Russian foreign investment regime: some rules tightened, others relaxed

The Russian foreign investment regime continues to evolve and sharpen, and a number of legislative amendments have come into force over the past months. Some of these address regulators’ longstanding concerns, aiming to tighten the regime in certain industries which have proven over the years to be critically important for Russia but insufficiently regulated to date. Others are intended to relax the rules in less crucial industries in order to facilitate (or at least, not hinder) foreign investments.

Which industries are affected?

Amendments introduced in 2021 primarily affect transactions by foreign investors in respect of Russian entities which are engaged in mass media, fishing, water supply (including companies active in the brick-cement, glass, stoneware, textile, metallurgy, forestry, electricity and many other industries requiring vast amounts of water supply), as well as activities involving pathogens (including healthcare, personal care and cosmetics production, food, farming and agriculture). 

Mass media – foreign participation restricted even further, with the risk of mandatory divestment

The Law on Mass Media has been updated to detail the restrictions imposed on "foreign persons” which prohibit them (independently or collectively) from owning, managing or controlling, directly or indirectly, over 20% of shares in any entity or a shareholder of an entity which is a mass media company – specifically, a mass media founder, mass media editor or a broadcasting company – or otherwise controlling or managing a mass media company or its decisions.

A new requirement provides that, in the case of a breach of the above limitations, the relevant foreign persons will be required to dispose of the excess shares either voluntarily within one year of the acquisition or – after the expiry of that term – be forced to do so in accordance with a court decision, in which case the shares will either be returned to the previous owner or placed under federal or municipal ownership. Until the breach is remedied, the foreign person is deemed to hold no more that 20% of votes at the shareholders’ meetings when determining the quorum and calculating voting results.

Auxiliary activities – still strategically important, but now benefitting from a simplified clearance process

A groundbreaking relaxation measure was introduced earlier this year for certain entities which are engaged in specified types of “strategically important activities” but for which such activities are auxiliary. These entities are still regarded as strategically important for the Russian Federation – and the foreign/strategic investment provisions continue to apply to transactions involving them. However, (i) foreign states (and entities under their control) are now allowed to acquire control over them, and (ii) investments and transactions of non-state-controlled foreign investors involving such strategic entities are now subject to a simplified clearance procedure. This will result in the relevant transactions potentially no longer requiring lengthy strategic investment clearances. Instead, the clearance would be adopted by the Russian foreign investment regulator (FAS) rather than the Governmental Commission (thus reducing the length of the strategic clearance process from 6-12 months to c. 3 months).

Additional tests are to be applied by the regulator to determine whether the strategically important activities are in fact “auxiliary” (e.g., by reference to the value of assets used for such activities and three years of historical activities of the strategic Russian target).

Fishing industry – regime tightened 

The fishing industry has been in the crosshairs of the FAS for several years now. The regulator has put significant effort into unravelling historic deals completed in breach of the Russian foreign/strategic investment regime. It has received backing for this strategy in the courts; all such measures aligned with the national strategy of significantly reducing foreign participation in the Russian fishing industry and increasing transparency in its regulation.

The statutory restriction introduced in July is just the latest measure. It has drastically reduced the stakes that foreign state-controlled entities may acquire and also imposes severe restrictions on non-state-controlled foreign investors. Pre-closing clearance by the Governmental Commission is required for foreign state-controlled entities to acquire over 5% in Russian fishing entities, while acquiring 25% or more is prohibited entirely. All foreign investors who already hold between 25% and 50% of voting shares in Russian fishing companies have until July 2022 to obtain clearance from the Governmental Commission to be allowed to continue to hold such stakes (or must reduce their stakes to less than 25% – and if not, they will be deprived of their voting rights by the courts).

Liability for failure to comply

Failure to comply with Russian foreign investment restrictions can have weighty consequences, including one or more of the following penalties:

• invalidation of the transaction in question, deemed null and void;
• deprivation of voting rights for the investor in respect of the relevant Russian target or invalidation of decisions adopted at shareholder meetings;
• a requirement imposed on the investor to divest excess stakes/rights; and
• administrative fines for the investor.

These penalties are applied equally to foreign-to-foreign transactions by the FAS and the Russian courts. Non-compliance may also create significant complications for future deals involving the Russian target in question.