In from the cold?

Is Russia subtly wooing the West? There are no flowers, chocolates or sweet nothings being whispered but in October, politically charged, multibillion-dollar litigations against Bank of New York Mellon and Telenor were settled amicably. When you consider the nature of the Russian authorities, it is practically foreplay.

But do these settlements mark the ­ushering in of a new era of harmony for ­foreign investors ensnared in disputes in Russia, or are they simply anomalies, ­serving only to make the jurisdiction more unpredictable?

“If this is a trend, then it’s at the very early stages,” says Maxim Kullkov, a dispute ­resolution partner at Goltsblat BLP in Moscow. “But in terms of political relations we do have a much better relationship with the US than we did a year ago.”

Indeed, the settlement accepted in the $22.5bn (£13.61bn) litigation brought by the Federal Customs Service of the Russian Federation against the Bank of New York Mellon was no different from the one ­rejected by the claimants a year ago.

Reached on 22 October, the deal will see the Bank of New York Mellon pay $14m to the Russian Federal Customs Service in costs – the exact same amount the bank paid to the US government in 2005 under a non-prosecution agreement with the US Attorney’s office in connection with the same case.

The facts of the case hark back to a fraud committed by a New York Bank (as it was then) employee Lucy Edwards and her ­husband during the 1990s. Edwards, a Russian émigré (born Ludmilla Pritzker), was a vice president at the bank and, between 1996 and 1999, laundered $7.5bn of Russian money through the bank in a wire-transfer operation. The scam caused Inkombank, a Russian bank that had its assets looted, to fail. Edwards and her ­husband pleaded guilty in the US in 2000 to two offences. 

The most recent lawsuit was brought before the Moscow City Arbitration Court in May 2007, with Miami-based litigation ­specialists Podhurst Orseck representing the Federal Customs Service, and Clifford Chance and Egorov Puginsky Afanasiev & Partners (EPAP) defending Bank of New York Mellon.

Podhurst Orseck partner Steven Marks brought the action using the US anti-­organised crime statue, the Racketeer ­Influenced and Corrupt Organisations Act. The act’s principal author Robert Blakey and Harvard Law professor Alan ­Dershowitz both backed the cross-border application of the act, but the courts never had a chance to rule on the matter.

“It was common sense that prevailed,” says EPAP chairman Dimitry Afanasiev. “First, it was a weak case from a legal standpoint. Second, even if the judgment were obtained in Russia, enforcing it outside of Russia would have been difficult. Third, Russia found a graceful exit: it gets as much money as the US got from the bank when it settled its case through a non-prosecution agreement several years ago, and it sends a message to Washington that Russia is reloading its relationship with the US and is turning a page on the past. Also, Bank of New York Mellon’s business in Russia gets a lift and Russian companies can benefit from the bank’s services and lending.”

Panel intervention

Although the merits of the case looked few and the advantages of an early ­settlement overwhelming, the process of getting a deal done was still “painstaking”, according to Afanasiev. In the end it took the intervention of a panel, convened by the Russian ­government, to bring more than two years of litigation to a conclusion.

In a joint statement, the Russian Federation said that it took into consideration a ­letter from the US Attorney’s office ­confirming that the Bank of New York ­Mellon was not charged with any criminal violations – admitting only failures in its monitoring system – as well as the bank’s “positive contribution to the development of the Russian financial markets”.

“The decision helps repair Russia’s image abroad after a number of cases where foreign investors have suffered gross injustice in the Russian courts,” explains Afanasiev. “It’s too early to call this a trend but it’s clearly a signal that if one takes the right tone and the right advisors, one can achieve a sensible resolution with the Russians.”

What the resolution of the $2.8bn litigation action brought against Telenor by Farimex (, 1 June) means, however, is less clear. The case boils down to a dispute between the Norwegian telecommunications company, Telenor, and ­Altimo, the telecoms arm of a Russian financial ­industrial conglomerate, Alpha Group, over the alleged delay of the entry of mobile phone operator OJSC VimpelCom – in which all three parties have shares  – into the Ukrainian market.

In a settlement reached on 5 October, the warring parties agreed to put their shares into a newly created company in Bermuda, VimpelCom, which will be regulated by US law.

Political differences

To those outside Moscow, these cases could appear to be proof of a Russian ­government becoming more malleable at a time of ­financial difficulty. Not so, say lawyers on the ground.

Although Russia has been hit hard by the downturn, experiencing the sharpest ­contraction of growth of any large economy, politically it is a different animal to the West. Decision makers in Russia respond to a ­different kind of logic and, according to one partner, cannot even be relied upon to always pursue their own best interests.

“I’ve lost count of the amount of times people say that a certain outcome [in a case] couldn’t possibly happen because it would be awful for Russia – and then it does,” says Baker & McKenzie London partner Paul Melling, who founded Bakers’ Moscow office.

As such, it will take more than two ­settlements to convince foreign investors in Russia of any real change. Particularly when the motivation for the Telenor ­settlement appears not to have been an altruistic intervention by the Russian ­government.

“In both cases [Telenor and Bank of New York Mellon] there was a great deal of ­political attention attached and the Bank of New York Mellon litigation was approved at a high level of government, definitely,” believes Melling. “But Telenor was a pure and simple commercial dispute. And my guess was that it was ultimately settled with commercial reasons in mind.”

The Mellon settlement also made commercial sense for Russia. After the dispute, a discounted $4bn trade finance loan from the bank was arranged for the Russian ­government.

Goodwill hunting

Thus, despite recent political rhetoric about the resetting of relations between Russia and the West, those in Moscow are yet to see any clear examples of the goodwill filtering down to court disputes.

“There’s some kind of feeling that there’ll be developments in the right direction ­concerning relationships between the ­government bodies and [foreign] investors,” says Alexei Panich, head of Salans’ litigation and arbitration practice in Moscow. “But it’s just a feeling because I haven’t seen any actions by officials to support this.”

“On the other hand,” adds Melling, “it’s still important to point out that Russia isn’t against [foreign] investment – it’s very keen. The country’s main problem is that it needs a good PR agency. It’s not very good at ­promoting itself. Bad news always seems to get a lot of publicity but the good stuff – and there’s a lot of it – doesn’t get as much.”

And although it is too early to say if ­Western businesses in litigating in Russia will see any benefit from an improved political ­dialogue, it is worth noting that Telenor and Bank of New York Mellon are far from representative of the majority of litigations.

“There are two different types of ­litigation,” explains Melling. “One is high-profile cases that involve a lot of money and where the parties are well-connected – both in business and politics – individuals. These outcomes are difficult to predict but they account for less than 5 per cent of ­litigation involving foreign investors in ­Russia.

“In the other 95 per cent courts are ­infinitely better than they were 10 years ago, particularly the main centres in Moscow and St Petersberg. The average time period in Russian disputes from filing the claim to a hearing is six weeks. The statutory period to hearing the claim to handing down the judgment is three months. The pluses for this are speed and costs but the minuses are that to keep to the statutory time limit you have to keep things simple – examining complex cases can be difficult. So lawyers generally advise clients to keep claims down to the bare essentials.”

Others, too, believe the Russian courts are improving.

“The court system is changing and my feeling is changed for the better, but I don’t feel like this is linked to the financial crisis. I believe they’re two different things,” says Edward Bekeschenko, litigation partner at Baker & McKenzie’s Moscow office. “We’re seeing a better quality of judges, not just in Moscow, but in the regions too.”

Investors beware

Investment in Russia will always be ­considered a high-risk jurisdiction, but it offers the potential for huge profits too. Just do not expect any sympathy from the Russian legal system along the way.

“For foreign investors it’s better to settle out of court in Russia,” advises Panich. “Russian courts are highly criticised for their levels of corruption. So it is preferable for investors to arrange for disputes to be settled in another jurisdiction.”

Another, US, litigator puts it in more forceful terms. “Any investors or business of any size would be advised to avoid the ­Russian legal system at all costs. Any lawyer who doesn’t advise that would be liable for ­malpractice,” argues Bruce Marks, ­managing director of US-Russian firm Marks & Sokolov. “The Russian court ­system is ­generally subject to corruption, undue ­influence and bias in any significant commercial case brought by a foreign ­interest against a Russian interest. If you’re the ­victims of misconduct related to ­Russia, then you’d want to bring a suit in the UK, US or another relevant ­jurisdiction where justice is dispensed impartially.”

The US Racketeer Influenced and Corrupt Organisations Act 1970

The US’s Racketeer Influenced and Corrupt Organisations Act 1970 (or Rico) is a Rottweiler of an act, threatening ­defendants that fall under its ambit with the crippling prospect of treble damages.

The statute has been used to pursue the Hell’s Angels and Mafia boss John Gotti, and its recent application in the Federal Russian Customs Service’s gargantuan $22.5bn (£13.59bn) law suit against the Bank of New York Mellon brought it into the fray once again.

The case attracted some heavy hitters, with the act’s author Robert Blakey and Harvard law professor and OJ Simpson defence lawyer Alan Dershowitz supporting the claimant.

The most contentious facet of the act’s use was that the case was brought in Russia. The defendant had no other option since a case relating to the same facts had been brought by private parties in 2000 in the US and was rejected forum non conveniens.

But lead lawyer for the claimant, Steven Marks of Podhurst Orseck, says it is a non-issue, citing the routine adoption of foreign statutes and the precedent’s global intentions.

Bruce Marks, managing director at Marks & Sokolov and expert witness for the Federal Customs Service, agrees. “There’s no reason why it cannot be applied more than any other statute,” he claims.

The act covers civil and criminal law but there must be at least two criminal acts in order to establish a pattern. And although the legislation was devised as a means to combat the Mafia, it is increasingly used against corporates.

“People think of it as an anti-mob deal,” says Lisa Osofsky, regulatory services adviser at Control Risks. “But it’s often used by civil law lawyers to show their weight and possibly to secure settlements. But so often it ups the ante in terms of money that if you think you have a claim then it’s almost negligent not to use it.

“It’s definitely been overused as a bargaining tool. As a prosecutor it’s a great thing and lets us do justice, but on the civil side there are so many cases that didn’t deserve it – all claimants have to do is show a pattern, and they always seem able to find that.”

Marks says there was no indication which way a judgment would have gone if the case had not been settled, but with the recession bringing financial crimes into the light, it won’t be long before Rico is used internationally again.

Litigation in Russia is already an intimidating prospect, fraught with uncertainties – with the prospect of treble damages it could become absolutely terrifying.