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