Meeting of the Government Commission on Monitoring Foreign Investment in the Russian Federation
Opening remarks by Dmitry Medvedev:
Colleagues, we are here for another meeting of the Government Commission on Monitoring Foreign Investment in the Russian Federation. This is a regular event. Let me start by giving you some figures that illustrate that we are making some progress. I cited them not so long ago, but I would like to do the same once again before you.
In keeping with some recent reports, including a report published by the World Bank, Russia has gained eight points, rising to the 112th position on its business scale. It’s modest growth, but growth all the same – better than the 120th place, but worse than the next 111. But, in fact, there are quite important changes. If we put irony aside and speak absolutely sincerely, we did well. For example, we are in 64th place in terms of taxation indices, which is decent. This means that foreign investors approach our taxation system precisely in this way, which is a considerable improvement. The task for today is to consolidate all these positive changes, putting an emphasis on the quality of long-term investments.
As usual, we will consider both general issues and a range of individual deals that are to be coordinated. The first item on the agenda is the implementation of the Government’s instruction on drafting amendments to the Federal Law On the Procedure for Making Foreign Investments to Business Societies of Strategic Importance for National Defence and Security. Specifically, foreign investors that own 75% or more of subsoil users’ registered capital no longer have to bother with preliminary coordination of deals. This makes sense, if we keep in mind the fact that they are already now in full control and can accept all corporate decisions, including one on closing this or that business. In the interests of foreign investors, we provide an opportunity for filing an application concerning extending the effective duration of the decision on preliminary coordination of deals that have been considered by the Government Commission. It is also suggested that we eliminate the use of infectious agents in food production from the list of strategic types of activity.
Let us consider all these issues. But it is obvious that these innovations are meant to encourage foreign businesses to implement new projects in strategic sectors of Russia’s economy. And, of course, we will consider applications for deals with strategic assets and adopt decisions in keeping with how these applications and deals meet this country’s security interests.
* * *
Head of the Federal Antimonopoly Service (FAS) Igor Artemyev spoke to journalists after the meeting
Igor Artemyev: The Commission reviewed a number of important issues. I would like to speak about this in more detail. First, we submitted new amendments to the 57th law on behalf of the Government. We expect it to review and endorse them next week and submit them to the State Duma for adoption at the legislative level.
I’d like to make several points. First, as regards food products that are processed through bacteria fermentation, special Commission permits will not be necessary for the use of third and fourth hazard category bacteria. These are the least dangerous microorganisms. They will no longer be covered by the Law on Strategic Assets of the Russian Federation.
The regions and their foreign investors will not have to address the Government Commission if residents of offshores that carry out their projects in these regions are Russian citizens. They will no longer have to do this under the amendment that has been introduced at the federal level. Also, if companies already own 75% of shares, regardless of whether they are involved in subsurface management, will no longer have to clear it with the Commission if they increase their stake to 100%. If the Commission has already issued a permit (we usually give two-year permits) and its term is about to expire, any strategic investor may ask the Commission to extend the term of its permit from two years to five or more. Investment projects are fairly long-term and expensive and there is no point in making investors nervous by asking them to go through the Commission's procedures unnecessarily.
In addition, we are introducing a number of other legally significant amendments. Thus, we have completely eliminated the concept of “coordinated action” that was rooted in antimonopoly legislation. Now the law will deal with shareholder agreements on running companies and other contracts between shareholders. These terms confused many foreign investors and their lawyers asked us to get rid of them. By and large, these amendments are part of the effort to liberalise our laws. The President and the Government are interested in investment in strategic sectors as well ,and these amendments represent a big step forward.
Question: May I ask you a more specific question? Does the rule on simplifying the procedure for raising stakes from 70% to 100% apply to all Russian and foreign companies?
Igor Artemyev: It applies to foreign companies at any rate – to all foreign companies in any strategic sectors.
Question: And this law will...
Igor Artemyev: Yes, this law will allow companies to buy shares without clearing it with the Commission.
Question: So for the time being only draft amendments have been endorsed, correct?
Igor Artemyev: Yes, the draft amendments have been approved. They will become law after being adopted by the State Duma and the Federation Council. We think it will take six months to adopt them and for them to take effect.
In addition, the Commission has reviewed a number of high-profile deals. For instance, we discussed the final settlement of relations between the Government and the shareholders of Vympelcom – I’m referring to Telenor. In line with the Government’s decision three days ago, we sent a request to the Commercial Court three days ago to withdraw all claims and proposed removing all restrictions, including those on interim measures. Today the Commission passed a number of very important formal decisions. We expect the Court to satisfy our requests to withdraw all claims on 30 November. We hope this will take place the day after tomorrow.
In addition, we have recognised the validity of all transactions that were a source of contention between us and Telenor. Now Telenor will not have to re-register anything or apply to our Commission or anyone else for that matter. The Commission has legalised all transactions that we disputed. So we no longer wish or have any grounds to argue about anything. In this context I’d like to thank all participants in this dispute for their patience. I think that patience always helps reach a good compromise.
We appreciate that Telenor did not take this dispute to any other jurisdiction. I think this was the right thing to do. We will take this into account. We appreciate that the dispute was resolved within the Russian judicial system. I think the compromise we have reached meets the interests of both sides.
There is one more important issue – the catching of bioresources in our Far East. This summer our Commission noted in its resolution that a number of companies, primarily from China (we mentioned one of China’s biggest companies Pacific Andes) has established de facto control over a large part of the Russian fishing fleet by way of different secret arrangements or open actions. We know that this company as well as all others had to address our Commission, that is, the Government Commission on Monitoring Foreign Investment in Strategic Sectors for a permit to buy shares of strategic companies in the Far East.
Specifically, Paragraph 40 of Article 6 of the Law on Strategic Investments classifies catching bio-resources as strategic activities. Accordingly, the operations of Chinese, Korean and, in some cases, Japanese companies that acquired the assets of Russian fishing companies with quotas and engage in fishing operations in the Russian Far East are illegal. By the same token, the shares in these companies have been acquired illegally. Furthermore, foreign investors have assumed the actual ownership of these companies by signing agreements and acquiring controlling interests in them. The Government commission said that it would take steps to restore law and order in this area. A decision was made with regard to Pacific Andes and the commission found a violation of the law. The Government commission has never authorised the purchase of the strategic Russian fishing fleet assets by this or by any other company.
Thus, today we have decided that if China wants to continue operating in the Russian Far East, then it should obtain these permits. As it doesn’t have them now, China should go ahead and sell its assets to Russian companies. I know that several Russian companies are already holding talks on their own accord, as businessmen are supposed to do. We will monitor this process closely.
The Government commission said the same thing to all of other firms operating in the seas bordering Russia. Other foreign companies – Chinese, Korean and Japanese – that bought respective shares without the Government's authorisation... We let them know that they are violating the law and the commission will do what it takes to restore law and order.
This is an important decision. Almost all developed countries do not hand over the control of their fishing fleets to foreign firms and the catching of bio-resources is conducted by the relevant national companies. However, we have respect for investors. We respect major operators, such as Pacific Andes, and the Government commission invites them to consider taking part in land-based Russian fish-processing plants. We do not want to see them go. We would like them to work in related fields where their capital, experience and practical skills would undoubtedly be appreciated. So, this issue only concerns strategic activities, such as catching fish and other biological resources. It isn’t related to other activities that are not strategic under Russian law. We think that this decision will have far-reaching consequences, and we will closely follow these events. Particularly, the Ministry of Agriculture and the Federal Agency for Fishery have been instructed to act in accordance with this commission's decision together with the Federal Antimonopoly Service and other government agencies, including the law enforcement authorities.
Question: How could they have purchased these assets without the commission’s approval?
Igor Artemyev: We are all aware of what was happening in this industry in the 1990s. First, our fishing companies were left without credit resources in the 1990s. I’m sure that you remember how messed up things were back then. I admit that capital flows from China played a positive role. But you know, these loans had to be repaid, so they were either swapped for company shares or fish exporting agreements were signed to take care of loan payments. Some loans back then and in the early 2000s were paid back in kind when all of the seafood catches were exported to foreign countries.
Question: These companies weren’t strategic then?
Igor Artemyev: The Law on Strategic Investments in Strategic Areas came into effect in 2008. Prior to that, there was no specific legislation in this field. There were presidential executive orders, but they did not cover the fishing fleet, which was not a strategic industry at the time.
A significant number of the assets that they acquired were purchased after 2008 when the law was already in effect. Additionally, Law No 57 stipulates that if you own shares in a strategic company, you have to send a notice to the Federal Antimonopoly Service and legalise your ownership. In this case, no sanctions would apply to you. However, this wasn’t the major threat. The Government commission and the Federal Antimonopoly Service believe that Pacific Andes acquired control over companies not through stock ownership, but rather through secret agreements whereby a single share of stock could provide control over the company. That is, a controlling interest didn’t exist, but the management agreement gave companies like Pacific Andes the authority to manage Russian companies on the grounds of an existing major debt. As a matter of fact, they promised to invest additional resources in Russian debtor companies. So, the Russian shareholders in these companies were the holders of bio-resources catch quotas in the Russian Far East, but they were nominal shareholders whereas Pacific Andes and some other companies were the actual owners of these firms. Please rest assured that we will look into other companies as well. Of course, this work will be performed mostly by the Federal Agency for Fishery and the Ministry of Agriculture.
As far as the Federal Antimonopoly Service is concerned, we are concerned about cartelisation – that Russian and foreign firms will form cartels to drive up prices and divide markets. The Government will take the appropriate actions with regard to such companies. This was one of the biggest issues that came under our review.
An important event occurred in the Customs Union – Garysh Sapary, a Kazakh company, became part of the Roskosmos space exploration project. Back in 1997, three countries – Russia, Ukraine and Kazakhstan – began a space exploration project. Kazakhstan officially joined when it bought a 23% stake in the joint stock company, which is now working with the Russian Space Agency. This is an important decision, which is very positive. These significant decisions have already been effectively made.
Question: What about the Arkhangelsk Trawl Fleet deal?
Igor Artemyev: It has also been approved. It was quite a formal procedure, as its shareholders were Russian citizens who acquired... The Russkoye More company bought the Arkhangelsk Trawl Fleet. In fact, the company hasn’t bought it yet, but if they win the privatisation auction they will have the right to buy it without any additional terms or conditions. They still have to win the auction, so we don’t know yet who will own this fleet.
Question: When you say “without additional terms or conditions”, you mean that they will follow a standard procedure?
Igor Artemyev: Yes, everyone will be treated equally. Primarily those companies that are subject to the law... In this particular case, the decision includes standard requirements, such as strict confidentiality, production capacities, etc., which is rather common.
Question: Mr Artemyev, with regard to the Verkhnesaldinskoye Metallurgic Production Association (VSMPO)... Will the Federal Antimonopoly Service probe the sale of the 25% stake in VSMPO-AVISMA? In fact, it’s being sold to the firm's management. What does the service think about this transaction, as VSMPO could be sold for a good price on the market given the strategic nature of the deal?
Igor Artemyev: We haven’t looked into this transaction yet. Thank you for being proactive. You – journalists – wrote about this in the newspapers, and I read about this in a paper today. We will consider the officially filed petition. First, VSMPO is also a strategic enterprise. It should be assessed from the point of view of Law No 57. Second, we must look at things in perspective because the government is interested in titanium and titanium structure production. I believe that in addition to the service, the Ministry of Industry and other relevant agencies will keep an eye on this case. So, I wouldn’t go as far as to say that this deal will be approved. An application should be filed in accordance with the antimonopoly law. Perhaps, there will be a need to file an application in accordance with Law No 57. The Government commission will then consider this issue during a meeting like the one we are having now.
Question: That is, in any case, the deal will be considered by a legal commission?
Igor Artemyev: Not necessarily. We do not know all of the circumstances. If the shares will be bought by Russian citizens without dual citizenship who are Russian tax residents, then there will be no need for the Government commission to issue a decision in accordance with the law.
Question: Even though they will be buying shares to set up an offshore company?
Igor Artemyev: Yes. That’s what the law says. If buyers are individuals with dual citizenship or foreign nationals, then it will have to go through the commission.