries and agencies.212 Though the process is not public. IZVESTIYA. See id. press reports of the more notable applications provide valuable insight into the Strategic Sectors Law’s initial implementation. 2009). Apr. gaz. See id. however. 215. Russia’s Putin Approves Alenia Buy of 25 pct Stake in Sukhoi.
2009). Archangel Diamond Corporation Delivers Notification of a Termination Event (Dec. in May 2009. it issued a formal approval with a condition “that diamonds extracted .pdf.com/pdf/ADC_News-Release-Oct-29-08. which owns exclusive rights to the Grib pipe. http://www. 2008). John Helmer. 221. ADC’s dispute resolution strategy included negotiations with Lukoil.net/?p=1173. [Vol. http://johnhelmer.223 First. Archangel Diamond Corporation Receives Formal Decision of Russian Government Conditional Consent for its Acquisition of a 49. 223. 12. 41 been involved in a bitter decade-long dispute with Lukoil over AGP. Press Release. and Palladium. De Beers reportedly voted to sell its stake in ADC to “a lawyer-managed US fund. ADC accused Lukoil owner Vagit Alekperov of depriving ADC of its rights to AGP through various contract violations. 2008). 2008. 8. .”219 The parties never agreed to the exact contours of this condition. Archangel Diamond Corporation Terminates Transaction for Purchase of Shares in AGD (Jan. available at http://www.217 The companies came to an informal agreement on the dispute in April 2008. See Press Release. Barrick Gold acquired an additional 29 percent stake in Fyodorova 217. however.”222 In February 2009. Russian Raiders Bury Hatchet with De Beers over Archangel Diamond – But Who Will Wield the Shovel?. and in December 2008. John Helmer.gzt. See id.99% Interest in AGD (Oct.pdf. MINEWEB. GZT. Andrei Biryukov & Maksim Tovkailo. in a meeting mediated by then-President Putin. the Commission held its second session.220 The issues were not resolved and ADC formally terminated the SPA in January 2009. http://www. arbitration in Stockholm. Feb. Rev.221 Finally. which is well-known as an investor in high-value litigations. Russia. and suing Lukoil in a Colorado court. . June 1. Platinum.archangeldiamond. Archangel Diamond Corporation. right before the Strategic Sectors Law came into effect. Wash. 16.com/pdf/ADC_News-Release-Dec-8-08. 218. 4.pdf. See id. though the subsequent contractual arrangement fell within the law’s purview. 2009. with two of the approved applications receiving press coverage.\\server05\productn\J\JLE\41-2\JLE208. 219. Int’l L. ADC issued a Notification of Termination Event. available at http://www. are processed in Russia in volumes to be agreed with the Russian Government. Vladimir Putin Gifts Foreigners with Gold.com/ mineweb/view/mineweb/en/page37?oid=51181&sn=detail. available at http://www. 2008.html. with a strong record of winning large settlements for the cases it has taken on. See id. . archangeldiamond.txt unknown Seq: 28 4-NOV-10 11:16 492 The Geo. at the Verkhotina prospect diamond mine in Arkhangelsk. 220.ru/business/2009/02/04/ 223032. Archangel Diamond Corporation. Essentially.RU. Apr. 222.218 After the Commission approved the deal at its October meeting. Dances with Bears: De Beers Sells Archangel Diamond to Litigation Attack Fund.mineweb. 2009.com/pdf/ADC_News-Release-Jan-12-09. Archangel Diamond Corporation. 29. which stated that ADC would exercise its option to terminate the Share Purchase Agreement (SPA) if the issues with the Russian government were not settled by December 31. Press Release.archangel diamond.
See. MOSCOW NEWS. C. though Russian. A Future Role of Foreign Firms in Russia’s Strategic Industries 31 (Electronic Publications of the Pan-European Institute. available at http://www. Commentary on the Strategic Sectors Law The Strategic Sectors Law has elicited more commentary than usual for Russian legislation. and some of their suggestions were incorporated into the legislation.ru/ index. has expressed support for ‘the introduction of a law setting clear guidelines for foreign investors’ and mentioned that their Russian colleagues seriously considered their amendment suggestions. Some. R . 227. http://www. including representatives of the Association of European Businesses in Russia.pdf. 226. e. consider the law to be a welcome development. Mar.ru/business/20080228/55312947.229 Many investors. Id. 2. were forced to comply with the Strategic Sectors Law because they made the purchase through offshore entities. See. See Biryukov & Tovkailo. Universal Cargo Logistics Holding BV (UCLH) purchased the Taganrog Shipyard from Valars Group. however. Ivan Petrov. 6. 2007. RUSSKII KUR’ER. President of the American Chamber of Commerce in Moscow. which was the first state security organization. 228.g.224 Second. MOSCOW TIMES.”227 Others claimed that the strengthened strategic policies contained in the law will lead to a decline in foreign investment. represented at the conference by Deputy Chairman Alex Stoljarskij. bringing its total to 79 percent.”). http://mnweekly. even participated in the drafting of the legislation. GUDOK. For example. 4/2007).. Feb.php/68006. 2008. Elena Leont’eva. Kari Liuhto.228 Still others criticized the inclusion of certain sectors. Feb. AEB Weighs in On Draft Investment Bill in Duma. http://gudok. also supported the legislation. Prodavets Smenilsya.html.fi/FI/yksikot/erillislaitokset/pei/Documents/Julkaisut/Liuhto04_ 07. such as fishing and newspapers. Publishing. 229. supra note 223. July 23.rian. 2008.txt unknown Seq: 29 4-NOV-10 11:16 2009] Strategic Protectionism? 493 Tundra.tse.html (“The AEB Legal Committee.g. 2009.225 The purchasers.themoscowtimes. 9.php?id=2892. The term “Chekist” refers to members of the Emergency Commission (Chrezvychainaya Kommisiya). saying: “The most interesting thing about the law is that there now 224. Anatoly Medetsky & Tai Adelaja. Internet and Fish Called Strategic.226 10.\\server05\productn\J\JLE\41-2\JLE208.com/stories/ 2008/03/06/003.ru/archive. Lublyanka Zaglanet v Portfel’ Investoru.230 Andrew Somers. Id. 225. Working Paper No. e. 230. Anne Shupe. later renamed the Committee for State Security (KGB). available at http://www. Some observers criticized the law for being restrictive and for involving the secret services in business. and now the FSB.. one Russian commentator noted that “the former Chekists will have a full carte blanche to interfere in the economic sphere.ruscourier.
the head of economic cooperation at the Russian Ministry of Foreign Affairs said. TIMES (London).ece. 2007. well-written. Mar. An additional. [Vol. is an organization of “30 member countries committed to democratic government and the market economy” and is a strong proponent of FDI. The limits referred to most likely include formal (that is.forbes. Jason Bush.”233 Thus. CO-OPERATION & DEV. 232.timesonline. Nov. and the clarification of these rules will likely encourage FDI into Russia. . 21.co. many claim that the “new laws will not just set clear rules for foreign investors. 235.”236 231. Russian Parliament Adopts Foreign Investment Law. WK. ORG.com/print/globalbiz/content/mar2008/gb20080319_484201. Mar.235 Indeed. 41 will be a law defining the rules of the game. How to Evaluate the Strategic Sectors Law—the OECD Criteria As stated above.txt unknown Seq: 30 4-NOV-10 11:16 494 The Geo. when the OECD officially invited Russia to join in May 2007. Thus. BUS. 1 RUSS. 29.html. http://en.. though investor groups have generally expressed optimism about the law and its likely effects. May 17.”231 Other analysts argued that the legislation likely will not have a net negative impact on FDI because there are already limits on foreign access to strategic companies. Wash. they will also set rules for Russian bureaucrats.rian. at 7 (2007). 17 (2007). FOR ECON. RIA NOVOSTI. 2006. OECD ANNUAL REPORT 2007.com/markets/feeds/afx/2008/03/21/afx4802244. Rev. 233. NEWS. available at http://business. for example. established in 1961.businessweek. one key consideration is whether the Strategic Sectors Law unnecessarily or excessively limits the growth of foreign investment. 2008.234 The main justification for using OECD criteria is that Russia wants to join the organization and therefore is mindful of its recommendations.\\server05\productn\J\JLE\41-2\JLE208.ru/russia/20061129/56191465. Russia Could Join OECD 3 Years After WTO Accession – Ministry. complementary approach is to judge the law from a legal perspective by determining if the law is. the reaction to the Strategic Sectors Law has been mixed. html. THOMSON FIN.uk/tol/business/economics/ article1800929. available at http://www. available at http://www.232 Indeed. codified) and informal rules. Int’l L. Kremlin to Clarify Rules of Game for FDI. & EURASIA ECON. Russia to Set Investment Rules. Jules Evans. htm. This Note will adopt criteria proposed by the OECD in recent policy statements regarding Russia and strategic policies. 11. 17. 236. OECD Invites Russia in as Expansion Gets Under Way. DIG. a central premise of this Note is that Russia needs FDI to sustain its strong economic growth and to diversify its economy. 234. The OECD. Rory Watson. 19. 2008. “[i]t’s something we’ve been waiting for for 11 years. [OECD].
in particular by setting clearly the time limits for notifications of government decisions. narrowly tailored and defined areas of regulation. RUSSIAN INVESTMENT POLICY. The group noted the recent trend in many countries—including the United States. 240. . 239. and. taking into account the need to protect classified information and sensitive business information”. and the protection of business secrets.240 In sum. A. the authors concluded the following: It is important that .”238 Finally. Id. See OECD. R R . executive branch control of the process. at 1. . OECD. this Note will analyze Russia’s Strategic Sectors Law based on these principles and recommendations—specifically. 238. limits the scope of restrictions to foreign investor participation based on national security grounds. and Russia—to strengthen strategic policies. supra note 3. the law under discussion defines the sectors in question. Specifically.237 The roundtable concluded that countries should be guided by three concerns with regard to investors: (1) a strategic industries policy “should be as transparent as possible. at 5.” that “[n]ational security should not be used as a pretext for protectionism. The most important of the roundtable’s recommendations were that the lists of strategic industries should be defined “as narrowly as possible. France. First. Germany. and clarifies the modalities of government review and permission procedures. transparency of the process and requirements. III. the law is clear on 237.txt unknown Seq: 31 4-NOV-10 11:16 2009] Strategic Protectionism? 495 In 2006. the OECD held a roundtable on investment freedom and strategic policies.\\server05\productn\J\JLE\41-2\JLE208.” and that the “executive branch is better placed to balance the pros and cons of an investment project than the legislative branch. (3) that “regulation should be non-discriminatory. non-discrimination. Id. supra note 40.”239 The OECD further commented upon the upcoming Russian legislation in 2006 in its economic policy review of Russia. at 57. the group offered several recommendations to countries implementing strategic policies. (2) the process “should be predictable in the sense that investors know beforehand the procedures”. ROUNDTABLE. ANALYSIS The Transparency of the Process and Requirements On its face. the Strategic Sectors Law’s procedures appear to be relatively transparent and predictable.
243. 242. circumstances. The TNK-BP example especially suggests how the security services can be a tool of a domestic.247 Investors might justifiably worry that the FSB will either serve the interests of a domestic patron or seek compensation for a favorable security assessment. See Sweeney & Zhdannikov. Rev. The Duma Committee recommended that all the key terms in the legislation be clarified.246 Thus. See id.243 In some circles of the Russian government. much less what “gives rise” to threats to national security. Int’l L. such as an overwhelming need for investment in a particular sector. investors might be wary of voluntarily subjecting themselves to the scrutiny of the FSB. See id. art. R R R R R R R . supra note 185. supra note 79. 249. See Rekomendatsii Parlamentskikh Slushanij. 6. See Gosling. the law provides a foreign investor with a descriptive guide that will allow the investor to evaluate whether an acquisition would require prior approval. art.249 241.241 Also. ROUNDTABLE.248 An improved law would explicitly define the scope. supra note 1. See id.245 Security itself being a subjective concept. 10. supra note 3. foreign ownership itself is a threat to national security. See Rekomendatsii Parlamentskikh Slushanij. See id. See Strategic Sectors Law. 248. and specifically state-owned. positive criteria would allow for a balancing of the interests of both national and economic security. Wash. It is unclear what constitutes a threat to national security.\\server05\productn\J\JLE\41-2\JLE208. as the committee report recommended.244 Since the very groups that lobbied for an even stricter law now will be entrusted with determining whether a national security threat exists. it would not be difficult for the Representative Body or the Commission to disguise protectionism as ensuring the national security of Russia.242 Thus. this result is even more likely. supra note 120. See id. at 5 (observing that “[n]ational security should not be used as a pretext for protectionism”). 10. art. ¶ 3. supra note 185. Although the criteria that govern the acquisition of strategic enterprises are transparent. it defines which characteristics of a business within those industries will raise national security concerns. See Strategic Sectors Law.txt unknown Seq: 32 4-NOV-10 11:16 496 The Geo. See OECD. 245. ¶ 1. Finally. 244. [Vol. 41 which enterprises trigger the application of the law. 247. the law could be improved if it included criteria for why a deal should be approved. These “circles” mostly consist of the siloviki who lobbied to increase the number of industries in the control list and especially insisted on the inclusion of natural monopolies. competitor. Such additional. which is partially in charge of investigating national security threats in the legislation. supra note 1. and methods used to conduct operationalsearch measures. foreign investors most likely will be disconcerted over the procedures for obtaining approval. 246.
256 It is also troubling that natural monopolies were included in the list of regulated industries. 253. armaments and ammunition. any attempt by a foreign investor to acquire. the obligations that may be imposed on investors are vague.). these 250. See id.255 Nevertheless. Russia Bans Sturgeon Fishing in Capsian Sea. defense. 258. most of the industries included in the list are arguably related to Russia’s national security. R R R . See id. See Strategic Sectors Law.250 For example.\\server05\productn\J\JLE\41-2\JLE208. 6.258 Furthermore. and this obligation risks being imposed based on political concerns over layoffs at formerly-Russian businesses. rather than retaining the option of an ever-expanding interpretation of which industries are strategic. 254. or state secrets.K. 255. supra note 1. art. ¶ 1.txt unknown Seq: 33 4-NOV-10 11:16 2009] Strategic Protectionism? 497 Finally. With regards to fishing. art. in that they do not deal with weapons. 257. The vast majority of the categories—the nuclear industry. but also it risks allowing the state to dispossess investors whenever they lack adequate plans to counter threats. ¶ 36. Mar. the inclusion of certain industries—fishing. and telecommunications companies—is puzzling. Russia did recently call for a five-year ban on sturgeon fishing in the Caspian Sea.254 Furthermore. art. will need to go through the entire evaluation process. an oil pipeline company. for example. and when they may be imposed is left open to question. the law provides for the obligation to take measures to prevent threats to Russia’s national security. 252. 256. The problem is that these industries have less to do with national security than some of the other industries on the control list.251 Not only is this vague. 2008. See Adrian Blomfield. 6.252 The right to choose how many employees to hire is fundamental to ownership. 251. See id. Another potentially troubling obligation for foreign investors is the requirement to maintain the number of mid-level salaried employees for a given period. See supra note 156 and accompanying text. Id. See Strategic Sectors Law. See id. and so forth—possess a clear connection to national security. Id.257 Effectively. TELEGRAPH (U.253 The size of the list is even deceptive—the regulated businesses can be categorized into fifteen groups. art. however. The Restrictions are Narrower than Critics Claim A major strength of the law is that it clearly limits its application to enterprises of certain industries. 2. 6. supra note 1. the cryptological industry. 12. B. printing and publishing houses.
Government investors. C. 262. Indeed. See supra notes 131-40 and accompanying text. Int’l L. supra note 1. however. supra note 3. supra note 137. See OECD. What is more important is whether this discrimination is for a legitimate purpose and whether foreign investors from one country will be treated differently than other foreign investors. supra note 1. In the final draft.262 The Siemens example described above certainly does not inspire confidence.264 The Russian government could. ¶ 36. See supra notes 131-40 and accompanying text. The Law is Facially Non-Discriminatory Laws that restrict foreign investment are inherently discriminatory. See Strategic Sectors Law. An investor’s appeal of a decision to the Supreme Arbitrazh Court could be an effective check on the Commission’s power. then similar outcomes might be expected from the Commission. R R R R R R R . [Vol. the law may in some cases have a prohibitive impact on certain risk-averse investors.\\server05\productn\J\JLE\41-2\JLE208. are prohibited from acquiring control over strategic enterprises. Certain groups of investors may forego pursuing an investment entirely if it requires prior approval from the Russian government. at 5. ROUNDTABLE. 6. Rev. 263. in contrast. 2. See Strategic Sectors Law. by blocking these industries’ access to capital for modernization. art.261 Nonetheless.265 This especially will be the case if the Supreme 259.263 Indeed. ¶ 7. 264. Russian authorities could be endangering those the legislation intends to protect. ¶ 2. art. 260.txt unknown Seq: 34 4-NOV-10 11:16 498 The Geo. Wash.259 This was recognized and is apparent in the changes to the law between the first and second drafts. The Strategic Sectors Law does not prohibit private foreign investment in any industry—it merely subjects it to prior approval in certain circumstances. See generally Press-Sluzhba FAS Rossii. On the other hand. 41 industries are arguably the most in need of investment in Russia. it is not clear how limiting much-needed investment in other areas of Russia’s infrastructure will serve the national security interests of the nation. if the FAS refused a deal at least partially on the basis of a Russian competitor’s interest in the target company.260 Still. add a provision in the legislation prohibiting discrimination on the basis of an applicant’s home country. the law may actually reduce risks and attract more investors because it establishes clear rules and a predictable approval mechanism. 261. See Strategic Sectors Law. art. the law’s coverage exempted certain natural monopolies that are in great need of investment—electricity and heating. supra note 1. 11. 265.
”). See Yamabaeva. investors might worry that applying to acquire a strategic enterprise will open up their entire company to the Russian secret services. 271.”).270 To some extent. supra note 125. Therefore. political influence over a purportedly neutral review process. supra note 1. which demonstrates a certain level of comfort with the uncertainty of doing business in Russia. foreign investors likely assume this activity occurs on a regular basis in Russia. supra note 179. 269. ROUNDTABLE. ¶ 6. supra note 227 (explaining that the law authorizes the FSB to investigate companies).txt unknown Seq: 35 4-NOV-10 11:16 2009] Strategic Protectionism? 499 Arbitrazh Court continues on its recent trend of increasing competence and independence.271 Nonetheless. See Petrov. regardless of what sector is involved. Legislative Branch Participation Should Be Minimized Although the law does not provide for formal participation at any stage of the application review process. Most importantly. Foreign investors likely would appreciate not having their business plans in Russia publicly broadcast. the level of scrutiny permitted by the law might prove prohibitive for certain foreign investors. at 366. See Strategic Sectors Law. the law would be better if it limited the information within the scope of operational search measures and provided special administrative or judicial recourse to companies whose secrets have been leaked. Despite problems that companies like Motorola have experienced. See Myers.268 The law permits “operational search measures” without defining their scope and duration.267 The Representative Body and Commission could minimize this problem if their activities were conducted privately until their final decision. 268.272 266. See Hendley. Business Secrets Might be Leaked Another troublesome aspect of the Strategic Sectors Law is the possibility for industrial espionage on applicant investors. R R R R R R R . the Siemens case demonstrates that the Russian Duma can have informal.\\server05\productn\J\JLE\41-2\JLE208. Strategic Sectors Law. companies do not want their proprietary information available on the black market for their competitors to buy. foreign investment continues to rise. supra note 3. supra note 132. Grib & Kornysheva. ¶ 5 (stating only that damage inflicted on investors “shall be recovered according to procedures stipulated by Russian Federationlegislation. The willingness to shoulder such risks is likely due to the high return on investments in Russia. 13. See id. art.269 Thus. 270. 267. at 5 (“Companies will not apply for approval if they perceive a risk that confidential information will be made available to competitors or the general public. 13. supra note 1. art. See OECD. E.266 D. 272.
Indeed. 277. arts. Int’l L. 6. [Vol. and 11 especially do a good job of detailing what is regulated. Rev. arts. Most importantly. Id. the case of ADC reveals some truths about Russia’s investment climate that raise questions about the Strategic Sectors Law’s effectiveness.\\server05\productn\J\JLE\41-2\JLE208. Id.277 If anything. ¶ 4. See id. 274. 278. and who evaluates the acquisition and makes the decision. supra note 211. 9. At the same time.273 Investors generally will know beforehand whether a company is considered strategic and the criteria used to determine whether a proposed acquisition must be approved by the Commission. First.278 Even in sensitive industries like aircraft producers and ports. The majority of the regulated companies are in the military sector which.txt unknown Seq: 36 4-NOV-10 11:16 500 The Geo.275 These features will provide investors with the kind of notice that is necessary to make rational investment decisions. The very nature of the regulated industries would make most investors hesitate before attempting to acquire a native company. Implementation of the Law—Nightmare or Silver Bullet? The initial implementation of the law demonstrates that it is neither the death knell nor panacea for foreign investment that both sides were predicting. several applications were approved before the one-year anniversary of the law. foreign investor groups likely support the Strategic Sectors Law because it goes a long way in establishing clear rules of the game for foreign investors. Wash. 10. 10-11. art. is already a challenging area for foreign investors. G. even the combination of the ad 273.276 Thus. the law only regulates foreign investor acquisitions that will result in the control of strategic companies.274 The law also creates clear time limits on the application review and decision process. 276. art. Articles 6. as the Siemens example demonstrates. The Strategic Sectors Law Establishes Clear ‘Rules of the Game’ Despite these few concerns. 275. 6. Id. how a proposed acquisition is evaluated. 2. R . the law will reduce uncertainty over these decisions and thereby increase total investment. See id. 41 F. 10. acquisitions went through without any political meddling. thereby preventing the government from drawing out the approval process until the investor gives up or pays up. Finally. 11. art. and hundreds of filings have been processed without incident. 6. the law’s overall impact is likely to be small. 9. See Press Release. investors are still free to acquire non-controlling stakes of companies in any of the industries listed in the legislation without an application.
IV. this often has little influence over the reality that companies face.\\server05\productn\J\JLE\41-2\JLE208. CONCLUSION The new strategic sectors law arose out of an uncertain and. but also from poor business practices by local partners and purely local administrative interference. . the Strategic Sectors Law is only one small piece of a broader effort that Russia must make to transform its business environment. and bring it up to international norms. cultural issues regarding a lack of respect for property rights and interference with business relations. and provides legal recourse when a deal is refused for reasons not covered by the law. and the possibility for a discriminatory application of the law. the new law is a step forward from the previous absence of a legal framework for strategic industries. The problems that ADC faces show that Russia’s investment environment is plagued by deeper. While the proposed law does indeed limit foreign investment. arbitrary regulatory environment for foreign investment in Russia. at times. however. In other words. This suggests that Russia’s poor investment climate stems not simply from high-level politics and state intervention.txt unknown Seq: 37 4-NOV-10 11:16 2009] Strategic Protectionism? 501 hoc approval of then-President Putin and formal approval of nowPrime Minister Putin as head of the Commission was insufficient to enable ADC to assert follow through on a SPA. The law clarifies in what industries and in which situations foreign majority ownership should be limited. Therefore. even though the president and prime minister may officially support more foreign investment. the perhaps overly broad application of the law to certain industries. Legitimate concerns do exist regarding the protection of company secrets. Ultimately. its likely effect will be minimal and the establishment of clear and predictable rules in place of murky and informal mechanisms will encourage the growth of FDI. It also establishes clear procedures for investors to apply for an acquisition.
\\server05\productn\J\JLE\41-2\JLE208.txt unknown Seq: 38 4-NOV-10 11:16 .
Documents Similar To Strategic Protectionism? National Security and Foreign Investment in the Russian Federation
14042574 Factors Attracting Mncs in India[1]
A New Dawn - Reigniting Growth in Central Eastern Europe[1]