Russian Minister calls for clear-cut rules for foreign businesses entering Russian energy sector

Victor Khristenko, Russian minister of industry and energy, announced at a recent meeting with Alistair Darling, Great Britain’s trade and industry secretary, that Russia will soon "make a final step which will make the situation clear for the foreign investors."

The key document—a draft of the Federal Law on Foreign Investment Into Strategic Industries in the Russian Federation—is to be finalized soon, and then sent to the state Duma. Most bills don’t pass through the Russian corridors of power so fast, but it’s highly probable that this law will be approved quickly, probably during the Russian parliament’s spring session.

All this demonstrates that Russian authorities watch the signals from the Western business-community closely, and are ready to create an outline for a predictable and liberal legal environment for international capital. It’s no secret that the traditionally hot issue of guarantees for foreign companies became especially topical in fall 2006, in connection with the development of the Shtokman gas-condensate field and Sakhalin projects based on production-sharing agreements.

The management of state enterprise Gazprom announced in October, 2006, that the huge deposits of oil and gas in Shtokman field would be developed without foreign participation. The project is valued at $20 billion to $25 billion dollars. It was initially intended to enlist a number of Western companies in its development, and to give them 49 percent of the project shares. The "short-list" of contenders included five companies: Statoil (Norway), Total (France), Chevron (United States), Hydro (Norway), ConocoPhillips (U.S.). But later Khristenko allowed for the possibility of allowing foreign players into the game on stricter terms.

A radical review of foreign participation in the Sakhalin-2 project was in progress at the same time. Eventually, Gazprom became the main shareholder, and acquired half of Shell’s shares in the project. Experts noted that Shell was discontent with these rule changes in the Russian market.

The widely publicized Kremlin bill is intended to explain what a foreign business can expect in Russia. "The participants of the deals are, themselves, interested in getting approval to minimize risks. This law is a final step which makes the situation clear for the investors." It’s simply natural that Khristenko is playing a key role in the process. He is well known in the West due to the "energy agenda" for last year’s G-8 summit in Saint Petersburg. And the position of Yuri Trutnev, minister of natural resources, is also quite significant, since his competence includes field development strategy.

Key provisions of the bill include limitations for foreign businesses in 39 industries, including aerospace, nuclear, military, and industries that are controlled by Russian natural monopolies. Limitations will also apply to industries that make up less than less than two to three percent of gross domestic product.

In general, the draft prevents foreigners from participating in 10 oil fields. These fields’ total reserves are estimated by Yuri Trutnev’s department to contain more than 10 billion barrels of oil. The list of strategic fields Westerners are barred from also includes 26 gas fields, with reserves of more than 50 billion cubic meters, as well as gold deposits, with reserves exceeding 50 tons, and copper fields that have reserves of more than half a million tons.

However, an earlier draft of the same bill included much harder hurdles for foreign business to clear.

It’s also important that foreign state-owned companies can get no more than one-fourth of Russian strategic companies. Such protectionism is by no means a Russian invention: The practice of limiting access to a country’s market is quite widespread in Europe and the U.S. For instance, Gazprom’s intention to develop Shtokman by itself was motivated by Western companies inability to offer it any comparably interesting asset—in particular, gas distribution nets in Europe.

When speaking of the bill, Khristenko always stresses that it involved joint work with foreign investors, which is a guarantee that the law will contribute to forming a transparent and predictable business climate in Russia. According to German Gref, the head of the ministry of economic development and trade, a "gray mechanism of getting permissions" is now functioning in Russia: Foreign companies consult with the government prior to making any acquisitions. Gref said that, from now on, permissions for foreigners to purchase assets will be issued by a specially formed interdepartmental committee.

So the rules of the game are clearly written, and the emphasis on the protection of strategic industries reflects the growing ambitions of Russian businesses, which is a consequence of Russia’s economic upturn in the past five years.

Russia is welcoming Western business. This message is clear from Khristenko’s offer to allow the West to be more involved in the Russian electricity generating industry. Under RAO UES of Russia’s reform plans, this will provide for an influx of private capital, and by 2011 100 percent of Russian electricity will be sold in a free market. Khristenko noted that even now investors are showing tremendous interest, and that "direct sales of assets, as well as public placement of shares of generating companies, are going to take place in the nearest future."

By Igor Veletminsky