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Cablegate: Embassy Moscow

VZCZCXRO4929
PP RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #0499/01 0531554
ZNY CCCCC ZZH
P 221554Z FEB 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 6779
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 000499

SIPDIS

SIPDIS

DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT
EUR/CARC, SCA (GALLAGHER, SUMAR)
DOE FOR HARBERT, HEGBORG, EKIMOFF
DOC FOR 4231/IEP/EUR/JBROUGHER
TREASURY FOR TORGERSON E.O. 12958: DECL: 02/04/2018 TAGS: EPET ENRG ECON PREL RS

------- SUMMARY -------

1.(SBU) A new and more restrictive draft of the Strategic Sectors Law (SSL) and relevant amendments to the Subsoil Law are circulating and are expected to be considered by the Duma soon. Most significantly, the new draft would limit to 10% the unsupervised acquisition by foreigners of entities that own licenses to develop "strategic subsoil assets." State-owned enterprises would be exempt from these restrictions -- a key exemption since Gazprom and Rosneft, for example, continue to float shares internationally. The foreign investment community is concerned about the law and is preparing a coordinated approach to the GOR, which we plan to help facilitate. End summary.

------------- NEW DRAFT SSL -------------

2.(SBU) Ministry of Industry and Energy Legal Chief Vladimir Taraskin told us February 21st that a revised version of the SSL and relevant amendments to the Subsoil Law will be considered by the Duma on March 19th. The new version is reportedly a Kremlin produced compromise among the various ministries and factions competing over the law. The Petroleum Advisory Forum (PAF), the association of western oil companies in Russia, suggested to us that the bill was being fast-tracked and could be considered even earlier. However, PAF added that Duma Deputy Chairman Yazev has said that Subsoil Law amendments will not pass in the near future because of continuing disagreements, including over the leadership of the proposed commission that would adjudicate foreign investments over the limits, which is still being contested between the Ministry of Economic Development and Trade and the FSB.

3.(SBU) The new draft is much more restrictive with regard to foreign ownership of "strategic subsoil assets" than the previous version, which had left untouched the current de facto limit of less than 50 percent foreign ownership, and also compares unfavorably with the 50 percent limit that exists in other strategic sectors (such as space, aviation, etc.). The new draft specifically limits unsupervised foreign acquisition of Russian companies that hold licenses to explore and develop a "strategic" field to 10%. Entities partly owned by foreign governments would face an even stricter 5% limit on unsupervised ownership. Foreign entities seeking a greater share of relevant Russian companies would need GOR approval from the special commission.

4.(SBU) The package to be discussed by the Duma will also include amendments to the Subsoil Law that would define "strategic fields" as oil fields with extractable reserves of more than 70 million tons, gas fields with more than 50 billion cubic meters (bcm), and all off-shore fields. According to PAF and other industry insiders, these limits are too low and define even relatively small fields as "strategic."

5.(SBU) Companies of which the GOR is a majority owner, in particular Gazprom and Rosneft, would be exempt from limitations on foreign ownership. This key provision resulted from the unexpected realization during internal GOR debates that both Gazprom and Rosneft are already more than 10 percent owned by foreigners, since their shares are publicly traded on foreign exchanges.

----------------- INDUSTRY CONCERNS -----------------

6.(SBU) The foreign investment community has reacted with concern to the restrictive new draft. PAF has already expressed its concerns directly to the GOR. AmCham and its MOSCOW 00000499 002 OF 002 European counterpart, the Association of European Businesses (AEB) are reviewing the legislation and are considering next steps. Individual oil companies are doing their own analyses. PAF is planning to host a roundtable discussion before the end of February to bring together all interested parties and to agree on a coordinated approach to the GOR.

7.(C) BP's Russia chief Richard Spies shared some specific concerns with the Ambassador on February 21st. He said that BP and TNK-BP are concerned about the "grandfathering" provision in the new drafts. Although the draft law would not be applicable retroactively, it is not clear how the proposed law would affect new discoveries of strategic fields by existing ventures such as Rosneft-BP (a 51/49 venture on the Sakhalin shelf) or TNK-BP or ConocoPhillips-Lukoil. Spies said it was unclear if these joint ventures have to submit discoveries to the commission for approval in order to retain the field.

8.(C) Given BP's Sakhalin shelf venture with Rosneft, Spies said his company was especially concerned about the off-shore limitation in the Subsoil amendments, which would apply to all fields regardless of size. According to Spies, the new proposal is also less clear than previous versions in defining what "foreign control" means, i.e. how many foreigners on the board, or on the management committee, and whether foreigners had effective control over certain transactions regardless of their level of shareholding. In that regard, he noted that although Rosneft was the majority shareholder, the Board of the Rosneft-BP JV was composed of two representatives from each company.

9.(SBU) In addition, the 10% limitation may become a problem for non-state-owned oil and gas companies with foreign owners, according to an analysis TNK-BP shared with us. TNK-BP pointed out, for example, that brokerages may limit transactions of oil and gas stocks because of the 10% limit of the proposed law.

------- COMMENT -------

10.(C) Despite Kremlin support, it is not clear that the new laws will pass as quickly as planned. For one thing, the issue of who heads the commission has been a major stumbling block in the past and could prove so again. We believe there is still time for the foreign investment community, with our support, to voice concerns about the letter and spirit of the draft laws. As such, we plan to help PAF organize the proposed roundtable and to encourage European diplomatic involvement with the goal of agreeing on a unified approach to the GOR. BURNS

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