Foreign Investors’ Legal Victories Boost Faith in Russian Courts

The story of an Arizona man’s ill-fated Arctic fishing camp is one of dozens, if not hundreds, of Western investments in Russia gone wrong.

It is a too-familiar tale of greedy local bureaucrats scuttling a booming business by muscling out the foreigner and grabbing his share. As in the case of Bill Davies’ Kola Salmon Marketing sport-fishing venture, the strong-arm tactics also tend to scare away paying clients.

What sets Davies’ experience apart is that he fought back through Russia’s fledgling justice system and appears to have won. After an expensive and arduous journey through Russian and international legal channels, Davies and his Russian partner have wrested a reversal of an earlier judgment from the Murmansk Regional Court and have been awarded more than $900,000 in lost profits and legal costs.

Russia’s days of shotgun justice are likely still far from over, but the Murmansk ruling and other recent decisions upholding the rights of foreign investors are bolstering faith in the work-in-progress that is the Russian court system.

“Last year, government entities lost more than half of the lawsuits brought against them in privatization and commercial disputes,” says Rafael P. Akopov, head of legal operations for the Moscow investment brokerage Renaissance Capital Group.

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Investors represented by Renaissance won a watershed decision from a provincial arbitration court in the town of Lipetsk last year that allowed them to eventually gain representation on the board of directors at the Novolipetsk Metallurgical Enterprise in which they held 40% of the shares. Local courts in the one-industry town 200 miles south of Moscow had earlier sided with the steelmaker’s director in his resistance to ceding power to the major shareholders.

“This was a key indication for us that there is change occurring in the right direction,” says Akopov, noting that the investment group’s success came after it pursued 14 cases of litigation.

Akopov concedes that the quality of justice is uneven across vast Russia but describes Moscow courts as developed enough to be above the bribery and influence of officialdom that still prevail in more far-flung regions.

“But even in the provinces, I would describe the predisposition of judges to back local authorities as more of a cultural phenomenon than outright corruption,” he said. “They live in the same housing blocks, their kids play soccer together, it’s easy for a sentiment to develop that it’s ‘our community’ against some outsiders.”

Such has been the case in Davies’ nearly 3-year-old dispute with the Lovozero district of the Murmansk region. In 1993, Lovozero officials sold him exclusive rights to fish the Varzina River for its huge Atlantic salmon for $50,000 a year for five years. Barely a year later, two other sport-fishing companies were also sold access to the bountiful Varzina, one a stone’s throw from Davies’ $1,000-a-day adventure camp.

“The Lovozero authorities acted surprised that we considered their deals with other companies to be violations of our contract for exclusive access,” recalls Mikhail Raditsky, Davies’ partner in the fishing venture. “They tried to argue that ‘exclusive’ means something different here.”

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Kola Salmon Marketing has consisted of a tiny Murmansk office since June 1995, when a helicopter dropped into the remote camp with masked, machine-gun-toting security guards from the Lovozero administration to run Davies and his stunned clients off the river--their response to the legal actions Davies had initiated.

Davies had filed suit against the Lovozero district alleging breach of contract, and he won on appeal to the International Court for Arbitration in Stockholm in late 1996. The Murmansk Regional Court, under presiding Judge Tamara Lagutina, ruled last year that the Stockholm court’s judgment that Davies was due $700,000 in lost income and more than $200,000 in court costs had no force in Russia, but the Federal Supreme Court in Moscow judged her decision erroneous and sent the case back to Murmansk.

Upon review of the high court’s opinion, Lagutina ruled in favor of Davies late last month, agreeing that the district government must pay.

“She lives in Murmansk and has had to face a great deal of pressure from the [regional] administration,” Davies said of Lagutina. Although the case originated in the Lovozero district, the chief protagonist in the Davies affair, former Lovozero Administrator Valentin Luntsevich, is now a vice governor for the whole Murmansk region. Because any penalties awarded to Davies would eventually come out of the regional budget, Luntsevich has lobbied intensively to get all matters involving the Davies dispute thrown out of the courts.

Russia’s regional courts are purportedly independent of local governments, but one former judge notes that the influence of officialdom--especially in the provinces--can be based on finances as well as the result of long-standing personal contacts.

“Although the courts are paid for through the federal budget, local courts often are dependent on the regional administrations for other important supports, everything from the location of their premises to the furniture,” says Olga Anissimova, a former St. Petersburg judge who is now with the Moscow office of the Coudert Bros. international law firm.

She attributes the trend toward a more responsive judiciary to both a strengthened legal foundation and to the improving pay and prestige accorded those on the bench.

“Salaries are much better now. In Moscow, an arbitration court judge can earn $1,000 a month. That isn’t much by Western standards, but here it is quite a lot,” Anissimova says. “Local court judges probably only earn half of that, but still this is a good salary in the regions.”

Genrikh Pavda, a prominent defense attorney and head of the Russian Union of Lawyers, says another important inducement to developing a reliable judiciary is pressure from the top to make the system predictable and accountable.

“Our leadership understands the significance of foreign investment in developing the country and that foreign investment will come only when there is a favorable legal climate,” Pavda says. “[Kremlin officials] have brought pressure to bear on local courts to abide by the law if any investor’s rights are violated, foreign or Russian.”

Arbitration courts, both local and international, have become the primary venues for resolving disputes involving Western investors, many of whom designate that type of legal recourse in their initial contracts with Russian businesspeople or agencies in the event the partnership runs into trouble.

More than 1,600 lawsuits involving foreign citizens were registered in Russian courts of arbitration in 1997, and about 45% of the 1,100 resolved were decided in favor of the foreign partner, says Nonna Grebneva, spokeswoman for the federal court system. Representatives for foreign investors, however, estimate that the proportion of successful lawsuits is much higher, noting that the majority of 500 or so cases never decided by the court were settled to the investor’s satisfaction in private negotiations.

Last year’s caseload was more than triple the level of five years ago, when disgruntled foreign investors were more likely to run when chased away by local partners’ goon squads.

“I must say that it is my impression that many judges, though certainly not all, are doing their best to develop an independent judiciary,” Davies says from his home in Mesa, Ariz. “And we should know--we’ve been in court in Russia 24 or 25 times.”

But the proof will be in the paying, says Davies, who still faces one more likely appeal in the breach-of-contract judgment and a labyrinth of hearings and reviews on peripherally related tax cases.

“We will contest this decision, and we will contest the sum [of the award],” vows the deputy regional administrator for the Lovozero district, Fedor Shveitser. “We will keep challenging as long as it takes.”

Davies’ local attorney, Ilya Beiderman, takes heart from the battle won in Lagutina’s court but predicts a long slog to victory in the war for reliable protection of investors’ rights.

“This case is significant because it shows that, if an investor’s rights are violated, there are legal mechanisms for rectifying those wrongs,” the Murmansk attorney says. “But it’s another question entirely whether local authorities can and will be made to comply.”

Williams was recently on assignment in Murmansk.