The Foreign Investment Regulation Review: Russia

Overview

The Russian foreign investment regime in its current form was first introduced in 2008 with a view to protecting Russian national security. The only instrument the Russian government could, and did, previously use for this purpose was Russia's merger control rules.

The current foreign investment regime provides that certain transactions require prior clearance or post-transaction notification, or both. These include transactions as a result of which a foreign entity or individual, including an individual with dual citizenship, directly or indirectly, including through a Russian entity, acquires the shares or rights in, or the fixed assets of, a Russian company. The law sets out specific thresholds and other tests that, if met, trigger the relevant requirements.

The foreign investment regime is mandatory and, where prior clearance is required, suspensory.

The regime only applies to transactions that affect Russian companies and it focuses on those that qualify as 'strategic entities', namely those entities that are associated with one or more of a total of 47 categories of strategic activities. Some of these:

  1. relate to specific sectors, such as operations with nuclear materials, defence, aviation, telecommunications and natural resources;
  2. depend on the existence of a 'natural monopoly', such as rail transport, ports, and pipeline transportation of oil and gas; or
  3. relate to specific activities or technologies (not sectors), such as activities related to encryption devices or biological infectants.

However, prior clearance may also be required where the transaction concerns a company that is not a strategic entity (for further detail on acquisitions of a Russian company by a sovereign foreign investor see Sections III.iii and V).

The regime includes several sub-regimes that vary significantly in terms of specific restrictions, notification thresholds and other matters. Which sub-regime applies depends on whether the foreign investor is controlled by a government or by an international organisation (a sovereign foreign investor) or is privately owned (a private foreign investor), whether the Russian company is strategic or non-strategic and, if it is strategic, whether or not its business relates to natural resources (a mining company) or the fishing industry (fishing company), and whether any exemptions apply. Generally, the regime is fairly complicated.

Year in review

In March 2021, Federal Law No. 57-FZ 'On the Procedure for Making Foreign Investments in Business Entities of Strategic Importance for the Defence of the Country and the Security of the State' enacted on 29 April 2008 (the Strategic Law) was amended such that a sovereign foreign investor is permitted, subject to obtaining clearance, to acquire control of a Russian company where that Russian target qualifies as a strategic entity only as a result of ownership of certain strategic assets (namely, assets related to the use of agents of infection, or to the provision of water supply or water disposal services), provided that the use of those assets is not the core business of the company and their book value does not exceed 1 per cent of the book value of the company's total assets. In circumstances where such an acquisition is carried out by a private foreign investor, a simplified review procedure applies. The amendment is important because it introduced notable exceptions to the general regime: prior to the amendment, sovereign foreign investors had been prohibited from acquiring control of strategic entities on an absolute basis and no simplified review was provided for.

The March amendment further expanded the list of obligations that can be imposed on a foreign investor as a condition to clearance. However, given that the list of obligations is non-exhaustive (i.e., obligations other than those listed may also be imposed), the amendment added little in terms of certainty or transparency.

The Strategic Law was further amended in July 2021. The only change was the expansion of the stricter regime applicable to mining and fishing companies.

Foreign investment regime

i Policy

The key purpose of the Russian foreign investment regime is to protect Russian national security. The substantive test for clearance is whether the transaction creates a threat to Russian national security or defence.

ii Laws and regulations

The two key laws that establish the general Russian foreign investment regime are Federal Law No. 57-FZ 'On the Procedure for Making Foreign Investments in Business Entities of Strategic Importance for the Defence of the Country and the Security of the State' enacted on 29 April 2008 (the Strategic Law) and Federal Law No. 160-FZ 'On Foreign Investments in the Russian Federation' enacted on 9 July 1999 (the Foreign Investments Law). In addition, a large number of industry-specific rules governing foreign investments are scattered across a number of other laws.

Compliance with the foreign investment laws is enforced by the Federal Antimonopoly Service of Russia (FAS), but the ultimate decision-maker with regard to transactions that require clearance under the Strategic Law is the Government Commission for Control over Foreign Investments in the Russian Federation (the Government Commission). The Government Commission is composed of 27 ministers and other top-ranking government officials, including the head of the FAS, and is chaired by the Prime Minister.

iii Scope

As a general rule, the following transactions require prior clearance under the Russian foreign investment regime.

Direct or indirect acquisition by a sovereign foreign investor

Direct or indirect acquisition by a sovereign foreign investor of:

  • more than 25 per cent of the voting rights in, or an ability to otherwise block decisions of, any Russian company, be it a strategic entity or not, other than a mining or fishing company; or
  • more than 5 per cent of the voting rights in a mining or fishing company.

    Except as permitted by the amendment to the Strategic Law enacted in March 2021 discussed in Section II above, sovereign foreign investors are prohibited from:

    1. acquiring control of a strategic entity. Control for this purpose includes acquiring more than 50 per cent (or 25 per cent for a mining or fishing company) of the voting rights (or a lesser stake giving de facto control), the right to appoint the CEO or more than 50 per cent (25 per cent for a mining or fishing company) of the board or other governing bodies, the right to determine decisions of the governing bodies, or to act as management company; or
    2. acquiring or taking a lease of fixed assets of a strategic entity, which account, in terms of book value, for 25 per cent or more of the total assets of that strategic entity.

    Collective acquisitions by two or more sovereign foreign investors of more than 50 per cent of the voting rights in a strategic entity (or of a lesser stake giving de facto control) are also prohibited.

    Direct or indirect acquisition by a private foreign investor

    Direct or indirect acquisition by a private foreign investor of:

    1. more than 50 per cent of the voting rights (or a lesser stake giving de facto control) in a strategic entity other than a mining or fishing company;
    2. 25 per cent or more of the voting rights in a mining or fishing company (any subsequent increase in the level of voting rights up to 75 per cent requires separate clearance);
    3. the right to appoint the CEO or more than 50 per cent (25 per cent or more for a mining or fishing company) of the board or other governing bodies of a strategic entity;
    4. the right to determine the decisions of a strategic entity;
    5. fixed assets of a strategic entity that account, in terms of book value, for 25 per cent or more of all the assets of that entity. A lease of fixed assets is subject to the same rules; or
    6. the right to act as the management company of a strategic entity.

    While private foreign investors enjoy a more liberal regime than sovereign foreign investors, that regime does not apply automatically: to benefit from such a regime, a private foreign investor must disclose to the FAS, prior to closing, its ultimate beneficial owners and controlling parties. Unless and until the private foreign investor does this to the FAS's satisfaction, it will be subject to the same prohibitions, restrictions and lower thresholds as those that apply to sovereign foreign investors.

    Certain transactions require, either in addition to prior clearance or instead of it, post-completion notifications. These notifications must be submitted after closing of any transaction that has been cleared by the Government Commission or, alternatively, have involved the direct or indirect acquisition of 5 per cent or more of the voting rights in a strategic entity.

    iv Voluntary screening

    Where it is not clear that a transaction requires clearance, the Strategic Law provides that a foreign investor may submit an inquiry to the FAS. The inquiry must include, however, approximately the same amount of information and documents as a full filing, such that it is usually more efficient to submit a filing rather than an inquiry. This is because the FAS has 30 days in which to respond to an inquiry, at the end of which it may conclude that the transaction requires clearance and then the full filing will need to be submitted, in which case the review process will only start upon submission of that full filing and the 30 days that the FAS spent on considering the inquiry would be wasted. If, however, a filing is submitted, the review timetable starts immediately upon submission and, if in the course of the review of the filing the FAS concludes that the transaction is not notifiable, it will say so.

    v Procedures

    A filing for prior clearance requires a great deal of information and documents, including the share purchase agreement or other transaction documents (or both), corporate and registration documents of the foreign investor and the Russian target, information on the business activities and licences of the foreign investor and the Russian target, and information on the structure, owners and ultimate beneficiaries of their respective groups. In certain cases, a draft business plan in relation to the Russian target needs to be prepared and included with the filing.

    Documents issued abroad must, as a general rule, carry an apostille (if the country where a document is issued is a party to the 1961 Hague Convention on Apostille) or be legalised by a Russian consulate in the relevant country (which is usually a more time-consuming process). All non-Russian documents need to be translated into Russian and the translator's signature must be certified by a Russian notary public.

    The filing is submitted to the FAS in two copies. As a first step, the FAS checks:

    1. whether the acquirer is a foreign investor;
    2. whether the Russian target is a strategic entity; and
    3. whether what is acquired meets the relevant tests for requiring clearance.

    If the answer to any of those questions is 'no', the FAS returns one copy of the filing to the foreign investor, which at that point can, as far as the Russian foreign investment regime is concerned, proceed with closing.

    If, however, all three questions are answered affirmatively, the FAS checks the filing for completeness (and requests further information if required), reviews the information and documents provided, and requests advisory opinions regarding the proposed transaction from the Federal Security Service, the Ministry of Defence and, where appropriate, other government authorities. Once the FAS has conducted all preparatory steps and completed the review, it prepares a recommendation for the Government Commission as to whether the transaction should be approved or not. At that stage, the case is ready for consideration by the Government Commission. The Government Commission is convened and meets once a sufficient number of cases have been notified, unless there are special reasons that prevent it from meeting. For example, as far as we are aware, the Government Commission did not meet between mid-November 2019 and the end of December 2020 due to the covid-19 pandemic. The absence of a fixed, pre-determined schedule for meetings of the Government Commission impacts the predictability of the foreign investment process in terms of timing.

    The Government Commission can clear the transaction – either unconditionally or on the condition that the foreign investor assumes certain obligations under an agreement entered into with the FAS – or block the transaction (which is rare). The decisions of the Government Commission are formalised in the relevant minutes, on the basis of which the FAS issues a formal decision to the foreign investor. The clearance decision defines the period of time within which the transaction can be validly closed. A foreign investor can request any duration, but it is at the discretion of the Government Commission whether or not to accommodate such a request. Requests of up to one year are usually accommodated; longer periods must be justified.

    As a matter of law, the review period can last up to six months but, in practice, may last longer, especially in light of the absence of a fixed, pre-determined schedule for meetings of the Government Commission as mentioned above. On average, however, the review can be completed within four to five months.

    Post-closing notifications are also submitted to the FAS and must be submitted within 45 days after closing. Assuming the notification is complete, the FAS typically sends a foreign investor a letter confirming acceptance of the notification 30 days after its submission.

    Failure to submit a pre-closing filing or a post-completion notification when required risks invalidation of the transaction, imposition of a fine or other negative consequences (or all three).

    vi Prohibition and mitigation

    According to the latest available statistics published by the FAS in February 2020,2 only 23 transactions out of more than 280 transactions reviewed by the Government Commission since the Strategic Law was enacted in 2008 were blocked.

    According to a report published by the FAS in May 2020,3 despite the new trade limitations and sanctions introduced against Russia, as well as the covid-19 pandemic, foreign investors remain interested in investing in Russia. In 2020, the Government Commission cleared 10 transactions valued at approximately US$2.5 billion with the proposed investment in Russian economy valued at approximately US$1.2 billion. The most significant transactions (in terms of volume of investment) were in the mining sector. In 2020, applications for prior consent of the Government Commission were made by foreign investors from various jurisdictions, including Cyprus, China, Luxembourg, Canada, Singapore, Norway and the United Kingdom.

    The FAS treats the details of notified transactions as highly confidential. Accordingly, information on cases reviewed by the Government Commission, as well as relevant decisions, are, as a general rule, not in the public domain.

    IV SECTOR-SPECIFIC REQUIREMENTS

    i Prohibited sectors

    As mentioned in Section I above, the Strategic Law contains a list of 47 types of strategic activities and if a Russian company carries out, or has a licence that permits it to carry out any such activity, foreign states, international organisations and non-Russian legal entities (which did not disclose information on their beneficial owners and controlling parties to the FAS or entities under their control) are generally prohibited from acquiring control over any such company, or purchasing or leasing its fixed assets if the book value of such assets amounts to 25 per cent or more of the total book value of all its assets.

    In addition to the general prohibitions set out by the Strategic Law, there are certain additional sector-specific prohibitions on foreign investments in Russia established by industry-related legislation. Foreign investors are prohibited from acquiring control over Russian companies that:

    1. operate in the mass media sector;4
    2. own agricultural land plots;5
    3. are active in diamond mining;6
    4. own regional gas supply or gas distribution systems;7
    5. conduct banking activities (if the relevant threshold for foreign capital in the Russian banking system is exceeded);8
    6. carry out certain types of insurance activities, including where the funding comes from the state budget or where insurance relates to state or municipally-owned property, or procurement for state and municipal needs;9
    7. are active in air transportation and related services;10
    8. are engaged in private detective and security activities;11
    9. are active in foreign trade in weapons and related products;12 and
    10. operate in the territory of a closed administrative regions.13

    There is no common definition of the term 'control' in the industry-specific laws establishing the above prohibitions. In most cases, foreign investors are prohibited from acquiring 50 per cent of the shares or more in the relevant Russian companies. In some sectors, the thresholds are lower, such as 49 per cent for companies active in the insurance and aviation sectors, and as little as 20 per cent for mass media companies or companies that own gas supply facilities. As regards the activities set out in the last three bullet points of the above list, foreign investors are prohibited from holding any stakes in companies that conduct such activities.

    ii Restricted sectors

    In addition to the general prohibitions discussed above, the Strategic Law provides for restrictions in respect of foreign investment in strategic entities. In particular, foreign investors are required to obtain prior consent of the Government Commission before entering into transactions in relation to the strategic entities (described in greater detail in Section III.iii above) or to submit a post-completion notification, or both. In certain cases, to avoid making a full filing for prior consent, a private foreign investor may disclose its beneficial owners and controlling parties to the FAS prior to closing.

    Most of the industry sectors in relation to which acquisitions of control are prohibited (as discussed in Section IV.i above) may also be viewed as restricted sectors, as foreign investors are not permitted to hold stakes exceeding certain thresholds in companies operating in those sectors, such as 49 per cent for companies active in the insurance and aviation sectors or 20 per cent for mass media companies or companies that own gas supply facilities. In the insurance sector, the share of foreign capital in the aggregate capital of all Russian insurance companies may not exceed the threshold set by the Russian Central Bank on an annual basis; similar restrictions exist in the banking sector.

    V TYPICAL TRANSACTIONAL STRUCTURES

    Provided that the acquisition vehicle qualifies as a foreign investor, the Russian foreign investment regime applies. This includes where the acquisition vehicle is a Russian company, which is ultimately controlled by a non-Russian national, a Russian national with another citizenship, a foreign state or by a legal entity incorporated outside of Russia.

    In asset deals, the Russian foreign investment regime catches only a direct purchase or lease of fixed assets of Russian strategic entities.

    In share deals, both direct and indirect acquisitions of the shares or rights in Russian companies are caught. There are no special rules or exemptions for public takeover bids.

    An acquisition, be it direct or indirect, of a minority stake in a Russian company may well be caught, depending on the exact size of the stake and, most importantly, on the rights, including contractual rights, that the foreign investor obtains in relation to the Russian company.

    Where a foreign investor incorporates a new Russian company, either solely or together with other non-Russian or Russian investors, the regime applies only to the sovereign foreign investors. This is because, at the time of its incorporation, the Russian company, by definition, may not be a strategic entity because it would not yet, at that time, hold any licences or conduct any activities that could make it a strategic entity.

    Where it comes to investing directly in a (yet to be established or already existing) Russian company, joint ventures with Russian partners are not uncommon. Such an arrangement would typically permit the foreign investor to benefit from the local knowledge, expertise and connections of the Russian partner.

    Transactions that frequently trigger the filing requirement are acquisitions of a stake in a non-Russian target that has a direct or indirect Russian subsidiary. Where a majority stake in, and therefore sole control of, the non-Russian target is acquired, the rationale for the filing is clear (assuming the purchaser is a sovereign foreign investor or the Russian subsidiary is a strategic entity).

    The purchase of a minority stake in a non-Russian target that has a Russian subsidiary may, however, also require a filing. This typically happens where the foreign investor enters into a shareholders' agreement that gives it certain minority protection rights. Some of these rights can cover all companies in the target's group, including its Russian subsidiary, and therefore give the foreign investor an ability to indirectly block, including though its nominees on the target's board, decisions of the governing bodies of the Russian subsidiary. Where the foreign investor is a sovereign foreign investor, the acquisition of the veto rights in the Russian subsidiary must be filed for prior consent, irrespective of whether the Russian subsidiary is a strategic entity or not. Where the foreign investor is a private foreign investor and the Russian subsidiary is a strategic entity, the investor, in order to avoid a full filing, must disclose its ultimate beneficiaries and controlling parties to the FAS. This rule has nothing to do with the acquisition of joint control: an ability to block any, even the most insignificant decision, of the Russian company is sufficient to trigger the filing or disclosure requirement.

    Where the foreign investor acquires veto rights in the Russian company under contract, rather than by operation of law, the filing requirement will not be triggered if, to the extent commercially acceptable, the Russian subsidiary is carved out of the scope of the minority protection rights; for example, through replacing the blocking rights with consultation rights.

    VI OTHER STRATEGIC CONSIDERATIONS

    Although the foreign investment regime in Russia is a stand-alone regime, in most cases a transaction that requires a foreign investment filing is also likely to require a merger control filing. Under Russian merger control rules, if a transaction that triggers a merger filing also requires clearance under the Strategic Law or the Foreign Investment Law, or both, the competition authority will not issue a merger control clearance until the foreign investment clearance is in place.

    By virtue of amendments to the Foreign Investment Law introduced in 2017, where a transaction does not fall within the requirements of the Strategic Law, the Chairman of the Government Commission can rule 'to ensure defence of the country and the security of the state' that any transaction by a foreign investor that affects a Russian company (including non-strategic companies) requires prior consent of the Government Commission, in which case a foreign investment filing will need to be made. According to the statistics available on the official website of the FAS,14 this rule is rarely applied: since 2017, only 16 transactions were considered by the Government Commission under this provision, only two of which were blocked.

    VII OUTLOOK

    Following the amendments introduced in March 2021, which are discussed in Section II above, the FAS has proposed further changes to the Strategic Law aimed at expanding the list of transactions that are subject to prior consent of the Government Commission.15

    In particular, amendments are being considered that would extend the filing requirements to the following:

    1. concession agreements in relation to the assets of strategic entities;
    2. transactions that affect strategic entities in corporate forms such as partnerships, production cooperatives and non-profit organisations (currently, the regime only applies to limited liability companies and joint-stock companies);
    3. the obtention of any licences by Russian companies controlled by foreign investors that would authorise them to carry out strategic activities; and
    4. the obtention by a Russian national who ultimately controls a strategic entity of foreign citizenship.

    Furthermore, according to a high-ranking FAS official, the FAS may consider extending the March 2021 amendment to the Strategic Law that allows sovereign foreign investors to acquire control of certain strategic entities engaged in activities related to the use of agents of infection or provision of water supply and water disposal services, and that provided for the simplified clearance process in relation to transactions affecting such strategic entities for private foreign investors to other types of strategic activities, depending on how those new rules are implemented and whether they prove efficient.16

    The general trend in Russia is to further refine the Russian foreign investment regime to liberalise it and reduce the administrative burden on foreign investors, as well as remove any gaps identified by the law enforcement practice to ensure that the security and defence of the state are safely protected.

    Footnotes

  • Sector-specific requirements

    i Prohibited sectors

    As mentioned in Section I above, the Strategic Law contains a list of 47 types of strategic activities and if a Russian company carries out, or has a licence that permits it to carry out any such activity, foreign states, international organisations and non-Russian legal entities (which did not disclose information on their beneficial owners and controlling parties to the FAS or entities under their control) are generally prohibited from acquiring control over any such company, or purchasing or leasing its fixed assets if the book value of such assets amounts to 25 per cent or more of the total book value of all its assets.

    In addition to the general prohibitions set out by the Strategic Law, there are certain additional sector-specific prohibitions on foreign investments in Russia established by industry-related legislation. Foreign investors are prohibited from acquiring control over Russian companies that:

    1. operate in the mass media sector;4
    2. own agricultural land plots;5
    3. are active in diamond mining;6
    4. own regional gas supply or gas distribution systems;7
    5. conduct banking activities (if the relevant threshold for foreign capital in the Russian banking system is exceeded);8
    6. carry out certain types of insurance activities, including where the funding comes from the state budget or where insurance relates to state or municipally-owned property, or procurement for state and municipal needs;9
    7. are active in air transportation and related services;10
    8. are engaged in private detective and security activities;11
    9. are active in foreign trade in weapons and related products;12 and
    10. operate in the territory of a closed administrative regions.13

    There is no common definition of the term 'control' in the industry-specific laws establishing the above prohibitions. In most cases, foreign investors are prohibited from acquiring 50 per cent of the shares or more in the relevant Russian companies. In some sectors, the thresholds are lower, such as 49 per cent for companies active in the insurance and aviation sectors, and as little as 20 per cent for mass media companies or companies that own gas supply facilities. As regards the activities set out in the last three bullet points of the above list, foreign investors are prohibited from holding any stakes in companies that conduct such activities.

    ii Restricted sectors

    In addition to the general prohibitions discussed above, the Strategic Law provides for restrictions in respect of foreign investment in strategic entities. In particular, foreign investors are required to obtain prior consent of the Government Commission before entering into transactions in relation to the strategic entities (described in greater detail in Section III.iii above) or to submit a post-completion notification, or both. In certain cases, to avoid making a full filing for prior consent, a private foreign investor may disclose its beneficial owners and controlling parties to the FAS prior to closing.

    Most of the industry sectors in relation to which acquisitions of control are prohibited (as discussed in Section IV.i above) may also be viewed as restricted sectors, as foreign investors are not permitted to hold stakes exceeding certain thresholds in companies operating in those sectors, such as 49 per cent for companies active in the insurance and aviation sectors or 20 per cent for mass media companies or companies that own gas supply facilities. In the insurance sector, the share of foreign capital in the aggregate capital of all Russian insurance companies may not exceed the threshold set by the Russian Central Bank on an annual basis; similar restrictions exist in the banking sector.

    Typical transactional structures

    Provided that the acquisition vehicle qualifies as a foreign investor, the Russian foreign investment regime applies. This includes where the acquisition vehicle is a Russian company, which is ultimately controlled by a non-Russian national, a Russian national with another citizenship, a foreign state or by a legal entity incorporated outside of Russia.

    In asset deals, the Russian foreign investment regime catches only a direct purchase or lease of fixed assets of Russian strategic entities.

    In share deals, both direct and indirect acquisitions of the shares or rights in Russian companies are caught. There are no special rules or exemptions for public takeover bids.

    An acquisition, be it direct or indirect, of a minority stake in a Russian company may well be caught, depending on the exact size of the stake and, most importantly, on the rights, including contractual rights, that the foreign investor obtains in relation to the Russian company.

    Where a foreign investor incorporates a new Russian company, either solely or together with other non-Russian or Russian investors, the regime applies only to the sovereign foreign investors. This is because, at the time of its incorporation, the Russian company, by definition, may not be a strategic entity because it would not yet, at that time, hold any licences or conduct any activities that could make it a strategic entity.

    Where it comes to investing directly in a (yet to be established or already existing) Russian company, joint ventures with Russian partners are not uncommon. Such an arrangement would typically permit the foreign investor to benefit from the local knowledge, expertise and connections of the Russian partner.

    Transactions that frequently trigger the filing requirement are acquisitions of a stake in a non-Russian target that has a direct or indirect Russian subsidiary. Where a majority stake in, and therefore sole control of, the non-Russian target is acquired, the rationale for the filing is clear (assuming the purchaser is a sovereign foreign investor or the Russian subsidiary is a strategic entity).

    The purchase of a minority stake in a non-Russian target that has a Russian subsidiary may, however, also require a filing. This typically happens where the foreign investor enters into a shareholders' agreement that gives it certain minority protection rights. Some of these rights can cover all companies in the target's group, including its Russian subsidiary, and therefore give the foreign investor an ability to indirectly block, including though its nominees on the target's board, decisions of the governing bodies of the Russian subsidiary. Where the foreign investor is a sovereign foreign investor, the acquisition of the veto rights in the Russian subsidiary must be filed for prior consent, irrespective of whether the Russian subsidiary is a strategic entity or not. Where the foreign investor is a private foreign investor and the Russian subsidiary is a strategic entity, the investor, in order to avoid a full filing, must disclose its ultimate beneficiaries and controlling parties to the FAS. This rule has nothing to do with the acquisition of joint control: an ability to block any, even the most insignificant decision, of the Russian company is sufficient to trigger the filing or disclosure requirement.

    Where the foreign investor acquires veto rights in the Russian company under contract, rather than by operation of law, the filing requirement will not be triggered if, to the extent commercially acceptable, the Russian subsidiary is carved out of the scope of the minority protection rights; for example, through replacing the blocking rights with consultation rights.

    Other strategic considerations

    Although the foreign investment regime in Russia is a stand-alone regime, in most cases a transaction that requires a foreign investment filing is also likely to require a merger control filing. Under Russian merger control rules, if a transaction that triggers a merger filing also requires clearance under the Strategic Law or the Foreign Investment Law, or both, the competition authority will not issue a merger control clearance until the foreign investment clearance is in place.

    By virtue of amendments to the Foreign Investment Law introduced in 2017, where a transaction does not fall within the requirements of the Strategic Law, the Chairman of the Government Commission can rule 'to ensure defence of the country and the security of the state' that any transaction by a foreign investor that affects a Russian company (including non-strategic companies) requires prior consent of the Government Commission, in which case a foreign investment filing will need to be made. According to the statistics available on the official website of the FAS,14 this rule is rarely applied: since 2017, only 16 transactions were considered by the Government Commission under this provision, only two of which were blocked.

    Outlook

    Following the amendments introduced in March 2021, which are discussed in Section II above, the FAS has proposed further changes to the Strategic Law aimed at expanding the list of transactions that are subject to prior consent of the Government Commission.15

    In particular, amendments are being considered that would extend the filing requirements to the following:

    1. concession agreements in relation to the assets of strategic entities;
    2. transactions that affect strategic entities in corporate forms such as partnerships, production cooperatives and non-profit organisations (currently, the regime only applies to limited liability companies and joint-stock companies);
    3. the obtention of any licences by Russian companies controlled by foreign investors that would authorise them to carry out strategic activities; and
    4. the obtention by a Russian national who ultimately controls a strategic entity of foreign citizenship.

    Furthermore, according to a high-ranking FAS official, the FAS may consider extending the March 2021 amendment to the Strategic Law that allows sovereign foreign investors to acquire control of certain strategic entities engaged in activities related to the use of agents of infection or provision of water supply and water disposal services, and that provided for the simplified clearance process in relation to transactions affecting such strategic entities for private foreign investors to other types of strategic activities, depending on how those new rules are implemented and whether they prove efficient.16

    The general trend in Russia is to further refine the Russian foreign investment regime to liberalise it and reduce the administrative burden on foreign investors, as well as remove any gaps identified by the law enforcement practice to ensure that the security and defence of the state are safely protected.

    Footnotes

    1 Alexander Viktorov is counsel and Olga Kovtunova is an associate at Freshfields Bruckhaus Deringer LLP.

    2 See Press Release, FAS: 'Andrey Tsyganov: Statistics shows that we have a friendly attitude towards foreign investors' (http://en.fas.gov.ru/press-center/news/detail.html?id=54753).

    3 See FAS Report on the State of Competition in the Russian Federation in 2020 (https://fas.gov.ru/documents/687779) (in Russian).

    4 Law of the Russian Federation No. 2124-1 dated 27 December 1991 'On Mass Media'.

    5 Federal Law No. 101-FZ dated 24 July 2002 'On Turnover of Agricultural Lands'.

    6 Federal Law No. 41-FZ dated 26 March 1998 'On Precious Metals and Precious Stones'.

    7 Federal Law No. 69-FZ dated 31 March 1999 'On Gas Supply in the Russian Federation'.

    8 Federal Law No. 395-1 dated 2 December 1990 'On Banks and Banking Activities'.

    9 Law of the Russian Federation No. 4015-1 'On Organisation of Insurance Business in the Russian Federation'.

    10 Aviation Code of the Russian Federation No. 60-FZ dated 19 March 1997.

    11 Law of the Russian Federation No. 2487-1 dated 11 March 1998 'On Private Detective and Security Activities in the Russian Federation'.

    12 Federal Law No. 114-FZ dated 19 July 1998 'On Military and Technical Cooperation between the Russian Federation and Foreign States'.

    13 Law of the Russian Federation No. 3297-1 dated 14 July 1992 'On Closed Administrative-Territorial Regions'.

    14 See Press release, FAS: 'Andrey Tsyganov on the consideration of transactions at the government commissions and the expansion of strategic activities' (http://en.fas.gov.ru/press-center/news/detail.html?id=55148).

    15 See Article 'FAS suggested extending the list of requirements in relation to transactions which are subject to obtaining consent of the government commission' (https://tass.ru/ekonomika/11177321) (in Russian).

    16 See Press release, FAS: 'Andrey Tsyganov on the consideration of transactions at the government commissions and the expansion of strategic activities' (http://en.fas.gov.ru/press-center/news/detail.html?id=55148).

    1 Alexander Viktorov is counsel and Olga Kovtunova is an associate at Freshfields Bruckhaus Deringer LLP.

    2 See Press Release, FAS: 'Andrey Tsyganov: Statistics shows that we have a friendly attitude towards foreign investors' (http://en.fas.gov.ru/press-center/news/detail.html?id=54753).

    3 See FAS Report on the State of Competition in the Russian Federation in 2020 (https://fas.gov.ru/documents/687779) (in Russian).

    4 Law of the Russian Federation No. 2124-1 dated 27 December 1991 'On Mass Media'.

    5 Federal Law No. 101-FZ dated 24 July 2002 'On Turnover of Agricultural Lands'.

    6 Federal Law No. 41-FZ dated 26 March 1998 'On Precious Metals and Precious Stones'.

    7 Federal Law No. 69-FZ dated 31 March 1999 'On Gas Supply in the Russian Federation'.

    8 Federal Law No. 395-1 dated 2 December 1990 'On Banks and Banking Activities'.

    9 Law of the Russian Federation No. 4015-1 'On Organisation of Insurance Business in the Russian Federation'.

    10 Aviation Code of the Russian Federation No. 60-FZ dated 19 March 1997.

    11 Law of the Russian Federation No. 2487-1 dated 11 March 1998 'On Private Detective and Security Activities in the Russian Federation'.

    12 Federal Law No. 114-FZ dated 19 July 1998 'On Military and Technical Cooperation between the Russian Federation and Foreign States'.

    13 Law of the Russian Federation No. 3297-1 dated 14 July 1992 'On Closed Administrative-Territorial Regions'.

    14 See Press release, FAS: 'Andrey Tsyganov on the consideration of transactions at the government commissions and the expansion of strategic activities' (http://en.fas.gov.ru/press-center/news/detail.html?id=55148).

    15 See Article 'FAS suggested extending the list of requirements in relation to transactions which are subject to obtaining consent of the government commission' (https://tass.ru/ekonomika/11177321) (in Russian).

    16 See Press release, FAS: 'Andrey Tsyganov on the consideration of transactions at the government commissions and the expansion of strategic activities' (http://en.fas.gov.ru/press-center/news/detail.html?id=55148).

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