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Associated Press: Russia OKs Draft Bill on Foreign Investors

By ALEX NICHOLSON 01.31.07, 7:13 AM ET  

The Russian government gave tentative approval Wednesday to long-awaited draft legislation that would restrict foreign companies’ access to oil and gas fields and mineral deposits that are deemed strategic.

The new regulations, which will also limit foreign access to over 40 sectors of the economy, such as military hardware, aviation and atomic energy, will for the first time clarify the rules under which foreigners will be allowed to invest in strategic Russian projects.

As well, bids by foreign companies for sensitive sectors of the economy will be screened by the Federal Security Service.

Several ministers voiced concerns, however, and Economics Minister German Gref suggesting the bill would slow investment and hurt economic development.

“It is clear that this law, in its present form, does not make it more attractive to invest in a whole range of areas,” he said in televised comments.

Prime Minister Mikhail Fradkov suggested that even the presence of a foreigner on the board of a “respected state company,” could present a strategic risk to the country.

“Sooner or later (they will) start to acquire the company’s shares under a preferential regime,” he was quoted as saying by the RIA-Novosti news agency.

The bill will be fine-tuned in coming weeks, Fradkov said.

President Vladimir Putin’s government has steadily increased its role in key sectors of the booming economy in recent years: last year Royal Dutch Shell PLC (nyse: RDSA – news – people ) ceded control of its giant Sakhalin-2 natural gas project to state-controlled gas monopoly OAO Gazprom after months of regulatory pressure.

That trend, combined with the fact that there have been no clear rules where foreigners would be permitted a majority role, has worried investors.

“Though the figure of 40 sectors sounds alarming, we hope it will introduce clarity and transparency into the current process, which relies on informal and indirect pressure on foreign directors,” Goldman Sachs (nyse: GS – news – people ) economist Roy MacFarquhar was quoted as saying by Dow Jones Newswires.

Industry and Energy Minister Viktor Khristenko told the Cabinet that the package of draft laws would establish a special state body to which foreigners seeking to acquire a controlling stake in a strategic enterprise would apply.

Applications would then be approved by a government commission involving the Federal Security Service – the main successor agency to the KGB – and the president would have the right of veto in certain cases, he said.

Natural Resources Minister Yury Trutnev said a list of fields which foreigners are forbidden from controlling would be submitted to the government, according to the Interfax news agency.

The list will include ten oil and 26 gas fields, one gold field – Sukhoi Log – and five copper fields, including the giant Udokan field, he said.

He noted, however, that large fields already held by foreign companies won’t have their ownership rights reviewed.

“The bill will not apply to existing contracts, for instance, those dealing with the Sakhalin fields, where foreign capital is involved,” he said.

Citing an unidentified government official, Interfax reported that foreigners would not be allowed to control any offshore fields, as well as deposits containing 70 million metric tons of oil, 50 billion cubic meters of gas, 50 tons of gold and 500,000 metric tons of copper.

While supporting the bill in general, Deputy Prime Minister Dmitry Medvedev, who sits on Gazprom’s board, said it needed to send a clearer signal on where foreigners could invest and where they would face restrictions.

“Whenever one meets with foreign investors their main message is: ‘Tell us where we can go and where we can’t go – give us a transparent situation. Even if you cut us out of certain sectors we have to have clear signal from the state’,” he said.

Copyright 2006 Associated Press. All rights reserved. This material may not be published broadcast, rewritten, or redistributed

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