Russia’s commercial courts – the part of the legal system that is most relevant to investment risks – are subordinate to the Supreme Arbitrazh Court, chaired by Anton Ivanov, a close associate of President Medvedev. During Medvedev’s presidency, the court has handed down investor-friendly rulings with growing frequency and of increasing significance, while Ivanov himself provided discreet support for Telenor in its fight with Alfa over Vimpelcom in 2009. Most important, on the eve of Medvedev’s election in February 2008, the court asserted its right to establish binding precedents – a right confirmed by the Constitutional Court in January 2010.
In the past two years, many investors focused on the Russian market will have noted several high profile and controversial lawsuits that have ended in the Supreme Arbitrazh Court (SAC – Russia’s highest commercial court) upholding the rights of property owners and creditors, righting corporate governance wrongs and generally supporting the development of a competitive market economy. The latest example was in May 2010, when, as predicted in our March 2010 report Russian oil: The death knell for easy downstream profits, the SAC upheld a fine of Rb1.1 billion (US$38 million) imposed by the Federal Anti-Monopoly Service (FAS – Russia’s competition regulator) on TNK-BP for monopolistic pricing in various regional oil product markets.
In effect, this particular SAC decision drew a line under a series of lawsuits brought by the FAS against almost all Russia’s vertically integrated oil companies for abuse of dominant market positions. For all its positive implications for the Russian economy as a whole, the ruling may not have caused automatic rejoicing among portfolio investors since one other major listed company, LUKoil, faces the same outcome as TNK-BP (a cassation court has already ruled for FAS and against Lukoil). But other landmark SAC rulings under the chairmanship since 2005 of Anton Ivanov – and especially since Dmitry Medvedev’s rise to the presidency in 2008 – amount to an impressive track record of strengthening property rights. Ivanov and the young Dmitry Medvedev were classmates and star students at the Law Faculty of Leningrad (now St Petersburg) State University in the late 1980s before working together in a private law firm in St Petersburg in the 1990s (by which time Medvedev had already come into the orbit of Vladimir Putin, another Leningrad Law School alumnus).
The following rulings on individual cases and resolutions on points of law – adopted either in the SAC’s plenary sessions or by its inner core (or “presidium”) – give a sense of the scope and importance of the court’s activity from an investor’s perspective:
Most landmark SAC rulings in defence of property rights and sound corporate governance differ from the verdict against BasEl in that they strike down rather than uphold rulings of lower courts (“lower” in this context includes the final appeal instance known as the court of “cassation”, comprised of very senior judges). One such ruling – which doubtless would have caused investors to sit up and take notice of the usually rather low profile SAC – would have been that in the dispute over Vimpelcom between the major mobile phone operator’s principal shareholders, Alfa and Telenor, and the scandalous legal action brought by a surrogate of Alfa against its Norwegian partners.
In an August 2008 ruling that appeared to fly in the face of Russian company law’s clear limitations on the liability of minority shareholders, the court of first instance awarded damages against Telenor of US$2.8 billion. This huge sum was supposed to represent the profit foregone as a result of Telenor’s having held up an Alfa-inspired move by Vimpelcom into the fast-growing Ukrainian market (although the figure for the Ukrainian subsidiary’s profit used as a basis for this “calculation” was, in fact, a loss). The outrageous ruling was upheld at appeal, triggering the start of enforcement proceedings against Telenor which, if completed, would have resulted in Telenor’s being in effect expropriated (i.e., having to sell its entire 30 per cent stake in Vimpelcom to raise the funds to pay the awarded damages) – with disastrous results for Russia’s investment climate. Telenor went on to lodge a final “cassation” appeal in the Federal Arbitrazh Court for the West Siberian District. That cassation court repeatedly postponed its hearing on various technicalities.
In the same newspaper interview of June 2009 mentioned above, Ivanov was asked whether the SAC was “getting ready” to hear the Telenor case. Naturally, he declined to be drawn into any discussion of the substance of the case. But he did give a signal by stating his view that future amendments to company law should reduce the liability of minority shareholders and increase that of controlling shareholders. And he concluded by saying simply: “If the case reaches us, we will hear it.”
The case never did reach the SAC, as shortly afterwards Alfa and Telenor settled out of court by agreeing to merge both groups’ entire portfolios of telecom assets in Russia and Ukraine. It was widely assumed in the market that such a settlement had been Alfa’s aim all along and that the purpose of the litigation was simply to “soften up” Telenor ahead of that negotiation (as well as to counteract Telenor’s successful campaign in the US courts against Alfa over the latter’s spoiling tactics against Kievstar, the leading Ukrainian mobile phone operator controlled by Telenor). While that assumption is most probably correct, Ivanov’s public signal about the case must in our view have reinforced Alfa’s motivation to settle – and thereby avoid the situation in which, having already lost in the US courts, its victories in west Siberian courts were overturned by the SAC.
This conclusion about the contribution of the SAC to the satisfactory outcome of the Alfa-Telenor scandal is based mainly on what we believe is the safe assumption that there is more to Ivanov’s statement (re.: “If the case reaches us, we will hear it”) than meets the eye. To the Russian legal community, that apparently non-committal formula would have sounded heavily loaded. The reason for this is to be found in two cardinal features of the SAC’s action which, together, give the court’s various investor-friendly rulings much wider significance than mere local victories for the cause of property rights in specific disputes.
On the strength of this retroactive precedent power, the SAC ordered shortly after the 14 February 2008 resolution that a case involving Moscow electricity supplies be reopened. The negatively affected parties responded by taking their case to the Constitutional Court (the highest of all Russian courts) to challenge the constitutionality of the SAC’s asserted right to establish binding precedents with retrospective application. After a December 2009 plenary hearing on this petition, the Constitutional Court handed down its definitive ruling (“definitive” in the sense that it cannot be appealed) on 21 January 2010.
That ruling states unequivocally that the creation of precedents by the SAC does conform to Russia’s Basic Law. At the time, much attention was paid to some of the fine print in this Constitutional Court resolution that was less favourable to the SAC – in particular, various restrictions on the retrospective application of precedents established by the SAC. But what matters most here is the endorsement of the principle of precedent being introduced into the Russian legal system and everyday Russian legal practice. For good measure, the Constitutional Court instructed the federal parliament to give explicit definition to this precedent power by amending relevant legislation (the Arbitrazh Procedural Code).
Dmitry Lovryev, Partner at Monastyrsky, Zyuba, Stepanov & Partners, a Russian law firm
In the area of tax law, taxpayers rely on current court practice when deciding how and whether to pay. But various local courts can make different decisions on the similar issues of dispute. The same goes for other areas in which the law is ambiguous, such as property leases or the proper definition of a good-faith purchaser. The SAC’s precedent power has the effect of creating uniformity and predictability as can be seen from the following selection of three SAC decisions striking down the rulings of lower courts.
Example No. 1: IKEA
On 14 July 2009 the SAC Presidium upheld a petition by IKEA to overturn lower court rulings in favour of a toy retailer called Premier seeking compensation of around Rb50 million (US$1.7 million) after being evicted from an IKEA mall for non-payment of rent. Having paid for the fit-out of its own store before being evicted, Premier’s compensation claim was based on “unfounded gain” (Article 395 of the Civil Code) on the part of IKEA. The lower courts had agreed with Premier’s argument that its original preliminary lease agreement with IKEA was invalid because at the time of signature the mall was still under construction and IKEA was not yet its registered owner. The SAC ruling states bluntly that the lower court’s position on this point was “mistaken”. It further ruled that Article 395 is applicable only when the gain is monetary (rather than in kind – such as, in this case, a fitted-out retail space in a shopping mall). That ruling on the meaning and application of a whole article of the Civil Code now constitutes a precedent.
An interesting feature of this ruling is that the SAC did point to other grounds on which Premier might have a stronger case for compensation and duly sent the case back to the court of first instance to be re-heard from scratch.
Example No. 2: Severgazbank
This successful petitioner to the SAC in July 2009 was a regional commercial bank that had lost a case brought against it by the receiver of a bankrupt factory that had guaranteed a loan of Rb1 million (US$33,300) extended by the bank to a third party. When that original borrower defaulted, the factory honoured its guarantee (by paying the bank the Rb1 million plus interest) before itself becoming insolvent several months later. The lower courts had ruled that the guarantee was invalid because it was dated after the original maturity date of the loan. Once again, the SAC ruled that the lower courts had got it “wrong”. Charter 26 of the Civil Code states that a debt obligation does not lapse just because it was not honoured by an originally agreed date and that a valid obligation is therefore eligible to be guaranteed.
Example No. 3: Akai
In July 2008 Akai won a final victory in the SAC after a string of defeats in lower courts in its struggle to reverse a highly dubious decision dating back to 1992. At that time, bureaucrats at Russia’s Patent and Trademark Office had award the legal protection of the Akai consumer electronics trademark in Russia to a company called “Akai Universal Industries”, which had been registered in Hong Kong only one month before filing its application. Even given the confines of legal language, the SAC’s ruling contains scathing criticism of the behaviour of the lower courts and Patent Office officials.
The SAC’s successful assertion of the right to make law by precedent may be reckoned a “quiet revolution” in various senses. For one thing, without any political declaration or fanfare or without even prior legislation, the Russian legal system has shifted onto hybrid ground between the classic “Continental [European]” Roman Law approach (in which courts apply codified laws to every individual case) and the “Anglo-Saxon” style (in which judges rule in the light of both statute and precedent). In his public defence of this shift in March 2010, Anton Ivanov reminded his audience that binding precedent had become part of Russian legal practice as long ago as the late Tsarist period. But his main arguments were based on contemporary principle and practice. The kernel of precedent can be found in post-Soviet Russia’s constitution – specifically the right given to the Constitutional Court to interpret the constitution with binding effect on the other branches of power and the citizenry. So the Constitutional Court really had no choice but to rule (as it did in January 2010) that similarly the SAC has the power to interpret civil law, which is typically drafted in very general and abstract terms.
More important still, in our view, is the profoundly positive impact that the expansion of precedents governing commercial court rulings will have on business practices and risks in Russia. Over time, it will reduce the key risk for investors and entrepreneurs of abusive rulings handed down by corrupt or incompetent judges in the lower courts.
In practice, as Ivanov has admitted, this constrains judicial independence. But the track record of Russia’s judges is so far from true independence as to make this seem an attractive shift from dependence on inadequate qualifications and external (corrupt) pressure to dependence on the conclusions of the highly experienced lawyers in the SAC about how the law should be applied. The obligation of commercial court judges throughout Russia to apply precedents established by the SAC looks all the more welcome in the light of the case histories highlighted by our trusted source, which exemplify the SAC’s systematic defence of contractual obligations.
The impact of precedent law will extend far beyond the courts by influencing in advance (i.e., before disputes and consequent litigation) the behaviour and decisions of economic agents. This is especially true as regards taxation – that is, taxpayers’ optimization strategies versus the enforcement efforts of the Tax Service. To return to the recent headline-grabbing SAC ruling in favour of the FAS (the competition regulator) and against TNK-BP on oil product pricing, a lower court has already handed down a similar ruling against LUKoil, while Rosneft has indicated that it will not wait for the next court ruling but settle with the FAS without further ado.
The obvious risk lurking in this broadly positive picture is SAC abuse of what amounts to an encroachment onto the territory of the legislature – moreover, one that lacks the democratic accountability of parliament to voters. This question, long familiar in the US, is a new one for Russia. Once again, Ivanov was quick to offer an answer by suggesting that (senior) judicial appointments in Russia are controlled by elected officials and that in any case the judicial branch is a tender young shoot in Russia’s political culture and needs to be strengthened.
Those are reasonable points, but the reality is that the establishment of precedent has given Medvedev and his old friend Ivanov a new instrument of personal power which, though inconspicuous (or perhaps despite being inconspicuous), has the potential over time to bring about great changes. From this perspective, civil law and the arbitrazh court system is the arena in which Medvedev is developing to a significant extent his own power base independent of his mentor, Vladimir Putin.
The most obvious counter-argument against this risk factor is that Medvedev and Ivanov will not abuse this power because they want to use it for the common good – that is, they are committed to the rule of law. In fact, Ivanov has promoted transparency within the arbitrazh courts by requiring all rulings to be posted on the internet and judges to disclose all approaches and representations they receive from parties interested in a case they are hearing. The problem with this argument is that politicians (and even senior judges) come and go, so the “nice guy” defence is unreliable.
A stronger argument is that the political risk inherent in the emergence of precedent law does not add to the existing risk whereby the “Kremlin”, however committed it may be in principle to the rule of law and judicial independence, can always press the override button and influence a court decision for the sake of some paramount interest. But at the same time, precedent law will gradually reduce the risk of abusive rulings in the lower courts. This must be reckoned a net reduction of risk.
Download PDF