State to Sue Over Strategic Sector Violations

The Federal Anti-Monopoly Service on Monday accused several Russian and foreign companies of flouting the law for investing in strategic industries and said it would retaliate in court for the first time since the rules took effect almost two years ago.

Lawyers said a decision on the cases could bring clarity to how the law will be enforced, potentially encouraging companies to seek approval from the government for deals that do not actually require it — just to make sure they do not fall afoul of the law.

In court, the competition officials will seek to designate the offending investment deals as void and reverse them, said Andrei Tsyganov, a deputy head of the Federal Anti-Monopoly Service.

They will also press for penalties, he said, although they likely would not be excessively severe.  

"There's no need to make the punishment too tough," he said, noting that the threat of voiding a deal was "sufficient impetus to abide by the law."

Tsyganov declined to name the suspected offenders — or the industries they chose to invest in — before the service completes its investigation, which he said would take another two months. Even so, he left no doubt that the service believes the offenses did take place and that they were intentional.

"They couldn't have made a mistake," Tsyganov said in an interview with The Moscow Times on the sidelines of a meeting dedicated to the law. "They had a sound understanding of what they did."

The charges, if they materialize, would come under the law that governs foreign investment in 49 strategic industries, such as oil production from major fields and deals involving aerospace technology, defense and large media organizations.

Enacted in May 2008, the law requires foreign-registered companies — including many with Russian owners — to seek permission from a specially created government commission chaired by Prime Minister Vladimir Putin before moving in for a major deal.

The service is investigating deals by "fewer than 10" companies, which have Russians, foreigners and "some obscure groups of people" as beneficiaries, Tsyganov said. One of the purposes of the investigations is to identify the specific individuals in these groups to bring to court, he said.

The purported breaches came to light in November and December when the companies filed papers to the service for unrelated approval under a law that regulates competition, he said.

"It transpired that they had acquired things that they shouldn't have," Tsyganov said. "Supervision over both laws allows us to do our work better."

Vladimir Elizarov, an associate at law firm Squire, Sanders & Dempsey in Moscow, confirmed that to date, there have been no court cases where the government has sought to enforce violations of the strategic sectors law.

"The lawsuits will enjoy increased attention, like anything that happens for the first time," he said.

Court rulings in the cases — especially if they pass the highest court of appeal, the Supreme Arbitration Court — may give investors guidelines as to where they must tread more "carefully and prudently," Elizarov said.

"It's very important how they will influence the parts of the law that suffer from legal lacunae," he said. "This might be one of the important benefits of these rulings."

Elizarov said he was referring to the requirements that strip offenders of their voting rights and order them to sell the shares they should not own. Those rules do not specify other details or consequences.

If the deals in question are overturned by the courts, it would have an intimidating effect on business, causing executives to seek permission even if they are not sure they need it, said Natalya Korostelyova, a lawyer at Egorov, Puginsky, Afanasiev & Partners.  

Companies would do that to ensure greater security for their investment because deals going through the government commission are usually worth millions and even billions of dollars, she said.

Since the controversial law on strategic sectors went into force in 2008, there has been at least one prominent court battle involving the added oversight of foreign capital.

Denis Spirin, corporate governance director at investment fund Prosperity Capital Management, said his company's fight to force Sintez Group to buy out minorities in power generator TGK-2 revolved around interpretations of the law.

A unit of Sintez, controlled by Senator Leonid Lebedev, asked a court to rescind its purchase of control in the generator. The unit, Kores Invest, is affiliated with two foreign entities.

Sintez had made its bid for control of TGK-2 with German utility RWE in March 2008. But RWE said in September — as the financial crisis was entering high gear — that it would not take a stake in TGK-2 because it was overpriced.

Sintez subsequently sued RWE for $1.4 billion for pulling out of the deal and asked a court in October to cancel its purchase of a 45 percent stake from former power monopoly Unified Energy System. PCM, which has a blocking stake in TGK-2, has been battling in court to force Sintez to go through with the buyout anyway.

In a similar dispute — also involving PCM as a minority investor — a Cyprus-registered unit of Mikhail Prokhorov's Onexim Group asked a court in late 2008 to cancel its offer to buy control of TGK-4 after the Federal Tariffs Service included the company in a list of natural monopolies.

The law on strategic sectors would require that a foreign-registered legal entity get permission from the government commission before raising its stake above 50 percent.