348 Save for later Print Download Share LinkedIn Twitter Moscow is laying down the ground rules for foreign investors in Russia, with the overriding aim of protecting its strategic assets and prioritizing the state's needs.With these goals in mind, President Vladimir Putin signed a decree last week to change the ownership structure of the Sakhalin-2 upstream and LNG project, in which Shell, Mitsui and Mitsubishi jointly control 50% minus one share. Under the decree, the current operator, Bermuda-registered Sakhalin Energy Investment Co., will be replaced by a newly established Russian company.The decree gives an opportunity for the Sakhalin-2 shareholders to take their respective stakes in the new operator. However, Moscow's ultimate goal was outlined this week by Russia's Security Council secretary, Nikolai Patrushev. Speaking at a meeting in the Far East city of Khabarovsk, he was quoted as saying that "limitations of foreign participation in projects that are significant for Russian energy [industry]" are important for the "protection of national interests and energy security." He pointed to the Sakhalin-2 decree as a move in that direction. Exxon Mobil-operated Sakhalin-1 and even BP's 19.75% stake in Rosneft and holdings in other joint ventures with the Russian state-controlled oil major could be next in the firing line. Tit for Tat The Sakhalin-2 decree says the change of operator is a response to “hostile” actions from the US and its allies against Russia, as well as threats to national interests due to the “violation by some foreign entities and persons” of obligations under the 1994 Sakhalin-2 production-sharing agreement (PSA). No details of violations were provided, but Russia's Audit Chamber, the parliamentary watchdog, in the course of its regular Sakhalin-1 and Sakhalin-2 audits always finds violation and noncompliances.The decree gives Sakhalin-2's foreign shareholders a month to notify the Russian government as to whether they are ready to take the respective stakes. The government then has three days to approve or deny the transfer.If a partner declines to opt for a stake or its application is rejected, the government is entitled to sell its stake to a Russian entity within four months. The money would be transferred to the previous owner minus the cost of any possible damage discovered in a new audit. Gazprom is to keep its 50% plus one share, while Shell is not expected to apply for a 27.5% stake in the new company as it is determined to fully withdraw from Russia and has divested a number of assets already. Mitsui and Mitsubishi, on 12.5% and 10%, respectively, wanted to stay in the project, but Japan's sanctions against Russia have antagonized Moscow. Dmitry Medvedev, Russia's former president and now Patrushev's deputy, warned that if Tokyo pursues a price cap for Russian oil, "Japan will have neither oil nor gas from Russia, nor participation in the Sakhalin-2 LNG project."Legal GroundsThe formal chance that Russia gives to foreigners to stay in the project differs from the freezing and expropriation of Russian assets by the West, which Moscow views as a mere robbery. But Rosneft CEO Igor Sechin warned last month of the potential for retaliation if Russian property was targeted overseas."We count that in case of efforts to expropriate Russian property [overseas], symmetrical measures will be offered by the Russian government," he said at the St. Petersburg International Economic Forum. Germany has said it plans to nationalize the Schwedt refinery in which Rosneft holds 54.17%.In a further round of new rules for foreigners, Putin also recently signed a law demanding that only legal entities established in accordance with Russian legislation can be the ultimate owners of Russian subsoil licenses. Foreign companies that own such licenses must reregister them under the new rules. Deputies of the State Duma, or lower house of the Russian parliament, passed in a third and final reading on Jul. 6 amendments that would allow Russian courts to decide on the transformation into Russian limited liability companies of foreign firms' affiliates that develop Russian subsoil resources and own oil and gas transportation infrastructure. Foreigners could keep their stakes in the new companies but their rights would be limited if they create obstacles for the normal functioning of the newly established entity. The wave of new regulations could push BP and Exxon into deciding once and for all whether to stay or go, rather than dragging their feet. Exxon has nearly ground production to a halt at Sakhalin-1, which is operated by the US major's Bermuda-registered subsidiary.Even if BP decides to sell its stake in Rosneft, Finance Minister Anton Siluanov said last week that the government would allow asset sales by departing foreigners to Russian buyers and at discounts of no less than 50% of current market value or one-third of earnings before interest, taxes, depreciation and amortization.State Needs First Retail investors in Russian shares will also have to play by new rules. Depository receipts should be transferred into Russian shares following the delisting of Russian companies from international stock exchanges. But they also need to be aware that the generous dividends of the past could be over, as Gazprom demonstrated last week. The state-run gas giant had planned to distribute 1 trillion rubles ($23 billion) in dividends for 2021 but will now pay the entire sum into the Russian budget in the form of an increased mineral extraction tax in September-November.