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Russia: Mind the bear traps
17 March 2014 | By Jonathan Ames
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The surge of oligarchs heading to London for their court battles is slacking off. But Russia still holds potential for those advisers ready to tread carefully
They wouldn’t agree in Kiev, but there’s nothing like the sight of a Russian coming through the door to cheer the heart of an English litigation lawyer. Oligarchs are not remotely frightened at the prospect of a bare-knuckle commercial punch-up and they rather enjoy having them in London, not least because the referee cannot be bought.
In addition to fair judges, London’s attraction is built on a reputation for having top-drawer lawyers, particularly barristers. Some Russian clients are understood to keep a couple of QCs on tap – fed on expensive retainers – to provide immediate pre-dispute advice on the strength of a claim.
The oligarchs are also rumoured to be falling out of love with arbitration, according to delegates at The Lawyer ’s recent roundtable on Russian dispute handling. Not surprisingly, one of the biggest cheerleaders for England’s High Court is a man who spends a fair amount of time in the executive box at Chelsea FC’s Stamford Bridge ground.
“Roman Abramovich is a big lover of the English High Court,” says Robin Wittering, an English partner at Moscow-based law firm Egorov Puginsky Afanasiev & Partners, pointing out that the Chelsea man’s 2012 victory over former business partner Boris Berezovsky made a big impact.
“He’s saying to all his mates that the High Court is actually quicker than arbitration. That contrasts with when I first started in Moscow in 2003 – from then until about 2010 the preference was for the London Court of International Arbitration.”
Wittering points out that rocketing oil prices over the past 15 years have made Russia wealthy, with much more of that cash held overseas. That makes the inability to enforce English court judgments in Russia a lot less important than was previously the case.
It is estimated that as much as 60 per cent of the London Commercial Court trial list involves overseas litigants. By no means are all those parties Russian, or even from the Commonwealth of Independent States (CIS), but the proportion is high enough that any reduction in caseflow would cause a few wobbles at City law firm litigation departments and around the Chancery bar.
And a reduction may well be on the cards. The roundtable highlighted several factors that could put the brakes on the good times for those English litigation lawyers that had been brushing up on their balalaika and folk dance steps.
While the popular perception of Russia is still that of the Wild East, where leather-clad chaps barely bothering to conceal Kalashnikovs are police, judge and jury all in one, the reality is improving. Round
table participants point out that business can now be fairly confident of a fair hearing and result in the commercial courts of Moscow and St Petersburg.
“A lot of what’s said against Russia in this context doesn’t stand up to much scrutiny,” comments one lawyer at the roundtable. “Local judgments in those courts can be impressive and well-reasoned.”
Quality will be much more variable on benches outside of those two cities, but Russian politicians have gradually come round to the view that in a globalised business world they have to be seen not to be applying pressure on the judiciary. International opinion is also part of the reason dispute resolution might be shifting from London back to Russia. Senior players at the Kremlin are understood to be highly embarrassed by oligarchs washing their dirty laundry in the highly public forum of London’s Commercial Court.
While it may not seem obvious in the West, Russian oligarchs don’t operate in a vacuum – they move in close quarters with domestic politicians and it is increasingly appearing that the Russian government will pressure them not to litigate in London.
The call of Mother Russia
Indeed, there are suggestions that Russian government entities will be obliged to stipulate domestic dispute resolution clauses in their contracts. The only exception would be when a Russian party wants to contract with a foreign counterparty and the latter insists on a neutral forum dispute resolution clause.
Wittering points out that the Kremlin says it will bring forward legislation on the control of foreign companies that will affect dispute resolution. The law is meant to be implemented in May, but those with Russia experience accept it is unlikely to see the statue book until the end of the year.
However, when the law does arrive it will hit hard those Russian businesses that have been monetising assets through overseas holding companies to avoid Russian capital gains tax when selling shares.
“Like everyone else,” explains Wittering, “Russia needs to build infrastructure and the government wants more wealth to be held onshore. That will mean less need to have offshore structures. Under the legislation, if the Russian state is going to inject money into a business it will have to be through a Russian structure and not an offshore one.”
A combination of these factors could mean a move away from English law to Russian law. Some roundtable participants describe the development as protectionism worthy of the former Soviet Union, destined to have a serious impact on investment. Indeed, one told the meeting that “since the financial crisis, there’s been very little foreign money coming into Russia – that’s why the stock market is so depressed. So any protectionist measures will be an increasing problem”.
And it is a problem that will affect English lawyers.
Many at the roundtable held the opinion that while there was once a view that whenever a Russian business had anything to do with England it would mean any dispute would be heard in England, there is now a significant pull-back from that approach.
English law still appeals
But there are still some suggestions that English law will remain attractive for Russian oligarchs and businesses. Wittering points out that fiduciary obligations under English contract law are becoming popular in the jurisdiction.
“There’s a lot of litigation coming onstream whereby one party is saying the other owed a super-duper duty of care and the damages should be much higher because ‘you promised to look after me’,” he explains.
Linked to that, claims Wittering, is a desire on the part of some to push to the limits the 1974 Wrotham Park ruling on damages in breach of contract, for example, to the point where veto rights have a financial value. Also, Russian deals cut at the height of the bull market before the financial crisis did not have protection from reflective losses.
“As people put their heads above the parapet now we are coming out of the crisis, they will start litigating on those three issues,” says Wittering. “And for the most part, those disputes can only come under English law.”
It might not give much solace to litigators, but English corporate lawyers advising businesses on moving into the Russian market will be encouraged to hear that while, according to Wittering, “legislation is sometimes introduced in a slightly hamfisted way that creates panic”, Russia generally wants to follow good practice models set down by the Organisation for Economic Co-operation and Development.
That means, according to the panel, that as a foreigner you can just about cobble together a Russian joint venture vehicle under local law. However, you can’t have all the bells and whistles you would get under an English or US deal.
Wittering highlights the introduction of depository accounts for holding shares, whereby foreign businesses can place Russian shares in special accounts, all governed by foreign law.
“That will satisfy the Russian government on the tax front because the shares aren’t held off-shore,” he says.
But he cautions there are still bear traps in Russia waiting to snare foreign lawyers, not least around due diligence.
“The oligarchs are all pretty tight-knit,” he says ruefully. “They all know who owns what. But if you are a foreign company coming into Russia, your nightmare can come when you decide to buy 100 per cent of a Russian company and then the prior chain owners suddenly email you. It is the classic trap that many foreign companies fall into – and trying to do diligence on it is difficult. There are contested ownership chains spanning the whole time since the end of Soviet stateownership”.
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