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Cablegate: Reliable Commercial Dispute Resolution: An Absent

VZCZCXRO6614
RR RUEHIK
DE RUEHMO #2560/01 2821146
ZNR UUUUU ZZH
R 091146Z OCT 09
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 5056
INFO RUCNCIS/CIS COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RHMFIUU/DEPT OF JUSTICE WASHINGTON DC
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 MOSCOW 002560

SIPDIS
SENSITIVE

STATE FOR EUR/RUS, EUR/ACE, EEB/IFD, INL/AAE
DOC FOR 4231/MAC/EUR/JBROUGHER
NSC FOR MCFAUL
DOJ FOR OPDAT/NEWCOMBE AND ALEXANDRE

E.O. 12958: N/A
TAGS: ECON EINV KCRM KJUS PGOV PHUM PREL RS
SUBJECT: RELIABLE COMMERCIAL DISPUTE RESOLUTION: AN ABSENT
PREREQUISITE FOR FDI INTO RUSSIA

MOSCOW 00002560 001.2 OF 002


THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED AND NOT FOR
INTERNET DISTRIBUTION

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Summary
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1. (SBU) An unpredictable legal system, specifically as it
relates to resolving business disputes, has undermined
foreign (and domestic) investor confidence in Russia. Some
investors have focused on international arbitration and
private dispute resolution to resolve commercial disputes
involving Russia. The failure of Russian courts, however, to
enforce arbitral awards has proven to be an obstacle.
Persuading Russia to improve its adherence to international
norms, including standards for enforcing judgments in Russia,
would make its investment climate more attractive. While the
recent Embassy sponsored conference on commercial dispute
resolution stimulates debate on the progress achieved
(septel), changing Russia's current nationalistic approach to
arbitration enforcement does not appear imminent. End
summary.

--------------------------------------------- -----
Importance of Reliable Business Dispute Resolution
--------------------------------------------- -----

2. (SBU) Business dispute resolution can take a number of
forms: litigation, arbitration, and mediation, but none is
credible if the judgment or award cannot be enforced.
Russia's infamously corrupt court system has led some legal
practitioners to place their hopes on resolving commercial
disputes via arbitration. Such arbitration could take place
in international fora, such as Sweden or New York, or in
Moscow. The International Commercial Arbitration Court
(MKAS) in Moscow is the leading venue for arbitrating in
Russia.

3. (SBU) Some lawyers argue that international fora are
preferable to MKAS because those arbitrators have more
experience. That said, MKAS is gaining greater experience
and sophistication in arbitrating. The challenge, however,
is shifting from getting a decision on the merits to getting
the award enforced in Russia. As Mark Appel (please
protect), Senior Vice President of the International Center
for Dispute Resolution, told us, only about 50 percent of
awards (this included those rendered by both international
and Russian arbitration courts) actually were enforced. He
noted a strong correlation between the perceived strength of
the "losing" side's Kremlin connections and the difficulty of
getting an award enforced.

4. (SBU) While optimists take heart that more cases are being
filed and more awards are being enforced in Russia,
pessimists counter that the global economic crisis has
engendered more disputes and the awards being enforced are
paltry. (Septel.) What does seem clear though, is that
enforcement is easier if the "losing" side has assets outside
of Russia that can be attached. For example, Franz
Sedelmeier was awarded USD 2.3 million, plus interest, in
relation to a 1995 property dispute with the GOR in St.
Petersburg. He was able to attach GOR-owned property in
Berlin, but, almost 15 years on, he is still trying to get
full relief.

--------------------------------------------
Poor Enforcement Increases "Russia Discount"
--------------------------------------------

5. (SBU) For business, tales like Sedelmeier's -- as well as
those related to the Yukos, Bank of New York, and Hermitage
cases -- are relevant. As one British oil and gas lawyer
told us, once the parties have resorted to an outside party
to resolve a dispute, the business relationship is ruptured
and it is a matter of settling accounts. According to him,
the value in impartial resolution is the discipline it brings
to the parties' behavior in avoiding a dispute. For this
reason, he concluded, the very public (and recent) disputes
of Telenor/Vimpelcom and TNK-BP further decrease the value of
potential deals in Russia vis-a-vis other emerging markets.

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Some See Fewer Deals
--------------------

6. (SBU) An American oil and gas partner at a major
international law firm told us that he had seen a definite
waning of interest among the oil and gas sector
multinationals over the past year. While he was unwilling to
conclude that this was entirely attributable to rule of law
issues -- the Strategic Sectors Law has also had an effect --
he noted that TNK-BP and Sakhalin GOR-supported takeovers had
definitely had a chilling affect on investor interest. He
also claimed that Russian companies, such as Lukoil, were not
inaugurating new Russian onshore business.

7. (SBU) Boris Karabelnikov, Professor and Arbitrator at
MKAS, told us that the only investors coming to Russia were
those who "had to be here." In Karabelnikov's opinion,
FMCG's (fast-moving consumer goods enterprises), such as
Proctor and Gamble, Coca-Cola, and Pepsi-Cola, could not
afford to ignore the advantages that FDI provided to access
Russia's consumer market. He concluded that not a single
large foreign investment in recent years had been undertaken
without Kremlin protection.

-------
Comment
-------

8. (SBU) Poor dispute resolution is a significant factor in
investors' decisions about Russia, although its precise
effects are not always quantifiable. Nonetheless, as Russia
seeks to increase foreign investment, we will continue to
encourage Russia to improve its dispute resolution system to
improve its investment climate.

Beyrle

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