UPDATE 2-Putin wants Russia to ease foreign investor rules

Tue Dec 28, 2010 5:06pm EST

* Says Russia needs "smart" investment

* Says law on foreign investment will be changed

* Says PepsiCo to invest $1 bln in 5 years

* Govt blocks TeliaSonera asset merger bid (Adds Putin quotes, commission decision, details)

By Gleb Bryanski

NOVO-OGARYOVO, Russia, Dec 28 (Reuters) - Russia plans to change a key law regulating foreign investment in so-called "strategic" sectors in 2011 in a bid to bring "smart" money into the country, Prime Minister Vladimir Putin said on Tuesday.

Russia passed the law, which limits foreign investment in strategic sectors in 2008, before the country was hit by the economic crisis. The law requires that major deals get approval from a government commission.

The Russian budget is now in the red, and with no improvement in the country's investment climate, major foreign acquisitions are rare, casting doubts over the country's bid to privatise $32 billion worth of assets.

"We understand that we need foreign direct investment but we need not just capital, we need "smart" investment, accompanied by technology transfer and job creation," Putin told the commission meeting.

"As far as the strategic sectors are concerned, the access will be significantly simplified. Already in 2011 we are planning to pass a number of amendments to the law on foreign investment," Putin said.

Putin did not disclose details but said the proposed changes will ease investor access to the food, pharmaceutical, banking and natural resources sectors. He said that a second round of amendments was already being worked on.

"I hope that measures we are taking will help us significantly increase the flow of foreign investment into Russia," Putin said.

Earlier on Tuesday, the Natural Resources Ministry signaled possible changes, saying the limit on foreign ownership of Russia's strategic mineral deposits should be raised to 25 percent from 10 percent. [ID:nLDE6BR0Y2]

DEEMED INEXPEDIENT

Putin said foreign direct investment was estimated to reach $40 billion in 2010, compared with only $16 billion last year, but FDI statistics in Russia are distorted by offshore ownership of major Russian firms.

The commission, chaired by Putin, gave a green light for acquisition of Russian juice and dairy firm Wimm-Bill-Dann WBD.N by PepsiCo (PEP.N) for $3.8 billion, one of the biggest acquisitions by a foreign company in Russia to date.

Putin said PepsiCo had pledged to invest about $1 billion in research and development, marketing and modernisation of the Russian firm's production facilities in the next five years.

The commission also declined a request by a shareholder in mobile operator Megafon TeliaSonera (TLSN.ST) to transfer its interest in MegaFon to an offshore firm where it can be merged with the stake in Turkish mobile firm Turkcell (TCELL.IS).

"We have reviewed a request by TeliaSonera regarding changes in the (Megafon) ownership structure. As a result of these changes shares in Megafon would be transferred to new offshore companies," said commission member Igor Artemyev.

The transaction -- backed by another Megafon shareholder, Altimo, but opposed by a third shareholder, tycoon Alisher Usmanov -- would have helped TeliaSonera increase control over one of its key holdings. [ID:nLDE6611CM]

The situation can spark a shareholder conflict in Megafon similar to the one over the rival operator Vimpelcom VIP.N. That conflict was solved through a similar scheme of asset merger in an offshore firm.

"This request was declined since TeliaSonera is controlled by governments of Sweden and Finland ... The situation with a handover of property rights to offshore firms given TeliaSonera's ownership structure was deemed inexpedient," Artemyev said. (Writing by Gleb Bryanski; Editing by Gary Hill)

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