In the exclusive interview to the ‘New Defence Order. Strategy’ magazine, Andrey TSYGANOV, Deputy Head of Russia’s Federal Antimonopoly Service (FAS) speaks on the business environment in Russia, laws and marketing tasks to be accomplished today in order to attract foreign investments.
– What do you think of Russia as a country being attractive for foreign investors?
– Russia is very attractive for foreign and Russian investors, because Russia’s economy has the enormous potential, the richest mineral resources, a variety of climatic zones, access to the largest transnational global transportation chains connected with all corners of the world, and, of course, such an important resource as available qualified personnel. Besides, Russia is a market with a large sales volume – 150 mln consumers in our country and about 200 mln consumers including the CIS countries.
For the past 20 years, all institutional and legal environments for convenient and safe investing in our economy have been formed. Russia has a well-developed legal base and established legislation. Russia takes a rightful place in the world's rankings for property rights protection and investment protection. According to Doing Business indices, every year Russia climbs several positions up, and now, for example, holds the leading position among the BRICS countries.
Moreover, until now some Russia’s resources have been underestimated, for instance, the land, production resources, and manpower. It is evident that with smart investing, this situation gives an option for gaining extra profit.
– Except the fuel and energy industry, which industries Russia can and shall attract foreign investors to?
– Natural resources are limited and therefore unique and especially valuable; that is why, they are initially attractive. But we are not talking about oil and gas only. Which country has, for example, so many land resources located in favorable natural and climatic conditions in comparison to Russia? Or such a variety of the periodic table’s elements which Russian mineral resources offer?
– Which countries show the most interest in the Russian market?
– The global investment market is arranged in such a way that we cannot identify any distinct national or geographic priorities. This market does not consider the national identity. Investment companies are the global market players; they are investing in different countries and regions, as well as in different industries.
Basically, they combine retirement and insurance funds, private investments and corporate savings, or bank money. Investment companies are controlled by highly skilled managers who apply certain mathematical and pragmatic principles; they estimate whether it is convenient or inconvenient, efficient or inefficient to invest in the given economy at the given time.
– If we get back to industries, the fuel and energy market and commodity trade market are well developed; so, which new opportunities and offers is Russian market trying to generate nowadays?
– The land is a new resource; until now, we have had a considerably complicated and imperfect legislative control over land resources. But now the situation is changing.
If we are talking about the production sector, it depends; we have targeted investments only. There are some very attractive objects for investments; and there are such objects which cannot arise any interest without proper preparation. We should understand that not in every instance a foreign or Russian investor purchases any Russian company to continue the type of activity such a company has been involved in. There are many examples when the investor has purchased enterprises working in the downtown areas in Moscow or in St. Petersburg just for demolition and further building of business centers, hypermarkets or apartment buildings. Another typical example: foreign investors purchased Russian businesses in order to eliminate competitors. They have purchased and closed companies or changed their line of business to maintain their own position in the market. The typical example of such investments in the 1990s – the famous factory manufacturing sewing machines (“Singer” company, founded in the beginning of XX century), located in Podolsk. The factory was purchased and closed.
– What's the situation with investments in the defence industry sector? Are there specific examples of successful transaction in this field?
– The defence industry is a very attractive sector for foreign investors. There are some examples of successful investments, if not in enterprises which are directly involved in the manufacturing of finished military products, but in high-tech companies producing assemblies, parts and components or dual-use products. Companies involved in the production of optical devices, communication equipment, electronic components and materials have a large number of foreign shareholders, sometimes, majority shareholders.
There are just a few transactions associated with direct investments in the defence industry, with companies manufacturing finished products, but there are some examples such as Tver Carriage Works and Siemens. Firstly, Alstom purchased the company's block of stock, and now, as a part of a big international transaction, Siemens is purchasing Alstom’s shares and after all necessary governmental approvals could include Tver and Bryansk Carriage Works in its business. These are diversified enterprises manufacturing products for civil and military purposes. Recently, this transaction has successfully passed the procedure by the Government Commission on Monitoring Foreign Investment. Okskaya Shipyard has also made a deal with a foreign investor. The enterprise is involved in manufacturing of special-purpose products. Working for the defence industry, NII Stali Research Institute also has foreign capital. Kirov Tyre Plant has been purchased by Pirelli. This list may be continued.
– The government has assigned a task to diversify defence enterprises. Some defence concerns, in their turn, are facing a number of problems when trying to accomplish this task, in particular, insufficient funds; launching the production of high-tech products for civil purposes requires big investments in R & D and modernization. In your opinion, can foreign investments in the defence industry help solve these problems?
– Of course, they can. Moreover, they can help out in the form of direct investments. As you have mentioned R & D, so try to find any Russian bank which would give you money for R & D... It is highly unlikely. In the current business environment in Russia, banks prefer short-term loans; that is why companies may spend only their own money for development. The situation in the global market is actually identical for Russian lenders – taking into account risks of the sanction policy within their own jurisdiction, very few foreign banks will be involved in the financing of R & D for Russian companies, especially, Russian defence companies. The capital in the form of direct investments by purchasing a share in a Russian company will have more reliable protection, with regard to the effect of sanctions. It is evident, taking into account Russian laws and international laws. This is the most promising and secure model of interaction.
– However, there are many aspects to be taken into account, including the restricting laws. Which steps are taken to encourage investors interested in defence companies?
– Our country has all necessary institutions for investing; we have the appropriate legislation, experience in legal enforcement, judicial practice, business support institutions, the Industrial Development Fund and the Russian Direct Investment Fund. The main problems lie not on the macro level, they rather lie on the level of enterprises.
We should understand that it takes skills, time and a thoughtful approach, including international strategic marketing, to attract any foreign investor. It takes skills to sell and promote the existing projects. This is the problem Rosoboronexport has been solving for years and they have achieved success; may be we should learn from them. Within the military and technical cooperation system, we can sell finished products. We should apply similar sales methods and skills in order to attract investments, establish joint ventures and manage joint research.
– Russia has been negotiating joint development of the most advanced fighter aircraft with India and United Arab Emirates for a long time with variable success, we should say. Do you think this approach (to joint development) is one of the methods to attract investors? What do Russian companies need to intensify business processes?
– They need sales skills; they should master modern methods of global marketing. Many Russian defence companies do not have any of them. This is the specifics of the industry; for decades, these companies have had the only customer – the state. Now, they have options and they must work for several customers; they should diversify their stock of orders and the list of partners. Many companies understand it.
Moreover, we need to fundamentally change the image of Russia as the business partner. That's a fact, because even expert communities have an insufficient or incorrect opinion of Russia as the investment medium, as the business environment. The world knows little about Russia.
– In other words, the opinion on Russia and, in particular, on the business environment in our country, has been shaped, we may say, based on erratic information flows, wild guesses and lack of understanding. What should we do to change this situation?
– We need to promote our country as the environment where scientists are involved in research activities, where corporations are growing, where enterprises are working; business multiplies capital; personnel are refreshing their skills; the government is taking care of the business environment. We need to represent the country as a country favorable for business.
– How to satisfy an investor? Which risks or pitfalls await the investor? Are there any risks for European investor's reputation when collaborating with Russia?
– Of course, some risks exist. First of all, there are the global economic risks associated with improper investments or with an inappropriate analysis of investment expectations. Also, there are political risks at all times. Those are global risks, they are not connected with Russia only. The recent history proves that sanctions are persistent in this world; we have managed to live and work in a situation like this since the Soviet era. By the way, not only those who are the target of these sanctions are taking risks, but also those who impose sanctions.
– Can we say that if we attract more foreign investors, if a larger number of investors enter Russian market and return to us often, if the geography of business cooperation is expanded, all this will become one of the factors ensuring stability and improvement in international political relations?
– No doubt, the more foreign investors, the less the profit of maintaining the sanction policy. Improving the dialog and business communications is the way to stabilize relationship at the global level. Attracting foreign investments is not an extraordinary event; this is routine and regular work. We should note that attracting foreign investments means not only money, but also extended competencies both managerial and technological. If a new representative of western top management enters a Russian company's board of directors, this means they attract representative’s job experience; this indicates that such a representative is interested and wants to make the business more successful, to faster return invested assets. Integration of any Russian business into the global economy cooperation system help the business grow and meet actual requirements.
– In one of your interviews you said that for 10 years of application of the law (“On the Procedure For Foreign Investment …”) you have received 516 applications, including 216 applications approved by the Government Commission. On average, we have 20 approved transactions per year. At first glance, it is not a very big figure for a large country like Russia. Why? And why did you reject applications?
– Twenty approved transactions per year is the only part of deals that are directly covered by the federal law, i.e. those are transactions relating to national defence and security. In all other cases, transitions are not to be approved by the Government Commission. Why we approved only 216 transactions of the whole bunch of 516 – that was not caused by rejections of all others. Often, businesses take a cautious approach and submit documents for transaction approvals, but there are no requirements to submit them. Actually, there have been 14 rejections for 10 years, or 5% of the total amount of reviewed applications.
– After the 2017 amendments to Federal Law No. 160-FZ in order to ensure the state defence and security according to the decision of the Chairman of the Government Commission on Monitoring Foreign Investment in the Russian Federation, transactions made by foreign investors with regard to Russian business companies may be reviewed by the Government Commission in accordance with the procedure specified by Federal Law No. 57-FZ. The Decrees of the Government of the Russian Federation dated 09.04.2018 Nos. 430 and 431 legally established the procedure to implement the regulation. What are these Decrees intended for?
– Federal Law No. 57-FZ contains a list of types of activity and industries which belong to the strategic category. It is evident that any list is imperfect. There are controversial situations when it is clear that a transaction is highly likely to cause damage to national defence and security due to its specifics, and such a transaction does not match the above-mentioned list. We have had a number of such precedents and analyzed them to prepare amendments to the law.
The Government decrees regulate the process of submitting a transaction to be reviewed by the Government Commission. The decrees regulate the procedure for submitting a transaction to be reviewed by the Commission; they also regulate the procedure for preparation and decision-making.
– How does the Chairman of the Government commission receive the information of an upcoming transaction? If company’s line of business is not specified in the list, how can they know about an upcoming transaction with a foreign investor?
– All transactions that meet certain criteria are to be checked by the FAS of Russia as we should check them, first of all, in accordance with the Law on Competition so that any large mergers and takeovers, not only in strategic industries, shall not reinforce any company’s dominant position in the market and limit the competition.
Every year we review a few thousands of transaction; we carefully analyze them, with regard to our internal regulations, and check them for any potential threat to national defence and security. Our report may be used as the ground for submitting a transaction to the Government Commission. First of all, we notify the company to let them know the current status of their transaction.
– Which tasks does the Government of the Russian Federation assign for the FAS of Russia?
– The President assigned the task to increase the rate of investments in national GDP up to 25% (any investments, not only foreign ones). No doubt, foreign investments are more profitable; they often bring new competences, knowledge, experience in product promotion, and access to new markets. Despite the fact that Federal Law 57-FZ seems to be a restricting law, it is intended not to restrict, but to attract foreign investments, and at the same time to analyze and identify potential threats. That is why, according to statistic data, we have over 200 approvals relating to the attraction of foreign investments; over 200 cases when transactions had not to be submitted to the Government Commission; and less than 20 cases when we have managed to identify the threat.
– Which steps does the FAS of Russia take to attract foreign investors to Russia, probably, to help companies?
– Knowledge is power. We are trying to inform Russian companies and foreign investors about Russian laws regarding foreign investments. Outreach activities work.
– What are the first steps to increase investments?
– Outreach activities are needed in our country and in other countries, too. It’s important to inform market players so that they should know peculiarities of investment laws and regulations; companies should understand what they can start with, what they should be prepared for, what the business environment in Russia is. Besides, there are many people in other countries that know nothing about it, and make it worse, they are telling false stories. So far, the image of Russia is the country where Cossacks are walking together with brown bears by the streets and drinking vodka on and on, and where foreigners are robbed or put in prison. In fact, information about our country is very scrappy, and the knowledge of Russia as a country for business activity is tenuous.
– The St. Petersburg International Economic Forum 2018 was a large-scale event and success, with a large number of foreign visitors. But they discussed global business problems, urgent macroeconomic issues and the future. Such events offer a very high level of discussion, in fact, for those who have expert knowledge. May be, we should descend to a middle level, non-philosophical, application level?
– We are finishing our work on clause-by-clause comments on the Russian foreign investment laws. The project is being developed with the help of lawyers who have wide experience in operations with foreign investors. Our consultants are international and Russian law firms. They are our project partners. After these comments are complete, we are going to invite foreign and Russian lawyers and counsels, businessmen and diplomatic mission representatives to take part in a special conference. This is a very important step. We need to communicate with Russian and foreign businesses.
Federal Law No. 57-FZ specifies limitations for foreign investors in case of ownership of business companies, which have the strategic importance. The limitations require that transactions are subject to the preliminary review by the Government Commission on Monitoring Foreign Investment in the Russian Federation. For now, the list includes 47 strategic types of activity (nuclear and atomic energy sectors, military-industrial complex, space industry, subjects of natural monopolies, subsurface users, etc.).
Private investors shall pass the process of monitoring of “strategic” types of activity. The investors controlled by foreign states, as well as investors who do not disclose the information on their beneficiaries and controlling persons, have no right to establish the control over strategic-type business companies and to block decisions of strategic-type companies’ management bodies. Generally, the purchase of strategic-type companies’ assets, the value of which is 25% and more of the book value is subject to approval.
Special threshold values for foreign investors' ownership of capital are specified for business companies-subsurface users. The FAS of Russia is the authorized federal executive body for monitoring foreign investments.
Examples of foreign investments in Russian diversified business companies:
- Siemens AG (Germany) purchased rights that allow to define decisions taken by management bodies of JSC “Tver Carriage Works”, JSC “Bryansk Machine Building Plant”, JSC “Kolomensk Plant” (2018);
- Palfinger CIS GmbH (the Republic of Austria) purchased 60% of shares of LLC “BELMASH-Service” (2014);
- JSC “National Company “Kazakhstan Gharysh Sapary” (the Republic of Kazakhstan) purchased 33.3% of shares of JSC “International Space Company “Kosmotras” (2012);
- Zartel Limited (the Republic of Cyprus) purchased 73.5% of JSC “Nizhnekamskshina” (2010);
- “SUBUR Finance Luxembourg S.a r.l.” purchased 100% of shares of JSC “Yaroslavl Tyre Plant” (2010);
- LLC “Concern “Tractor Plants” purchased 100% of shares of JSC “NII Stali” (2011);
- Vаsial Trading Limited (the Republic of Cyprus) took control over JSC “Promsintez”.
New defence order. Strategy | 05 | 2018