Russian Judicial Loophole May Hamper Foreign Transactions

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Apr. 2 – Any deal to buy a strategic enterprise by a Russian company that has foreign daughter companies may be declared null and void. Blame the broad interpretation by the Federal Anti-Monopoly Service and the courts for their elastic notion of what constitutes a group of persons. Even major Gazprom deals could be contested.

In April 2008, a law on foreign investment in strategic sectors of Russia’s economy entered into force. It applies to foreign investors and groups of persons who seek to buy shares in Russian companies operating in 42 strategic sectors including the oil industry, telecommunications, defense, space industry, and so on.

If you follow the law scrupulously, even domestic companies that have foreign subsidiaries, such as offshore, could be considered a group of persons. It turns out that any deals over they have made over the last two years should have been done with consent of permission from the government commission or else be declared null and void.

Examples of such transactions are the purchase by Gazprom – which has foreign subsidiaries – of a 20 percent stake in Gazpromneft from the Italian ENI, or the purchase by Novatek – which is a group with Swiss, Cypriot and Polish subsidiaries – of 51 percent of Yamal LNG, purchase by Systema, which has dozens of foreign investors controlling stocks of the enterprises Bashkir Fuel and Energy complex.

“We inquired the Russian Federal Antimonopoly Service (FAS) for explanations”, corporate management director of ‘Prosperity Capital Management’ Denis Spirin said to business paper Vedomosti, “and FAS asserts that similar transactions should meet with approval from the commission.”

“However a problem with the “group of persons” concept definition does exist,” said FAS deputy Head Andrey Tsyganov.

“If we interpret this definition literally, any company which has foreign subsidiaries and active in strategic branch should meet with approval of the governmental commission”, he said.

Gazprom lawyers said to the newspaper that they already know about this collision of interest and have started to study it.

According to Vedomosti’s data, there are some identified cases of null and void transactions because of this legal collision.

“FAS considers present requirements redundant and is preparing amendments to the law”, said Tsyganov, – “Only if foreign investors supervise the deal will the company-purchaser be required to meet with commission approval.” However, Tsyganov refused to comment possible risk of contesting completed transactions.