The People vs. Russia

It was not just that the Russian government had defaulted on its short-term treasury notes, or that by doing so it had stripped Gleb Shestakov’s Cossack Investment Fund of 70% of its value in scarcely more than a day.

What finally provoked Shestakov to sue the government was the way it dealt with the victims of its foolhardy fiscal policies.

“They were completely Communist” about it, he said, invoking a favored epithet among this country’s once-highflying business elite.

He was alluding to the Russian central bank’s initial proposal to pay off investors with IOUs that many analysts valued at between 5 and 10 cents on the dollar.

“They said investors who didn’t accept the offer were ‘stubborn and super-greedy,’ and said they’d get nothing,” Shestakov said with a snort. “Even banana republics usually offer you a better deal than 5 cents on the dollar. So I decided to make that point with them by taking them to court.”

Shestakov’s lawsuit, seeking redress from what is widely regarded as illegal government fiscal directives issued Aug. 17, is a bold test of the independence of Russia’s judicial system--bound to be closely watched here, if only because the notion of suing the government is such a novel one in Russia.

In the United States, the right of the people to petition the government for redress of grievances is enshrined in the Bill of Rights. Lawsuits against the government, including those asserting financial damages, are heard by the U.S. Claims Court, which was established in 1855.

No such tradition exists in Russia, but the inclination to hold the government legally responsible for its deeds is growing.

Signs are mounting that Russia, already staggering under the triple plague of devaluation, default and stagnation, is about to be run over by a scourge of a distinctly Western character: litigation.

Foreign and Russian lawyers in Moscow say they have been inundated with queries from victims of the double-barreled financial disaster that struck here in August, when the government in effect defaulted on about $55 billion in ruble-denominated treasury securities and allowed the ruble to fall in value.

Because the treasury notes were theoretically the safest short-term investments available to businesses and bankers, the actions led to a virtual collapse of the country’s banking system and a freeze on the banks’ payments to domestic and Western creditors.

“Our capital markets and banking people are very stressed out,” said Bruce W. Bean, a Moscow-based partner in the London law firm of Clifford Chance. “But it’s our litigation people who are going crazy.”

Thousands of citizens with rubles and dollars in Russian bank accounts have filed claims against their banks, which since Aug. 17 have been unable to return the money on deposit. That leaves those accounts at the mercy of the deteriorating ruble, which has lost more than half its value in two months. There are so many claims, in fact, that some bankers have stopped counting.

“After the first two or three,” said Alexander Zurabov, chairman of the bankrupt Bank Menatep, “you just have to say they’re ‘numerous.’ ”

The action is unfolding not only within Russia. Aggrieved investors in the defaulted treasury bills, as well as those who have loans or currency deals outstanding with Russian banks, have embarked on a worldwide quest to seek out and freeze Russian assets parked abroad.

Several have succeeded. Lehman Bros., the New York investment bank, persuaded a London judge to temporarily freeze, or “arrest,” European assets belonging to three Russian banks--SBS-Agro, Inkombank and Uneximbank--on Lehman’s claim that those banks had broken foreign-exchange contracts or defaulted on loans worth $110 million.

In a separate case, Germany’s Deutsche Bank moved in September against a Russian government-owned institution called Eurobank, freezing its assets in Europe. Deutsche Bank claims it lost $30 million in mid-September when Russian finance officials undermined its currency hedge by manipulating the ruble’s value upward against the dollar over a period of several days.

Whether those legal actions are wise has become a topic of considerable debate among investment analysts here. Given the delicacy of the country’s fiscal situation, suing Russian institutions is a political as well as commercial decision. This is true especially because intense negotiations are going on between central bank officials and a select group of European commercial and investment banks over the restructuring of $10 billion of debt held by the foreigners. Observers say the overseas lawsuits have already hardened the Russians’ positions.

“I don’t think any of this is particularly useful,” remarked Eric Kraus, head of the Moscow fixed-income desk for investment firm Dresdner Kleinwort Benson. “Attempting to sue strikes me as a relatively American mentality. A lot of lawsuits are not going to improve the situation.”

For all that, the more interesting legal developments are happening here, where the financial crisis and its fallout may represent the stiffest test ever for a Russian judiciary that has not yet enjoyed a full decade of independence.

Many domestic and foreign businesspeople say they have been impressed so far by the judiciary’s fairness, even in cases in which one side is politically well-connected. Last year, according to official statistics, foreign companies won about 70% of the cases they brought in arbitration courts, a special category of courts established specifically to hear commercial disputes.

But it is uncertain whether the inexperienced and chronically underpaid judges (the recent ruble devaluation cut their salaries to about $200 a month) will have the spine to stand up to government pressure in cases like Shestakov’s, given that the government’s very fiscal solvency is at stake. Even Shestakov occasionally wonders out loud, and not entirely jocularly, whether his reward from the case will be “a bullet in the head.”

“I am absolutely sure that the court will look for any opportunity it can find in order not to establish a precedent,” said Andrei A. Nechayev, a former minister of economics who is co-chairman of the Russian Business Round Table, an organization of entrepreneurs. “Otherwise the Russian government would have to declare itself bankrupt.”

Such sentiments elicit a shrug from Shestakov’s high-profile lawyer, Genrikh P. Padva.

“Predictions are so unrewarding,” he said. “History teaches us that it was easy in the past for the state to make a decision and have the courts obey. But while it’s fair to say that we’re a long way from the true independence of the system, I do hope the judges will be willing to do something that saves the judiciary’s face.”

By some standards, the courts’ task is straightforward: They must find that the government exceeded its authority in defaulting on its bonds and ordering private businesses not to pay foreign creditors.

Even then-Prime Minister Sergei V. Kiriyenko apparently doubted that those financial directives were legal when he announced them in August. He had already prepared a package of retroactive enabling legislation--themselves legally questionable measures--to present to the Russian parliament.

Before he could do so, however, he and his government were summarily fired by President Boris N. Yeltsin. Kiriyenko’s successor, Yevgeny M. Primakov, never tied up the loose ends.

Lawyers in Moscow say that leaves the state as well as Russian businesses legally vulnerable to lawsuits demanding full payment of all notes and debts. But they also note that it is difficult in Russia to enforce court judgments.

In crisis-related cases, the customary obstacles to collecting on a money judgment are sure to be aggravated by the newfound penury of the defendants--including the government itself.

Anyone trying to sue Russian banks or the government over the defaults, said Daniel Matthews of the Moscow office of the U.S. law firm Baker & McKenzie, faces “the practical legal issue of getting blood from a stone.”

In fact, that is precisely the issue that led Shestakov to retain Padva as his lawyer.

The 67-year-old Padva is something of a Johnnie Cochran in the country’s fledgling private law community, one of Moscow’s best-known and wiliest lawyers. During his more than three decades’ experience here, his clients have included former Supreme Soviet Chairman Anatoly I. Lukyanov, whom Padva defended against treason charges related to the failed 1991 coup attempt against former Soviet leader Mikhail S. Gorbachev. (As did most of the other 12 defendants, Lukyanov accepted a government offer of amnesty before the trial court could reach a verdict.)

Padva, dividing his time now between criminal and civil cases, said he has devised a way to ensure that a judgment against the Russian government will be collected. He would not elaborate.

“We’re going to be tough with them,” he lectured animatedly. “The state can’t go bankrupt. If it sold me a treasury bill and is not paying me back, let it sell its gold mines or Red Square to raise the money.”

That is not to say he is sure Shestakov’s case will go smoothly. “I’ve been reluctant to take other cases until we see how this trial balloon flies,” he said. “I haven’t promised anyone it will all work out.”