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Russia buys abroad but discourages reverse

THE WALL STREET JORNAL: Russia buys abroad but discourages reverse

Rules in works may
curb foreigners’ entry
to certain companies
By DOMINIC ELLIOTT
April 22, 2008

RUSSIAN COMPANIES are set to make a record number of acquisitions this year, just as the Kremlin has increased the protection afforded to its own industries from overseas predators.

For the year up to April 18, Russian companies have declared 50 overseas takeovers valued at a total of $13 billion, up from $3.4 billion via 33 deals at the same time last year, according to data provider Thomson Reuters.

The more than fourfold rise in volumes year-to-year marks the latest expansion in international mergers-and-acquisition activity by Russian companies, which before 2004 had totaled less than $2 billion a year.

While the Kremlin exhorts national companies to look abroad, imminent legislation may limit the ability of international business to buy into Russia. A draft law passed by the lower house of Russia’s Parliament at the start of the month fences off 42 industries deemed to be strategic.

Building on protection for Russia’s commodities sectors, it requires international acquirers to seek government approval before buying 50% or more of a company in industries considered to be vital to national security. These range from mass media and publishing to the nuclear, aerospace and arms sectors.

Yury Fedotov, the Russian ambassador to London and former deputy minister of foreign affairs of the Russian Federation, said the country needed to protect national security and pump investment into sectors that have been neglected since they passed out of state control. “It is not a matter of restricting competition, just preserving essential security and promoting the development of certain sectors where necessary,” he said.

Reaction to the bill has been split between those who view it as a worrying sign of the Russian state tightening its grip on the private sector and others who believe it as natural consequence of the brisk development of the country’s free-market economy. It has been in existence for less than two decades since the transition from communism that began with the breakup of the Soviet Union.

“While Russia has tightened state control in the oil and gas sector, the state will continue to allow Russian as well as foreign private enterprises to flourish in non-resource sectors and do successful business in Russia for as long as they abide by the rules set by the authorities,” said Steven Meehan, chief executive and country head for Russia and the Commonwealth of Independent States at UBS AG.

Some bankers remain concerned that the legislation may give Moscow leeway to seize without warning Russian assets held by international companies. Royal Dutch Shell PLC suffered such a fate when its Sakhalin II oil-and-gas project was appropriated by Russian state-owned gas company OAO Gazprom, forcing the Anglo-Dutch company to write down its reserve figures last year by more than a half.

Roland Nash, head of research at Russian bank Renaissance Capital, which has a negative view of the bill, said the government should make it clear where foreigners can and cannot invest: “We believe that clarity is preferable to confusion.”

Meanwhile, Arnab Das, head of emerging markets research at Dresdner Kleinwort, said: “Political risks loom large given the state’s desire to reassert authority particularly in strategic sectors.”

Lawyers, for their part, have cautioned that the additional layers of bureaucratic processes implied by the legislation could act as a drag on business.

The growth in foreign investment looks set to continue after Dmitry Medvedev, Russia’s President-elect, pledged in February to grant government support to companies that invested abroad. He urged them to follow the example of the Chinese and boost overseas investment.

“Solid domestic growth versus weak global conditions, high commodity prices and a stronger ruble have created the right conditions for Russian companies…to start investing abroad,” said Riccardo Orcel, Merrill Lynch & Co.’s head of investment banking for Central and Eastern Europe, the Middle East and Africa.

Stefan Reutter, head of corporate finance advisory at financial-services firm Deloitte & Touche LLP’s Russia business, said: “There are three main motives for Russian companies expanding overseas: to gain access to new technologies, to become global champions and to secure and diversify their future supplies of natural resources.”

• From Financial News at www.efinancialnews.com.

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