Russia law restricts foreign investment

Private companies in energy sector will need government permission to acquire more than 50% of a Russian company

Sarah Hurst

For Petroleum News

A new law that limits foreign investment in key sectors of Russia’s economy, including the oil industry, may provide a solid footing for companies that have faced a barrage of regulatory changes during the tenure of outgoing President Vladimir Putin. The Duma, Russia’s lower house of parliament, passed a bill April 2 stipulating that private foreign companies will need authorization to buy more than 50 percent of a Russian company in a “strategic” economic sector.

Foreign state-controlled companies will need permission to buy more than 25 percent of a Russian company in one of the 42 sectors listed. The bill is likely to pass the upper house, the Federation Council, and will then go to the president for his signature. Putin’s chosen successor, Dmitry Medvedev, who takes office in May, is expected to appoint Putin as prime minister and to continue the policy of maintaining state control over Russia’s biggest industrial projects.

“In many ways the legislation codifies the existing de facto procedures. Nothing in the new legislation prevents companies from having access to some of the defined strategic assets — the new law simply means companies need to secure approval first and defines a process,” a spokesman for TNK-BP told Petroleum News. BP owns 50 percent of TNK-BP and Russia’s AAR (Alfa, Access/Renova Group) owns 50 percent.

“In principle we welcome the greater transparency, comprehensiveness and clarity the new legislation should provide,” the spokesman continued. “We understand that Russia, like most OECD countries, has strategic or national interest concerns that may require non-market based restrictions. We also welcome the consultative manner in which this legislation was introduced and developed, that was aimed at minimizing the negative impact that could be made on the investment climate.”

Royal Dutch Shell’s head in Russia, Chris Finlayson, also reacted positively to the legislation. “In the coming 10 years, Russia must do a lot of catching up in offshore oil production in remote, environmentally sensitive and ice-covered areas the size of the North Sea,” Finlayson was quoted as saying in Dutch paper Het Financieele Dagblad. “This offers us new chances. Russia is striving for national control over the energy sector, but that doesn’t mean that there are no opportunities for foreign oil companies.”

TNK-BP, Shell and other private oil companies have been forced by the Russian government to give up some of their assets in recent years. Just a month ago, an employee of TNK-BP with dual Russian-U.S. citizenship was arrested for allegedly gathering secret information aimed at giving foreign oil companies a competitive advantage. TNK-BP denies the charges. The company has agreed to sell its stake in the Kovykta gas field in eastern Siberia to Russia’s state gas monopoly Gazprom.

Shell and its Japanese partners Mitsui and Mitsubishi sold a 50 percent stake in the Sakhalin-2 oil and gas project to Gazprom in December 2006 after the Russian government accused Shell of violating environmental laws. Shell was left with a 27.5 percent stake in the Far East project.