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Presentation to British Russian Law Association New Restrictions for Foreign Investments in Russia Sergei Presentation to British Russian Law Association New Restrictions for Foreign Investments in Russia Sergei Voitishkin 24 November 2008 Baker & Mc. Kenzie – CIS, Limited is a member of Baker & Mc. Kenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm.

New Restrictions of Foreign Investments in Russia Foreign Investments in the Russian Economy 1 New Restrictions of Foreign Investments in Russia Foreign Investments in the Russian Economy 1 st Half 2003 -2008 (% to GDP)

New Restrictions of Foreign Investments in Russia Foreign Investments Structure: 1 st Half of New Restrictions of Foreign Investments in Russia Foreign Investments Structure: 1 st Half of 2008

New Restrictions of Foreign Investments in Russia 2 new laws • “On the Procedures New Restrictions of Foreign Investments in Russia 2 new laws • “On the Procedures for Foreign Investments in Companies of Strategic Significance for National Defense and Security” • “On the Introduction of Amendments in Legislative Acts of the Russian Federation in Connection with the Adoption of Federal Law “On the Procedures for Foreign Investments in Companies of Strategic Significance for National Defense and Security” Both effective as of May 7, 2008 The restrictions do not apply to transactions consummated before May 7, 2008, except to the extent the rights and obligations under the transaction arise after this date

New Restrictions of Foreign Investments in Russia Purpose • Is it a ban on New Restrictions of Foreign Investments in Russia Purpose • Is it a ban on foreign investments? • Aimed at streamlining foreign investments in Russian strategic companies and establishing procedures for obtaining approvals

New Restrictions of Foreign Investments in Russia Foreign Investor • Any foreign (non-Russian) organization, New Restrictions of Foreign Investments in Russia Foreign Investor • Any foreign (non-Russian) organization, company, individual • Russian companies Controlled by foreign persons • Group of persons which includes a foreign investor • Foreign states and international organizations and companies controlled thereby

New Restrictions of Foreign Investments in Russia Strategic Company means Russian companies (LLC or New Restrictions of Foreign Investments in Russia Strategic Company means Russian companies (LLC or JSC) engaged in any 42 strategic activities These broadly include: Ø activities involving nuclear facilities and radio active materials and wastes Ønatural monopolies (oil and gas pipelines, railways, airports and ports, dispatching in electricity, internal waterways) Ø production and distribution of cryptographic means and related services requiring licenses Øtelecoms (for companies with a dominant position, except Internet providers) Ø electronic surveillance Ø weapons and military hardware Ø Aviation and aviation safety Øproduction of metals and special alloys for military use (having a dominant position) Ø space activities Øprinting (200 million pages a month) Ø TV or radio broadcasting (≥ 50% of public in a constituent member of Russia) Ø activities involving use of agents causing infectious diseases Ønatural resources on strategic deposits (federal plots) Øfishing Øactivities affecting нydrometeorological and geophysical processes

New Restrictions of Foreign Investments in Russia Strategic Deposits (Federal Subsoil Plots) Hard Rock New Restrictions of Foreign Investments in Russia Strategic Deposits (Federal Subsoil Plots) Hard Rock Deposits: • Subsoil plots containing deposits and showings of uranium, diamonds, nickel, cobalt, platinum group of metals and certain other minerals • Containing as of January 1, 2006 the following reserves: (i) core gold – over 50 tons; (ii) copper – over 500 thousand tons

New Restrictions of Foreign Investments in Russia Strategic Deposits (II) Hydrocarbons: • Containing as New Restrictions of Foreign Investments in Russia Strategic Deposits (II) Hydrocarbons: • Containing as of January 1, 2006 the following reserves: (i) recoverable oil reserves 70 million tons and above; (ii) gas reserves 50 billion cubic meters and above • Deposits located in the inland sea waters, territorial sea waters, or on the continental shelf (off-shore deposits)

New Restrictions of Foreign Investments in Russia Strategic Deposits (III) • Those which can New Restrictions of Foreign Investments in Russia Strategic Deposits (III) • Those which can only be developed using defense lands List of strategic subsoil plots to be published by Federal Agency for Subsoil Use Conservatively, a deposit meeting the requirements need not be on the list to qualify as federal (strategic)

New Restrictions of Foreign Investments in Russia Restrictions Foreign states, international organizations and organizations New Restrictions of Foreign Investments in Russia Restrictions Foreign states, international organizations and organizations controlled thereby cannot acquire control over strategic companies Control means: As regards strategic companies: • > 50% of voting shares • Right to appoint CEO and/or >50% of the management board or board of directors • Act as management company (manager) • Determine decisions of the strategic company Strategic natural resources companies: • • 10% and more of voting shares Right to appoint CEO and/or 10% or more of the management board or board of directors Act as management company (manager) Determine decisions of the strategic company

New Restrictions of Foreign Investments in Russia Approvals Foreign investors and groups (non-state controlled) New Restrictions of Foreign Investments in Russia Approvals Foreign investors and groups (non-state controlled) require special approval to: Strategic companies • • Acquire more than 50% of voting shares Get right to appoint CEO and/or >50% of the management board or board of directors; Act as management company (manager) Any other right to determine decisions by the governing bodies and the business

New Restrictions of Foreign Investments in Russia Approvals Strategic natural resources companies • Acquire New Restrictions of Foreign Investments in Russia Approvals Strategic natural resources companies • Acquire 10% and more of voting shares • Get right to appoint CEO and/or 10% or more of the management board or board of directors • Act as management company (manager) • Any other right to determine decisions by the governing bodies and the business

New Restrictions of Foreign Investments in Russia Approvals As regards foreign states, international organizations New Restrictions of Foreign Investments in Russia Approvals As regards foreign states, international organizations and organizations controlled thereby: • >25% of voting shares in a strategic company (or other right to block decisions) (but cannot buy more than 50%) • >5% of voting shares in a strategic natural resources company (but cannot buy more than 10% minus one share)

New Restrictions of Foreign Investments in Russia Approvals Restrictions also apply to cases when New Restrictions of Foreign Investments in Russia Approvals Restrictions also apply to cases when control is established through a change of shareholding as a result of share conversions, buy-back, charter capital decrease, etc. Foreign investor must file for approval within 3 months, and if approval is denied, must decrease its shareholding

New Restrictions of Foreign Investments in Russia Restrictions • Transfer of subsoil rights (transfer New Restrictions of Foreign Investments in Russia Restrictions • Transfer of subsoil rights (transfer of licenses) to federal plots to companies under the control of foreign investors is prohibited (intra group transfers? ) • Foreigners are prohibited to hold subsoil rights with respect to federal deposits • Off-shore deposits may be used by Russian companies in which Russian state holds more than 50% shares

New Restrictions of Foreign Investments in Russia Conversion of Exploration Rights into Production Rights New Restrictions of Foreign Investments in Russia Conversion of Exploration Rights into Production Rights • New grounds for refusal (threat to national security) • New compensation rules (expenses, return of bonus for grant of rights, plus a premium) • Generally may be viewed as a positive development

New Restrictions of Foreign Investments in Russia Approvals Approval may be sought by the New Restrictions of Foreign Investments in Russia Approvals Approval may be sought by the foreign investor or in the case of a group, by any legal entity or individual in the group who intend to do a transaction (or acquire control) Filing documents: • • Application Registration certificate, foundation documents Draft contract for the acquisition of control Information about key activities of the applicant Information about the applicant’s group and persons who control it Draft business plan Information about shares it already has in the strategic company Other relevant information

New Restrictions of Foreign Investments in Russia Notification requirements: Foreign investors and groups must New Restrictions of Foreign Investments in Russia Notification requirements: Foreign investors and groups must notify FAS of acquiring 5% and more in a strategic company. As regards past deals (prior to May 7, 2008) – within 180 days, ie. by November 3, 2008. Deals done after May 7, 2008, must be notified within 45 calendar days from the date of transaction. The investor must submit a copy of the sale and purchase agreement (or similar document).

New Restrictions of Foreign Investments in Russia Approvals Filing should be made with the New Restrictions of Foreign Investments in Russia Approvals Filing should be made with the Federal Antimonopoly Service (FAS), Vladimir Putin Prime Minister approval is granted by the Russian Government Commission for Control over Foreign Investments Timing (3. 5 months which may be extended to 6. 5 months) Anatoly Serdukov Minister of Defense Yuri Trutnev Minister of Natural Resources Igor Shuvalov First Vice President Igor Artemiev Head of the Federal Antimonopoly Service

New Restrictions of Foreign Investments in Russia Approvals If it is not clear whether New Restrictions of Foreign Investments in Russia Approvals If it is not clear whether approval is required, a request for clarifications may be filed with FAS. Time for review: 30 days FAS asks the Federal Security Service if the transaction poses a threat to state security and defense, determines whether the strategic company has any relevant licenses, access to state secrets, defense orders, dominant position, and defense-related or socially important IP, etc. FAS then sends all materials to the Government Commission which may reject or grant approval (including conditional approval)

New Restrictions of Foreign Investments in Russia Approvals Conditions: • • Appointment to the New Restrictions of Foreign Investments in Russia Approvals Conditions: • • Appointment to the governing bodies of candidates who have clearance (i. e. Russian nationals) Performance of government defense contracts Maintenance of facilities which may be used for defense purposes Provision of services applying tariffs set for natural monopolies Implementation of the business plan proposed by applicant Implementation of measures envisaged in the case of war or state of emergency Undertaking not to allow redundancies Processing of natural resources in Russia

New Restrictions of Foreign Investments in Russia Approvals • The Commission should decide which New Restrictions of Foreign Investments in Russia Approvals • The Commission should decide which conditions apply and the applicant must agree to such conditions prior to the Commission’s decision to grant its approval. • The conditions are specified in an agreement signed by the applicant with FAS within 20 days of the Commission’s decision to impose conditions. • The agreement enters into force on the date the Commission grants the conditional approval.

New Restrictions of Foreign Investments in Russia Sanctions • Transactions executed in breach of New Restrictions of Foreign Investments in Russia Sanctions • Transactions executed in breach of the Law on Strategic Activities are null and void. • The parties to a void transaction may be ordered to return everything received under such transaction. • If it is impossible to reverse a deal, a Russian court may rule to deprive the foreign investor of voting rights at general shareholders meetings of the strategic company.

New Restrictions of Foreign Investments in Russia Appeals Procedure • FAS decisions and actions New Restrictions of Foreign Investments in Russia Appeals Procedure • FAS decisions and actions in connection with applications for strategic acquisitions may be appealed with a Russian court • The Commission’s decision may be appealed with the High Arbitration Court.

Presentation to British Russian Law Association New Restrictions of Foreign Investments in Russia Sergei Presentation to British Russian Law Association New Restrictions of Foreign Investments in Russia Sergei Voitishkin 24 November 2008 Baker & Mc. Kenzie – CIS, Limited is a member of Baker & Mc. Kenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm.