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Oil Report

UPDATE 2-Russia passes foreign investor law on 2nd reading

(Adds details, background)

MOSCOW, March 21 (Reuters) - Russia’s State Duma on Friday approved the key second reading of a long-awaited law on foreign investments in strategic industries, designed to clarify which assets will be off-limits to foreigners.

The vote took place against the background of a raid by Russia's Federal Security Service (FSB) this week on the offices of BP's BP.L Russian venture TNK-BP TNBPI.MM, sparking concerns about a new Kremlin asset-grab campaign.

The FSB was heavily involved in drafting the law, seeking the right to block investment deals and wanting the law to apply to existing exploration licenses -- proposals not included in the draft approved by the Duma.

The draft says firms like TNK-BP -- half-owned by a foreign investor and possessing licences for deposits that would have qualified as strategic according to the new law -- need not seek permission for deals already concluded.

“This law will guarantee protection of Russia’s national interests, and on the other hand will create conditions for forming a stable and transparent business climate for foreign investors,” said Duma member Martin Shakkum in presenting the law.

The new draft lists 42 sectors where foreign investment will be restricted, such as nuclear energy, natural monopolies, exploration of strategic mineral deposits, aviation, space and other defence-sensitive industries.

DEFINITION OF CONTROL

The lawmakers also approved amendments to the existing subsoil law, defining recoverable deposits of over 70 million tonnes of crude, 50 billion cubic metres of natural gas, 50 tonnes of gold and 500,000 tonnes of copper as strategic.

The draft law bans firms controlled by foreign governments from seeking control over Russian companies and requires other foreign firms to seek permission from a special authority, which will be set up at a later stage.

The draft extended the definition of control, cutting the threshold for control over a firm exploring strategic mineral deposits to only 10 percent.

Investors complain the law would cover over half of Russia’s GDP.

The Duma passed the draft at a first reading last September, over two years after President Vladimir Putin ordered officials to more clearly draw up legislation defining rules on foreign investment.

Russian officials had pledged the law would be passed last year, before the parliamentary and presidential election, but the second hearing was delayed after intervention by the security services.

A renewed effort to push the new rules through the Russian legislature comes weeks after Dmitry Medvedev, Putin’s ally, won the presidential election. Putin is expected to step down in May but has vowed to stay on as prime minister.

Putin’s economy guru and Finance Minister Alexei Kudrin said in January that Russia under Medvedev should change its hawkish foreign policy and seek more foreign investment.

Under Putin’s eight-year rule, the state regained control over the lucrative energy sector, often at the expense of foreign companies, and largely ignored Western criticism of property rights violation.

The pro-Kremlin United Russia faction, which dominates the Duma, took guidance from the Kremlin administration and security services when drafting the law. The Friday hearing was brief, and an overwhelming majority supported the draft. The third reading is seen as technical, and the law will go into force following a hearing in the parliament’s upper chamber and after being signed by the president. (Editing by Will Waterman)

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