Russia Business Watch Vol. 19, No. 2
Summer 2011
Washington, DC
The Report of the U.S.-Russia Business Council
THE TIME IS NOW:
Business Leaders Urge Russia’s Global Integration
PRESIDENT’S MESSAGE: p. 1 • Cliffhangers
REGIONAL PROFILE: p. 12
• USRBC Leads a Delegation to the Republic of Tatarstan
WTO WATCH: p. 14
• U.S. and Russian CEOs Meet with President Medvedev to Support Russia’s WTO Accession
NEW USRBC MEMBERS: p. 27
ACTIVITIES: pp. 4-11
• Luncheon with the Association of Russian Regional Banks • Briefing with Russian Research Universities • Luncheon with FAS Delegation • Luncheon Briefing with RF Federation Council Delegation • Dinner with RF Deputy Minister of Health and Social Development Dr. Veronika Skvortsova • Breakfast Discussion: The Customs Union and Russia’s WTO Accession • Reception in Honor of RF Deputy Minister of Industry and Trade Vladimir Salamatov
LEGAL UPDATE: pp. 16-25
• KEYNOTE ADDRESS: Richard Alderman Director, UK Serious Fraud Office • A Conversation on Legal Reform and Corporate Governance • PANEL: Legal Reform and the Courts in Russia • PANEL: Shareholder Rights and Corporate Governance • PANEL: Global Anti-Corruption Legislation and Risk Management • PANEL: International Arbitration and Russia: Geneva, Stockholm and New Forums for Redress
Contents
PRESIDENT’S MESSAGE p. 1. Cliffhangers
Klaus Kleinfeld, Chairman of the Board Edward S. Verona, President and Chief Executive Officer
Russia Business Watch • Summer 2011
Chairmen Emeritus Robert S. Strauss E. Neville Isdell Theodore Austell, III, The Boeing Company Stephen E. Biegun, Ford Motor Company James P. Bovenzi, General Motors Corporation Laura M. Brank, Dechert LLP Carolyn L. Brehm, Procter & Gamble Peter A. Charow, BP America Inc. James F. Collins, The U.S. Russia Foundation for Economic Advancement and the Rule of Law Jeffrey R. Costello, JPMorgan Chase Bank Andrew Cranston, KPMG Marthin De Beer, Cisco Systems, Inc. Richard N. Dean, Baker & McKenzie Neil W. Duffin, Exxon Mobil Corporation Dorothy Dwoskin, Microsoft Corporation C. Cato Ealy, International Paper Terrence J. English, Baring Vostok Capital Partners Mark B. Fuller, Monitor Group Piotr Galitzine, TMK IPSCO Toby T. Gati, Akin Gump Strauss Hauer & Feld LLP David Gray, PricewaterhouseCoopers LLP Herman Gref, Sberbank of Russia Drew J. Guff, Siguler Guff & Company, LLC Trevor Gunn, Medtronic, Inc. Jay M. Haft, Renova Group of Companies Greg Hill, Hess Corporation D. Jeffrey Hirschberg, Kalorama Partners, LLC Kamil S. Isaev, Intel Corporation Karl Johansson, Ernst & Young, LLP Alexey Kim, Philip Morris Sales and Marketing Ltd. Klaus Kleinfeld, Alcoa Sergei A. Kuznetsov, OAO Severstal / Severstal North America Ramon Laguarta, PepsiCo, Inc. William C. Lane, Caterpillar Inc. Eugene K. Lawson, Lawson International, Inc. James J. Mulva, ConocoPhillips Peter B. Necarsulmer, The PBN Company Thomas R. Pickering, Eurasia Foundation Jay R. Pryor, Chevron Corporation Paul Rodzianko, Hermitage Museum Foundation Charles E. Ryan, UFG Asset Management Claudi Santiago, General Electric Company William M. Sheedy, Visa Inc. David Simmons, Pfizer Inc. Maurice Tempelsman, Lazare Kaplan International Inc. Peter L. Thoren, Access Industries, Inc. Clyde C. Tuggle, The Coca-Cola Company Alberto Verme, Citi Mark von Pentz, Deere & Company Daniel H. Yergin, Cambridge Energy Research Associates (IHS CERA) Honorary Director Peter J. Pettibone, Hogan Lovells U.S. LLP
ACTIVITIES p. 4. USRBC Luncheon with the Association of Russian Regional Banks p. 5. USRBC Briefing with Russian Research Universities p. 7. USRBC Luncheon with FAS Delegation p. 9. USRBC Luncheon Briefing with RF Federation Council Delegation p. 10. Dinner with RF Deputy Minister of Health and Social Development Dr. Veronika Skvortsova p. 10. Breakfast Discussion: The Customs Union and Russia’s WTO Accession p. 11. USRBC Reception in Honor of RF Deputy Minister of Industry and Trade Vladimir Salamatov REGIONAL PROFILE p. 12. USRBC Leads a Delegation to the Republic of Tatarstan WTO WATCH p. 14. U.S. and Russian CEOs Meet with President Medvedev to Support Russia’s WTO Accession LEGAL UPDATE p. 16. USRBC Third Annual Russia Legal Forum p. 16. KEYNOTE ADDRESS: Richard Alderman Director, UK Serious Fraud Office p. 19. A Conversation on Legal Reform and Corporate Governance p. 20. PANEL: Legal Reform and the Courts in Russia p. 22. PANEL: Shareholder Rights and Corporate Governance p. 23. PANEL: Global Anti-Corruption Legislation and Risk Management p. 25. PANEL: International Arbitration and Russia: Geneva, Stockholm and New Forums for Redress p. 27. NEW USRBC MEMBERS
USRBC STAFF Edward S. Verona President and Chief Executive Officer verona@usrbc.org / 202-739-9181 • Julia Bacon Manager of Membership Affairs and Programs bacon@usrbc.org / 202-739-9189 • Jeff Barnett Senior Director of Policy and Programs barnett@usrbc.org / 202-739-9187 • Jo Bottalico Vice President of Administration and Finance bottalico@usrbc.org / 202-739-9188 • Keith Bush Research Director bush@usrbc.org / 202-739-9186
Randi B. Levinas Executive Vice President levinas@usrbc.org / 202-739-9196 • Maryia Dauhuliova Media and Creative Product Manager dauhuliova@usrbc.org / 202-739-9184 • Julia Kulagina Head of RF Representation, Moscow Office kulagina@usrbc.org / [7] 495-228-5896 • Svetlana Minjack Director of Communications and External Affairs sminjack@usrbc.org / 202-739-9182 • Candice Pareshnev Administrative Assistant pareshnev@usrbc.org / 202-739-9180
Russia Business Watch The report of the U.S.-Russia Business Council
1110 Vermont Avenue, NW, Suite 350, Washington, DC 20005 Tel: (202) 739-9180 • Fax: (202) 659-5920 • www.usrbc.org • www.usrbc.org/ru Novinskiy boulevard 8, Office 907, 121099 Moscow, Russia Tel: 7-495-228-5896 • Fax: 7-495-228-5893 ditor: Svetlana Minjack • Assistant Editor: Jeff Barnett • Design and Production: Maryia Dauhuliova E Research Assistants: Olga Larionova, Tatiana Nikiforova, Mark Simeone, Stephen Smith, and Hannah VanHoose For additional information or copies of Russia Business Watch, please contact USRBC at (202) 739-9180 or email RBW@usrbc.org.
PRESIDENT’S president’sMESSAGE message
Cliffhangers membership. Success seemed tantalizingly close in June 2009, when suddenly the Russian government announced that the creation of a Customs Union comprising Russia, Kazakhstan and Belarus would take precedence over WTO accession. Consequently, the accession package that had already been largely agreed upon had to be completely revised to reflect changes to the customs schedules between the three countries.
Dear Council Members and Friends:
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So the next cliffhangers are: Will the Republic of Georgia give its assent to Russia’s membership (the only WTO member country not to have done so) and will the U.S. Congress permanently “graduate” Russia from the JacksonVanik Amendment, a now baseless relic of a time when the Soviet Union restricted emigration, primarily of Jews. The Georgia question is one for the
The time for getting this message across is now. Unfortunately, it will be competing with other vitally important trade legislation before Congress: namely, the Colombian, Panamanian and South Korean Free Trade Agreements, and extension of Trade Adjustment Assistance. These are cliffhangers in their own right, and the majority congressional leadership has already indicated that it will not take action on other trade-related legislation until all three FTAs are approved. We are for the earliest possible approval of the FTAs, but we believe that Jackson-Vanik also deserves high priority to ensure that American business does not suffer a serious competitive disadvantage in the growing Russian market if and when Russia joins the WTO.
Summer 2011
At various times in the 17 years that negotiations have been taking place, Russia’s accession bid has been stymied. Protracted and occasionally acrimonious discussions of intellectual property rights, sanitary-phytosanitary (SPS) standards for agricultural goods, and other problematic areas were often on the brink of breaking down, thus threatening to put an end to Russia’s prospects of
Unlike Georgia — and unlike the cinema — in the case of Jackson-Vanik it’s possible for the audience to influence the outcome. Business leaders and ordinary citizens can explain to Congress that if Jackson-Vanik remains in effect once a commercially viable agreement is reached, the United States will be forced to invoke “non-application,” meaning that we will not automatically extend unconditional MFN status (or Permanent Normal Trade Relations, as it is called in congressional parlance) to Russia. Similarly, Russia will not be bound to extend unconditional MFN to the U.S. This would be potentially disastrous for American exports to Russia, which are almost all high-value-added, manufactured goods vulnerable to discriminatory tariffs should Russia decide to impose them.
Russia Business Watch
n the era of silent cinema, patrons were enticed back to theaters each week by so-called cliffhangers, wherein the hero — or more often the heroine — would be left in a hopeless and deadly situation at the end of the movie. Moviegoers would have to return the following week to discover how the seemingly imminent demise of the heroine was miraculously averted in the nick of time, only for her to fall into a similar predicament once again at the end of that installment. There are times when Russia’s WTO accession process reminds me of that format.
While these episodes may have lacked the drama of a heroine being tied to a railroad track, for those of us with a stake in Russia’s integration into the global economy they did have a cliffhanger quality. Now the screenplay is getting even more complicated. After two years of laborious and highly technical negotiations in Geneva, Russia is again close to having a completed accession package. As always in such negotiations, the remaining unresolved issues are the toughest. Local content requirements for the automotive sector, meat quotas, SPS standards, and enforcement of IPR legislation are the subjects of intense discussions. Once again, the prospects for Russia’s accession by the end of this year look reasonably good. Moreover, American and Russian business leaders believe that having Russia in the WTO would be of significant mutual benefit, as 35 of them said in a letter we presented to President Medvedev at the St. Petersburg International Economic Forum in June (see p.15).
diplomats and there is no benefit in having the business community involved in the delicate talks between Russia and Georgia, mediated by Switzerland. But make no mistake, it will be a nail-biter to the end.
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PRESIDENT’S MESSAGE
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Yet another cliffhanger is the introduction of bills in the House and Senate calling for visa denials and asset freezes of officials implicated in the tragic death of Sergey Magnitsky, a lawyer working for an American law firm and acting on behalf of business clients. Some Washington insiders maintain that such legislation could replace Jackson-Vanik as an instrument for exerting pressure on the Russian government to observe the rule of law. That is a debatable proposition, but to the extent that it were to substitute Jackson-Vanik, it would have the merit of eliminating a major threat to American commercial interests. Our views on the case were conveyed in a letter to President Medvedev shortly after Magnitsky’s death, in which we called for a thorough investigation of the circumstances and prosecution of those responsible for Magnitsky’s mistreatment and the associated tax fraud. Further, in interviews and public forums we have cited the negative impact of that case on Russia’s international image, which has undoubtedly had an effect on business sentiment. Of course, dominating all of these at the moment is the biggest cliffhanger of them all — the ongoing impasse and debate in Washington over raising the U.S. debt ceiling and cutting the budget deficit. While some cliffhanger fans may be looking forward to the next installment, we are hoping that the series comes to a happy ending. With warm regards,
Edward S. Verona
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THE COUNTDOWN TO RUSSIA’S WTO ACCESSION HAS BEGUN… GET INVOLVED NOW!
Please join us in a historic campaign on Capitol Hill to support stronger U.S.-Russian economic ties. Sign up now to get involved in shaping the debate on the future of U.S. companies’ access to the Russian market! For more information, please visit us at www.usrussiatrade.org or call or email today. Randi Levinas Executive Director Phone: (202) 739-9196 Email: levinas@usrbc.org
Kellen Moriarty Program Coordinator Phone: (202) 222-0670 Email: kmoriarty@usrussiatrade.org
The Coalition for U.S.-Russia Trade, headquartered at the USRBC, is the U.S. business community’s engine for ensuring that U.S. firms and farmers will be able to compete on equal footing in the Russian market once Russia becomes a WTO member.
RUSSIA ON THE CUSP USRBC Annual Meeting 2011 October 3-4, 2011 -- Chicago, IL
We are pleased to announce that the U.S.-Russia Business Council's 19th Annual Meeting will take place on Monday and Tuesday, October 3-4, 2011 in Chicago, IL, with the Conference Program on Tuesday, October 4, at the Swissotel, and the Gala Dinner kicking off the prior night, on Monday, October 3, at the Art Institute of Chicago. This year's Annual Meeting, "Russia on the Cusp," will feature panels exploring Russia's investment attractiveness and market opportunities on the cusp of national elections, the country's leadership of APEC, and its long-awaited WTO accession, as well as energy and healthy workforce issues, and how the country's planned privatization, financial services reforms and industrial policies may impact its competitiveness.
SWISSOTEL ROOM BLOCK The USRBC has reserved a block of rooms at the Swissotel at a discounted rate of $279 for Annual Meeting participants. In order to reserve a room in the USRBC Room Block, please call the hotel at 1-888737-9477 (within the United States) or 1-800-637-9477 (International Reservations) and ask for the "U.S.-Russia Business Council Room Block." The room block at the expires on September 1. http://www.swissotelchicago.com/ FOR MORE INFORMATION AND TO REGISTER, PLEASE GO TO: https://www.usrbc.org/activities/am/
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activities
activities USRBC Luncheon with the Association of Russian Regional Banks April 1, 2011 Washington, DC
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Russia Business Watch
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he USRBC met with a banking delegation led by Anatoly Aksakov, member of the State Duma and President of the Association of Russian Regional Banks. The delegation included representatives from Maritim Bank, KS BANK, United Bank of Industrial Investments, FORS-Banking Systems, RUNA-BANK, Krayinvestbank, International Bank of AzerbaijanMoscow, Russian Bank of Development, Mosoblbank, and Krasnodar Region. Mr. Aksakov discussed trends in the Russian banking sector since the global economic crisis and the priorities for the sector’s future development.
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He began his remarks by discussing some macroeconomic indicators of Russian banking sector activity. Loans and other advances to non-financial organizations and individuals (including arrears) increased from 2006 to 2011, with slight negative growth recorded in 2010. Deposits by individuals quadrupled from 2006 to 2011, increasing even during the worst years of the crisis. Total assets of the banking sector as a percentage of GDP steadily increased from more than 40 percent in 2006 to nearly 80 percent in 2010, leveling off for 2011. Banking sector capital as a percentage of GDP has increased slightly since 2006, but remains largely unchanged at 10 percent. Mr. Aksakov continued by examining the aggregate capital of Russian banks and capital adequacy indicators. While aggregate capital has not changed in relative terms, it has increased in absolute
From left to right: Edward S. Verona and Anatoly Aksakov.
terms from just over 2.5 trillion rubles in January 2008 to over 4.5 trillion rubles in January 2011, with 2009 bringing the most growth. The capital adequacy ratio of top-30 banks has seen some ups and downs over the same period, but has increased from 14 percent in 2008 to 17 percent in 2011. The discussion then turned to the topic of credit organizations and their performance in the Russian market. The number of credit organizations with capital less than 90 million rubles ($3.2 million) sharply declined from 2007 to 2011, from 372 to 45, with the drop leveling off in 2010. The number of credit organizations with capital over 90 million rubles ($3.2 million) has remained largely unchanged since 2007, with organizations over 180 million rubles ($6
million) showing some growth. More generally speaking, the number of operating credit organizations in Russia decreased from 1,136 in 2008 to 1,012 in 2011. Additionally, the number of unprofitable credit organizations, which had remained largely the same from 2005 to 2007, increased sharply in 20082009 from around 10 to 120. However, the financial result recovered in 2010 and surpassed pre-crisis levels to reach almost 600 billion rubles ($21 billion), and the number of unprofitable credit organizations dropped off to around 80. After focusing on trends in credit organizations, Mr. Aksakov looked at the status of their loans. The quality of the banking sector credit portfolio has improved slightly from 2010, with standard credit increasing from 42 percent to 46 percent
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sub-prime credit decreasing from 38 percent to 35 percent. Delinquent, problem and lost credit percentages remained largely unchanged at 10 percent, 4 percent and 6 percent in 2011, respectively.
arrears was seen in 4Q 2010. The portfolio share of overdue loans exhibited a similar trend. Arrears on loans to individuals also increased during this period but at a slow rate, and the trend began to reverse in 4Q 2010.
Examining the status of banking sector credits led to a discussion of the dynamics of overdue payments indicators. Arrears on loans to non-financial organizations increased sharply during the crisis years, but the rate of increase slowed in 2H 2010 and a decrease in
Mr. Aksakov concluded his remarks by shifting the focus from past trends toward the expectations that those trends yield for the future. The banking sector development strategy for 2015 seeks to implement protection for competition on the financial market, privati-
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zation of state banks and new requirements for equity. It also recommends ensuring banking sector transparency, responsibility of owners and managers, increased access to banking services for individuals and small businesses, and protection for financial market consumers. In 2015, the Russian banking sector could achieve assets to GDP ratio of greater than 90 percent, capital to GDP ratio of 14-15 percent, and loans to nonfinancial institutions and individuals at 55-60 percent of GDP. n
USRBC Briefing with Russian Research Universities April 12, 2011 Washington, DC
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n April 12, 2011 the USBC hosted a delegation from Russian Research Universities, lead by Igor Protsenko, Head of the Department of International Integration at the RF Ministry of Education and Science.
From left to right: Igor Protsenko and Randi Levinas.
businesses. Between 500 and 1,000 Russian graduate students per year will be sent to accredited U.S. universities for training, and will be guaranteed jobs upon return. In addition, the Ministry is planning to launch a competition for implementing pragmatic and applicable research, which it hopes will attract $60 million in investment per year.
Many U.S. companies seek cooperation with Russian universities. Bentley Systems looks to partner with
Summer 2011
The briefing continued with a presentation by Anna Rivkin of Merck, a USRBC member company, who talked about the importance of collaboration between industry and research institutions in Russia and the value in negotiating deals with universities and local businesses to develop innovations. Ms. Rivkin argued that businesses and universities must find a common interest and focus on research
projects. Businesses and universities then need to draft work plans (including funding and deliverables) and develop a format for agreement, in addition to addressing issues such as intellectual property ownership, confidentiality and publication. Ms. Rivkin stressed that successful collaboration is critical to achieving high-level innovation. Building collaboration requires communicating research interests often and clearly, better knowledge of the state of Russian science, further implementation of the policy and legal framework, and more industryacademic forums on science and development issues.
Russia Business Watch
Mr. Protsenko began the briefing by noting that Russia’s two overarching goals are the improvement of the investment climate and the development of human capital. To improve the investment climate, Mr. Protsenko explained that Russia hopes to train highly qualified experts and attract foreign experts and consultants. The State Duma is discussing draft legislation for a program that would recognize foreign diplomas in Russia with full social benefits and no authorization procedure. To develop human capital, Mr. Protsenko emphasized working with American universities and contracting with private entities to develop curricula and train specialists for better business management. The Ministry of Education and Science is going to launch a competition for attracting scientists from the U.S. to Russia for research and innovation, awarding $5 million in grants. The participants include 29 national universities, 18 federal and 2 municipal, altogether receiving an additional $35 million per year for infrastructure, training and development. The purpose is to facilitate U.S. business entry into Russia by cooperating with universities to train students in specific skills as requested by U.S. and Russian
USRBC members discuss healthcare sector cooperation with the OPORA delegation.
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to bring skills to the students, and 22 universities in Russia are currently teaching with Bentley’s software. The company is cooperating with Rosatom to form a technology innovation center. Amgen aims to establish a fact-finding mission to identify Russian universities for collaboration. CRDF Global promotes development in many Russian universities and closely cooperates with the Ministry of Education and Science to provide innovation training to universities. Russian Universities expressed their desire for closer cooperation with U.S. educational institutions and businesses. Bauman University, for example, is working closely with MIT and Boeing and hopes to establish a relationship with leading U.S. engineering companies. Far Eastern Federal University is interested in expanding undergraduate and graduate faculty exchange with U.S. institutions, and in expanding relations with universities in other countries. The university has a partnership with the University of Maryland and aims to introduce bilingual programs to attract foreign students.
Gubkin Russian State University of Oil and Gas has a close relationship with the Russian oil and gas industry and is well-positioned for cooperation with the U.S. The university currently works with mining schools in both Colorado and Texas, and it is interested in cooperating in management and research. The Higher School of Economics cooperates with George Mason University, Stanford University and the University of Maryland in software development and information technology, but is also interested in other areas such as management and consulting. The National Research University of Information Technologies, Mechanics and Optics (ITMO) cooperates with Stanford, MIT and UCLA in information technology. Kazan State Technological University is interested in chemical engineering and is currently seeking cooperation in automation processes, namely automation control systems. Nizhny Novgorod State University has partnered with Intel Corporation to train students and provide state-ofthe-art equipment, and is also working with the University of Maryland and University of Florida in tourism.
Northern (Arctic) Federal University has signed agreements with ConocoPhillips and the University of Alaska at Fairbanks in energy, engineering and marine infrastructure. Perm State University hopes to expand cooperation with U.S. companies and universities in the fields of space technologies, ecology and geology. Saratov State University primarily conducts research in agricultural and fuel issues, and has a manufacturing center for medicines and new construction materials. The university also has a strategic partnership with Colorado State University through joint masters programs in mathematics, psychology and sociology, and it hopes launch a joint research center between the two universities. Siberian Federal University is primarily focused on oil, natural gas, mineral resources, and other natural resources. The university would like to launch Russian projects with Western capital and establish links between Western universities and businesses. St. Petersburg State Polytechnical University is focused on energy efficiency, information technology, nanotechnology, and manufacturing technology. The university currently has partnerships with Microsoft, Cisco, Motorola, GM, Ford, and Boeing, and hopes to focus cooperation on training management personnel and education programs. Tomsk State University focuses on space exploration research, and currently cooperates with more than 20 U.S. universities. Tomsk has a strategic partnership with Ohio and is looking for a partner in the U.S. to award joint diplomas.
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Northeastern Federal University (Yakutia) works with U.S. counterparts in education and training and is primarily focused on northern construction issues and nanotechnology.
Anna Rivkin (r.) discusses private sector - university partnership with Randi Levinas (l.) and USRBC members.
Urals Federal University is a participant in Pharma 2020 and Skolkovo, focusing on research in metallurgy, machine building and energy efficiency. The university currently cooperates with Microsoft and Cisco, and hopes to become a management training area for companies like Boeing. n
Randi Levinas (l.) looks on as Sergey Puzyrevskiy (c.) and Mikhail Evraev (r.) discuss FAS’s agenda.
April 13, 2011 Washington, DC
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n April 13, The USRBC hosted a luncheon in honor of a delegation from the Federal Antimonopoly Service (FAS) of the Russian Federation, led by Sergey Puzyrevskiy, Head of FAS’s Department for Legal Affairs.
Switching to the issue of monopolies, Mr. Puzyrevskiy pointed out the negative effect that monopolies have on many sectors of the Russian economy and stressed the importance of free and fair competition. He noted that, according to legislation adopted in 2009, a company could be considered a monopoly even if it controlled only a small portion of the market. The main condition for a company to be qualified as a monopoly was that it controlled the market price of the product or other conditions of the product circulation. Speaking about merger control, Mr. Puzyrevskiy pointed out that the Russian thresholds in this regard were much higher than in the U.S. He said that, while FAS was not interested in mergers of small and medium-size companies, they closely monitor large mergers and analyze how each deal might affect competition. These mergers are largely blocked, but if creation of a monopoly in a certain industry is seen to be beneficial for Russia’s economy, they are permitted with the imposition of strict rules of behavior for the company. In conclusion, Mr. Puzyrevskiy discussed another important obstacle to fair competition in Russia — corruption. He noted that 50 percent of all cases that are reported to FAS do not result from the behavior of the companies
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Sergey Puzyrevskiy, FAS Director of Legal Affairs, began his presentation with an overview of anti-monopoly legislation in Russia. The first Anti-Monopoly law in Russia, adopted in 1991, was based on the classic anti-monopoly legislation such as the Sherman AntiTrust Act in the U.S. The Sherman Act introduced certain rules that were necessary for the process of transition from the state-monopolistic economy to the free market. He explained that
Changes made to anti-monopoly regulations in 2006 marked a second step in its development: the government introduced new regulations on restriction of state preferences, modifications in merger regulations, etc. However, the most crucial year in the development of the anti-monopoly law was 2007, when the government introduced harsh sanctions for non-compliance with the law. This step greatly facilitated the law’s enforcement and made companies take the anti-monopoly rules more seriously. Mr. Puzyrevskiy pointed out that the Russian State Duma was planning to introduce further changes to the law, which would reflect the current economic conditions and, more specifically, the recent economic crisis. He added that there are many spheres and issues that are not covered in current anti-monopoly legislation and that more work is needed.
Mr. Puzyrevskiy went on to say that one of the priorities for the Anti-Monopoly Service in Russia today is the struggle against cartels, which present a serious problem for the Russian economy. He explained that the problem of cartels is connected to the communist legacy: during the Soviet period, it was common practice for companies of the same sector to collectively determine prices for their products and volumes of production. Surprisingly, many companies continued these practices even after the collapse of the Soviet Union, unaware of the new anti-monopoly rules. To help those companies transition, FAS initiated a program that allowed them to come to the Anti-Monopoly Service and denounce their cartel membership without facing any penalties. Many companies took advantage of that program. However, starting in 2007, the program ended and now all members of cartels face severe penalties. Another important achievement in this regard was the change in the court procedures for cartel cases. Following the Supreme Arbitrage Court’s instructions, all lower courts now have to accept circumstantial evidence of cartel activity, which greatly facilitates the legal prosecution of cartels.
Russia Business Watch
USRBC Executive Vice President Randi Levinas started the briefing by noting that the purpose of the Federal AntiMonopoly Service delegation’s visit was to meet with their U.S. counterparts and discuss best practices in government procurement and anti-monopoly policy. She noted that a great deal of discussion has already been undertaken on this topic, including within the Bilateral Presidential Commission.
many sectors of Russia’s economy are still monopolistic due to the legacy of the previous regime. The goal of the FAS in this regard is to promote competitive market system where possible. Mr. Puzyrevskiy stressed that, although some sectors were likely to stay monopolistic (as it served Russia’s economic interests), many areas currently controlled by monopolies have great potential for competition, and FAS will try to do everything possible to assist that transition.
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USRBC Luncheon with FAS Delegation
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that restrict the company’s freedom of action or show favoritism to certain businesses. The role of FAS in this regard is to reprove such government agencies and officials. In 2009, FAS introduced more severe sanctions for corrupt officials that made the government take the anti-monopoly law more seriously. Mr. Puzyrevskiy stressed that, despite many problems, he and his colleagues were prepared to work hard to ensure free and fair competition in Russian markets and to protect each company doing business in Russia from the illegal activities of the government or other companies. In answer to a question about the merger of foreign companies in Russia, Mr. Puzyrevskiy replied that Russian legislation was in fact not clear on that particular point. Foreign companies doing business in Russia or controlling a Russian company fall under the general anti-monopoly legislation. However, if a foreign company does not control a Russian company, but only acts as a supplier of goods, it would only be obligated to get merger approval from FAS if the volume of goods supplied by that company for the previous year exceeded $30 million.
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Asked about the status of the Gazprom Transportation System, Mr. Puzyrevskiy explained that, since Gazprom was a natural monopoly, its activities were regulated by a special set of laws ensuring non-discriminatory access to its resources and services.
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Answering a question about the connection between the anti-monopoly and anti-corruption laws in Russia, Mr. Puzyrevskiy admitted that the compliance of foreign companies with their own anti-corruption laws was an important factor for FAS. According to Mr. Puzyrevskiy, the Russian government is expected to introduce similar norms and regulations to the international anticorruption efforts in the near future. He also pointed out that he and his colleagues were studying the American experience in anti-monopoly and anticorruption legislation. Mikhail Evraev, Head of the Department for Management and Control of Public Procurement Placement, spoke in detail about the public procurement system in Russia. Mr. Evraev began by saying that public procurement in Russia amounted to $200 billion every year and has a major impact on Russia’s economy. Therefore, it is important to ensure transparency and fair competition in that sphere. One
of the most significant achievements in this regard was the creation of a unified website containing all information on public procurement for all Russian regions. Starting in 2011, government agencies on all levels are obligated to place their procurement orders electronically through a special internet tender system, consisting of five platforms. He added there also was an effective system of working with companies’ complaints through the website. Mr. Evraev pointed out that the introduction of this new system made the process of public procurement significantly more transparent and less subject to corruption. Comparing the new Russian system to the practices of government-owned natural monopolies not subject to the same regulatory rules, Mr. Evraev pointed out that the latter had little transparency — information on their procurement practices was closed. However, he said that Duma was already working on a bill that would force government-owned companies and natural monopolies to make their procurement information public. Mr. Evraev also stressed that the quality of services and products offered by companies was the main criteria for participation in electronic tenders. However, he pointed out the necessity to improve all stages of the procurement process: planning, selection and fulfillment. In this regard, he said that he and his colleagues were planning to adopt some elements of the U.S. Federal Contract System. Mr. Evraev said that they were working on shaping a similar comprehensive, centralized regulatory system of public procurement. Mr. Evraev pointed out that due to the reforms, the Russian system of public procurement was now open to all companies, including American, who can now participate in bidding for public contracts electronically. In conclusion, he invited the guests to visit the websites of the Russian procurement system (www.zakupki.gov.ru) or the official website of FAS, which contain a great deal of information on the public procurement mechanisms in Russia. Anna Katamadze, Deputy Head of the Department of Competition Development at the Ministry of Economic Development, provided additional details on the public procurement internet portal. She noted that one of the main difficulties that FAS faced while creating the portal was the fact that there were over 200,000 public contractees in Russia and each of those entities had at least five employees, who had to be provided with a digital signature. Ms. Katamadze mentioned that state-owned natural monopolies did not face the
same requirements, which make it much harder for contractors to understand the requirements they need to meet to be eligible for a contract. She stressed, though, that she and her colleagues thought that providing complete and full information on the requirements and details in the offer was absolutely crucial for free and fair competition in the sphere of public procurement. She went on to say that the public portal also helped control the companies’ compliance with the established procedural rules and regulations. The site has a mechanism allowing companies to send electronic complaints to FAS, and the Anti-Monopoly Service has plans to establish similar mechanisms of communication with other law enforcement agencies. Finally, she noted that, overall, the portal was a comprehensive system containing all information on public procurement in Russia, which helped make that process more transparent (both for the public and law enforcement) and effective. In answer to a question about the timing of the proposed legislation and the measures that are being taken to protect the bidders’ company information, Mr. Evraev said that a Law on Amending the System of Public and Municipal Procurement had been adopted. He specified that that law contained regulations concerning the formation of the initial price of the contract services, the quality of the goods and services provided and other issues. Legislation on public procurement is still a work in progress; it is constantly updated and significant progress has already been achieved in the construction sector. As for the protections of proprietary information, Mr. Evraev shared FAS’s plans to introduce an Independent Registrar, a separate server that would monitor all the websites to prevent unauthorized access to the bidders’ information. Mr. Puzyrevskiy added that he expected the new anti-monopoly legislation to go through the Duma during this year. He also noted that, in his opinion, the antimonopoly law should be conservative and should not be changed too often in order for companies to be better aware of the established rules. One participant noted that legislation currently being authored by the Russian Ministry of Health would ban representatives of pharmaceutical companies from contacting Russian doctors during their working hours, which is contrary to established international standards. Mr. Puzyrevskiy promised that FAS would work to promote a compromise decision on that issue that would be in accordance with international standards. n
June 14, 2011 Washington, DC
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n June 14, 2011 the USRBC hosted a briefing for members with a Federation Council Delegation represented by Senators Lyudmila Narusova, Chair of the RF Federation Council Commission on Information Policy and Member of the Committee on Education and
Mr. Gattarov emphasized that e-government is an essential tool in fighting corruption. Last year, the government enacted federal law FZ-210, which describes the various services at all levels of government (federal, regional and municipal) that will be
Ms. Narusova noted that she received an invitation to join this Working Group. She noted that there is a fragmentation of ministries and departments that supervise different segments of the innovation agenda in Russia, as is the case in the United States. As a result,
new members activities
USRBC Luncheon Briefing with RF Federation Council Delegation
Randi Levinas (c.) with Lyudmila Narusova (r.) and Ruslan Gattarov (l.).
Science, and Ruslan Gattarov, Member of the RF Federation Council’s Commission on the Introduction of New Technologies to Governmental Agencies.
In addition, the Commission on an Information Society was created under the Board of Legislators of the Federation Council in order to monitor the regulatory framework and laws of the various regions in order to overcome any obstacles to the implementation of the e-government program in the regions. Question & Answer Session
Q. Part IV of the Civil Code of the RF is very important for the business community in the U.S., particularly in terms of the amendments that brought Russia’s legal system up to global standards with respect to intellectual property. How will these laws will be enforced? Ms. Narusova answered that there are uniform requirements for compliance. Regarding the enforcement of laws protecting intellectual property, Ms. Narusova noted that the Russian courts will be monitored to check their compliance with these laws. n
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Q. During the last Presidential Summit in Dauville, it was decided to create a Working Group on Innovation led by Under Secretary of State Robert Hormats and Arkady Dvorkovich. What is your impression about what such a group might focus on?
it has become necessary to create a coordination center that will unite the diverse issues and set priorities. This work is essential with regard to the creation of the Skolkovo innovation complex. Russia Business Watch
Ms. Narusova began by emphasizing that in order to create a favorable investment climate and foster business collaboration in Russia, the Commission on Information Policy has prepared and already implemented a number of important laws concerning electronic documents, the enforceability of electronic signatures and electronic auctions. The electronic government program will be implemented at both the federal and local levels, which will greatly eliminate the possibility of bribes for officials because it will be possible to register documents or a company electronically. Investors and the public will be able to obtain the necessary approvals and certificates electronically and it will be possible to create access to electronic textbooks and e-learning.
made available online. [Ed: The first phase of the plan went into effect on July 1, 2011.]
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new members activities
Dinner with RF Deputy Minister of Health and Social Development Dr. Veronika Skvortsova June 9, 2011 New York City
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n June 9, 2011, the USRBC organized a small, dinner in honor of Deputy Minister of Health and Social Development of the Russian Federation,
Dr. Veronika Skvortsova. The dinner, which took place in New York City, was hosted by Pfizer and attended by representatives of Aerolase Corp., Amgen, Johnson & Johnson, Medtronic, and Merck.
Breakfast Discussion: the Customs Union and Russia’s WTO Accession July 7, 2011 Washington, DC
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n July 7, 2011, the USRBC hosted a breakfast discussion with Alexey Shishayev, Counselor/Head of the Economic Section at the Embassy of the Russian Federation; John Gurley, Partner at Arent Fox LLP; and Tom Thompson, Executive Director at the Coalition for Intellectual Property Rights.
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Mr. Shishayev began by noting that although the Customs Union came into existence on January 1, 2010, the decision to create a Customs Union was made in 2006 in order to develop further cooperation between Russia, Belarus and Kazakhstan. The actual treaty was signed and negotiations started in 2007.
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Mr. Shishayev explained that Customs Union member countries each use a different formula for WTO accession: they have decided to join as individual countries but will coordinate accession with each other. He emphasized Russia’s position that the Customs Union is a further step toward trade liberalization, not an obstacle to it. The Customs Union brings opportunities for exporters and investors as no registration needed and companies can trade freely. Mr. Shishayev concluded by noting that the Customs Union is not a final goal,
Tom Thomson (l.) discusses Russia’s WTO accession with John Gurley (c.) and Alexey Shishayev (r.).
but another step toward economic integration. The next step is likely to come in 2012 — the Single Economic Space, with one microeconomic policy, one competition policy, one technical policy and common subsidies. Mr. Thomson continued the discussion by noting that there are several concerns that have arisen with the formation of the Customs Union, including the management of the Union and development of its laws. Therefore, the key elements that need to be addressed are the unified customs trade mark registration, the WTO’s Trade-Related Aspects of Intellectual
Property Rights (TRIPs) compliance and the implementation of laws and regulations. There are a number of legal concerns for rights holders: foreign and domestic trademark owners are concerned about how the three countries will harmonize their laws, particularly pertaining to: • parallel imports (especially not registered importers); • ex-officio rights — for officials to check at the borders; • counterfeit goods crossing the borders — there should be a common policy solution
new members activities
USRBC Reception in Honor of RF Deputy Minister of Industry and Trade Vladimir Salamatov July 7, 2011 Washington, DC
On July 7, 2011, the USRBC hosted a cocktail reception in honor of Deputy
Minister of Industry and Trade of the Russian Federation Vladimir Salamatov and a delegation of officials from the Ministry, who were in the U.S. on a fact-finding mission related to the development of industry standards.
Mr. Shishayev answered that it is based on the current GDP of the member country. Russia will get the largest amount (approximately 80 percent). If the member countries’ GDPs change, the duty share will be revised. Q. Is it possible for countries to opt out from the Customs Union’s Code provisions? Mr. Shishayev explained that all the exceptions are deviations from the Customs Union’s Code. He emphasized that the Customs Union legislation should not contradict with WTO policies. Q. Russia has policies designed to increase production of domestic pharmaceutical products. Is there any contradiction with Customs Union policy? Mr. Shishayev noted that for the Customs Union, there is no contradiction. As for the Single Economic Space, it will be necessary to bring those regulations in compliance. USRBC members listen as the panel outlines the various issues involved with reconciling the Customs Union’s codes to WTO standards.
• the unified customs register — the Customs Union’s unified register will be managed by Russia (it will be implemented by 2012);
for Russia’s accession to the WTO. Question and Answer Session Q. Could any other countries join the Customs Union?
Mr. Gurley added that the Customs Union does not present any difficulty
Q. What is the duty share within the Customs Union?
• protection of Intellectual Property rights;
Mr. Thompson concluded by noting that the Customs Union’s laws and regulations will be enforced at the same level in all three member countries in order to gain balance. Ex-officio procedure has not been applied in Belarus as there is a significant problem with a flow of counterfeit goods; it is difficult to provide information regarding their origin. n
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• the threshold for duty-free imports — increase from 1.5 to 10 thousand euros.
Mr. Shishayev answered that the members of the Eurasian Economic Community decided that the Customs Union would be comprised of the three countries with the highest level of economic development. In the long term it is possible that other countries will join.
Mr. Shishayev answered that interested companies should request information directly from the governments of the member countries. In Russia, it is the Ministry of Industry and Trade.
Russia Business Watch
• Rights holders are also concerned about the implementation process of:
Q. What is the best resource to get information about the Customs Union and its policies?
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regional profile
regional profile USRBC Leads a Delegation to the Republic of Tatarstan April 11-13, 2011
As part of its ongoing
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Summer 2011
efforts to help members in the expansion of their business outside of the Moscow-St. Petersburg regions, the USRBC led a delegation of companies to Tatarstan to meet with government and business leaders. The delegation consisted of representatives from Cameron, Case New Holland, Caterpillar, Ernst & Young, KPMG, PwC, RusRating, STS Logistics, and the U.S. Russia Center for Entrepreneurship.
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The first day of the trip was devoted to meetings in Kazan and included a discussion with President Rustam Minnikhanov and memEdward S. Verona (l.) and President of Tatarstan Rustam Minnikhanov (r.). bers of his cabinet. The second day was spent in the industrial heartland of Tatarstan, with tours of the Alabuga Special Economic and faculty of Kazan (Privolzhskiy) The second day featured a tour of the Zone (SEZ) as well as factories in NabaAlabuga SEZ with Vasily Kudryashov, Federal University. rezhniye Chelny and Nizhnekamsk. the General Director of the site, and In Kazan, the delegation visited Tatarstan’s IT Park, where the hosts demonstrated the testing of a new emergency response system based on the GLONASS navigation system. The agenda also included meetings at the Himgrad Technopolis, a high-tech petrochemical manufacturing complex built to support small- and mediumsized enterprises, and with the dean
The day was capped by a meeting with Tatarstan President Rustam Minnikhanov, who was joined by Iskander Muflikhanov, Director of the Department of Foreign Affairs of the Government of Tatarstan, Igor Nosov, First Deputy Minister of Industry and Trade of Tatarstan, and Linar Yakupov, Head of the Agency for Investment Development of Tatarstan.
included a meeting at the Fiat-Sollers joint venture that in 2012 will become a Ford-Sollers joint manufacturing facility. The day also included a tour of the Cummins-KAMAZ joint venture and a walk-through of the enginebuilding and truck assembly lines at those facilities. n
regional profile
USRBC Leads a Delegation to the Republic of Tatarstan • continued
Russia Business Watch Summer 2011
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newWTO members watch
WTO watch U.S. and Russian CEOs Meet with President Medvedev to Support Russia’s WTO Accession
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June 17, 2011 • St. Petersburg , Russia
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On
June 17, 2011, the U.S.-Russia Business Council Board Members, led by USRBC Chairman Klaus Kleinfeld of Alcoa, met with President Medvedev in St. Petersburg at The St. Petersburg International Economic Forum to present him with a letter voicing their full support for the Russian Federation’s accession to the World Trade Organization (WTO) upon the conclusion of a commercially viable agreement and the approval of that agreement by the Russian government.
The letter (see p. 15) was signed by 35 chief executive officers of leading Russian companies and U.S. corporations with a significant presence in the Russian market: Alcoa, Alfa Bank, Alfa Group, Boeing, Caterpillar, Chevron, Cisco, Citi, Coca-Cola, ConocoPhillips, Deere, Dow Chemical, Ernst & Young, ExxonMobil, General Electric, Intel, International Paper, JPMorgan Chase, KPMG, Medtronic, Microsoft, PepsiCo, Pfizer, PricewaterhouseCoopers, Procter & Gamble, Renova Group, RUSNANO, Sberbank, Sever-
stal, TMK, Troika Dialog, United Technologies Corporation, Visa, Volga-Dnepr Group, and VTB Bank. The CEOs assured President Medvedev of their firm belief that WTO membership will significantly improve Russia’s position as a key, rapidly growing member of the global economy. “Membership in the WTO will fully integrate Russia into the modern global trading system and provide confidence to foreign and domestic investors that
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new watch activities WTO members
Klaus Kleinfeld, Chairman of the Board Edward S. Verona,
June 17, 2011
President of the Russian Federation Moscow Russian Federation Dear Mr. President, the Russian market, we write to voice our full support for the Russian Federation’s accession to the World Trade Organization (WTO) upon the conclusion of a commercially viable agreement and the approval of that agreement by the Russian government. rapidly growing, member of the global economy. Further, by joining the WTO, Russia will engendynamic marketplace, which will both improve Russia’s export capacity and provide substantial of economic growth and increased prosperity for the Russian people. We look forward to working with you and members of your government in pursuit of a strong process. Sincerely, Signed by the CEOs of the following companies: Alcoa, Alfa Bank, Alfa Group, Boeing, Caterpillar, Chevron, Cisco, Citi, Coca-Cola, ConocoPhillips, Deere, Dow Chemical, Ernst & Young, ExxonMobil, General Electric, Intel, International Paper, JPMorgan Chase, KPMG, Medtronic, Microsoft, PepsiCo, Pfizer, PricewaterhouseCoopers, Procter & Gamble, Renova Group, RUSNANO, Sberbank, Severstal, TMK, Troika Dialog, United Technologies Corporation, Visa, Volga-Dnepr Group, VTB Bank.
> Russia will adhere to the rules and norms
“Besides improving Russia’s position in the global economy, WTO membership will also expand trade and investment ties with the United States,” said Klaus Kleinfeld, Chairman and CEO of Alcoa and Chairman
of the USRBC Board. “Accession will send a strong signal to the business community that Russia is committed to reforming and modernizing its economy. This will in turn attract the foreign investment, technology and talent that Russia needs to accelerate sustainable economic growth over the long term,” he added. The CEOs believe that Russia’s membership in the WTO will create conditions that could serve as the catalyst for a more competitive and dynamic marketplace, which
will both improve Russia’s export capacity and provide substantial benefits for Russian consumers. In the long-term, these benefits will ultimately yield higher rates of economic growth and increased prosperity for the Russian people. During their meeting with President Medvedev, the business leaders stressed their willingness and readiness to work with the Russian Government in pursuit of a strong final agreement on Russia’s WTO accession. n
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of the world’s largest trade organization. It will also ensure Russia’s access to WTO dispute resolution procedures previously unavailable to it,” said Ed Verona, President and CEO of the U.S.-Russia Business Council.
Russia Business Watch
1110 Vermont Avenue, NW, Washington, DC 20005 (202) 739-9180 Fax: (202) 659-5920
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legal update
legal update USRBC Third Annual Russia Legal Forum June 9, 2011 ● London
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n June 9, 2011, the USRBC, in partnership with International Business Leaders Forum (IBLF), held its Third Annual Russia Legal Forum in London, UK. The Forum addressed a range of issues, such as Russia’s legal reform efforts, minority shareholder rights and corporate governance, anti-corruption legislation, and the role of international arbitration in Russia, featuring a distinguished lineup of speakers and panelists, including noted authorities on legal compliance and risk management strategies. Keynote addresses were given by Richard Alderman, Director of the UK Serious Fraud Office, Richard Thornburgh, former Attorney General of the United States, and E. Neville Isdell, former Chairman and CEO of The Coca-Cola Company. n
KEYNOTE ADDRESS: Richard Alderman Director, UK Serious Fraud Office The following is a transcript of Mr. Alderman’s remarks.
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“… ne of the privileges of my job has been the way that I have been able to meet so many people from different countries to be able to talk about the range of work that we do and indeed the issues that confront those in commercial life. One week will always stand out for me long after I have left the SFO. This is the week that I spent in Russia in March this year. This was kindly arranged by my friend Brook Horowitz of the International Business Leaders Forum. I am delighted that Brook is at today’s event. Brook gave me the opportunity to go to Moscow and St. Petersburg to meet many people active in commercial life in Russia, whether in Russian companies or foreign companies doing business in Russia. I was able to talk to them about corruption issues and the challenges they face. It was a fascinating and indeed memorable week for me.
A lot of the interest at the moment arises from the UK Bribery Act and what this means both for UK companies doing business in Russia and also for Russian companies doing business abroad. What I found in Moscow and St. Petersburg was a high level of awareness of the Bribery Act in general and a strong desire to learn more. The Russian business people that I spoke to know that they are running global enterprises and that they therefore have to comply with global rules. The Bribery Act, like the FCPA, forms part of those global rules and Russian business people know that they need to comply with them. Indeed, some mentioned to me how helpful it was to have this body of law because they wanted to be sure that in their own investments in other countries, they could be sure that their money was safe and was not subject to shrinkage as a result of corruption. What are companies concerned about? Well a lot of the discussion concerns the new offense in the Bribery Act of failing
to prevent corruption. Corporations with worldwide activities, including activities in very challenging jurisdictions, are particularly concerned about this. They worry about the defense of adequate procedures and whether their procedures can be described as adequate. They worry as well about the one off occurrence by an individual in a remote jurisdiction who does something, perhaps with the best of intentions, but that gets the company into difficulties. The guidance issued by the Ministry of Justice as well as the guidance by the prosecuting authorities is very helpful here. I often look at the foreword to the Guidance written by the Justice Secretary, Ken Clarke. There are a number of key messages in that foreword. One of the those messages, for example, is that the Act is aimed not at the vast majority of the companies who want to get it right but at the mavericks who are determined to continue to use corruption.
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legal update
KEYNOTE ADDRESS: Richard Alderman Director, UK Serious Fraud Office • continued >
What we in the SFO have been trying to do is to re-assure companies about our approach. We recognize that many companies want to get this right. They want to ensure that their companies do not get involved in bribery. They know that a company that gets involved in bribery gets involved in much else as well and all of it is bad. Offered a choice between doing business ethically and doing business with bribes they clearly opt for ethical business. No surprises. The issue they have, of course, is how to reconcile that ethical commitment with the realities of doing business where asking for bribes is common practice.
A company that does this but that finds problems will receive very sympathetic treatment at the SFO. A company that closes its mind to the issues while perhaps having some veneer of paper procedures will receive different treatment. Of course, there are many difficult issues. One of them is what to do about small facilitation payments. This is indeed an extremely difficult issue and the overall answer to this lies in wider measures to combat the demand for bribes. Many are
We have done our best to reassure companies about this. No set of procedures can ever guard against the one off occurrence. We will be realistic about this. We do, though, expect the Board of the group to take an active interest in these issues and to be able to demonstrate to employees wherever they are that bribery will not be tolerated. These employees are very alert to messages from the top and will pick up what really matters to the Board. If the message from the Board (whether spoken or unspoken) is that it does not matter how business is obtained so long as it is obtained, then it will be no surprise if bribery occurs.
Nevertheless, of course, I recognize that these payments will not come to an end, whether in Russia or other countries, when the Act comes into force [Ed: the Act came into force on July 1]. Our approach in the SFO has been to recognize that this will not happen. What we have said is that our aspiration is that companies generally should move towards zero tolerance over a period of time and that we shall let them do that if they keep us informed about what they are doing. I want to know, in respect of those that still make the payments, what they will be doing after July 1 to bring an end to this practice and over what length of time. I recognize that this may be a process that takes a few years but what matters is the end result. I hope that this is a proportionate approach to a very difficult problem and that it will help corporations to find their way through this issue. I do want them to come and talk to us, not least because it means that when we hear complaints from their competitors that these payments are being made, then we are less likely to open an investigation because we will know from the company that they are committed to zero tolerance in due course.
If, though, employees know that the Board only wants ethical business, then they know that that is the tone set from the top. In the SFO, we are therefore very interested in the lead set by the top of the organization.
asking us what our approach is to dealing with small payments. Our approach is a realistic one. I am very mindful of the fact that there are a number of corporations that have got zero tolerance for bribery, including small facilitation payments. They enforce that rigorously and ensure that employees do not find ways (such as the use of agents and others) to find a way around these procedures.
• The phrase “carrying on business” is a very general one and the SFO is adopting a very wide interpretation of these words. • The words need to be seen in the context of international groups with complex business structures sometimes based on very different systems.
Summer 2011
I do not want to do anything that would undermine the hard work that these corporations put in to establishing zero tolerance of facilitation payments. These companies tell me that it is possible to do business without making these payments (including doing business in Russia) and that it is good for them commercially to have that reputation. The
Another issue that has given rise to great interest, particularly during my visit to Russia, is the impact of the Bribery Act on foreign companies. We have put forward some simple propositions in the SFO following on from the Bribery Act. These are as follows: • A foreign company that carries on business or any part of its business within the UK is within the scope of the Bribery Act in respect of any of its activities anywhere in the world.
Russia Business Watch
We know, for example, that some companies believe that all they need is a certificate from a firm of lawyers that they have adequate procedures. We hear about this. We hear as well that the company is not prepared to pay very much for this and expects a certificate of adequate procedures for its worldwide enterprise under, say, £25,000. This will not impress us very much. This does not mean that we expect companies to spend millions of pounds on this. What we do expect, though, is a proportionate approach by companies focusing on the key risks and on what they are doing in order to be able to combat those risks. This is what companies should be doing anyway. Indeed some companies have told us that this is a valuable exercise for them for all sorts of reasons that they should have carried out before.
companies that talk to me about this, though, tend to be large companies and I am concerned about the problems that smaller and medium-sized companies have. I have encouraged sector led initiatives through suitable representative organizations.
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legal update Summer 2011 Russia Business Watch
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KEYNOTE ADDRESS: Richard Alderman Director, UK Serious Fraud Office • continued >
• Our view is that if a foreign group has a subsidiary in the UK and in another country and that bribery occurs in that other country then that bribery is within the remit of the SFO. • The sort of case that we will be interested in is one where the bribe paid disadvantages an ethical UK corporation. In such a case, there
is a strong UK public interest in bringing that foreign group before the UK Courts. This will be a high priority for us. • There is argument about the relevance of a subsidiary in the UK and also about whether mere listing in the UK is sufficient to constitute carrying on business here. The Ministry of Justice guidance has said that these will be issues for the Court. What I have said to corporations is that it would be very dangerous for them to use a highly technical interpretation of the law to persuade themselves that they are not within the Bribery Act and that it is permissible for them to carry on using bribery. I have said that they could have a very
unpleasant shock in a few years’ time and that the best and least risky way of doing business is to avoid bribery. …The SFO is committed to enforcing the Act through a range of activities. As you will have heard, it is important for us to try to help companies whether UK or foreign to get it right so that they do not get into difficulties.
When companies do find problems and bring them to us, then we want to help them resolve them in the most effective and proportionate manner. I believe that we are showing this in the cases with which we are dealing. Finally, we owe it to ethical companies to be very robust in dealing with those companies and individuals who want to continue to use bribery to carry on business. I want to bring those people before UK criminal courts. I believe that there is a strong public interest in doing this and that we will have the support of the ethical UK business community in doing this. This is something I wish to see. There are many more aspects of the Bribery Act that I could talk about but let
me leave it there and turn to one other issue. I have been very interested to see that Russia wants to join the OECD Working Group on Bribery and that it has recently been invited to do so. This Working Group brings together senior representatives of authorities in the countries that are implementing the convention. It is an
important group because we talk about what is happening in each country and how we can help each other. There is also a review process under the convention. This means that the country’s progress in implementing the convention is evaluated by a group of experts from other member countries. We have had these reviews and they have been very searching and very constructive. I very much welcome the fact that Russia has now been invited to join this Working Group. It is an important sign of commitment to anti-corruption. Let me thank you once again though for the opportunity to be here.” n
legal update
A Conversation on Legal Reform and Corporate Governance Facilitator:
Richard Dean Partner Baker & McKenzie
Participants:
E. Neville Isdell Former Chairman and CEO The Coca-Cola Company
Richard L. Thornburgh Counsel K&L Gates LLP Former U.S. Attorney General
The
Russia Legal Forum opened with a conversation on Legal Reform and Corporate Governance, facilitated by Richard Dean, Partner at Baker & McKenzie and member of the USRBC Board of Directors.
Russia Business Watch Summer 2011
was a payment that added value to society rather than to an individual and thus avoided propagating corruption. Mr. Thornburgh agreed with Mr. Isdell’s idea that U.S. businesses could have a positive impact on the culture of corRichard L. ruption in Russia Thornburgh began through adherby noting that the ence to the FCPA. concerns of the When prosecutions U.S. and other busifor foreign corness communirupt practices first ties regarding the began in the United shortcomings of the Richard Dean (r.) moderates the opening session with Richard Thornburgh (l.) States, the internaRussian legal sys- and E. Neville Isdell (c.). tional community tem frustrate and was skeptical at deter investment in best of such meathe country. The rule of law transcends the Soviet Union, but it is certainly bet- sures. But in the time since then, other requirements in commercial rela- ter than it was in 1989. anti-corruption measures have been tions — investors need confidence that adopted by the United Nations and the the State Duma will pass clear, uncom- Additionally, U.S. businesses and inves- Organization for Economic Cooperation plicated and fair laws, that judges will tors need to remember the importance and Development. An environment be qualified and truly independent, and of example and of the individual human inhospitable to corruption develops that the executive will be open about its dimension: we can encourage the devel- only through patience and persistence. policies toward the business communi- opment of anti-corruption principles ty. The U.S. business community needs by maintaining our own adherence to Mr. Dean then opened the discussion to to articulate its specific grievances with those principles. The U.S. cannot leg- questions, asking if there is a connecshortcomings in the Russian legal and islate in other countries, but it can and tion between corporate governance and corporate governance framework in does require adherence to the Foreign public policy issues, and how corporate order to ensure that its concerns are Corrupt Practices Act (FCPA). This sets governance reforms affect competitiveheard by officials at the highest pos- the standard for U.S. businesses, and ness. sible level. the more it is adhered to the more likely it is that its spirit will be picked up by Mr. Thornburgh answered the first E. Neville Isdell described some con- the country in which U.S. businesses are question by saying that we should levercrete ways U.S. and international busi- operating. age the overlap that exists between U.S. nesses could have a positive effect on concerns with its own legal system and the Russian business environment. He Mr. Isdell related an experience Coca- Russian legal concerns. Both countries first pointed out that any form of cor- Cola had in its Russian operations to struggle with issues of fraud offenses, ruption is detrimental to society, and illustrate how U.S. businesses can com- illegal entrepreneurship, corporate liathat any efforts to eradicate corruption petitively operate in an environment bility, etc., and the United States can should be applauded. He then ques- where corruption (like bribery) exists draw on its experience to lay out spetioned how the issue of corruption can without sacrificing its anti-corruption cific projects Russia can undertake in be dealt with in the real world. The principles. Coca-Cola needed to lease its reform efforts. international community must be aware land from the Moscow Region for its that Russia is currently involved in a first factory. The Region hospitals Mr. Isdell responded to the second process that will not yield results over- needed medical supplies. Coca-Cola question by emphasizing that smallnight. Russia today is not quite what arranged for Johnson & Johnson to pro- and medium-sized businesses are hurt people had hoped for after the end of vide the needed goods to the hospitals. most by a corrupt system and have This was a kind of payment, but it to fuel it in order to survive, which
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A Conversation on Legal Reform and Corporate Governance • continued >
creates a negatively reinforcing loop that undermines their competitiveness. Streamlining regulatory processes to remove chances for corruption would increase the competitiveness of the economy as a whole by increasing the ability of small- and medium-sized businesses to compete. In response to a question regarding whether amnesty for white collar crime in Russia would send a good or bad signal to the international investment community, Mr. Dean answered that while some prosecutions of white collar crime were of questionable validity, some were valid and legitimate investigations. A broad-based amnesty would undermine these legitimate cases and
thereby send the wrong signal. Mr. Isdell stated that an amnesty without a clear path to enforcement of rules after the amnesty would not be worthwhile — the two need to accompany each other, as has been shown in cases of tax amnesty elsewhere. Mr. Thornburgh proposed executive pardon as an alternative to amnesty. One participant asked about President Dmitri Medvedev’s proposed special process for victims of state corruption, and how the participants would recommend implementing it. Mr. Isdell replied that such a process will be inadequate without a reformed criminal justice system. The commercial courts have come under much scrutiny
and have improved as a result. If similar pressure were put on the criminal courts to reform, victims of state corruption would have a greater chance of securing redress. USRBC President Ed Verona concluded the conversation by asking about the effectiveness of exemplary prosecution. Mr. Thornburgh responded that deterrents are essential in combating legal abuses and crime, and that exemplary prosecutions serve this purpose. However, over-criminalization is also a problem, and mechanisms need to be in place to ensure that prosecutors are not overly zealous, as has happened in some instances in the United States. n
PANEL: Legal Reform and the Courts in Russia Moderator:
Bruce Marks Founder & Managing Director Marks & Sokolov
Panelists:
Vladimir Pastukhov Advisor to the Chairman Constitutional Court of the Russian Federation William Bowring Professor of Law Birkbeck College University of London
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Thomas Firestone Resident Legal Advisor U.S. Embassy—Moscow
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From left to right: Vladimir Pastukhov, Thomas Firestone, William Bowring, and Bruce Marks.
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he first panel session of the day, moderated by Bruce Marks, Managing Director of Marks & Sokolov, discussed the status of legal reform and the state of the courts in Russia. Vladimir Pastukhov began the discussion by asking, is Russia really moving towards legal reform, and does Russia really need reform? He answered that the current court system is adequate for the contemporary political culture and fits well with the current political system. Additionally, there is little political will for court reform: there is no serious political force in Russia pushing for this
reform, and the general population cares little about it. According to polls, those who have had experience dealing with the court system have a better opinion of it than those who have not.
From the outside, the system appears functional, but there are two ways to shed light on the internal dysfunction: by looking at corruption and political dependence.
Besides criminal and politically-motivated cases, the system is quite functional. What is needed is a fine-tuning of the legal system, not an overhaul. However, this fine-tuning is important and necessary — the same Soviet court system from 20 years ago still exists today with little change, and is dysfunctional for a market economy.
Corruption in the courts is just like the corruption that exists in all the other branches of the state machine. It cannot be adequately treated with legal reform; rather, the development of economic competition and political plurality will eradicate this problem.
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The political dependence of Russian courts leads to one of its greatest problems — politically-motivated cases. While political motivation is a problem in and of itself, the greater concern is the side effects from such dependence. Political dependence has degraded the legal culture; judges are unprofessional, and do not understand basic legal language, the legal process is informal, and the line between the legal and the illegal has been blurred beyond understanding since practices that were legal a few years ago have suddenly become illegal. Many people propose judicial independence as a solution to Russia’s issues with its courts. But if independence were given to the Russian courts as they are today, conditions would most likely worsen. Corruption and political dependence are problems, but so are the negative conditions these problems have created. William Bowring disagreed that the current court system in Russia is unchanged from the Soviet period, but noted that the current period is not one of reform, as some have claimed. The significance of Medvedev’s reforms is overrated, and there is little to no difference between Medvedev’s and Putin’s policies. However, there were significant changes made to the Russian legal system in the early years of Putin’s administration, like the 2002 changes to the Criminal Code. Other significant changes came in the Yeltsin period, with Russian accession to the Council of Europe in 1996 and the ratification of the European Convention on Human Rights in 1998.
In response to a question regarding the European Court of Human Right’s ruling that Mikhail Khodorkovsky’s arrest was not politically motivated, he responded that the Court did not say that Khodorkovsky’s case was not politically motivated, but that his lawyers did not provide sufficient evidence to prove political motivation beyond a reasonable doubt. This is a surprising interpretation, which has raised the bar for burden of proof to that of murder and torture cases. Thomas Firestone spoke about specific problems with the Russian court system and the measures Medvedev’s administration is taking to address them. A few anecdotal instances offered a look at the scope of the corruption problem: a major Moscow bookstore carried a manual on how to offer bribes effectively, and a section of an energy conference focused on how to pay bribes in that sector.
Between 2008 and 2010, President Medvedev sponsored amendments to the Criminal Code and Code of Criminal Procedure on money laundering, illegal entrepreneurship, tax crimes and pretrial detentions. These amendments make it more difficult for corrupt law enforcement officials to abuse the criminal justice system to extort money from businesses. The U.S. also provided assistance to the Duma in the drafting of legislation establishing a system whereby defendants’ sentences can be reduced for cooperation with prosecution. Russia did not have such a system prior to the passage of this law in 2009, which made it difficult to prosecute complex cases. In addition, the absence of such legislation also encouraged the provision of illegal benefits to informants. The 2009 law renders this process transparent in order to protect against corrupt deals. It has already been used successfully in a number of high profile cases.
In addition to corruption, “raiding” is one of the most perverse practices in the Russian criminal justice system, and is unique to the post-Soviet world. Mr. Firestone defined this practice as the use (or abuse) of the legal system for criminal ends. It is a much more dangerous practice than ordinary organized crime or extortion, because when extortion is blatant it is easy to combat. However, when extortion is committed under the guise of legality, it allows the extortionist to enlist the entire state apparatus to cover his criminal scheme and protect it from external criticism.
U.S. assistance programs also try to use the Foreign Corrupt Practices Act to attack both the supply side and the demand side of corruption. For example, last year President Medvedev instituted mandatory anti-corruption training for government officials. The Presidential Academy for State Service, which is charged with implementing this training program, regularly provides the Embassy with the opportunity to address the government officials who are participating in the training and to inform them about the FCPA, the UK Anti-Bribery Act and other international anti-corruption legislation.
Some people within Russian government and civil society are trying to improve the system. American assistance programs try to identify agents of change within these organizations and give them the resources they need to accomplish reform. In contrast to Professor Bowring’s assertions regarding the amendments to Article 108, Mr.
In conclusion, Mr. Firestone said that, although corruption remains widespread in Russia, there are some serious attempts to deal with aspects of it. In particular, the amendments to Article 108 show that President Medvedev understands some of the subtleties of Russia’s corruption problem and has instituted measures to address it. n
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Professor Bowring continued that there is currently open warfare between the prosecutor’s office and the investigative committee. Not only are they attempting to arrest each other, they are also attempting to have various courts do their bidding. The acquittal rate in courts
He noted that, Vyacheslav Lebedev, Chairman of the Supreme Court, wondered why people were bothered by this. According to him, preliminary investigations in Russia are done so well that acquittal is inconceivable. However, these preliminary investigations are carried out by the two warring institutions mentioned above, which makes this statement appear ridiculous.
Firestone noted that they are having a significant impact and have been supported by U.S. assistance programs. In 2008, a business association sought assistance from the U.S. in combating abuse of pretrial detention for extortionate purposes. The Embassy assisted the organization with a series of roundtables focusing on this problem. Participants in these roundtables included experts from the European Court of Human Rights and a federal judge from New York.
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Comparisons are being drawn between Medvedev’s current reform efforts and Alexander II’s reforms, but in reality the administration is inept in drafting new laws and ensuring their implementation. The Supreme Court of the Russian Federation recently reported that Medvedev’s new draft law getting rid of criminal libel is unclear and poorly drafted. Article 108, which seeks to end incarceration for economic crimes, is incompatible with the Criminal Code. Neither Medvedev’s nor Putin’s decrees are carried out, particularly in the provinces.
in general jurisdiction is 0.4 percent, while it is 18-20 percent in cases that reach jury trial (which are only 1 percent of cases overall).
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PANEL: Shareholder Rights and Corporate Governance Moderator:
Jeff Barnett Senior Director of Policy and Programs USRBC
Panelists:
Denis Morozov RF Representative European Bank for Reconstruction and Development Laura Brank Partner, Head of Russia Practice Dechert LLP Matthew Murray Chairman Center for Business Ethics and Corporate Governance
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eff Barnett opened the panel by noting that corporate governance and shareholder rights in Russia is a timely topic, given the government’s current privatization plans and the low ratings Russia achieved in the new World Economic Forum Global Competitiveness Index. He asked the panelists to discuss areas for improvement as well as describe what positive steps have already been taken in these areas.
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Denis Morozov began by remarking that the status of corporate governance in Russia is fairly positive for a country that has only 20 years of experience with a market economy. The past two decades witnessed dramatic improvement, which Mr. Morozov personally experienced as CEO of Norilsk Nickel. Controlling shareholders realized that the company could improve its market capitalization only by treating minority shareholders better and by improving corporate governance standards. Norilsk set higher standards for itself than required by law, and its market capitalization improved from $800 million when Mr. Morozov joined the company to $60 billion when he left it. While the late 1990s and early 2000s saw improvements in corporate governance, the 2008 global economic crisis greatly changed the state of corporate governance in Russia. Controlling shareholders felt the need to become more handson, and their focus shifted away from improving the market capitalization of their companies. This situation remains
From left to right: Matthew Murray, Denis Morozov, Laura Brank, and Jeff Barnett.
today, but is showing signs of improvement. Mr. Morozov noted that the legal framework currently in place supports good corporate governance, but could go further to encourage greater improvement. There is a good mechanism for registration in place today, but the Russian government should do more to support best business practices. There is some minority shareholder say in what happens in the subsidiaries of large public companies, but the Russian legislature has given the board of directors of the holding company more authority concerning subsidiaries. The role of independent directors should be further improved through higher standards for their election and nomination. Laura Brank focused her remarks on a review of current laws with respect to corporate governance and minority shareholders and how these laws are applied. She began by noting that the Global Competitiveness Index figures for Russia are alarming and make it seem as if there are daily shareholder battles. While it is true that there have been some significant battles, on a day-to-day basis things are not as bad as they seem in the press. Between 1998 and 2002, there was a boom in progressive legal reform, particularly concerning shareholder rights. Abuses following the 1998 economic crash led to the adoption of strong laws
protecting minority shareholders. The joint stock company law outlines the composition of the board of directors, with Ÿ of its members independent. Directors are voted in by cumulative voting, which assures minority shareholders the right to push their own candidates, which Ms. Brank noted happens quite frequently. Shareholders with a 10 percent stake can demand an audit of the company and the company must have an independent registrar. Anti-dilution clauses are built into the law, with a 75 percent majority vote required to increase issuance of shares. If shareholders vote against corporate reorganization, major transactions or amendments to the company’s charter, they can have their shares redeemed, and this has happened on a number of occasions. Limited liability companies have different protections, with legal rights laid out about withdrawing, right of first refusal or sale of interest. A majority vote is required for many decisions, while some decisions require unanimous approval. Shareholders can protect their rights judicially by going to court and claiming that a major transaction was entered into in violation of the law or that the rules for disinterested shareholders were not followed. Under Article 71 of the joint stock company law, claims can be brought against executives or board members for inflicting damages on the company. The courts are used as a means of recourse and see a great deal of activity.
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Ms. Brank noted that it is difficult to develop the habits of good corporate governance in only 20 years, and the idea of directors’ fiduciary responsibility to the company is not well developed. Directors still often feel that they are working on behalf of a single investor rather than the company as a whole. The law specifically says that board members should act in the interest of the company and should not use their position for their own benefit, but there is little legislation in this area. High-profile disputes create the perception that it is prohibitively difficult to do business in Russia, but this is not the case. Ease of business depends on the partner that foreign firms choose — selecting the right partner is paramount. Partners should create action plans for possible future disputes, and shareholders should actively communicate with each other. Matthew Murray observed that business is the most important change agent in the Russian environment today, because it has incentives, resources and skills to tie together the different strands of reform currently underway, and is capable of taking steps that government cannot. Stumbling blocks, cultural considerations
and political restraints on the development of good corporate governance in Russia exist. The benchmark for how these are being overcome is the corporate governance code issued in 2002, and which parts of it have and have not worked. Adherence to the code is voluntary, and when it was drafted there was debate on this point. The side that wanted it to be voluntary prevailed based on the thinking that corporate governance should not be treated as a new set of regulations but as a market incentive, a way to induce cultural change from inside the company and a way to let those changes become part of the larger operating environment. This thinking was underpinned by three basic principles: law can only go so far, internal behavior cannot be mandated since every company is different, and overly-detailed laws are counterproductive. However, the code did not work. Its failure offers a few lessons that can be applied today. First, good corporate governance was not properly rewarded by the state, and it needs to be. The state felt threatened by the idea of good corporate governance, and over time good performers were punished. State champions took over and replaced competitive compa-
nies. TNK-BP is an example of a company that suffered from this phenomenon. Second, the public environment did not sufficiently reward the behavior of good corporate governance — the idea of one set of rules for everybody threatened a lot of stakeholders. Without public support, internal corporate governance reforms began to collapse. However, ample opportunity exists to take corporate governance reform to the next level. Mr. Murray emphasized his belief that there is a significant difference between Prime Minister Vladimir Putin and President Dmitry Medvedev, who he says has given a new set of tools to business and law enforcement. Medvedev is the “whistleblower in chief”, having decried in his state of the union address that $35 billion a year is lost to leakage, fraud and corruption. The Defense Ministry has done something similar in announcing that it loses 20 percent of its budget to fraud and corruption. Whistleblower Alexei Navalny has said that he’s doing Medvedev’s work. Medvedev has said that the key missing ingredient in the Russian modernization program is trust; that trust can be built by doing what Navalny has done: using the strengths of Russia’s laws and legal systems to address their weaknesses. n
PANEL: Global Anti-Corruption Legislation and Risk Management Moderator:
Brook Horowitz Director International Business Leaders Forum Russia
Alexei Volkov Chairman Russian Federation State Duma Commission on Legislative Provisions of Anti-Corruption Measures
Paul Melling Partner Baker & McKenzie—CIS, Limited Ian Colebourne Partner KPMG
Mr. Volkov noted that a new initiative introduced by President Medvedev focuses on establishing stricter checks on the tax declarations of public officials. It has had its first reading in the State Duma, and similar legislation will soon be introduced to the Federation Council. Law enforcement reform is an important component of the fight against corruption, and is currently being implemented. Reforms are occurring throughout the Interior Ministry and the police force, and the legislature is currently working on increasing the salaries of police officers to counteract the temptation of accepting bribes. Mr. Volkov emphasized that the Russian government and legislature recognizes
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Sanford M. Saunders Co-Managing Shareholder Greenberg Traurig (DC)
Alexei Volkov began his remarks by noting that the Russian government has not shied away from the topic of corruption: President Medvedev himself has frequently spoken on this issue and the government has implemented serious measures for fighting corruption. Anticorruption legislation was recently established introducing stricter control, supervision and audit requirements. This was followed with more than 20 bylaws and regulations focused on actively fighting corruption. Additionally, the Russian
Federation ratified the United Nations Convention against Corruption and the Council of Europe’s Convention on Corruption.
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Panelists:
B
rook Horowitz started the panel by asking the participants to discuss whether and how business can be done in a corrupt environment. He requested that the panel focus on the impact of the Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act will have on companies operating in Russia, as well as review anti-corruption measures taken by the Russian government and their plans for future actions.
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importance of civil society in making progress in fighting corruption; corruption will only be eradicated with the help of civil society. Over the last three and a half years, the Duma has hosted roundtables to which representatives of non-governmental organizations, experts and representatives of other jurisdictions have been invited to discuss proposals for new anti-corruption legislation. Sanford M. Saunders continued the discussion by noting that the laws on the books in Russia are sufficient to combat corruption, but their implementation is problematic. Russian procedural code on pretrial detention and release is better and more thorough than similar code anywhere else in the world, but these laws are frequently violated. In the Khodorkovsky case, for example, the European Court of Human Rights found that Russia had broken its own laws governing pretrial detention. Having the right laws is one thing; having the will to implement them is another. Mr. Saunders asserted that the many articles published about new legislation and improvement on corruption stand in stark contrast to the Khodorkovsky case, which is one of the worst abuses of human rights in the commercial sector the world has ever seen.
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He noted that Mr. Khodorkovsky considers the European Court decision a victory, since it ruled in his favor on almost all the substantive charges and was only based on evidence up to 2003. However, negative cases like this need to be addressed. He emphasized that the Russian government cannot keep Mr. Khodorkovsky in jail and cannot leave the Magnitsky case unaddressed and still claim that it has the will to end corruption.
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With the United States looking to step up its commitment of the FCPA and with the UK Bribery Act coming into force, Russia needs to be ready to face the possibility that Russians may be charged and extradited under these laws. Paul Melling began by comparing the FCPA and the UK Bribery Act, noting that the Bribery Act will be stronger on paper than the FCPA. While the bribery of foreign public officials is covered by both laws, private sector bribery is covered only by the Bribery Act. At the same time, the failure to keep accurate books and records is punished under the FCPA but not the Bribery Act. Companies are liable for the activities of third parties under both laws.
From left to right: Alexei Volkov, Sanford M. Saunders, Paul Melling, Ian Colebourne, and Brook Horowitz.
The FCPA, the Bribery Act and international anti-corruption laws are beginning to be harmonized with each other, especially in terms of the expectations authorities have of companies and how business is conducted. Regulators have five key expectations: leadership (commitment to compliance at the top); risk assessment; standards and controls; training and communication; and monitoring, auditing and response.
trend beginning of Russian businesses implementing their own ethics codes.
Russia is doing its part with regard to anti-corruption laws. It has radically increased fines for bribery under both the Code of Administrative Offenses and the Criminal Code. Bribes greater than 20 million rubles ($700,000) are subject to fines as high as 100 times the amount of the bribe, but not less than 100 million rubles ($3.5 million). For the first time, bribery of foreign public officials is included in legislation.
Ian Colebourne discussed the specific risks attendant to operating in Russia while remaining in compliance with the FCPA and the UK Bribery Act. The Bribery Act looks for businesses to take actions on a risk-based approach. How can such an approach be implemented in Russia?
Mr. Melling noted that, largely as a result of these reforms, Russia has signed international anti-corruption conventions and has been invited to join the OECD working group on bribery to ensure their anti-bribery legislation is consistent with international standards. While many positive reforms are happening in the Russian environment, what is happening with U.S. and UK law is in many ways having more of an impact on business in Russia. Due to the legal demands on foreign companies to do business ethically, Russian companies will be more attractive to foreign investors if they can demonstrate a commitment to business ethics, so there is a
Mr. Melling emphasized that it is possible to do business in Russia in a way compliant with anti-corruption laws; many companies have succeeded in doing just this. However, the greatest requirement is to build a compliance culture within the company, which requires a lot of time, effort and leadership.
Russia is a high-risk jurisdiction, as can be seen from a survey KPMG conducted across Russia and Kazakhstan that asked risk managers what were their greatest areas of concern. They listed human capital at the top of the list. This did not include concerns about retention of talent, since many companies were cutting staff following the 2008 economic crisis. It was a question of recognizing that people within the company presented a serious risk of diverting assets or behaving inappropriately. Mr. Colebourne noted that compliance frameworks are based around the ability to prevent, detect and respond to noncompliant behavior, but the detection side is what is particularly challenging in Russia. Companies need to set up hotlines and other such reporting mechanisms. Some claim it is impossible to
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use such reporting mechanisms due to sensitivity inherited from the Soviet era of reporting someone and having them jailed. However, experience shows that this is not the case—many of KPMG’s investigations have revealed that people want to report corrupt behavior because they do not want to work in a corrupt environment. A company’s ability to operate in a compliant manner depends on the controls
it puts in place, and many companies rely on their finance function to achieve that. This is not a reliable way to operate in Russia given the cash conversion phenomenon. Fictitious companies will submit invoices to the business, with cash paid to their bank. That money is then used to pay bribes. Mr. Colebourne emphasized that this phenomenon is endemic, and presents liability to the company. Russian tax authorities will hold a company liable for shell compa-
nies it interacts with when they fail to pay taxes and sufficient due diligence has not been performed. An entire industry is built to serve the demand for generating off-books cash in this way. Controls for compliance are important, but companies must actively monitor for compliance. A once-yearly audit is not enough to detect this kind of behavior.
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PANEL: International Arbitration and Russia: Geneva, Stockholm and New Forums for Redress Moderator:
Valery Knyazev Director of Forensics KPMG
Panelists:
Ivan Marisin Partner Dechert LLP Valery Musin Chair Civil Procedure Law Faculty St. Petersburg State University Tim Osborne Managing Director GML, Ltd. From left to right: Tim Osborne, Valery Musin, Ivan Marisin, and Valery Knyazev.
Valery
The company considered, but discounted the possibility, of suing in the Russian Federation because it felt that the courts would not be impartial. Alternative international processes were also taken into consideration but ultimately, it was decided to bring a claim under the Energy Charter Treaty, a multinational treaty that came into force in 1997. The EU and 44 other countries have ratified this treaty and are fully bound by it, while the Russian Federation signed the Treaty but did not ratify it.
bound pending ratification, unless it either specifically opts out or its constitution prohibits provisional application. In 2009, the Russian Federation notified the Energy Charter Treaty depository that it did not intend to become a party to the Treaty. It subsequently ceased to apply the Treaty provisionally during the course of October 2009 (although investments made prior to that date continue to enjoy Treaty protection for 20 years). Under the provisions of the Energy Charter Treaty, before an investor commences arbitration he is required to notify the relevant government that he has a claim and to ask the relevant government to meet and attempt to settle the dispute amicably.
Under the provisions of the Treaty, if a country signs it, it is provisionally
In February 2005, GML commenced an arbitration against the Russian
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Tim Osborne spoke about GML, Ltd.’s arbitration against the Russian Federation, claiming compensation for what they say was the illegal expropriation of Yukos Oil Company. Together with the Veterans Pension Fund, GML owned approximately 70 percent of Yukos Oil. The claim — in excess of $100 billion and reputed to be the larg-
est commercial arbitration ever — is being heard before a panel of arbitrators under the auspices of the Permanent Court of Arbitration in The Hague.
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Knyazev began the panel by providing some background statistics on international arbitration and the number of CIS and Russian companies in international arbitration. Over the last several years, there has been tremendous growth in the number of cases, a large percentage of which come from Russia and the CIS countries. In 2009, there were nearly 100 Russian or CIS-related international arbitration cases heard in different jurisdictions around Europe.
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Federation. Russia responded appropriately, with each party nominating an arbitrator. The Permanent Court of Arbitration nominated the chairman while Russia argued that it was not bound by the Treaty. In November 2009, the tribunal ruled that the Russian Federation was at all relevant times bound by the Energy Charter Treaty in its entirety and that claimants are entitled to protection under the Treaty. Theoretically, if ultimately an award is made against the Russian Federation and the country does not in fact pay damages awarded, recourse under the New York Convention on Enforceability of International Arbitration Awards is possible; Russia has been a party to that convention since 1960. The New York Convention allows claimants to enforce any award against any Russian stateowned asset in any country that is party to the Convention. Mr. Osborne stressed, though, that GML has no reason to believe Russia would not pay any award made against it. He also emphasized that recourse to an independent and enforceable dispute resolution mechanism should be a prerequisite to any investment in Russia. In the absence of a functioning judicial system, that recourse will continue to be to international arbitration.
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Valery Musin noted that there are currently some indications that the Russian legal system is converging towards the Anglo-American system. It is traditionally accepted that the main source of law in Russia is statute, while in countries of common law, a precedent is a substantial source of law in addition to statutes. In Russia, precedent is gradually becoming one of the sources of law.
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First of all, the Russian Federation is a member of the European Convention on Protection of Human Rights and Fundamental Freedoms. Therefore, the judgments of the European Court of Human Rights are legally binding for the state and all state agencies including the courts. Second, the Constitutional Court of the Russian Federation also acts on the basis of precedent. Some of the rulings of the Presidium of the Supreme State Arbitration Court should also be binding for lower courts of the same system. Mr. Musin stressed that currently the Russian legal system is modern and is now completely market-oriented.
Russia is a participant in the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards, which allows participants to appoint arbitrators. Often, Russian arbitrators apply foreign law, not only Russian. As for arbitral awards, it is difficult not to enforce them because such awards may be put aside or a refusal of enforcement may be granted according to Article 5, which contains an exhaustible list of relevant legal reasons. One group encompasses reasons that rule that a party who wants to set aside the arbitration award or to obtain refusal of its enforcement should prove his claim. If he does not succeed in proving the claim, enforcement will be inevitable. Another group of reasons includes those that should be checked and established by the state arbitration court itself regardless of relevant motions by the parties. The Supreme State Arbitration Court and its Presidium only allow refusal of enforcement if there is fraud or if there is an award concerning rights and obligations of those who are not participants to the arbitral agreement. Mr. Musin emphasized that foreign counter partners are often reluctant to acknowledge the Russian substantive law as a governing law or to submit a legal dispute to a Russian arbitration, due to the fact that the innovations introduced in Russian law within the last 20 years may not be very well known. Russian law is now incomparable to what it was 20-25 years ago and does have a set of legal instruments that are able to provide adequate legal protection for the business interests of domestic and foreign investors. Ivan Marisin agreed that when a Western company enters into a contract with a Russian company, it needs to consider how it will protect its rights when disputes arise. Russian legislation related to international arbitration is well developed and quite advanced, and corresponds to all the basic principles and model laws. The practice is what makes international arbitration in Russia different from legislation in many other countries. Mr. Marisin expressed his observations about the attitude of Russian state courts to international arbitration. International arbitration is based on an agreement between certain states, but it does not have the same power that state courts in any jurisdiction would have. What makes arbitral awards binding is support from the Russian state courts,
mainly arbitrage courts. How the state courts approach international arbitration is very important; unfortunately, this approach has not been positive or supportive. According to a survey conducted by White & Case last year, Russia ranked last among many jurisdictions when assessed with regard to attitudes toward arbitration. Unfortunately, in the Russian state courts there have always been two groups of judges. One group is proarbitration and the other group is antiarbitration. The party of anti-arbitration judges is expanding. However, the role that arbitration plays in Russia does not depend on groups of judges. Mr. Musin commented that these groups are among the judicial community of state judges. One group is very supportive of arbitration forums, while the other one is not. But the Presidium of the Supreme State Arbitration Court issued a special instructive letter in December 2005 concerning issues related to enforcement of foreign state courts’ judgments and foreign arbitral awards, as well as enforcement of internal arbitrations. It is specifically underlined that in the course of deciding whether or not to grant an execution, a state arbitration court is obliged to review the case on its merits. In May 2011, the Constitutional Court issued a special ruling concerning the scope of jurisdiction of voluntary arbitration courts. This ruling was initiated by the Supreme Arbitration Court because it was unclear to what extent, if any, civil law disputes involving pieces of real estate may be submitted to arbitral forums. Due to the fact that disputes about pieces of real estate are somehow connected to the public law element, the Constitutional Court in its ruling took a very liberal view. It held that any legal dispute concerning a piece of real estate is within the jurisdiction of arbitral forums. However, it is different if it comes to a dispute between a purchaser on the one hand and a registration agency on the other. Such a dispute falls only within the exclusive competence of a state court. Mr. Musin added that violation of public policy is not equal to violation of Russian national law. Violation of public policy may only be established if the enforcement of a foreign arbitral award would undermine the very fundamentals of the Russian legal system. n
new members
new USRBC members AMWAY
Amway, the world's second-largest direct selling enterprise, works with more than 3 million distributors who sell the company's branded products, including NUTRILITE vitamin, mineral and dietary supplements; ARTISTRY skincare and color cosmetics; and eSpring water treatment systems. With more than 14,000 global employees, Alticor, the parent company of Amway, reported 2010 sales exceeding $9.2 billion. Alticor is privately held by the Van Andel and DeVos families, headed by Chairman Steve Van Andel and President Doug DeVos, and governed by a board of directors led by the two families. Launched in March 2005, Amway Russia has 13 Production Selection Centers in 11 cities across the country. AMERICAN RUSSIAN CULTURAL COOPERATION FOUNDATION
The American-Russian Cultural Cooperation Foundation (ARCCF) is a 501(c)(3) non-profit, public organization, founded nearly 20 years ago by a gathering of distinguished Americans dedicated to the cause of mutual understanding and respect through programs of cultural and educational exchange, which has lead to increased mutual trust in the business world. Its leadership is poised to use its multiple high-level cultural ties in Russia and the United States. ARCCF is recognized as a trusted organizer of major exhibitions in leading museums, both here and in Russia; has arranged performances by prominent Russian and American virtuosos; and has produced major events at the Russian Embassy, the Kennedy Center, on Capitol Hill, etc., celebrating historically important events from our joint pages of history. ARCCF is a proven, non-partisan, resource for peace through cultural diplomacy. FUQUA SCHOOL OF BUSINESS AT DUKE UNIVERSITY
In its relatively short history, The Fuqua School of Business at Duke University in Durham, North Carolina, has established itself as one of the leading business schools in the world. With a top-ranked faculty (according to BusinessWeek, 2010) and renowned research centers, the school sits among the best U.S. business schools. Fuqua enrolled its first class in 1970 and today has an annual enrollment of more than 1,300. These programs include M.B.A., Executive M.B.A., Ph.D., and Master’s programs.
GREVILLE MANAGEMENT Russia Business Watch
Greville Management Ltd London is the UK-based branch of the Greville Group, a consulting and investment group founded in 2002. Greville has offices in Moscow, Nicosia and London and plans to open offices in the U.S. by the end of 2011. Greville focuses on consulting, initializing and supporting investment projects in the finance, retail and real estate sectors of countries with transitional and emerging economies including Russia, Ukraine, Kazakhstan, and Belarus, based on a principal of the “whole cycle.” The company employs 100 permanent staff and profile experts in different areas of global economy, politics, law, philosophy, psychology, and other sciences as well as consultants from specialized firms.
With a 16-year success story in the Russian market, Kraft Foods proudly sells delicious products that are now part of the Russian culture: Carte Noir, Jacobs, Maxwell House, Côte d'Or, Alpen Gold, Toblerone, Jubilee, Cadbury, Barni, Halls, Dirol, and Stimorol. Kraft Foods is the leader in three market segments in Russia: chocolate confections, premium coffee and cookies. Kraft Foods has invested more than $800 million into the Russian economy, including more than $200 million over the last three years. Kraft Foods Rus’ LLC and Dirol Cadbury LLC presently employ almost 4,000 people and in 2010 had joint revenues in Russia in excess of $1 billion. Kraft Foods operates six production facilities in Russia, as well as a wide network of regional sales branches.
Summer 2011
KRAFT FOODS RUS LLC
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new members
• New USRBC Members • continued >
METLIFE With over 140 years of experience, the MetLife companies are a leading innovator and a recognized leader in protection planning and retirement and savings solutions around the world. MetLife has established a strong presence in over 60 countries through organic growth, acquisitions, joint ventures and other partnerships, and is strengthening its global brand by extending core products and competencies to markets around the world — an important driver of growth for the enterprise. UNITED TECHNOLOGIES CORPORATION United Technologies Corporation (UTC) is one of the most broadly invested foreign companies in Russia. The corporation participates in 25 joint projects with leading Russian industrial and aerospace companies and employs more than 3,500 Russian citizens in projects in the aerospace and building systems sectors. Based in Hartford, CT, UTC is a $42.7 billion company whose products include Carrier air conditioners, Hamilton Sundstrand aerospace systems, Otis elevators, Pratt & Whitney aircraft engines, UTC Fire and Security protection services, Sikorsky helicopters, and UTC power fuel cells. n
GOT THINK?
Russia Business Watch
Summer 2011
NationalInterest.org
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Ahmed Rashid Benny Morris Cato Skeptics Paul Pillar Jacob Heilbrunn Bruce Riedel Geoffrey Wheatcroft Anatol Lieven Kenneth Pollack & More!
Special Room Rates for USRBC Members at Marriott Hotels in Moscow Marriott is pleased to provide members of the U.S.-Russia Business Council with favourable room rates at Marriott Moscow Royal Aurora, Marriott Moscow Grand and Marriott Moscow Tverskaya hotels. With questions regarding this special room rates offer for members of the U.S.-Russia Business Council, please contact Marriott Moscow Cluster Reservations Department at reservation@marriott-moscow.ru or via phone +7 495 937 00 55.
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