Russia is edging closer to passing a key law on foreign investment in 'strategic' industries. On Wednesday, the Duma should approve the draft on strategic enterprises legislation in the crucial second reading without any delays. The third reading is largely technical.
The list has expanded dramatically since 2005, when President Vladimir Putin first ordered the legislative changes. New amendments were made to the draft earlier this month and four more sectors were added to the list, bringing the total number of strategic sectors in Russia to 43.
Yukos bad publicity
Although it is often assumed that the state decided to introduce the strategic sectors bill to legalise its takeover of the economy, this is not quite the case. The state expansion was well under way when Putin instructed the government to draft the law on the subsoil and strategic enterprises. At a time of rising nationalism, Russia hardly felt the need to explain its actions to the outside world, especially its control over its subsoil riches and vital sectors, such as defence. The changes proposed were not to justify the state's encroachment on the economy but to neutralise the negative effect that the 'Yukos affair' had had on foreign investors and clarify the rules of engagement for foreign business.
The drafting of the law took far longer than planned, overshooting the deadline set by senior Kremlin officials who pledged to have the law passed by late 2007. The delay was largely due to inter-ministerial squabbles, and competing drafts presented by different ministries. The Kremlin finally opted for two separate pieces of legislation: one on strategic enterprises as a separate bill and amendments to the subsoil law of 1992:
- The latter deals with all exploitable underground resources in Russia, but its main impact will be on oil and gas. Under the latest definition, deposits that contain over 70 million tonnes of oil and 50 billion cubic metres of gas will be considered strategic.
- The number of strategic enterprises has grown to encompass telecoms and even fisheries. The inclusion of the telecoms, in particular, has raised concerns that growth in the sector may be stifled, as foreign investors will have to seek the government's permission before they can purchase controlling stakes in mobile and landline communications companies.
Excluding foreigners? Not quite
Instead of reassuring foreign investors, as was originally intended, this continuous expansion of 'nationally vital' assets may send a signal that the state is seeking to exclude foreign participation from all lucrative and vibrant sectors of the economy. Yet several developments over the recent months are noteworthy:
- In December last year, Natural Resources Minister Yuri Trutnev stated that his ministry was seeking to make it easier for foreign companies to take part in state auctions of strategic fields.
- The power of the Foreign Security Service (FSB) to veto foreign participation in a strategic company/deposit in question has been revised. In a meeting chaired by the head of the Presidential Administration, Sergei Sobyanin, it was decided that the FSB would submit its conclusions to the prime minister, who would refer the issue to the government commission, which would then decide on whether foreign partnership in a particular project would represent a threat to Russia's national interests.
The latter revision is an indication of the forthcoming empowerment of the office of prime minister, before Vladimir Putin assumes the post. But the softening of tone reflects the realisation that Russia cannot develop its largest - and hence the most strategic - deposits without foreign expertise and finance, especially in oil and gas.
This realisation will strengthen under President-elect Dmitry Medvedev. However, the passage of the strategic sectors legislation in its present extended form will impose limits on just how much he can open up Russia to foreign investment.