Thought the following article might interesting and sobering regarding investments in Russia.
LLGM
Maclean's (Canada)
May 20, 2002
Ripped off in Russia
Canadian companies are losing their investments
PAUL WEBSTER in Moscow
Alex Rotzang expected to make a fortune developing the Siberian oil
field. But one day last June, as the hard-driving businessman arrived at
his office in Moscow, the phone rang. It was his firm's director
general, Lyudmila Kondrashina, calling. She had just fled the company's
operations office and she sounded terrified. A score of heavily armed
men dressed in army fatigues had seized the building and four gunmen
barred her way when she attempted to return. "The company has a new
director," their leader shouted, waving a document under the muzzle of
his AK-47. It was a hostile takeover -- Russian style.
Rotzang, the chairman of Norex Petroleum Ltd., is now at his head office
in Calgary, and fighting to get justice for his firm. "We worked hard
for 10 years, paid our taxes and built a model company," he says. On
Feb. 27, Rotzang launched a $2.4-billion lawsuit against Tyumen Oil Co.,
the powerful Russian firm that was Norex's partner in the project -- and
the
company, Rotzang says, that sent in the gunmen. Rotzang is not the only
Canadian businessman battling his way through Russia's capricious court
system in an attempt to hang on to Russian assets. In a country where
new laws regulating foreign corporations are written almost daily, and
where
local laws often conflict with federal legislation, a disturbing trend
has
emerged: after the Canadian firms spend millions of dollars getting the
projects off the ground, their Russian partners exploit legal
technicalities in court to break the contracts and take control.
Just ask Kinross Gold Corp. of Toronto. The company invested $68 million
developing a gold mine in Siberia. Its lawyers are now in court in
Magadan, a former Soviet prison town on Russia's remote north Pacific
coast, trying to fend off a dispute over shares that could result in
Kinbross losing control. Facing off against the company: its Russian
partner, Geometall Plus. Unlike Rotzang's employees, Kinross executives
were not threatened
with AK-47s. Instead, the court has been asked to rule on a complicated
legal question surrounding the validity of Kinross's shares in the
project.
Even though Kinross now controls the majority of shares, it faces an
uphill struggle in court. "A judge in Magadan is going to be thinking
about a crowbar on his head if he favours a foreigner," says Peter
Sahlas, a Canadian lawyer who has worked on Russian legal reform
programs. Kinross
vice-president John Ivany understands the reality. He says he is
optimistic that he will win in court, but Russian judges, he adds
diplomatically, "are known for hometown decisions." And while Russian
President Vladimir Putin has instituted changes to the legal system --
among them dramatically boosting funding for the courts and attempting
to blunt the arbitrary power of judges by moving toward a jury-based
system -- analysts say the country still has a long way to go before
foreign companies can expect impartiality.
It was into this murky, sometimes violent world of frontier capitalism
that Prime Minister Jean Chretien led more than 300 Canadian businessmen
on a
trade mission in February. The Russians hoped to sign $1 billion in
contracts, but given the controversies surrounding Norex and Kinross, in
the end Team Canada inked just $148 million in new deals. Still, the
mission culminated in a giant party at the Moscow arena where Canada
defeated Russia in the 1972 hockey showdown. Putin attended, shaking
hands and chatting, but Sergei Kovalev, a respected member of the
Russian parliament, told Maclean's he doubts if the Canadian firms will
ever make much money. Some, he said, will be lucky not to lose their
shirts: "Go ahead and invest -- but don't trust the legal system in
Russia."
Rotzang certainly won't be investing in Russia again. He faces arrest if
he returns -- there's an ongoing criminal case against him for alleged
misappropriation of funds. And he is so fed up and frightened by his
experiences that he turned down Chretien's invitation to buy a spot on
the trade mission for $8,000. "Given the level of personal intimidation
I've
had from police and even judges, I don't feel safe in Russia," he says.
"I think Chretien made a huge mistake picking Russia for the Team Canada
visit, because what happened to me could happen to any Canadian who
invests in Russia."
The list of Canadian companies claiming their projects have been stolen
out from under them by their Russian partners is already long -- and
growing. Archangel Diamond Corp., which is listed on Calgary's TSX
Venture Exchange, is among the losers. In 1996, the company discovered a
massive diamond deposit in northwestern Russia, estimated to be worth $8
billion. But the project was stalled when its partner went to court in
an attempt to overturn a deal under which the two firms had agreed to
co-own the mine.
"There's no way we can get a fair hearing in Russian courts," says
Archangel chief executive officer Timothy Haddon, who also fears for his
life if he returns to Russia. Appealing to Ottawa hasn't helped either.
"Chretien," says Haddon, "has decided he wants to be pals with Putin no
matter what happens to us."
In late 1999, Vancouver-based Pan American Silver ran up against the
Kaskol Group, a giant Moscow-based conglomerate that has major holdings
in aerospace, shipbuilding and mining, and enjoys close government
connections (its offices are located across a narrow lane from the
powerful Ministry of Natural Resources). Kaskol also controls
Polymetall, Pan American's partner in the development. After investing
$60 million in a massive Russian silver mine located in Magadan, Pan
American was forced to write off its investment through a dubious legal
process that challenged the technicalities surrounding its
government-issued licence -- a legal manoeuvre that the mine's former
general manager Jim Wade describes as "very clever" but "very unhappy."
Another of the unhappy ones is Ivanhoe Energy of Vancouver, which
invested $68 million in a very promising Siberian oil venture. But
Ivanhoe's partner, which controlled the licences to produce the oil,
reneged on a deal to share the revenues. Ivanhoe walked away in 2000
with a settlement of $46 million, well short of its original investment.
And Toronto-based
Bitech Petroleum had a similar experience two years ago, when its
Russian partner went to court claiming Bitech did not have legal title
to its licence to develop an oil field in the Komi region of Siberia and
should be forced to quit the project. The company spent nearly $8
million defending its licence and buying out its partner before finally
deciding it had had enough of the Russian justice system and left the
country.
During a speech at the Team Canada party in Moscow, Chretien
acknowledged that "the negative experience of some Canadian investors
has tarnished the Russian market in the eyes of many." But he noted
that, recently, the Russian economy has grown rapidly, while Putin is
implementing legal reforms that should level the playing field for
Canadian firms. Pierre Pettigrew, the Canadian international trade
minister, agrees. He told Maclean's the Russian market is simply too big
to ignore. "We have to be
here," he said. "We are impressed by Putin and his efforts to implement
reforms."
The Canadian International Development Agency has also suffered in its
dealings in Russia. Since 1993, it has spent $130 million to, among
other goals, germinate Canadian business in Russia -- but has virtually
nothing to show for it. "There are huge barriers here," concedes Eric
Yendall, CIDA's representative in Russia. "Our efforts to support direct
contacts
between Canadian and Russian businesses mostly didn't work out."
Even some CIDA projects designed to improve the legal framework
backfired. In 1995 the agency gave a $1-million grant to help the
prestigious Toronto-based Gowlings, now Canada's second-largest law
firm, to rewrite
Russia's bankruptcy laws. By forcing companies that had been ignoring
their creditors to finally pay their debts, the new legislation spurred
a big increase in bankruptcies, which rose to 11,000 in 1999 from 4,300
in 1997. With weak, money-losing companies out of the market, analysts
hoped the Russian economy would become more competitive. Instead,
powerful politicians and businessmen often had their cronies named as
court-appointed managers of troubled companies, allowing them to take
over some of the firms and strip them of any prize assets.
Last February, CIDA also put $4.8 million into a project in the Magadan
region, which is aimed in part at helping small Russian businesses
develop in the area where Pan American Silver and Kinross Gold have
struggled. But Rotzang thinks CIDA will be wasting its money. "The
Canadian government may think Russia is being reformed," says Rotzang.
"But from what I've seen after dozens of trips there, the courts still
allow Russians to steal from us at will."
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