Alfa Bank in Moscow -

The Duma approved at the beginning of April the Strategic Industries Bill, which will now almost certainly become law. Although the last-minute inclusion of mobile operators on the list was a negative surprise, on balance the bill improves the investment environment in Russia, finally clarifying the limitations placed on foreign direct investment in "strategic" sectors after more than four years of uncertainty.

Clarity, at last

Investors have generally understood for the past four years that the Russian government would seek to limit foreign direct investment into "strategic" industries. However, neither the definition of what was deemed strategic nor the level of the limitations was well defined. Indeed, given the shifting nature of the various definitions floated by the government over that time period, it was clear that until recently no one, not even in the government, really knew. However, with the passage of the Strategic Industries Bill, investors of all stripes at last have clear guidelines on which industries are deemed strategic, what the limitations are, and to whom to apply for an exemption.

42 sectors, two sets of limitations

For the bulk of the 42 sectors deemed strategic, the limitations only kick in when a foreign investor desires to acquire more than 50% of a company, or 25% if the investor is a sovereign wealth fund. The exceptions are the extraction industries such as oil and gas, where the limitations are substantially stricter at 10% and 5% for foreign companies or persons and sovereign wealth funds, respectively.

Telecom a small negative surprise

The only small negative surprise of note came with the late inclusion of the mobile telephone operators into the list of "strategic" assets. By the rules laid down, all three major operators (MTS, VimpelCom and MegaFon) fall afoul of the law, limiting existing major shareholders' options for an eventual exit. However, given that any such transaction already required regulatory approval on competition grounds, this inclusion changes little in practical terms.

Which direction FDI?

With the pockets of many Russian companies bulging with cash, it seems the likely direction of net foreign direct investment may not necessarily be tilted inward. Thanks to the global commodities boom, metals and mining companies such as Severstal, Norilsk Nickel, NLMK and Evraz, as well as Gazprom, have deep and/or rapidly deepening pockets, and have demonstrated an appetite for foreign acquisitions in the past. Indeed, with the Russian government's own foreign currency reserves exceeding $500bn, the third-largest in the world, how much longer will it be before we see Russia's sovereign wealth funds invest actively in real assets outside the country's borders?

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