Strategic Protectionism? National Security and Foreign Investment in the Russian Federation

Article excerpt

Russia recently joined the growing list of nations that formally control foreign investment in "strategic" industries. The new law regulating foreign investment generated mixed reviews, ranging from harsh criticism in the media to restrained optimism from investors. This Note will argue that the new Strategic Sectors Law, though not perfect, is less restrictive than critics claim and helps establish the "rules of the game" for foreign investors in sensitive industries. Most importantly, the law is generally consistent with standards promoted by the Organisation for Economic Co-operation and Development and will likely help promote foreign investment in Russia.

I. INTRODUCTION

Some commentators have criticized Russia's new law1 regulating foreign investment in its strategic sectors.2 This Note will argue that the law is less restrictive than it seems and will likely encourage foreign investment by making the rules in Russia more transparent and predictable. More importantly, the law generally complies with Russia's goals of encouraging the growth of foreign investment and meets criteria for such legislation proposed by the Organisation for Economic Co-operation and Development (OECD).3 Finally, based on these criteria and the initial evidence of the law's implementation, this Note will critically assess how well the law compares to the "ideal" and identify areas where the law should be modified or amended.

A. Russia's Economic Recovery, the Growth of Investment, and Legal Gaps

Since its recovery from the 1998 ruble devaluation and the rise in world oil and gas prices, Russia has enjoyed robust economic growth.4 From 2000 to 2007, the influx of foreign direct investment (FDI) increased by approximately 800 percent.5 The level of FDI as a percentage of gross domestic product (GDP), however, is still low compared to other developed economies.6 Indeed, the Russian government has made it a priority to encourage FDI, not only as a source of capital, but also for necessary technology and knowledge transfers to Russian enterprises.7 More importantly, weaknesses in Russia's economy related to underinvestment exacerbated the impact of the 2008 global financial crisis.8 At the same time, concerns over foreign acquisition of domestic corporations and gaps in the existing legal framework have led the Russian government to consider laws restricting FDI in certain sectors.9 Then- Russian President Vladimir Putin first spoke to the need for such a law in his annual address to the Federal Assembly in 2005.10 The State Duma and Federation Council passed the final draft of the Strategic Sectors Law in April 2008, and President Putin signed it into law on May 5, 2008.11 The Strategic Sectors Law restricts the level of foreign investment in forty-two different types of businesses, establishes procedures to approve such investments, and defines the rights and obligations of foreign investors.12 The law also shares many characteristics with similarly-focused laws in a majority of developed countries.13 Indeed, in recent years, several Western European countries and the United States have adopted or amended laws that regulate foreign investment in certain economic sectors, at least partially due to concern over acquisitions of domestic companies by foreign state-owned companies.14

B. Taxonomy of Foreign Investment

In Russia, there are three categories of foreign investment: FDI, foreign portfolio investment (FPI), and other foreign investment.15 FPI "includes purchase of shares, bonds or other securities of Russian enterprises, at levels below 10 percent of the equity capital."16 The other foreign investment category is a mixed bag of various types of credits, including direct lending from foreign banks.17 FDI generally "occurs when a foreign investor exerts direct control over domestic assets."18 This happens in one of two ways: (1) foreign investors start a new business or increase the amount of their ownership in an existing firm; or (2) foreign investors acquire ownership over an existing business. …