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MosNews: Russian Government Unable to Approve Law on Foreign Investment Due to FSB Objections

EXTRACTS: The Kremlin has substantially strengthened its grip over strategic industries in the past years by putting pressure on foreign firms via its technical, environmental or tax agencies. As a result, talks on potential foreign-led projects in Russia have ground to a virtual halt, although a few such deals that were signed in the mid-1990s, such as the infamous Sakhalin-2 project in the Far East, are still in place. Royal Dutch Shell said it was ready to work under new rules despite being heavily pressured last year to cede control in Sakhalin by Russia’s environmental agency.

THE ARTICLE

Created: 01.02.2007 11:18 MSK (GMT +3), Updated: 11:18 MSK

On Wednesday, Jan. 31, Russian government failed to approve a draft law on capping foreign investments in more than 40 strategic industries because it met with opposition from the Federal Security Service (FSB).

“I have some disagreements from them (the FSB), particularly from their commission on the state secret law,” Prime Minister Mikhail Fradkov was quoted by Reuters as telling a government meeting.

He did not elaborate on the objections from the FSB, one of the successors of the Soviet Union’s KGB, and said the draft law would be debated again in a month.

The idea to limit foreign participation in sectors from oil and gas to metals and mining was raised by President Vladimir Putin —- himself a former KGB operative —- and Russian ministries have been working on the draft since 2005.

The Kremlin has substantially strengthened its grip over strategic industries in the past years by putting pressure on foreign firms via its technical, environmental or tax agencies.

As a result, talks on potential foreign-led projects in Russia have ground to a virtual halt, although a few such deals that were signed in the mid-1990s, such as the infamous Sakhalin-2 project in the Far East, are still in place.

The existing deals would not be affected by the new law and analysts even say that the legislation might help improve Russia’s investment climate, as it would bring more clarity. “Any clarity regarding the rules of play is much better than uncertainty,” said Yelena Savchik from Renaissance Capital.

Western oil firms BP and Royal Dutch Shell, interviewed by Reuters, agreed it was important to know the exact rules of the game.

“Every country has the right to define the rules of access to its resources. We, as a major long-term investor in Russia, are interested in clear and transparent rules to define the way we can work here,” said BP’s spokesman Vladimir Buyanov.

BP venture TNK-BP remains the last big foreign venture in Russia with a controlling or one-half stake.

Royal Dutch Shell said it was ready to work under new rules despite being heavily pressured last year to cede control in Sakhalin by Russia’s environmental agency. “Russia is not the only country to introduce such restrictions,” said Shell spokesman Maxim Shub. “We are working in over 40 countries under different formats. We are ready to work under the new Russian format and want the country to remain attractive for investors.”

The latest draft was prepared by the Industry and Energy ministry. It proposes limiting the involvement of foreign-led firms in the military equipment, nuclear, aircraft and other sectors. It will also restrict their access to the markets of natural monopolies and to strategic deposits, although officials have long debated which fields should be designated as strategic.

The latest proposal says that the term would be applied to oil fields with reserves of more than 70 million tons (513 million barrels) and gas fields with reserves of over 50 billion cubic meters. The threshold for copper deposits is 500,000 tons and for gold is 50 tons.

Natural Resources Minister Yuri Trutnev said on Wednesday strategic deposits would include 10 oil fields with total reserves of 10 billion barrels, 26 gas fields, the Sukhoi Log gold deposit, and 5 copper fields, including the giant Udokan. Foreigners would be also banned from uranium, diamonds and pure quartz as well as offshore deposits, all of which will be split between oil firm Rosneft and Gazprom.

“Even though the proposed restrictions… seem severe, they leave enough room for future foreign investment in Russia, where most new oil and gas fields would be below the reserve cap,” said Valery Nesterov, an analyst at Troika Dialog brokerage.

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