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Russia to Establish Foreign Ownership Limits on Telecoms in WTO Negotiations. From Business Eastern Europe.
Feb 4, 2003

The Russian government is seeking to impose a 49% foreign ownership limit on telecommunications providers in the World Trade Organisation (WTO) accession negotiations. The Russian Duma is also debating a government proposal to give greater regulatory powers to the Russian Telecommunications Ministry.

Russia's official WTO negotiating stance now includes imposing a 49% limit on foreign ownership of telecoms companies, even though there are currently no such ownership caps. The government is, admittedly, now talking about including a "grandfather clause" to exclude existing foreign investments from the 49% limit. Yet, even if the limit is only applied to newcomers, the measure would still harm existing investors since the value of existing telecom assets would drop due to the limited number of foreign buyers.

Behind the measure, the government maybe seeking to restrict competition in order to preserve the existing system of tariffs, in which cheap local call rates are subsidised by much higher international prices. If there were no limits on foreign operators, international call rates would plummet and local operators might go bankrupt, driving up local rates.

The 49% restriction on foreign ownership does, however, appear to be a crude and illogical way of preserving the current tariff system. Russian WTO negotiators have simply come up with the demand as a means of extracting other concessions from the WTO.

The proposed 49% limit may not be the biggest problem for telecoms investors. A widely criticised draft telecoms law is now being debated by the parliament, and is due to be enacted shortly. The draft law has been slammed by both the European Business Club and the American Chamber of Commerce, the two main foreign investment lobbying bodies in Russia. Their central concern is that too many powers will be concentrated in the hands of the telecoms ministry. These include not only the licensing of telecoms operators, but also the certification of telecoms equipment, the regulation of tariffs and even the settlement of disputes between operators.

It gets worse. The ministry will also get new powers to regulate pricing and access rules for telecoms companies other than fixed-line providers (eg mobile operators). Moreover, it will be given powers to adjudicate in commercial disputes, usurping the role of the courts. Investors are most concerned about the absence of a clear mechanism for legal appeals against ministry decisions (such as the revocation of licences), which the new law does nothing to address.

The law also contravenes the government's stated aims. It introduces a definition of market dominance as a 25% market share, far more restrictive than Russia's anti-monopoly laws applied in other sectors of the economy. And tougher telecoms equipment certification rules contradict the general liberalising approach to certification that the government claims to favour.

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