At the beginning of this month, a long-awaited draft law on the procedure for foreign investments in commercial organisations deemed of strategic importance for the national security of the Russian Federation was signed into law by Russian president.

It is difficult to overestimate the importance of this law since it is the first of its kind in the history of Russian legislation. Before that, the only law specifically governing foreign investment in Russia was a federal law on foreign investments in Russia passed in 1999, which stipulates national treatment for foreign investors and gives them the right to engage in investment activity in any form authorised by law. In other words, it established basic rules for foreign investors wanting to enter the Russian market. According to the new law, the legal status of foreign investors has essentially changed.

The main goals of the law are to set out transparent rules for foreign investors intending to invest into Russian commercial organisations that have strategic significance for national security in order to protect the foundations of the constitutional system and guarantee the state defence.

There are 42 types of activity that are listed as strategic. First and foremost, the law applies to the production and circulation of special equipment, nuclear power, space, aircraft-building, development, production of and trade in armaments and military hardware, geological exploration, natural monopolies with the exception of public electronic communication and mail services, television and radio broadcasting, prospecting for and production of mineral resources in subsoil areas of federal importance, including the continental shelf, and the commercial fishing.

Telephone and postal services and internet service providers had been removed from the list of strategic activities before the Bill's second reading. Requirements for television and radio broadcasting have been specified. The term 'strategic' applies to television and radio broadcasting to an area populated by half or more than half of the residents of each constituent territory of the Russian Federation. There was a last-minute decision to de-list internet companies and reduce the strategic sphere in the telecommunications sector. Also featuring on the list are print shops capable of producing no fewer than 200 million sheets a month, and publishing houses and the editorial boards of periodicals issued in no fewer than one million copies.

The Russian Government will control the foreign investments through approval deals entailing the establishment by the foreign investors or a group of persons, of control over commercial organisations having strategic importance. The meaning of control is different for foreign private companies and foreign state or foreign firms owned by a foreign state. For foreign private investors, 'control' means taking over 50% of shares in a strategic company and less than 50% in the case of actual control but more than 10% of shares. For foreign state companies, it means acquisition of more than 25% and acquisition of other possibilities to block decisions of the management bodies. In the mineral extraction industry, the rules are even stricter: those seeking even 10% of shares or more for private investors and 5% or more for foreign state companies must apply for official approval.

The governmental commission makes its decision on foreign company participation after it receives a statement on the application from the federal official authority for state security and the committee overseeing state secrets if the commercial organisation has a licence for operations related to the use of information comprising state secrets. Two to three federal official authorities take part in the approval process: the whole process of approval should take no more than three months, with an exceptional possibility of prolongation for another there months.

The law establishes strict sanctions for acquisition of control without the consent of the official body. Among them are annulment and avoidance of transactions, invalidity of the resolutions of company passed after taking control and prior to this moment, losing ownership title to the shares, obligation to sell shares within three months only through passively-obtained control due to widespread shareholdings. Personal liability of the involved parties is possible.

The law is not retrospective and it is not applied to acquisitions closed before the law goes into force. Even so, the law requires all foreign firms owning more than 5% of a strategic company to report it to the officials within six months.

Though the adoption of the law is considered to be a big step forward in the regulation of foreign investments in Russia, specialists have noted its negative sides. The most important of these are the broadened list of strategic industries which comprise the core of Russian economics, sometimes inadequately strict sanctions, a complicated and unclear procedure for obtaining the approval, and a lack of experience in administrative regulation. But without any doubt, the law's real impact will depend to large extent on how it is applied in practice.

Olga Prokudina is an associate at Konnov & Sozanovsky in Moscow.