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. 
 
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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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MOSCOW 00002560  002.2 OF 002 
 
 
Some See Fewer Deals 
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¶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. 
 
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Comment 
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¶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