Russia wants its rows back

Recent legislative changes are an attempt to stop Russian disputes being heard in foreign courts

This year marks a turning point for the legal system in Russia. The process of redrafting the civil code, the fundamental piece of Russian legislation that regulates business, started after the collapse of the USSR in 1994. But even before the last part of the code was adopted, it became evident that it needed to be significantly re-tailored to fit the newly adopted strategy of ‘de-offshorisation’ of the Russian economy.

Russia’s corporate laws, which do not easily accommodate joint venture investment schemes or the international arbitration of corporate disputes, drove foreign investors to rely on shareholders’ agreements governed by English law, and to work through offshore companies to arbitrate disputes abroad. As a result, in the past decade a significant number of Russian disputes were heard before English courts and arbitral tribunals seated in England.

Amendments to the civil code are aimed at introducing legal concepts that have been foreign to the Russians as well as developing existing ones. New concepts include options, liquidated damages/indemnities, representations, ‘good faith’ negotiation and framework agreements. The government expects that liberalisation will have a material impact on Russian business and attract domestic disputes back to Russian courts.

However, it seems that Russia has a long way to go.

The problem lies in the lack of confidence in the Russian judicial system. Russian lawmakers realise transparency is important if Russia is to have a competitive legal system. A number of draft laws aimed at making information about courts’ activity available online and setting up video cameras in courtrooms are being considered by the parliament. Meanwhile, Russian disputes will remain on foreign shores and the difficulties of enforcing foreign judgments and arbitral awards in Russia will continue to be a cause of concern.

Although a few recent cases have shown a positive tendency in the enforcement of foreign judgments in Russia, arbitration remains the most secure dispute resolution method when aiming at enforcement against assets there. Russia is a signatory to the 1958 New York Convention, making the process of recognition fairly straightforward, but the most common ground for refusing to recognise and enforce foreign judgments remains public policy violation.

In the spring the High Commercial Court of Russia directed courts to properly apply this ground when considering the enforcement and recognition of foreign judgments and arbitral awards. It also aimed at narrowing the application of this ground, which is likely to result in a higher ratio of successful enforcements in Russia.

Time will show whether the reforms to legislation in combination with the improvement of the judicial system will make Russia one of the countries with a legal system capable of competing with the progressive jurisdictions. 

There is clearly a good intention here. The question is – how long will Russia need to achieve this objective? But given the continuing rise in the number of Russian disputes being litigated or arbitrated aboard, there is clearly a pressing need for change.