Russia Special Report: Cold front
1 June 2009 | By Tom Phillips
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Western companies operating in Russia have been beset by legal problems in recent years, with courts consistently ruling against them despite seemingly watertight cases.
Western lawyers take note: if you get invited to Western Siberia to defend a client, packing a thick overcoat is essential. Travel books would also do well to advise that you pack a thick skin as well because, while a fur coat will protect you from the unrelenting cold weather, it will not do much to combat the cold shoulder you are likely to receive from the courts.
Many lawyers from western companies have made the journey to this remote corner of Russia only to hear rulings go the other way. Rulings have gone against BP, Deutsche Bank and mobile phone operator TeliaSonera.
The latest super litigation - which at the time of writing is under appeal at a court in Tyumen, Western Siberia - has sent a chill through lawyers as far afield as London. They are concerned over the implications for corporations operating joint ventures in the country.
The details are a complex saga going back five years, but in essence involves a dispute between Norwegian telecommunications company Telenor and Russian financial industrial conglomerate Alfa Group over plans to expand Russian mobile phone operator VimpelCom into Ukraine. Telenor and Alfa both own large stakes in VimpelCom, which was due to enter the Ukrainian market via the purchase of local company Ukrainian Radio Systems.
In April 2008 British Virgin Islands company Farimex Products, which had bought a 0.002 per cent stake in VimpelCom, filed a claim in the distant court of KhantyMansiysk in Western Siberia alleging that Telenor, Altimo and various other Alfa Group members deliberately delayed the deal. The Khanty-Mansiysk court held Telenor solely liable for VimpelCom’s alleged late entry into the Ukrainian mobile market and ordered Telenor to pay VimpelCom $2.8bn (£1.8bn) in damages.
This decision was later cancelled by a court in Omsk. However, in February 2009 the Omsk court held Telenor liable for $1.7bn (£1.06bn). The court gave Farimex a writ of execution to claim the amount that resulted in the seizure of all Telenor’s VimpelCom shares.
Which brings us to Tyumen, where Telenor’s lawyers are waiting to hear the result of an appeal argued on 26 May.
Prior to the Farimex litigation, Alfa had been the subject of an arbitration brought by Telenor in Geneva. That action had stated that Alfa had failed to comply with its obligations under the VimpelCom Shareholders Agreement. Last year the Geneva arbitration panel forced Alfa to comply with the agreement.
The companies had also locked horns in 2006 over their joint ownership of Ukrainian mobile operator Kyivstar. While Alfa affiliates had gone to the Ukrainian courts in an effort to invalidate the Kyivstar Shareholders Agreement, Telenor commenced arbitration proceedings in New York aimed at forcing Alfa to comply with its obligations under the agreement. Alfa went to court in Ukraine and New York to try to stop that arbitration. Telenor won, Alfa did not comply and a judge held Alfa in contempt.
Telenor’s attitude towards the ongoing battle was summed up by the company’s executive vice-president and head of central and Eastern Europe, Jan Edvard Thygesen: “We’re very pleased with the court’s decision. It shows how little regard Alfa Group has for the rule of law, the agreements they have entered into, arbitration awards, court orders and their business partners.”
Bjørn Hogstad, Telenor’s in-house, adds: “Having a large emerging market footprint, Telenor has over the years gathered valuable expertise in assessing and handling local legal risk. What we’re experiencing in the Siberian courts has taken even us by surprise and really goes far beyond anything we reasonably could have expected. It’s a legal Bermuda Triangle over there, but we remain confident that justice will resurface in the Supreme Business Court in Moscow and that it will properly address the grave miscarriages of justice that have occurred to date.”
Lawyers involved in the case are no less forthright. They speak of their frustration over a Russia with a new president but a similar regime that turns a blind eye to unusual claims in far-flung courts.
Peter O’Driscoll, the Orrick Herrington & Sutcliffe partner who has led Telenor’s external legal team in the battle with Alfa and who has advised Telenor since 1998, says: “There’s no question that legal risk for multinationals with large investments in Russia has increased over the past five years. In addition to the Farimex case, the BP-TNK affair, the Bank of New York Mellon case and the TGK-2 and TGK-4 cases all indicate that there are serious rule-of-law issues in Russia that, despite the rhetoric from senior Russian government officials, have yet to be addressed.”
Rupert D’Cruz, a barrister at Ten Old Square who specialises in CIS-related litigation, believes the Siberian court cases could create chaos.
“It allows a large group of interested parties to interfere with existing companies and the rights of their shareholders,” he argues. “In UK law we would regard the status of the shareholder making the claim and the amount of shares the shareholder owns as a fundamental clause in this case. It’s quite remarkable that the Russian courts have broadened this so significantly. It creates enormous uncertainty and leaves shareholders in joint venture companies at the behest not just of their joint venture partners but their associates too, and under the threat of attack from unexpected quarters.”
One lawyer described the frustration felt by many - that attempts to raise the standards of commercial law in Russia to that found in the UK and US are being foiled.
“It feels like only 25 per cent of the legal work we do is worth it. The rest is worthless,” complains the lawyer.
UK and US law firms are also criticised by native lawyers who say they turn a blind eye to “shenanigans” by their Russian clients.
Dimitry Afanasiev, a partner at Egorov Puginsky Afanasiev & Partners, which is representing Telenor in Russia, cannot hide his disappointment with the way the case has been conducted.
“A successful law firm must give something back to the country that has helped make it successful,” he says. “The best way of doing this is to fight the injustice on behalf of our clients as best we can under the current circumstances. As a native law firm, we must believe that our system will improve in the future - or shortly thereafter, as we sometimes joke.”
New president, same Kremlin it seems. For Telenor, political intervention would be very welcome, although it is not certain that the same could be said for Alfa. Relationships between western financial houses and Russian corporations are strained, with western banks seeking to recover hundreds of billions in loans to Russian corporations that suffered badly in the credit crunch.
A visit by Norwegian Prime Minister Jens Stoltenberg to Moscow on 19 May will have gone some way towards reaching a settlement that suits both parties. Norway and Russia have joint interests in gas fields on the Arctic Shelf so there is leverage on either side.
Meanwhile, western lawyers operating in Russia had better pick up some of the country’s humour in the face of adversity. Under the current administration it appears there are limits to how much law lawyers can practice. And it will take more influence than lawyers can muster by themselves to bring Russia’s legal system in from the cold.