The Russian commercial justice system has suffered from image problems in the past, but recent court reforms and a boom in litigation look set to challenge this. LB investigates the impact on the domestic litigation market
In 2005, when Anton Ivanov was appointed chairman of Russia’s Supreme Court of Arbitration, the country’s highest commercial court, the domestic judicial system was blighted by accusations of political interference and corruption. It is fair to say that, for those seeking greater judicial independence within Russia and a broom to sweep away the court system’s perceived problems, Ivanov’s appointment wasn’t immediately seen as a great herald for change. For anyone hoping for an outsider, his arrival was an immense disappointment.
At the time of his appointment Ivanov had no experience as a judge and was only 39 years old. He was just three months older than one of his best friends, Dmitry Medvedev, who happened to be Vladimir Putin’s chief of presidential staff and was himself being groomed for greater things.
The upward trajectory of Ivanov and Medvedev can be traced back to Leningrad University, whose most famous alumni is Putin. Since graduating, Ivanov and Medvedev’s careers have been like two planets in constant orbit of Putin’s sun. It is perhaps fitting, then, that when they left university, they started a company whose Russian name roughly translates as Uranus.
They crossed paths again at state-owned energy giant Gazprom. Here Medvedev rose to the position of chairman of the board and, in 2004, Ivanov was appointed first deputy director general of its subsidiary Gazprom Media. The two are inextricably linked, which is hardly ideal now that one chairs Russia’s commercial court system and the other is the country’s president.
The doubts surrounding the proximity of this relationship were raised in the London High Court last year, during the ongoing dispute between the two Russian oligarchs Michael Cherney and Oleg Deripaska. The issue of jurisdiction was hotly contested, with Deripaska arguing it was a Russian dispute that should be heard in Russia, while Cherney’s team successfully claimed that their client wouldn’t get a fair hearing in Moscow. In his summary, Mr Justice Clarke stated: ‘Mr Deripaska’s Rusal group is one of the most important assets of the Russian economy and is of extraordinary importance to the Russian state… The arbitrazh courts have in recent times been brought into much closer alignment with the economic structures of the state through a series of controversial appointments. It has been acknowledged at the highest level that there are problems of corruption in the judicial system and of political interference.’
‘In my view the biggest problem is that the courts are too busy. Corruption is yesterday’s news.’
David Goldberg, White & Case
In spite of these criticisms, five years into his job Ivanov is credited with making reforms to the Russian commercial court system, which at the start of his tenure would have seemed a pipedream. These have included changes to the court infrastructure that have greatly increased transparency, such as its internet site www.arbitr.ru where you can track every case currently going through the system.
‘One can criticise the current management of the Supreme Arbitrazh Court, but it has definitely achieved a lot,’ insists David Goldberg, a Russian native and a partner in White & Case’s London disputes team. ‘I don’t think that many Western court systems have achieved so much in such a short time. You get every single judgment online now, so the infrastructure is probably better than most Western systems,’ he adds. Russia’s judicial head has made quite an impact.
A clear view
For a system that is trying to shake off the perception that its judges are easily corruptible, the greater transparency that Ivanov has tried to instil is crucial. The impact of an online tracking system should not be underestimated. ‘Taking into account the size of the country, it’s a huge achievement because in Moscow I can see what is happening with my case in Vladivostock – including dates of the hearings, e-copies of judgment decisions and information on applications of other parties,’ enthuses Vassily Rudomino, senior partner of Alrud Law Firm.
Having embraced the internet, the commercial courts are pitching for even greater transparency, with a move towards filmed court proceedings, which will also be available online. Now their judgments can come under far wider scrutiny, which has helped police the situation. As Maxim Kulkov, a litigation partner at Berwin Leighton Paisner’s Russian arm, Goltsblat BLP, says: ‘The judge now knows that any document they issue will immediately be published. Psychologically it will push them to control the quality more closely.’
‘For dealing mainly with litigation in the state arbitration courts, I can say that for the past few years there has been a breakthrough in the issues of transparency and function,’ adds Alexander Khrenov, a partner at the Russian law firm Yukov, Khrenov & Partners. ‘The system of electronic justice and court websites that allows people to follow the progress of cases, get familiar with court acts and study case decisions, as well as the introduction of live online broadcasting of the sitting of the Presidium of the Supreme Arbitration Court, all illustrate the improvements in the Russian courts.’
‘For the past few years there has been a breakthrough in the issues of transparency and function.’
Alexander Khrenov, Yukov, Khrenov & Partners
Beyond such practical changes to the court infrastructure, Ivanov has also started to unofficially implement a system of precedent within the commercial courts.
‘Having an English-based precedent system is quite novel and Chief Justice Ivanov has made it clear that he wants to see it happen. I think it is his way to try to speed up the reform while not waiting for the legislature to catch up and change the black letter law,’ says Dimitry Afanasiev, chairman of Egorov, Puginsky, Afanasiev & Partners. ‘Even though Russia doesn’t formally recognise the decisions of the higher court as being binding for the lower court, in reality no judge wants to be overturned. The message has been sent to the judges of the lower courts to follow the decisions of the Supreme Arbitrage Courts. Whether this will be formally enacted will take a longer time as it really is a novelty for a civil law (continental) system such as Russia.’
Combined with attempts to modernise the country’s inflexible corporate laws, the hope is that Russia will become an increasingly attractive place to domicile one’s business, particularly for the many Russian businessmen who prefer to go offshore, and, as a result, are resolving their disputes in foreign courts or international arbitration. For the independent local firms, this is crucial in their fight for market share, particularly with the international law firms, who in the words of one domestic lawyer, ‘often tell their clients that Russia is hopeless and they should do their business in England’.
‘We have two competitors in Russia: the first is English law, the second is called corruption,’ says Afanasiev. ‘To the extent to which Russia is going to continue to humiliate itself by having de-facto domestic transactions governed by English law makes it harder for Russian law firms to compete. On top of this, our law firm invests $2m a year on training associates, but why invest in highly skilled lawyers if somebody else can cut all the corners and fix the problem through corruption? Domestic firms have a shared interest with the government to make Russian law more user-friendly and to assist the government in improving the courts so that they are trusted by Russian litigants. It is not only a moral and ethical issue, it is an economic one as well.’
Case overload
For many, the main challenge now is for the courts to increase their capacity. ‘In my view the biggest problem is that the courts are too busy,’ says Goldberg. ‘Corruption is yesterday’s news. It is no longer there in the form that we knew it in 2000.’ This over-capacity was clearly illustrated in 2009, when the Russian arbitration courts heard 1,409,503 cases, a rise of almost 50% from 2008, which saw 970,152 cases. So far, in the first half of 2010 there have been 621,291 cases.
‘The judges are very overloaded with work,’ says Kulkov. ‘This for sure has impacted on the quality of the hearings because the judges can’t consider the cases properly. Time isn’t the issue, what is much more important is the quality. The average hearing is now 20 minutes, which is impossible to present your case.’
‘Most Russian judges have about 37 cases a month, so that leaves them no time to think properly,’ adds Evgeny Timofeev, the Moscow-based co-head of Salans’ global tax practice. ‘That’s a problem.’
Despite this, measures are in place to deal with it. ‘The problem is recognised because all the statistics are publicly available on the website of the court,’ says Rudomino. ‘Secondly they have clear plans of how to deal with those problems and they recognise that it is impossible to leave it like this.’
‘We have two competitors in Russia: the first is English law, the second is called corruption.’
Dimitry Afanasiev, Egorov Puginsky
The most concrete change so far has been the announcement in early October of the creation of a specialised court for intellectual property disputes. Further specialisation among the judges is also expected. Another factor is the incredibly low cost of court cases which is set to rise. At present the maximum court costs are 100,000 Roubles (around $3,300), while the awarding of costs is also low, particularly compared to the UK. This means that there is little incentive to avoid the courts. ‘To initiate a case is very cheap,’ says Kulkov. ‘At the end of the day, even if you lose a case you don’t pay much on top of the other costs. In Russia the court fees are very low, the legal costs are usually granted in favour of the winning party, but in a very limited amount. If I win the case, my client has the right to claim the fees from the losing party, but the most they will get is 30 to 40%. That means if somebody doesn’t want to pay his debt he will go to the court quite easily.’
Nevertheless, some local lawyers see distinct advantages in the court system’s fast turnaround, especially for small to mid-size cases. ‘It is fast, so in four months you will basically receive the decision of the first court, within five months it will go into appeals, and if all appeals are used the litigation won’t last longer than a year,’ says Andrey Zelenin, a litigation partner at the Moscow firm Lidings. ‘Another point that makes it attractive is that if you have a Russian debtor that isn’t Gazprom or Rosneft – so that you won’t get any political influence – you will get a faster relief to the debtor’s assets if you do it in Russia, rather than in the foreign courts or arbitration.’
The bad old days
The fact that lawyers are growing more concerned about the level of costs awards shows how far the Russian commercial courts have come since Anton Ivanov’s appointment. Back in 2005, there were far more weighty concerns. Outside of Ivanov’s arrival, the year was notable for one other Russian legal milestone: on 31 May, Mikhail Khodorkovsky, the billionaire chief executive of the Russian oil giant Yukos, was led away from Moscow’s Meshchansky courtroom to face nine years’ imprisonment for alleged fraud and tax evasion. He languishes in a Siberian labour camp to this day. To the casual observer, Khodorkovsky’s trial, and the subsequent collapse of his Yukos empire, is emblematic of all that is wrong with the Russian judicial system. The ramifications of the case continue to this day, both in terms of the negative PR that it has created, and also the subsequent $100bn claim that Yukos’ main shareholder GML (formerly Group Menatep, Khodorkovsky’s holding company) has brought against the Russian Federation under Energy Charter Treaty and UNCITRAL arbitration rules (for a more detailed analysis of the case read ‘Over a barrel’ in LB201, pages 24-30). Emmanuel Gaillard, Shearman & Sterling’s Paris-based head of international arbitration, is representing GML in its claim against Russia. ‘The big problem in Russia is the independence of the judiciary,’ he says. ‘Not just in Yukos, but cases where the powers that be have an interest, the independence just isn’t there. It is going backwards. Independence of the press isn’t improving either and it goes hand in hand.’
In some respects Yukos is a unique case, and few dispute that there were political motivations behind it. Khodorkovsky had stepped out of line with the Kremlin by funding opposition parties in the 2003 parliamentary elections. In some corners this was interpreted as a direct challenge to President Putin, breaching an unwritten agreement between the oligarchs and the government hierarchy that they wouldn’t step on each other’s toes.
In the course of the case, Khodorkovsky wasn’t the only one to pay the price for insubordination. Two judges also lost their jobs: Natalya Cheburashkina, who accepted Yukos’s appeal against the Tax Ministry, only to be removed by said ministry, and Vlada Bliznets, for twice making decisions in favour of Yukos. ‘Frankly if this isn’t a political vendetta under the guise of taxes, I don’t know what is,’ says Gaillard. ‘When you read the facts, it is really over the top on every account. It is one thing to put pressure on judges. The only judges who found in favour of Yukos were immediately removed, the ones who found against were promoted.’
‘Most Russian judges have about 37 cases a month, so that leaves them no time to think properly. That’s a problem.’
Evgeny Timofeev, Salans
While Yukos is the best known, other headline-making spats, such as the bitter boardroom dispute at TNK-BP, BP’s Russian oil and gas joint venture with the Alfa, Access/Renova group, further tarnished Russia’s image. When TNK-BP’s chief executive Robert Dudley was accused of having broken Russian laws and expelled from the country in 2008, it confirmed most people’s view that Russian-based disputes, and Russian business as a whole, were best avoided. Anecdotally, commercial lawyers at international firms also felt threatened, especially in cases involving state interests. One partner at a major international firm recalls: ‘At one stage, to properly handle a case, I decided to make a declaration of falsified evidence. It was the most aggressive step needed to make the litigation run the way we wanted. After I did that I left the country for a week and stayed in England. While I was away there were all sorts of declarations saying that I would be criminally prosecuted.’
Less overt, but equally damaging, was the pervading sense of corruption: the belief that, with certain judges, the decision could be bought. Because of this, international firms made sure that disputes were taken as far away from the Russian courts as possible. The fact that most Russian joint venture and shareholder agreements are governed by English law, and that most Russian company vehicles are registered in offshore jurisdictions such as the British Virgin Islands and Cyprus, made this much easier to facilitate.
‘Initially our practice was undoubtedly focused on servicing Russian problems outside of the Russian courts,’ says Herbert Smith litigation partner Simon Bushell, who established the firm’s Moscow-based disputes practice back in 1999. ‘The advice was invariably about manoeuvring disputes outside of the influence of the Russian courts. In those early days we were uncomfortable with the unpredictable nature of the Russian judicial system and the possibility that someone might try to influence the outcome of domestic proceedings.’
For the last couple of years, however, many lawyers concede that the situation has improved. This has been coupled with a rise in demand for strong litigation counsel, particularly from domestic clients who used to do most of their work in-house. ‘More and more often the clients will go to court with counsel, as opposed to five years ago when all the big clients had very big internal litigation departments,’ says Dmitry Dyakin, the Moscow-based head of litigation and arbitration at CIS firm, Magisters. ‘Now the situation has changed. Even if they have these departments many prefer to hire law firms. Their disputes have become much more sophisticated. They became much more professional, which of course requires more professional lawyers.’
Perhaps influenced by this general rise in litigation, as well as the need for lawyers on the ground to help with the enforcement of arbitration awards, international law firms are slowly starting to take domestic litigation seriously. One of the key influences behind this is the sense that the commercial court system is getting better, albeit gradually.
‘If you have a Russian debtor you will get a faster relief to the debtor’s assets if you do it in Russia.’
Andrey Zelenin, Lidings
‘It’s premature to say that those issues have worked away completely,’ says Herbert Smith’s Moscow disputes head Dmitry Kurochkin. ‘We still feel some administrative pressures and the influence of the big Russian players, but the overall position is improving. We aren’t seeing overtly corrupt judgments. On the other hand the position might be different in the regions where the local companies might have huge influence. Ultimately, though, firms like us wouldn’t do local disputes work if all the courts were corrupt and if we couldn’t get any justice for our clients. You will definitely see examples where international players were successful in the Russian courts. There are clear signs of success, where international clients are suing local companies and winning those cases.’
The general sense is that the further up the court ladder you go and the closer you stay to Moscow the better your chance of obtaining a fair hearing. ‘It is improving pretty fast,’ says Sergey Yuryev, a litigation partner at CMS Russia. ‘Of course sometimes problems exist, but those cases are quite obvious. The higher you go the more the chances of getting fair justice increases. Somewhere in the regions corruption might be a factor, but if you go higher it decreases significantly and eventually ceases to exist. It is still an issue for the huge political cases, but in normal day-to-day business disputes you don’t experience any administrative interference. If you handle something extreme, like something close to $1bn in value, there might be certain issues, depending on the nature of the case.’
Even in tax disputes, tax lawyers claim that the courts are taking a more balanced approach. The real problem in tax is the tax authorities themselves. ‘About 50% of our litigation is with the tax authorities,’ says Timofeev at Salans. ‘They are still aggressive. If they are auditing a company and they come back empty handed there are disciplinary procedures launched against those auditors. The bad thing is that the tax authorities are aggressive, but the good thing is that the courts are fairly intelligent.’
‘Cases where the powers that be have an interest, the independence just isn’t there. It is going backwards.’
Emmanuel Gaillard, Shearman & Sterling
‘Now that we have a very experienced local disputes practice, we have a different perspective on things,’ adds Bushell. ‘We will obviously protect our international clients’ interests in the domestic Russian courts as necessary. In addition, while there is always a need to choose clients carefully in Russia, where appropriate we will also act for major domestic companies in the domestic courts. We’re very conscious of the need to be able to say to clients that we have experience in representing domestic and international clients.’
White & Case litigation partner Jason Yardley agrees. ‘Until a few years ago, White & Case didn’t really do any domestic litigation in Russia, but, with the ongoing reform of the courts, this is a growing area for us,’ he says. ‘A few years ago there were concerns about the courts, but those concerns have now receded.’ While political interference for the larger cases does remain an issue, most believe that corruption is being ironed out, particularly in Moscow.
| Russia’s Commercial Arbitration Courts’ caseload | ||||
|---|---|---|---|---|
| 2007 | 2008 | 2009 | 1st half 2010 | |
| Total cases heard | 905,211 | 970,152 | 1,409,503 | 621,291 |
| Challenges to international arbitration enforcements | 1,710 | 2,113 | 3,770 | 2,098 |
| Cases involving foreign companies | 1,338 | 1,639 | 1,732 | 809 |
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Source: Alrud Law Firm and www.arbitr.ru
|
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International recruits
White & Case isn’t the only international firm gearing up in disputes. The most high-profile move came in May when Dechert, which has invested heavily in Moscow since opening in 2009, recruited Ivan Marisin, Clifford Chance’s local head of litigation and arbitration, plus counsel Vasily Kuznetsov and associate Alexander Sidorov.
For those international firms that take a broader view of the increasingly profitable arena of Russian disputes, even though the larger cases often go to international arbitration or into the London courts, most feel a presence on the ground in Moscow is critical.
‘It’s absolutely invaluable to have a Russian office, and without it I don’t think it’s possible [to handle Russian cases] unless you speak Russian yourself,’ says Michael Stepek a Geneva-based arbitration specialist at Akin Gump Strauss Hauer & Feld who has several high-profile Russian clients, including the Russian oligarch Suleiman Kerimov, recently ranked at 196 on Forbes’ global rich list.
In several cases the presence of a Moscow office has been an important factor behind partner moves in London. Before Goldberg joined White & Case in July 2010, he was a partner at SJ Berwin, which has no Moscow presence although it is understood to have looked closely at opening one. ‘Having the Moscow office obviously helps,’ he says. ‘I’ve worked with all the major Russian law firms and now we can do it all in-house. My view is that most international law firms will now look into building up capacity for disputes in Moscow, and we are doing exactly that.’
‘We wouldn’t do local disputes work if all the courts were corrupt and if we couldn’t get any justice for clients.’
Dmitry Kurochkin, Herbert Smith
Melanie Willems, a London-based arbitration specialist at Chadbourne & Parke, who joined from Howrey in March 2010, sees similar advantages. ‘If you’re in the energy market you simply can’t ignore Russia,’ she explains. ‘It did strike me that I needed a firm that was looking East. It was a huge benefit to be able to jump into a firm that offered such a footprint. In my case it was very much client driven.’
This push by international firms puts them into direct competition with the main domestic law firms who continue to dominate the litigation market. Those Russian lawyers who focused solely on litigation typically didn’t see any advantage in going to the major international practices because they rarely received partner opportunities. ‘Some of the international firms are developing their interest in this area and trying to recruit the leading litigators to their teams, but it is really difficult for them,’ says Rudomino at Alrud. ‘Mostly it is because of the structure of their operations. In most cases they wouldn’t give partnership positions to the top Russian litigators, who themselves wouldn’t consider positions lower than partnership. Also, most of these people aren’t so easy to manage. It is difficult for them to be incorporated in the transactional structure of the more international firms.’
According to Goldberg, however, this could be changing: ‘More and more international firms are headhunting for litigators. The natural place to look is Russian law firms. They matured there because at the time they would never have become partners, but this has changed.’
The most extreme example of this came in January 2009, when Berwin Leighton Paisner raided the top Russian law firm Pepeliaev, Goltsblat & Partners for 70 lawyers, including name partner Andrey Goltsblat. According to Kulkov at Goltsblat BLP, from the litigation perspective the move was mutually advantageous: ‘To deal with the Russian courts is a very different way of litigation than in the UK. M&A transactions aren’t so different, but to go to Khabarovsk and speak before a judge is quite different to going before a London judge.’ The flipside for the Russian lawyers is that ‘now we have a big office in London, so it is much easier for us to advise clients. We often need advice on English law, so we are now much more attractive to clients’.
Home or away
The importance of English law capabilities cannot be understated, especially for the larger Russian corporates and banks. This harks back to Afanasiev’s earlier point about English law being one of his firm’s largest competitors. The danger is that, if the international firms get a stranglehold on the Russian law aspects as well, then it could be increasingly hard for the domestics to set themselves apart, except for in their prices. Most, however, aren’t entirely convinced about the domestic ambitions of their international rivals, and feel they still have a big edge when it comes to the domestic disputes.
‘We’ve been involved just recently in a litigation case and as soon as the international firm saw that our client had instructed a Russian firm, they immediately instructed a Russian firm as a sub-contractor,’ says one Russian litigator.
There is also the fact that the proportion of cases before the commercial courts that involve foreign entities is tiny. In 2009, out of the 1,409,503 disputes heard, only 1,732 involved foreign entities. With this in mind, when asked whether he sees the international firms taking control of the domestic litigation market, Afanasiev is forthright: ‘Not in the next 20 years. It’s too Russian. I hear them say that they will in conferences, but we don’t see anyone in courtrooms in cases of any significance. My view of international law firms in Moscow is very simple. They sit in their ivory towers wearing white gloves spreading propaganda that everyone else apart from them is a second-class system. They have cultivated a number of Russians who work for them that are taking the same view and would probably rather live outside of Russia themselves. But if you are a client you would want a lawyer who is not afraid to fight for you in the trenches so you can sit in the ivory tower. You would want a lawyer who is in Russia by choice rather than necessity.’
It is clearly an argument that bounces back and forth between the two rival factions. ‘Their traditional story is: we are the local guys, no one except us knows the local market better than us. What can international firms do in comparison to us?’ says a litigation partner at one international firm. ‘The reality is that as long as international law firms have Russian-educated people on the ground then the story is no longer relevant because they still have the Russian guy doing the local stuff, but also with the international experience and the ethical standards.’
Another adds: ‘It isn’t just about the international companies, but it’s also the Russian businesses who want us to provide high-quality advice on Russian and non-Russian law, and clearly there is no question of whose quality of work is better, a local firm or an international one.’
Herbert Smith partners like Kurochkin point to the domestic litigation work they did in defence of Robert Dudley at TNK-BP as a classic example of the sort of work that Russian firms typically claim they are best at: ‘We were doing this defence for almost a year. All of this was pure domestic litigation.’
At Field Fisher Waterhouse, which doesn’t have an office in Moscow but does include a 12-lawyer London-based CIS group that has a turnover in excess of £3m, the partners are quick to defend the domestic firms. ‘In my experience local firms have come a long way, especially the Moscow-based ones,’ says the firm’s Russian-born litigation partner Natalia Chumak. ‘There is little doubt that when it comes to local litigation, local firms are better than international ones, because they do a lot of ground work, so are experts in doing that.’
Follow the money
If the smaller business clients continue to use the domestic firms, the key battleground will be for the hearts and minds of the larger Russian and international clients. The most potent weapon will be with the governing law, be it Russian or English. Attempts are being made to improve Russia’s corporate laws so as to keep as much of the business onshore, as well as making Russia a more appealing place to live for its various billionaires.
‘There is a trend for more and more disputes to be resolved in Russia,’ says Afanasiev. ‘There really is no reason to go offshore for tax purposes. Russia has a flat income tax of 13%.’ Despite the best efforts, however, most attempts to bring the corporate laws up to scratch have so far failed.
‘Attempts are there but not everything works the way you want it to in Russia,’ says Goldberg. ‘There have been very good drafts flying around. The idea was to retain M&A transactions within Russian law, but the original legislation didn’t work, unfortunately. The amendments introduced into the proposed drafts changing the corporate law, at the last minute changed the whole picture and made it unlikely that the participants in large M&A transactions will choose Russian law. The English lawyers will still be busy for the foreseeable future.’
‘Russia is following a natural progression that most countries have followed themselves.’
Michael Stepek, Akin Gump
However, even without such a legislative overhaul, Ivanov’s achievements in bringing the courts up to scratch have certainly helped matters. ‘Step by step, what Ivanov has managed to achieve is to fight corruption, which was unbelievable in scale,’ says a litigator at an international firm. ‘The price was, in effect, the loss of independence of the judges. Hopefully the next step will be obtaining further judges and more independence from the Kremlin than there is now.’
The rest will be very much reliant on the Kremlin’s willingness to adapt. The consensus is that if the price of oil falls, Russia will be on the lookout for inward investment. ‘If Russia does want more inward investment,’ says Yardley, ‘the investment banks will push for even more change.’ As such, the Kremlin’s hand might be forced, and, as is often the case, politics will follow economics.
‘Russia is following a natural progression that most countries have followed themselves,’ says Stepek at Akin Gump. ‘It’s just that Russia is starting from 1990, so they’ve only been at it for 20 years. Typically the court system follows the progression of the mercantilist class. They demand a forum that is effective for resolving disputes.’
Slowly and surely it seems like they might be getting one. LB