VZCZCXYZ0008
PP RUEHWEB

DE RUEHMO #1565/01 1661337
ZNR UUUUU ZZH
P 151337Z JUN 09
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 3797
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC

UNCLAS MOSCOW 001565 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EUR/RUS, EEB/IFD/OIA (GOETHERT, BUTLER), L/CID 
(PEARSALL) 
 
E.O. 12958: N/A 
TAGS: EINV KIDE ETRD ECON RS
SUBJECT: 2009 REPORT FOR RUSSIA ON INVESTMENT DISPUTES AND 
EXPROPRIATION CLAIMS 
 
REF:  STATE 49477 
 
PORTIONS OF THIS CABLE ARE SENSITIVE BUT UNCLASSIFIED.  PLEASE 
PROTECT ACCORDINGLY. 
 
¶1. (U) Per reftel request, attached is post's draft 2009 Report for 
Russia on Investment Disputes and Expropriation Claims.  We have 
also e-mailed to EUR/RUS and EEB/OIA the draft report as a Word 
document marked to show changes from the 2008 Report for Russia. 
Begin text of draft report: 
 
¶2. (U) The United States Government is generally aware that many 
United States persons have outstanding Soviet-era or pre-Soviet-era 
claims against the Government of the Russian Federation.  These 
claims are outside the reporting scope of the Act.  While such 
claims are not included in this report, the Department of State 
provides appropriate assistance to all United States persons with 
claims against Russia. 
 
¶3. (U) The United States Government is aware of six (6) reportable 
claims of United States persons against the Government of the 
Russian Federation.  Only one of the Claimants (Claimant F) has 
contacted the Embassy and Consulates during the past year.  There 
has been one new reportable case in the past year (Claimant F). 
 
---------- 
CLAIMANT A 
---------- 
 
¶4. (U) A. Claimant A. B. Year 1995. C. Claimant A is a U.S. 
corporation that holds a contract for a sport fishing enterprise. 
According to the Claimant, in 1993 it obtained exclusive fishing 
rights to the Varzina River on the Kola Peninsula in a contract with 
the Lovozero District Administration (the local authorities for that 
part of the Kola Peninsula).  In January 1995, these authorities 
alleged that Claimant A failed to fulfill certain obligations and 
abruptly cancelled the contract.  Armed police forcibly shut down 
Claimant's fishing camp. 
 
¶5. (U) The authorities held a new tender and awarded the local 
fishing rights to a competing Finnish-Russian joint venture.  A 
Russian court ruled that the dispute should be resolved by 
arbitration in Stockholm as stipulated in the original contract.  An 
arbitration hearing was held in June and an October 1996 decision 
awarded Claimant A USD 940,000. Neither the district nor the Oblast 
(region) complied with the award, so in 1997 and 1998 Claimant A 
undertook a number of court actions seeking enforcement of the 
award.  In December 1997, the Murmansk Oblast Arbitration Court 
ruled in favor of Claimant A and dismissed the Murmansk authorities' 
claim that Claimant A's business activities were illegal.  In 
February 1998, the Murmansk Oblast Court ordered the recognition and 
enforcement of the Stockholm award.  In March 1998, the Murmansk 
Authorities appealed to a higher Federal Arbitration Court in St. 
Petersburg and the decision by the Murmansk Arbitration Court was 
overturned.  The case was returned to the Murmansk Arbitration 
Court, which issued a writ of execution of the Stockholm Award. When 
local authorities again appealed, the Supreme Court of Russia 
rejected the appeal. 
 
¶6. (U) The Murmansk administration then argued that the arbitration 
award was against the Lovozero administration and, because the 
Murmansk Oblast was not a party to the contract, it was not 
responsible for settling the award.  In December 1998, Claimant A 
petitioned the Murmansk court to direct the Oblast to pay the writ 
of execution against Lovozero.  The presiding judge refused to hear 
the petition.  In February 1999 an appeal was filed with the Supreme 
Court, which returned the appeal without action on the basis that it 
had already ruled on the case and it was the responsibility of the 
court bailiffs to take the necessary steps for execution.  On June 2 
and again on November 24, 1999, the Lovozero District Court 
instructed the bailiffs to execute the judgment against both the 
Lovozero District and the Murmansk Oblast. 
 
¶7. (U) Consulate General and Embassy personnel raised this issue at 
increasingly higher levels between 1998 and 2004.  On September 29, 
1999, the U.S. Ambassador and St. Petersburg Consul General raised 
the issue directly with Murmansk Governor Yevdokimov.  The St. 
Petersburg Consul General also wrote to Governor Yevdokimov 
regarding the case on December 21, 1999.  The Ambassador wrote twice 
to then Minister of Justice Chaika (on October 12, 1999, and June 7, 
2000) to protest the lack of action by Russian bailiffs in enforcing 
the courts' judgments.  The Charg d'Affaires also wrote to the 
Minister of Justice on December 29, 1999.  The Ministry of Justice 
responded that bailiffs attempted to enforce the judgment against 
Lovozero District, but were able to impound only 463,152 rubles of 
property (approximately USD 18,526 according to July, 2006 exchange 
 
rate). 
 
¶8. (U) In the first half of 2001, Claimant A, supported by the USG, 
made progress in extracting assurances that the Chief of the Moscow 
bailiffs would pursue complete and thorough local enforcement of all 
the previous rulings in Claimant A's favor.  Preliminary rulings in 
2000 and 2001 from local courts that challenged Claimant A's award 
were successfully overturned by the Russian Supreme Court in June 
¶2001. Embassy personnel met with the Bailiffs' Service in December 
2001, and were told enforcement was being held up by new court 
actions filed by the Lovozero District.  The Russian Supreme Court 
again on January 22, 2002 ruled that there should be no more appeals 
and the judgment should be executed.  In February 2002 Embassy 
personnel accompanied Claimant A to a meeting at the Federal 
Bailiffs' Service, where it was agreed that representatives of the 
Moscow Bailiffs' Service would travel to the Murmansk Oblast to 
instruct local bailiffs to execute the court actions.  Further 
appeals by Murmansk Oblast to the Russian Supreme Court were denied 
in March 2002.  In May 2002, the court actions still had not been 
enforced against Lovozero District, and the Bailiffs' Service 
reported that two other creditors of the district were ahead of 
Claimant A, and also that the Chief Bailiff of Murmansk Oblast had 
been dismissed.  In June 2002, the St. Petersburg Consul General 
again raised the case with the Governor of Murmansk Oblast, 
stressing the need to resolve the case soon. 
 
¶9. (U) The Ambassador met with the Minister of Justice in December 
2002 to once again raise the lack of enforcement in this case. The 
Minister claimed that the Bailiffs' Service was unable to enforce 
the judgment because other appeals were ongoing at the time. 
Subsequent to that meeting, the local creditors allegedly in line 
ahead of Claimant A withdrew their claims in December 2002, opening 
the door for enforcement by the bailiffs of Claimant A's claims. 
After another letter from the Ambassador to the Minister of Justice 
in February 2003, and a meeting between the St. Petersburg Consulate 
General and the Deputy Regional Presidential Representative in April 
2003, Claimant A reported that the local administration had finally 
decided to allow recovery of the award and the local bailiffs were 
in the process of recovery; however, this did not occur. 
 
¶10. (U) In January 2004 the local bailiff system unilaterally 
dismissed the case. Claimant A has not appealed this decision. Given 
the poor financial situation of the local administration, it was 
unlikely that Claimant A would be able to recover the entire amount 
of its award from the Lovozero District. 
 
¶11. (U) The Ambassador wrote again to the Murmansk Governor in 
September 2004, and subsequently received a reply that provided new 
justifications for not enforcing the decision and which made no 
effort to resolve the case.  While the Embassy and Consulate General 
St. Petersburg continue to monitor the case, they have not been 
contacted by Claimant A since 2004. 
 
---------- 
CLAIMANT B 
---------- 
 
¶12. (U) A. Claimant B. B. Year 2000. C. Claimant B is a U.S. 
manufacturer of piezo quartz glass, used in electronic applications. 
 In 1994, Claimant B purchased part ownership in a quartz glass 
production facility in Gus-Khrustalniy in Vladimir Oblast.  The 
quartz glass company subsequently went into bankruptcy.  According 
to the Claimant, it secured a long-term lease on the company's 
equipment in 1997 and invested a significant amount of money (by 
some accounts as much as USD 7 million) in renovating the plant and 
re-starting production.  In May 2000, the Vladimir Oblast 
prosecutor, acting for the Russian partners of Claimant B, filed a 
case challenging the validity of Claimant B's lease, for which 
Claimant B had completed its payments.  On February 9, 2001, a 
Vladimir court ruled Claimant B's lease was invalid, and ordered the 
bankrupt glass company to repay USD 1.68 million to Claimant B.  The 
other partners in the bankrupt enterprise used the court's orders to 
evict Claimant B from the quartz glass production facility in June 
2001 and seized USD 1.2 million in inventory and work in progress. 
Claimant B appealed and subsequently lost two cases before the 
Nizhniy Novgorod appeals court, but won one case in June 2002. 
These decisions have let stand the invalidation of the lease and 
have invalidated the order for the bankrupt glass company to repay 
Claimant B for the lease, but have reaffirmed Claimant B's rights to 
inventory, equipment, and improvements in the disputed plant.  One 
aspect of concern to Claimant B is that although local bailiffs have 
enforced rulings unfavorable to Claimant B, they have been unwilling 
to enforce rulings that reaffirm Claimant B's property rights. 
 
¶13. (U) The Ambassador and other Embassy officials have raised this 
issue with the Ministry of Economic Development and Trade, the Prime 
 
Minister's Chief of Staff and Ombudsman, the office of the 
Presidential Representative for the Central District, and other 
senior Russian government officials.  The Ambassador also 
highlighted this issue in a May 2002 article for a leading Russian 
business publication.  USG officials have also raised this issue 
with President Putin.  The Ambassador traveled to Vladimir region in 
June 2002 to encourage a negotiated resolution. 
 
¶14. (U) In June 2003, the Ambassador met with the Vice Governor of 
Vladimir Oblast, who promised to help broker a solution.  The Oblast 
Government contacted a Swedish businessman to investigate the 
dispute, but did not succeed in resolving it.  In October 2004, 
Claimant B's Russian assets were transferred to a new U.S. legal 
entity established by the firm's president when he left in June 
¶2004.  The new entity continued to pursue settlement of this 
dispute, and Claimant B informed the Embassy that there had been no 
progress toward resolution.  Claimant B has not contacted the 
Embassy in more than two years, but the Embassy will continue to 
monitor the case and provide all appropriate assistance to Claimant 
¶B. 
 
---------- 
CLAIMANT C 
---------- 
 
¶15. (U) A. Claimant C. B. Year 2001. C. Claimant C is a venture 
capital firm that in April 2000 entered into a joint venture with a 
state-owned coal producer in Primorye Kray to produce germanium by 
burning special coals.  According to the Claimant, it invested USD 
5.5 million in equipment, improvements, and working capital in the 
venture.  In November 2001, the Ministry of Energy informed Claimant 
C's joint venture partner that they should abrogate their contract 
with Claimant C and return the investment.  Subsequently, Claimant 
C's joint venture partner lost its mining license and stated it was 
unable to repay the invested funds.  Meanwhile, another company had 
been given the mining license for the special coal deposit. 
Claimant C attempted to re-start the joint venture with the new 
company, but this new licensee did not show interest in negotiation 
and demanded an extremely large sum from Claimant C for transfer of 
the license.  Because of the location and type of equipment, 
Claimant C believed it was unlikely that it could recover any 
significant portion of its investment through salvage. 
 
¶16. (U) The Embassy and Department of Commerce officials have raised 
this issue in bilateral consultations with the Ministry of Economic 
Development and Trade, and have requested explanations from the 
Ministry of Energy.  However, the Embassy has not heard from the GOR 
on this issue since November 2001, and the investor has not 
requested further assistance from the Embassy. 
 
---------- 
CLAIMANT D 
---------- 
 
¶17. (U) A. Claimant D. B. Year 2000. C. Claimant D is an investment 
company that originally bought a 20 percent minority share in a 
grain-processing company in the Russian Far East for USD 2 million. 
Claimant D also exported grain to the Russian firm in which it was a 
shareholder. According to the Claimant, following the 1998 financial 
crisis in Russia, the Russian firm was unable to pay Claimant D for 
the grain exports.  In 2000, Claimant D found that it had been 
removed from the company board, was unable to access the company 
books, and the grain exports, held as collateral, were illegally 
removed from their silos.  Claimant D in 2001 obtained two 
international arbitration awards totaling USD 3.7 million against 
the Russian company.  In early 2002, Claimant D informed the 
Consulate General in Vladivostok that it had reached a compromise to 
recover its investment; however, the Russian company failed to make 
the agreed-upon payments.  One of the Russian company's other 
creditors petitioned for bankruptcy in March 2002.  Claimant D 
obtained a court order to freeze the Russian company's assets. 
However, during a brief interim when the parties had completed a 
negotiated settlement, the Russian company was able to sell its 
largest asset, a flour mill in Ussuriysk.  Subsequently, the local 
representative of Claimant D had her automobile windows smashed and 
was threatened with physical violence.  Claimant D pursued court 
action to reverse these asset sales, but in mid-June 2002 local 
courts refused to overturn the Russian company's asset sales. 
 
¶18. (U) In August 2002 Claimant D received favorable court judgments 
freezing the sale of remaining assets of the grain-processing 
company and reaffirming the legitimacy of its arbitration award. 
Bankruptcy proceedings were initiated in November 2002 to determine 
the grain-processing company's liabilities and assets.  At the 
request of the Vladivostok Consulate General and the Embassy, the 
Primorye Administration met with Claimant D in November and December 
 
¶2002.  The Ambassador wrote the Primoriye Governor in February 2003 
urging resolution of this dispute.  To date, the Governor has not 
responded.  Another meeting between the two sides was scheduled for 
spring 2003, but did not occur.  The DCM also raised the dispute 
directly with the local administration during a trip to Vladivostok 
in spring 2003.  The Economic Minister Counselor met with local 
officials in April 2004.  The investor has not requested further 
specific Embassy assistance within the past three years. 
 
---------- 
CLAIMANT E 
---------- 
 
¶19. (U) A. Claimant E. B. Year 2003. C. Claimants E are American 
citizens who held share-related rights in a major Russian 
corporation.  They have filed suit in U.S. federal court against the 
Russian government and others, alleging that defendants expropriated 
their interests.  Claimants approached the Department with a request 
for USG support of their case during the summer of 2008.  The suit 
is pending, and the Department continues to monitor developments. 
 
---------- 
CLAIMANT F 
---------- 
 
¶20. (U) A. Claimant F. B. Year 2008. C. Claimant F is a partner in a 
closed Russian joint stock company that was established in 1994 as a 
50-50 Russian-American joint venture. Each side separately 
contributed approximately $1 million in fixed assets, equipment and 
working capital in order to commence initial operations of the port 
of SovGavan, which is located in the Khabarovskiy Kray region of the 
Russian Far East.  Between 1994 and 2007, virtually all of the joint 
venture's earnings were reinvested in the corporate entity and used 
to improve the site's infrastructure, including adding rail spurs, 
paving storage areas, and improving the facility's electrical 
supply.  As the volume of cargoes shipped through the facility 
increased, approximately $1.5 million of additional operating 
equipment (cranes, frontend wheeled loaders, and hydraulic logs 
loaders) were added, most of which was either financed by or leased 
from Claimant F.  In the summer of 2007, the joint stock company 
received a firm offer of $1.1 million for its fixed assets.  Clamant 
F considered that offer to be unacceptably low. 
 
¶21. (U) Since its founding in 1994, the joint stock company had 
exclusive operating rights at the ten-hectare port facility, which 
it had continually leased from another open Russian joint stock 
company (hereinafter referred to as the "Lessor").  In 2000, 
Claimant F acquired 36% of the Lessor's publically traded stock. 
Subsequently, the original joint stock company and the Lessor signed 
a 20-year long term lease agreement for the entire site.  Claimant F 
maintains that the long-term lease is the Lessor's sole asset. 
 
¶22. (U) In early 2008, the Lessor forcefully took over all of the 
original company's assets and began operating the facility 
independently itself.  Initially, the takeover did not involve any 
court or other legal procedure.   Instead, overnight, the original 
company's security forces were replaced; proceeds  from the original 
company's operations (e.g., the accumulated accounts receivable) 
were diverted to the Lessor's bank account; and the original 
company's employees were hired by the Lessor; the original company's 
fixed assets and operating equipment at the port were seized, along 
with all of the original company's operating supplies, spare parts 
and pre-paid expenses.  In addition, according to Claimant F, as the 
Lessor lacked any authority or legal status necessary to legally 
operate the port, the Lessor also misappropriated the original 
company's official stamps and, by forging the original company's 
signature authority, utilized the stamps to illegally operate under 
the original company's permits, licenses and contracts with the 
Russian Federal Customs Service, the Russian Maritime Security 
Service, and with railroad and electrical utility service 
providers. 
 
¶23. (U) The regional government administration of Khabarovskiy Kray 
(the administrative region of the Russian Far East where the port is 
located), as well as regional and local prosecutors, police and 
court officials, were informed of the takeover by Claimant F and its 
Russian lawyers through official filings, written updates and 
numerous meetings.  However, none of these regional and local 
officials took any action or intervened to stop the takeover of the 
port.  Claimant F also informed Russian Customs and the Russian 
Maritime Security Services of the takeover. 
 
¶24. (U) Since the takeover, the U.S. Consul General in Vladivostok 
has been very actively involved in advocating for the claimant's 
rights with regional and local officials, but those efforts have 
also been ignored. 
 
 
¶25. (U) In August 2008, the Lessor forced the original company into 
bankruptcy, and the original company is now in the final liquidation 
stages of the official bankruptcy process.  During the period when 
the Lessor freely used the port's equipment, most of it was 
destroyed, and its value today is minimal, according to Claimant F. 
It also appears that the bankruptcy trustee, who was nominated by 
the Lessor, will avoid filing a $1.5 million civil damages claim 
against the Lessor for the misappropriated port assets and equipment 
despite strong evidence of the theft.  Claimant F has no legal 
standing or status in the bankruptcy proceeding. 
 
¶26. (U) The bankruptcy proceeding has also placed Claimant F's 36% 
ownership position in the Lessor in serious jeopardy.  The Lessor 
has closed the port facility and plans to lay off all but two 
employees.  The Lessor is now financially viable only because of 
loans from its majority owner, none of which have been reviewed or 
approved by the board of directors or shareholders.  Claimant F 
believes that the replacement value of the port facility is over $10 
million but, in the current depressed economic conditions in the 
Russian Far East, it might sell for approximately $4 million.  The 
Embassy and Consulate General in Vladivostok will continue to 
monitor the case and provide all appropriate assistance to Claimant 
¶F. 
 
--------------------- 
IDENTITY OF CLAIMANTS 
--------------------- 
 
¶27. (SBU) The Claimants are identified as follows: 
 
Claimant A: Kola Salmon Marketing Inc. 
U.S. Citizen 
No Privacy Act Waiver 
 
Claimant B: Russian Quartz, Ltd. (Formerly Sawyer Research 
Products) 
U.S. Citizen 
No Privacy Act Waiver 
 
Claimant C:  Pennwood Industrial Products 
U.S. Citizen 
No Privacy Act Waiver 
 
Claimant D:  Euro Asian Investment Holding, Inc. 
U.S. Citizen 
No Privacy Act Waiver 
 
Claimant E:  U.S. Investors in the Yukos Oil Company 
U.S. Citizens 
No Privacy Act Waiver 
 
Claimant F:  Global Forestry Management Group 
U.S. Citizen 
No Privacy Act Waiver 
 
BEYRLE