Disputes from Russia and the CIS are an increasingly profitable area for Western firms, even for those without offices in the region. LB looks at how long the trend can continue
It’s a time bomb,’ says Dimitry Afanasiev, chairman of the Russian law firm Egorov, Puginsky, Afanasiev & Partners. ‘Given the fact that at some point some of these commercial contracts are going to blow up into a dispute then I think the English legal market is going to see Russian business for a long, long time.’Despite the financial knocks that the UK has taken over the past few years, one small, but very important English niche retains a market-leading foothold in the wider global economy. UK manufacturing may perpetually be in the doldrums and the financial services sector might have taken a battering in the credit crunch, but English law remains one of the country’s most saleable assets.
The prevalence of commercial contracts governed by English law has turned London into a major hub for dispute resolution, either through its commercial courts or through its international arbitration forums, particularly the London Court of International Arbitration (LCIA), and Russia and the CIS is one of the biggest customer bases. So much so that there can be few London-based firms without at least one Russia or CIS-related dispute on their books. As Melanie Willems, an arbitration expert at Chadbourne & Parke says: ‘The word in the marketplace is, if you haven’t got a couple of Russian cases on, what are you doing?’
Slow fuse
The fuse for the litigation time bomb was lit in the late 1990s and at the beginning of the new millennium, and was instigated by a pervading lack of trust in the judicial systems of most former Soviet states, either due to corruption, political interference or both. As a result, English or common law governed the majority of commercial contracts, with arbitration clauses that ensured the disputes were resolved as far away from the domestic courts as possible. While most cases will invariably go to international arbitration, several will end up in the English courts. It is these that tend to grab the headlines.
Perhaps it’s the soap opera-like quality that makes disputes from Russia and the CIS so noticeable, populated as they are by larger-than-life characters and the sort of contested sums that wouldn’t fit onto a pocket calculator. Boris Berezovsky v Roman Abramovich and Michael Cherney v Oleg Deripaska are the most high-profile title bouts, but other cases such as the Fiona Trust dispute are equally important, even though the names involved aren’t as well known. The former case, which is due to be heard in 2011, relates to allegations that Abramovich coerced Berezovsky into selling his stakes in the Russian oil company Sibneft and the aluminium giant Rusal at a knock-down price that was some $3bn less than their actual value. According to Berezovsky, Abramovich had allegedly made an oral agreement to hold his stake (and the stake of the now deceased Georgian businessman Akardi ‘Badri’ Patarkatsishvili) on trust. While Abramovich is being represented by his longstanding legal advisers Skadden, Arps, Slate, Meagher & Flom, Berezovsky’s lucrative mandate has landed at the feet of Addleshaw Goddard, a UK firm with no international offices. The fact that Berezovsky has separate cases against Inna Gudavadze, the widow of Patarkatsishvili, as well as the Russian metals oligarch Vasily Anisimov over a stake in the company Metalloinvest, means that the likelihood of further work for Addleshaws is huge. (The firm declined to comment for this article.)
‘I personally think that my preference is the ICC. The LCIA is less predictable and English law is less predictable.’
Serhii Sviriba, Magisters
In the Cherney v Deripaska case Rusal pops up again. Cherney, who is being represented by Andrew Hearn at Dechert, is suing Deripaska for over $3bn regarding an alleged oral agreement concerning a 20% stake in Rusal. The issue of jurisdiction has been an especially emotive one. Deripaska, represented by Bryan Cave, argued unsuccessfully that the case should be dismissed since there was no English jurisdiction. In July 2009, the Court of Appeal ruled in favour of Cherney, on the basis that he faced the possibility of criminal sanctions if he pursued the case in Russia. In his judgment Mr Justice Christopher Clarke stated: ‘The available evidence indicates Mr Cherney will not obtain a just and expeditious hearing in the Russian arbitrazh courts and that there is a strong likelihood that he will be arrested on false allegations.’ In October this year, Deripaska also lost a court ruling in his bid to present expert evidence about Russian organised crime, having alleged that Cherney was ‘a representative of Russian organised crime’.
Ukraine: A fine balance
The tricky balance between fighting corruption and maintaining judicial independence is one that is currently being tackled in the Ukraine as well as Russia. Ukraine’s new pro-Russia president, Viktor Yanukovych, who was sworn in earlier this year, has implemented a series of judicial reforms that will have a major impact on the domestic court system. These have included significant procedural changes and a diminished role for the country’s Supreme Court. The decreased power of the Supreme Court has been widely criticised by local Ukrainian litigators. ‘I don’t think that it is very reasonable, because it is better for the Supreme Court to decide [cases] rather than the court of lower instance,’ says Mikhail Ilyashev, managing partner of Ilyashev & Partners. One of the biggest changes concerns the appointment of judges, in order to try to tackle the high levels of corruption that riddle the system.
‘We had so many corrupt judges, and the system can’t tolerate them anymore,’ says Andrey Astapov, managing partner of Astapov Lawyers. ‘If you could hear some of the cases we were part of you would be really scared.’
To deal with this, judicial appointments will now be in the hands of a newly empowered Supreme Council of Justice. Most commercial lawyers have taken a pragmatic view, seeing benefits for the commercial litigation market, but acknowledge there are definite downsides in respect of judicial independence.
‘The problem is that most members of the council are appointed by the president,’ says one litigator with experience of the Ukrainian market. ‘Therefore, while the first signs are that the appointment process is more efficient, in the long term the majority influence of the presidential branch of power will soon lead to direct influence. The commercial corruption they are trying to fight has a very good chance of turning into political corruption.’
Culture clash
The fact that the English courts consider themselves in a position to judge on issues stemming from Russia and the CIS raises hackles among Russian domestic lawyers. ‘It is wrong for Russian law to be interpreted by English judges,’ says one leading Russian litigator. ‘They don’t often appreciate the realities of Russian business life. How is the English judge going to understand the realities of Russia in the 1990s, and the level of threat that is applicable for someone to be scared? If you come home and there are three people wearing leather coats and sitting on your doorstep saying, “Hello, how are you doing?”, would the English judge understand that this is a death threat?’
Looking ahead, it could be argued that there is some pragmatic business reasoning behind why the English courts might want to accept jurisdiction. ‘What is interesting about all of this is that four or five years ago the English courts were becoming quite wary of these cases, that they should be heard somewhere else,’ says one London-based litigator. ‘Recently I think the English courts have been really focusing on international disputes. We’ve been doing this for 400 years, so for us to be selective about these cases is bad for business. I think we’ll find a more liberal approach going forward.’
Working on the assumption that the English courts are more likely to accept jurisdiction in the future, there are other aspects that make them appealing to litigants from Russia and the CIS. One of these is the willingness of the UK courts to accept oral testimony and evidence. ‘The majority of these disputes are based on a trust in the UK courts and oral evidence provided by the relevant parties, whereas in Russia the courts focus more on the written evidence,’ says Denis Bykov, the head of dispute resolution at the Pepeliaev Group in Moscow. It is no coincidence, then, that both the Deripaska and Abramovich disputes crucially hang upon oral agreements that were allegedly made in London hotel rooms. This also illustrates a cultural difference in the way Russian and Western business leaders conduct their business arrangements.
‘What I can now say is that when you begin a case you have to think about the enforcement angle at the beginning.’
Simon Bushell, Herbert Smith
‘Oral agreements are a big feature of these cases,’ says Natalia Chumak, a London-based Russian litigation partner in Field Fisher Waterhouse’s CIS group. ‘In Russia oral agreements are often made in respect of very big transactions whereas in the West no one would dream of doing that in regard of big assets. In Russia the legal agreement very often doesn’t reflect the actual agreement, which is often reached at the highest level between the two principals. The reason for that is a cultural one. When two principals behind the companies enter into an oral agreement… they see it as a gentleman’s agreement. Culturally you have given your word and that is enough. That is well and good when things are friendly, but when there is a dispute English law allows them to argue about it.’
Other contributing factors include the fact that many of the deals, which later descend into litigation, were carried out in short time frames, often with little risk management. ‘The Russian market has developed so quickly, and Russian parties have had to be very nimble,’ says Jason Yardley, a litigation partner at White & Case. ‘They’re spotting opportunities and snapping them up quickly, with limited due diligence and quite often without even engaging a law firm.’
Clients from Russia and the CIS have also been generally quite unafraid to carry out such disputes in public, particularly if the claimant sees it as a good opportunity to try to drag their opponent through the mud. ‘When shareholders fall out in some jurisdictions you might get the partners resolving their disputes behind closed doors,’ Yardley adds. ‘ While the British Virgin Islands are a hugely popular location for Russian holding companies to be set up, they’re also huge for Chinese holding companies, but you never hear about the Chinese disputes because they prefer to deal with these matters privately. For some Russian parties, on the other hand, litigating in the English courts can be seen as a status symbol.’
According to Bushell at Herbert Smith, there are indications that this slightly more laissez faire appetite for public litigation is starting to wane. ‘I think if you are looking for trends, there will be fewer battles between the Russian oligarchs fought out in London over strategic assets of importance to the Russian Federation. Certainly, those who are trying to maintain good relations with the Kremlin are likely not to want to attract attention to themselves and the background to their business affairs in a high-profile English court case.’
The other issue is with cost. ‘In the past several years, as some of these contracts have now ended up in litigation in England, the Russians are realising it isn’t a very efficient forum,’ says Afanasiev, who represents Rusal’s interests in Russia. ‘The world famous English litigation system, when it comes under closer scrutiny, actually ends up being very costly and not very efficient. A lot of Russians have been disappointed with the process, although the attraction remains because the system is not corrupt.’
In 2008, in one case before London’s High Court brought by a client from the CIS, a Herbert Smith team led by Bushell was forced to reveal that it was charging the Tajikistan state-owned company Tajik Aluminium, now Talco, projected fees of over £50m for representing it in a £245m fraud claim. The respondents, who were represented by a selection of firms, including Clyde & Co, Peters & Peters, Bryan Cave and Osborne Clarke, were themselves facing costs of around £30m. However, amid the publicity, Talco’s chief executive Sadriddin Sharipov told The Financial Times that the expense was justified. ‘Talco commenced High Court proceedings as a vital step in the protection of the interests of the Tajik economy,’ he commented. ‘The operational expenses of legal and related costs, borne by Talco, reflect the central importance of the issues and have been a necessary price to pay in re-establishing a successful aluminium industry in Tajikistan.’ The case was eventually settled four weeks into an 18-month trial.
Cyprus and BVI: The Rim of the Wheel
A recent state visit by the Russian president Dmitry Medvedev to Cyprus on 10 October underpinned how closely linked the two economies have become. On a superficial level it seems a mismatch, the Russian giant sitting next to a small Mediterranean island with a population of just under 800,000 people. Yet, officially at least, Cyprus is one of Russia’s largest trading partners. According to the European Commission’s Directorate-General for Economic and Financial Affairs, in 2006 Cyprus accounted for 18% of foreign investment inflows into Russia, more than any other country that year. In the period up to 2008, Cypriot investment into Russia amounted to $57.6bn. The driver behind this is the fact that thousands of Russian businesses are registered in Cyprus and channel their money through the country. According to a report in the national newspaper, Cyprus Mail, up to €15bn of Russian money is deposited in Cypriot bank accounts, accounting for 22% of the country’s total deposits.
For a couple of years Russia had blacklisted Cyprus as a tax haven, but Medvedev’s visit put an end to that. Alongside the Cypriot president Dimitris Christofias, Medvedev signed 15 agreements and memoranda of understanding, including improvements to the double taxation treaty that exists between the two countries. The fact that Christofias is a former leader of the Cypriot Communist Party and was educated in the Soviet Union only underscores some of the historic ties that exist between Cyprus and Russia.
Regardless of the cultural and political links, it is the arrival of the Russian businessmen that has been the biggest boon to Cyprus’s leading lawyers. ‘In the past five years it has exploded,’ says Alexandros Tsirides at Costas Tsirides & Co. ‘We now have a specialised corporate department for administering Russian-related companies, we have Russian speakers and Russia and Cyprus-qualified lawyers to accommodate the high demands of the Russian clients.’
As more and more disputes materialise, Cypriot litigators are also getting in on the action. Most of the work involves interim proceedings and freezing orders that are often ancillary to major arbitrations and litigations elsewhere, but even so the figures can be astronomical, particularly compared with the amounts that are usually disputed in the District Courts of Limassol and Nicosia.
‘The amounts of the disputes are very high, even for very well developed countries like the UK or US.’
Panayiotis Neocleous, Andreas Neocleous
‘The amounts of the disputes are very high, even for very well developed countries like the UK or US,’ says Panayiotis Neocleous, head of litigation at Andreas Neocleous & Co, which has its own Moscow office. ‘These are amazing amounts of money. Having said that, almost all the cases end up in the district courts, so usually the judges there are very experienced.’
The most recent example of this came in September when lawyers for the Russian politician and businessman, Ashot Yegisaryan, successfully imposed a freezing order on the assets of the Russian billionaire Suleiman Kerimov. The assets, which include stakes in the mining company Polyus Gold and the fertiliser maker Uralkali, are reported to have a value of almost $6bn.
‘[The Russians] certainly brought a lot of the court’s day-to-day business,’ says Andreas Haviaras, senior partner at Haviaras & Philippou, which represented the claimants on the Kerimov freezing order. ‘Here the judges and the courts have the capacity to deal with them. Of course we are dealing with numbers unknown to the day-to-day matters in Cyprus, but they don’t disrupt the court’s day-to-day business.’
‘It seems more and more Russian people are trusting the Cypriot courts to deliver effective justice,’ adds Menelaos Kyprianou, managing partner of Michael Kyprianou & Co. ‘We even see cases where it could be argued that the Russian courts could have jurisdiction, but more often than not the Russian beneficial owners will choose Cyprus.’
It is a shift that offshore firms are cottoning onto. The BVI firm Harneys became the first offshore firm to establish a presence in Cyprus through its 2008 merger with Aristodemou Loizides Yiolitis. ‘At the moment the Cypriot merger was very much based on trying to get more banking and corporate work,’ says Phillip Kite, the firm’s head of litigation, who is now seeking to expand the disputes side of the Cypriot practice. ‘We’re actively recruiting at the moment with a view to offering litigation as well.’ Conyers Dill & Pearman has since followed Harneys’ lead, opening its own Cyprus office in 2009.
Russia-related disputes in the BVI, the other offshore hub favoured by CIS businessmen, have been booming as well, most recently illustrated in the $1.3bn dispute between Russia’s Alfa Telecom and Turkey’s Cukorova Finance International over shares in Turkcell. The difference in this litigation matter was that the hearings that reached the newly refurbished BVI High Court weren’t ‘the rim of the wheel’ as one partner puts it, but the core proceedings. ‘There is a move towards that,’ says Kite. ‘Almost two years ago we set up our commercial court and we brought over Edward Bannister QC and he is now Mr Justice Bannister. I certainly think there is a move towards BVI where it can be more the focus of the trial.’
Alternative measures
The preferred alternative, of course, is international arbitration, but even here the favour has been swinging in the direction of the UK arbitral institutions such as the LCIA. In 2009, there was a reported 54 Russia-related cases in the LCIA, compared to just over 20 in the London High Court. Historically the preference within Russia and the CIS had been for Stockholm-based arbitrations, but that has since shifted. ‘During the cold war and post-cold war times, when you really had two blocks and it was a matter of political correctness, they would go to Stockholm and only accept that as a politically correct venue. That was true for the Russians, but also true for the Chinese,’ says Emmanuel Gaillard, Shearman & Sterling’s Paris-based head of international arbitration. ‘With the end of this existence of two different blocks, Russia has changed. It may not be completely democratic, but it’s a different animal, so they have changed that policy. The LCIA has done a good job in terms of PR. Also the new generation of rich Russians like London and spend a lot of time there, so that has helped.’
Despite the prevalence of London-based arbitrations, the qualms that many Russia and CIS-based lawyers have about English law remain. ‘I personally think that my preference is the ICC, it is more predictable,’ says Serhii Sviriba, head of international arbitration and litigation at Magisters’ Kiev office. ‘The LCIA is less predictable and English law is less predictable, especially if you have the combination of Ukrainian business and the attempts by foreign judges to implement English law. That combination is sometimes very scary.’
‘LCIA is today the preferred forum of choice, but as people get more experienced they will shift to other jurisdictions, particularly Switzerland,’ notes Afanasiev. ‘First because Switzerland is the third most popular place in Europe for Russians after London, the second being the Côte d’Azur, but I don’t think anyone is considering that. Swiss arbitration is cheaper than in London and there is the similarity of the civil code system.’
Enforce for good
Regardless of whether the clients opt for the LCIA, the ICC or another forum, international arbitration still plays into the hands of those firms with strong global networks, especially when it comes to enforcement. Those that don’t appreciate the intricacies involved in getting their awards enforced in Russia or elsewhere can come severely unstuck. ‘This is the first thing you need to think of wherever you are,’ says White & Case’s London-based Russian arbitration specialist David Goldberg. ‘There are examples of a Magic Circle firm spending £3m of their client’s money, obtaining a client’s award and then finding that the assets in Russia have changed hands more than once in the mean time.’
In many cases the claimant’s lawyers will have to judge whether the defendant will actually stick around to fight the enforcement proceedings, let alone pay up. As the Kiev-based head of disputes at one international firm puts it: ‘It’s pretty problematic. The first issue is to have the award recognised in the Ukraine if the defendant still exists. If there are claims of millions of dollars the company might disappear quite quickly. If the brand is well known, they will fight severely for the courts not to allow enforcement.’
When it comes to these sorts of scenarios, there is no substitute for on-the-ground litigation expertise. This is something that the domestic firms have in spades and something that the international firms are trying to build. ‘When we hired Dmitry [Kurochkin], we did so in response to client demand for top-quality Russian disputes capability to support our international focus,’ says Bushell. ‘So, at the beginning of a case we might need to pursue freezing orders to preserve assets. You also have to think about the enforcement angle at the beginning. If a defendant thinks it is going to lose an arbitration and they are prepared to use “guerilla tactics”, you need to anticipate these steps. Having specialist Russian disputes expertise available from the outset means that you can better resist any attempt to “torpedo” the arbitral process, for example, by way of parallel proceedings or an “anti-arbitration” injunction.’
If Russian or CIS-based assets are in play, it is crucial that these domestic jurisdictions are kept at the forefront of the mind. ‘It is very important that all procedures abroad are performed according to special rules, because if it isn’t done correctly it will be very hard to enforce the decisions in Russia,’ says Bykov at Pepeliaev. ‘That is why we are now working on a number of cases with foreign firms.’
‘It is wrong for Russian law to be interpreted by English judges. They don’t appreciate the realities of Russian business life.’
Leading Russian litigator
Ultimately, Russia and the CIS can often be circumvented because in a lot of these disputes the assets are actually held in offshore jurisdictions such as Cyprus and the BVI, where the holding companies are based. The fact that so many interim proceedings and freezing orders take place in these respective courts has led to an increasingly profitable line of work for Cypriot and BVI-based firms (see offshore box, ‘Cyprus and BVI: The Rim of the Wheel’, page 80). Even in cases that do involve Russian assets, there are always angles that can be taken. ‘Depending on how shrewd you and your partners in Moscow are, you can get operational control over the companies in Russia,’ says Goldberg. ‘There are tricks to the trade.’
Arguably the most high-profile arbitration case at the moment is the $100bn claim that Yukos shareholder GML is making against the Russian Federation, following the demise of the Russian oil giant in 2005 and the imprisonment of its chief executive Mikhail Khodorkovsky. Gaillard, who is representing GML, believes that, in the event that they are successful in their UNCITRAL arbitration, there is a strong possibility that Russia will be obstructive. In which case, the claimants will target Rosneft, which was listed on the London Stock Exchange on 14 July 2006, but in which the Russian government still has a 75.2% stake. The targeting of Rosneft is based on the fact that it now owns Yukos’s most vital oil production facility Yuganskneftegaz. ‘We would attack those state-owned assets, Rosneft being the main target,’ says Gaillard, whose client’s very threat of Rosneft proceedings, however distant, had to be marked up on the company’s prospectus prior to its IPO. ‘So that is the next step. I think Putin will resist because it’s a personal thing… We don’t expect them to crack a cheque immediately.’
A better tomorrow
Despite the fact that arbitration awards can be harder to enforce, most lawyers admit that this isn’t a problem that is exclusive to the CIS. Russia, after all, is signed up to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, whereas in the case of London litigation there is no bilateral treaty in place to enforce foreign court proceedings. ‘There is a tendency for some people to be overly negative about Russia and to not necessarily put it into its proper context,’ says Willems at Chadbourne & Parke. ‘One should never forget that enforcement can sometimes be rejected for perfectly good reasons. You will get some horrendous cases but you will still get many that work out well.’
The sense is that, given the recent reforms that have taken place in the domestic court system of Russia, and even though the threat of political interference remains, things are slowly improving, at least when it comes to rooting out corruption. Tentative moves are also afoot to try to amend Russia’s corporate laws and keep more of the business and governing laws within Russia. While deals involving foreign parties will probably remain governed by English law, if such legal changes do occur, it will make it more likely that pure Russian matters will remain onshore.
‘I certainly think that a particular category of disputes between Russian parties does take place in Western jurisdictions, particularly with regard to old debts,’ says Alexander Khrenov at Yukov, Khrenov & Partners. ‘Hereafter, I predict a quantitative decrease in such disputes, since the general number of those disputes will be heard under the jurisdiction of the Russian courts.’
If this is the case, then when the fuse for the next litigation time bomb is lit, there is every chance it will eventually explode in Moscow rather than London. LB