Misimplementation

Similar to misinvestment, misimplementation is a small category in terms of the number of separate disputes covered by the newspaper. There were 4 instances of this dispute affecting 4 organisations in 1998 versus 3 cases (3 organisations) reported in 2006. However, these disputes had a much larger impact than misinvestment disputes because of the amount of coverage received (see graph 4.11). Clearly, 2006 stands out in this regard suggesting that failure to implement viable investment projects was a prominent feature in forming investment perception in the latter year of the investigation.

Graph 4.11: Misimplementation Disputes

In 1998 there were a variety of reasons behind the failure to implement viable investment projects. Among such reasons were political differences between key individuals seeking to form a joint venture, failure to negotiate mutually acceptable terms of partnership and value destroying actions by a partner. Examples of such corporate conflicts reported in 1998 are further detailed below:

A joint venture between Sibneft and Yukos (Yuksi) was postponed and eventually terminated because of political differences among top management (namely Berezovsky who was politically active and Khodorkovsky who preferred to keep a low political profile) (Yukos).

Page 111

Tax and wage arrears, fight for control and ownership at Vyborg Paper resulted in a failure to implement what otherwise would have been a viable project. The property was eventually re-nationalized (Vyborg Paper Mill).

Most-Bank alleged serious abuses on the part of Uneximbank calling for government regulators to investigate the matter. Uneximbank, however, argued that the operations of United Card Service (joint venture) had been audited by Price Waterhouse who did not uncover anything suspicious. Most-Bank pulled out of the venture citing unwillingness to accept responsibility for the gross misconduct on the part of the joint venture partner (Most Bank).

Many questioned legitimacy of Prosystem GmbH‘s stake in Kuznetsky Mine even though the actual sale had taken place. There were efforts to reverse privatisation. Those were probably linked to the fact that the mine stood a good chance of returning to profitability after a major revamp by the foreign investor. It is possible that the local administration and other parties were interested in gaining control over the mine and used the political context as a pretext for their self-centred actions. The foreign investor failed to find a compromise with the local stakeholders (Kuznetsky Mine).

In 2006 two cases of corporate disputes were arguably caused by a failure to reach a compromise with powerful stakeholders who eventually intervened with the goal of redistributing the property. The third case of a failed merger bid was evidently caused by a lack of managerial competence. Key aspects of these disputes pertaining to 2006 are presented below:

In a conflict with Shell, the Russian government made full use of the Natural Resources Ministry and its powers to revoke licenses. In general it is extremely difficult not to violate environmental rules in the process of oil and gas extraction, particularly if you are forced to use local subcontractors which one has little control over. Clearly, based on a technicality in the point of law, the Russian government had the right to revoke licenses and some violations probably did take place (this made it possible for the government to attack the Production Sharing Agreement⁵⁵ which offered a great deal of protection to foreign partners). Additionally, Shell annoyed the government by increasing the costs of the project. This meant a longer wait for the government before it was to get any returns from the agreement (Shell).

55 Production Sharing Agreements were designed in the 1990s to protect major investors from the unstable legislative environment in Russia. As a rule, such agreements nominated a foreign court (usually Stockholm Arbitration Court) as an arbitrator.

Page 112

The European shareholders did not welcome Mordoshov‘s (Severstal) bid because they suspected foul play on the part of the unknown Russian businessman. Also, it was very easy for the competitors for Arcelor‘s assets (Mittal) to play the corruption card, i.e. a rich Russian who was not doing a great deal to introduce himself to shareholders, was a bit of a dark horse, and therefore was very likely to be/have been connected to the criminal underworld (Severstal).

A well-connected local business group used fire violation (this aspect of Russian legislation is very vague) to put IKEA at a disadvantage ahead of a busy trading period. It was also very possible that the business group had more fundamental plans to do with the permanent closure of the mall. In these circumstances, based on the previous experience where the company invested in the infrastructure, IKEA had no choice but to negotiate a common solution with the stakeholders involved. The courts here were clearly used as an instrument at the disposal of the influential local parties. Had IKEA maintained good relationships with the power structures in the region, the assault would probably not have taken place (IKEA).

2.1.4.1 Implications for the Rule of Law with Reference to Misimplementation Disputes

Despite the fact that the number of corporate disputes within this category fell by one instance, increased coverage in 2006 has had a negative impact on the perception of how easy it is to implement viable investment projects in Russia⁵⁶. A more advanced stage of Russia‘s transition has not led to a more balanced relationship with key stakeholders. This situation was probably caused by a conflict of interests arising as a consequence of highly discounted sales of the past⁵⁷. Under new economic conditions these discounted sales became politically prohibitive and a failure to renegotiate claims has led to the government-assisted redistribution of property. From an optimistic view point this could be interpreted as a fix in the very foundation of the Russian corporate environment, nevertheless, on the surface investor perception has suffered a great deal from the well-published examples of crude interference in the business processes.

56 Actions of influential stakeholders will be considered in more detail in the subsequent sections dedicated to the analysis of enforcement strategies.

57 The period in question started when Russia began its transition from command to market economy.

Page 113