4 april 2013

Government meeting

Transcript of the beginning of the meeting:

Dmitry Medvedev: We have some important draft laws on our agenda today, so let’s start discussing them. One of the laws is dedicated to investments: investment in companies of strategic importance for the country’s defence and security. A normal investment climate is a top priority for the activity of the Government. We have made a series of decisions lately that concern removing the obstacles that discourage foreign investors, including those investing in strategic industries. The list of so-called strategic activities has been cut, which means they are subject to different regulations now; the regulations governing foreign capital in banking and subsurface use have been eased. I have recently given a series of directives to develop measures to motivate the regions to actively search and attract investors.

On our agenda today is the draft law on regulating foreign investment, specifically Law No 57 and the corresponding amendments. This is the result of our work over the past several months. We discussed this subject last year at a meeting between the Government and the Government Commission on Monitoring Foreign Investment. We are speaking now about simplifying the process for considering of applications made by foreign investors and eliminating administrative barriers which hinder this activity.

First, we have eliminated the prior approval of business deals related to the use of subsoil resources of federal importance if 50% of the company’s registered capital belongs to the state directly or indirectly and this balance remains in place after the deal is concluded.

Second, approval will not be required for foreign investors who own 75% (the qualified majority) in the registered capital of these strategic companies, because they already control the assets and have the authority to do so.

Contracts with organisations under the jurisdiction of Russian regions are also not subject to this law.

Also, investors will have the opportunity to extend the terms of the decision taken by the government commission on preliminary approval of a deal, which means they will have more time to conclude it. This law will also include another series of measures to liberalise these kinds of investments.

We will promote having foreign investors and businesses work with Russia’s most important industries. We have discussed the draft law and some agencies have made proposals to ease the investment process for foreign companies, including investment in strategic industries.

Departments, which doubt a number of decisions for some reasons, have their own considerations. We will now discuss this, and we will listen to experts who have also been invited to the Government meeting.

Another issue is anti-monopoly regulation. This is a high-priority task of our economic policy. We will examine a draft federal law on introducing amendments to the Criminal Code. This involves an article which stipulates criminal responsibility for establishing cartels and for taking advantage of dominant market positions. The draft law proposes a number of changes which should ensure more effective investigations of these cartel agreements and, of course, to help anti-monopoly divisions and law-enforcement agencies to analyse the situation, investigate and prevent such actions. Actually, we still lack any substantial law-enforcement practice in this area. These are considered to be major violations all over the world. As for Russia, they are perceived as much less socially dangerous actions, on the same scale as 5,000-rouble case of fraud, etc. In reality, monopolist collusion and the relevant decisions may lead to much more complicated and serious consequences.

We are examining one more draft law on the relevant procedure for entering and exiting the Russian Federation. This draft law is also expected to combat illegal immigration more effectively. The document specifies cases in which foreign citizens might face restrictions or bans on entering Russia. This concerns individuals who violated the law in Russia, and who faced sanctions for administrative offences, as well as those covered by readmission and administrative-banishment and deportation verdicts. In case of repeat violations, a foreign citizen would be forbidden from entering Russia for a period of ten years. To be honest, this is in line with generally accepted practice when individuals found guilty of repeat immigration-law violations are unable to enter any state of their choice.

At any rate, immigration flows should meet national development requirements. We would like law-abiding persons who are in high demand on the Russian market to come and work here.

The above-mentioned draft federal law is the first item on the agenda. Mr Artemyev, Head of the Federal Anti-Monopoly Service, has the floor.

Igor Artemyev: Mr Medvedev, Government members. This is to inform you about amendments to the law on the procedure for channeling foreign investment in legal entities which have strategic significance for national defence and security. Over the past few years, including in 2011-2012, the Government already examined and submitted a number of important amendments to the State Duma. You can see them on the second slide. These amendments aimed to simplify foreign-investment procedures, including investment in strategic spheres. Several hundred transactions were reviewed during that period and foreign investors arrived. Some were quite large. We can cite examples. This demonstrated that the law is fulfilling its function well. The latest issues linked with vital issues such as fishing in the Far East show that we can rely on Law No. 57 for resolving strategic national tasks.

We have tried to adopt provisions that will help provide access to foreign investors and remove barriers for Russian citizens, even if some of them have companies registered abroad. These steps produced seriously positive results in 2011-2012.

Look at the fourth slide. What additional provisions do we want to introduce into the legislation to facilitate foreign investment? First, we want to allow the regions to receive approval for such transactions. Just like the federal Government and the State Duma, we can trust them to make decisions on investment projects with foreign companies… All the more so because large projects are still the federation’s prerogative.

As Mr Medvedev has already stated, investors had to go to the commission when they bought every share of stock – the first, the second, the third or 10 more shares. The bureaucratic barriers were too high. This is unnecessary if investors buy 75% of the shares or receive formal control – 50% or 25%. This is also a major issue.

Importantly, we have renounced the review of so-called “intra-group transactions”, recognizing what has already been acknowledged by the anti-monopoly legislation. Notably, it does not matter to the Government what companies have these or other commitments if they are part of a single holding. Thus, we will not have many deals to discuss as before. Foreign companies that have invested their resources and funds in Russia will conduct the required reorganisation activities inside large holdings without involving the commission. This way, they will benefit by increasing capital turnover.

Finally, I would like to draw your attention to what I consider the most important norm that is being suggested and is subject to discussion. Executive bodies have some objections in this regard. It has been suggested that companies that invest in food production, for instance, in fruit shakes, and use unhazardous bacteria of the third or the fourth class, should be relieved of… I am referring to lactic acid or other bacteria, and the labs that monitor them and make sure technology is observed in the manufacturing process.

All of this is related to biological material and as Mr Onishchenko (Gennady Onishchenko, Head of the Federal Service for Supervision of Consumer Protection and Welfare) rightly said, these bacteria may be safe today and dangerous tomorrow. But why do we suggest that the commission should not deal with investments in such factories? It does not have to approve a cheese factory purchase by foreign investors. A strategic cheese factory sounds strange. With all due respect, I’d like to say the following…

Dmitry Medvedev: In our history, lots of things were declared strategic.

Igor Artemyev: Yes.

Dmitry Medvedev: I will not quote examples. They are common knowledge.

Igor Artemyev: But what is very important? Our amendment does not renounce sanitary, epidemiological or medical control. Our inspectors and our specialists are professionals and they will retain all of the necessary powers and opportunities. We are just removing one more barrier for investors. They will not have to come to the government commission’s meetings for endorsements. Members of the commission are not bacteria experts. They should decide on investments – whether or not this is a strategic investment, whether or not Russia requires them, and whether or not it creates additional threats. As for control, it has been preserved.

I think that we will not lose anything and decision-making on numerous yogurt factories… We have seen how the commission operated in the past few years. We have always approved such deals regarding the food industry, and we would have always done this anyway.

We would have applied this amendment to all industries using bacteria of the third and the fourth class as to entire food and other production. However, we were criticised, and we decided to apply this to the simplest and safest cases. This was a major barrier, and if we remove this barrier our commission will not have to review so many transactions.

There are also many important factors that would legally… For instance, the definition of agreements is specified. We know well that it is possible to control a company both by holding shares and via agreements between shareholders. Because of these stock agreements, companies frequently belong not to their shareholders who have a 51% controlling interest, but to other individuals. The latter have the right to issue mandatory instructions. It will be very important to take this into account as far as the definition of “control” is concerned.

And the last point. We have worked hard and met foreign investors many times. There were other proposals that were being discussed. We can work on them in cooperation with State Duma deputies. There are many interesting proposals. All foreign investors have supported our proposals and I would like to mention this. Thank you.

Dmitry Medvedev: Thank you. We usually invite experts to discuss draft laws. Let’s first listen to our expert and then discuss the issue, if need be. Mr Sidorov, member of the Government’s Expert Council, go ahead please.

Vasily Sidorov: Thank you. Mr Medvedev, ladies and gentlemen.

The draft law submitted by the Federal Antimonopoly Service takes into account the results of public and expert discussions. The suggested amendments are aimed at liberalising control over foreign investment in strategic companies and removing administrative barriers for foreign investment in such companies. These amendments conform to the proposals voiced in the public discussion. Importantly, the bulk of amendments, with the exception of the food industry proposal, are more technical than anything because they remove obvious discrepancies between the operating law and sensible business practices in regulating foreign investment in strategic industries.

Importantly, the bulk of amendments, with the exception of the food industry proposal are sooner technical because they remove obvious discrepancies between the operating law and sensible business practice in regulating foreign investment in strategic industries. The expert community has developed a number of additional proposals on finalising law No. 57 – in our view these proposals will contribute to an overall reduction of investment barriers for strategic industries and improve the Russian position on doing business rankings.

Regarding additional amendments aimed at eliminating these asymmetries, we would like to propose – in Article 2, Part 1 – to outline more precisely the criterion for a foreign control over a company, and possibly to reduce to the minimum any subjectivity in such assessment. 

In the current law’s Article 7, we propose eliminating a long-standing problem, where the law is interpreted in such a way as a purely Russian investor possessing foreign subsidiaries is required to agree his contracts in compliance with the law. An example of this problem is the case of TGK-2 and Kores Invest. 

Third, in article 15 of the current law, we propose introducing amendment that would help prevent a situation where a foreign investor is deprived of his voting right in principle while the law permits acquisition of the voting right in strategic companies up to a certain threshold where an agreement is not required under the law. The specific proposals on the wording of the amendments have been submitted to the Government Executive Office.

Regarding general methodology, we would propose four things, or four amendments, or four additions. First, we propose gradually introducing a differentiated approach to foreign investment for companies extracting minerals or using natural resources – in such cases a more careful and conservative approach to agreeing is probably justified. On the other hand, we have companies whose business is based on intellectual property or technology. There are many examples – producers of goods and services in the pharmaceutical sector, in some defence technologies, including dual-purpose technologies, in new materials, in electronics and machine-building. We believe, a more simplified approval regime can be used for these companies. 

Second, we propose shifting the focus in regulation – from building barriers to entry for investors on the Russian market by acquiring shares, to more efficient regulation of the operation of strategically important companies ­– with respect to using intellectual property, commodity exports, agreements (that has just been mentioned), state secret security. These amendments will protect state interests more efficiently. 

Third, we propose introducing a simplified approval procedure in the event that a Russian source finances a deal or an investment programme for a project. This will be an additional encouragement for investment, on the one hand, and on the other hand, this presupposes maintaining indirect control over an asset through a Russian lender. 

Fourth, we propose involving investors to a larger extent in the process of examining and discussing the applications – thus they will be able to better substantiate their position before executive bodies. 

In our view, the additional amendments that we propose should be introduced in the law in the near future. The proposed approaches and principles should be taken into consideration when finalising not only the current law No. 57 but also other regulatory acts. Compared with work on other factors affecting Russia’s position on international doing business rankings, the proposed solutions will take less time and have a rather considerable and rapid impact as regards investment. Thank you.    

Dmitry Medvedev: Thank you.


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