Streetwise Professor

March 14, 2009

I Can’t Hear You Knocking

Filed under: Economics,Politics,Russia,Uncategorized — The Professor @ 11:49 am

The North-Wallis-Weingast book that expands their argument on the natural state, Violence and Social Orders, is now available.  One thing that caught my eye is their list of the “doorstep conditions” for a personalized, cartel-like natural state to transition to an “open order” free society.   The first such condition is the creation of an impersonal rule of law among the elites.  

Two news items make it abundantly clear that Russia hasn’t even made it past the front gate, let alone to the front door, let alone to knocking on it.  

The first is the battle between Mikhal Fridman’s Alpha Group (a key player in the BP-TNK holdup) and Norwegian telecom firm Telenor:

A Russian bailiff seized  Telenor ASA‘s 29.9 percent stake in  OAO VimpelCom, escalating a dispute between the biggest Nordic phone company and billionaire  Mikhail Fridman‘s Alfa Group.

The seizure is linked to a Siberian court decision from February that found Telenor liable for $1.7 billion in damages in a suit filed by Farimex Products Inc., Fornebu, Norway-based Telenor said in a statement today. The bailiff served its order to VimpelCom’s share registrar in Moscow.

The case is one of several court battles between Telenor and Alfa Group as they jockey for control of VimpelCom, Russia’s second-largest mobile company, and Ukraine’s ZAT Kyivstar GSM. Telenor said the move is a “retaliation” to a New York court decision yesterday that went against Alfa Group. The government of Norway, Telenor’s biggest shareholder, said the dispute is the “most pressing issue” in its relationship with Russia.

. . . .

Telenor said it found out about the seizure less than two hours after New York Federal Court Judge  Gerard E. Lynch  held Alfa Group companies Altimo, Alpren, Hardlake and Storm in  contempt  for a second time. Telenor said it hadn’t been formally notified about the seizure.

‘Another Escalation’

The measure “is yet another escalation of the attempts to steal our VimpelCom shares with the aid of Russian courts,”  Jan Edvard Thygesen, Telenor’s head of central and eastern Europe operations, said in a statement.

Reuters has more detail on the history of this dispute:

In the suit, tiny Vimpelcom shareholder Farimex said Telenor caused losses for Vimpelcom by delaying its purchase of Ukrainian mobile operator URS. A Siberian court in Omsk backed its claim and ruled Telenor should pay Vimpelcom compensation.

. . . .

British Virgin Islands-based Farimex owned 0.002 percent of Vimpelcom shares when it filed the suit in April 2008.

Telenor said its Vimpelcom board members opposed the 2005 URS purchase because URS was over-valued, had “no credible business plan” and because the deal lacked transparency.

“To date, the identity of the beneficial owners of the sellers of URS has not been disclosed,” Telenor said.

It said despite more than $600 million in investments by Vimpelcom in URS, the firm was still in the red at Dec. 31, 2008, and only had a 4 percent market share, according to information from telecoms market consultants AC&M.

. . . .

Telenor says Farimex is linked to Russian Alfa Group of billionaire Mikhail Fridman, with whom it has fought courtroom and boardroom battles in Vimpelcom and in co-owned Ukrainian mobile venture Kyivstar. Alfa denies any links to Farimex.

Chyorny rejected allegations that Farimex general director and owner Dmitry Fridman was Mikhail Fridman’s cousin.

“I have found no evidence confirming that these people are connected with each other in any way,” Chyorny said.

So, a Russian court has taken hostage Telenor’s stake in a company that is the target of one of the favored oligarchs in Russia, Mikhail Fridman.  This is to compel payment of a $1.7 billion dollar judgment levied by the court to penalize Telenor for its refusal to buy a money losing Ukrainian mobile operator with typically shady connections, in a lawsuit filed by another shady, opaque, offshore outfit with a plausible connection to Fridman. (Can you say “straw plaintiff”?  I knew you could.)  Note that the purchase of URS was only delayed, not stopped altogether.  Note further that the purchase price of the company was around $230 million, that Telenor has invested $600 million and seen only further losses and no business expansion (market share of URS is a paltry 4 percent of the Ukrainian market).  Just how do you get $1.7 billion in damages out of the delay of the purchase of a $200 million company that has lost money since it was eventually acquired?  (I guess Telenor should feel lucky.  Originally, a court in  Khanty-Mansiysk imposed a $2.8 billion judgment.  Wow.  The forum shopping opportunities across 11 time zones worth of corrupt and corruptable courts must be pretty amazing.)  

There’s more stuff on Reuters about a parallel battle between Telenor and Alfa:


Kyivstar — Ukraine’s largest mobile operator. Shareholders: Telenor (56.52 percent); Alfa company Storm (43.48 percent)

* On Wednesday the U.S. Federal Court for the Southern District of New York granted Telenor’s motion requesting that four Alfa Group companies be held in contempt of court for failing to obey U.S. arbitration court orders.

* Alfa Group’s telecoms arm Altimo said the rulings were “close to impossible” to fulfil, that its fines totalled $12 billion a year and accused Telenor of trying to gain control of its foreign assets.

* Telenor was forced to deconsolidate Kyivstar in 2007 due to “insufficient control” over the company. Storm has not shown up to shareholder meetings for most of the past four years.

* Storm boycotted the Kyivstar meetings because of a Ukrainian court-ordered injunction, triggered by a case brought forward by EC Venture, the Swiss company that sold its interest in Kyivstar minority owner Storm in 2004 and later sued Storm.

* The U.S. court believes the EC Venture-Storm case was friendly collusive litigation, a claim rejected by Alfa Group which maintains it has no control over EC Venture.

* The court said Alfa companies failed to deposit Kyivstar shares with the U.S. court and it ordered Alfa to pay daily fines of $100,000 from March 12, with the daily fee doubling every 30 days until they are no longer in contempt.

* The court ordered Alfa companies to secure the dismissal of EC Venture litigation in Ukraine by March 23 and imposed escalating fines in similar amounts if they fail to comply.

* Finally, the U.S. court again ordered Storm to sell its Kyivstar shares by March 23, or sell its shares in Kyivstar competitors in excess of 5 percent — such as Turkcell (TCELL.IS) and Ukrainian High Technologies.  

Further annals of the glories of Russian corporate governance and jurisprudence.  

This is just another example of “corporate raiding” a la Russe.  No impersonalized rule of law here.  Another example of a powerful, connected person using the Russian courts to steal assets.

Not that exploitation of the legal system doesn’t happen in the US.  Believe me, it does.  But such egregious, over the top, use of the courts is routine in Russia in a way not seen here.  Just a particularly flagrant example of how far Russia is from the doorstep.

The other story relates to the use of violence to enforce contracts and solve business disputes among putatively “legitimate” enterprises in Russia:

Alexander Antonov, a little-known Russian businessman survived an assassination attempt after he was shot in the head by a gunman in Moscow on Wednesday morning. Though the news hardly caused a stir in Moscow- relegated to the third page of most newspapers – it’s a powerful reminder that despite attempts to stamp out corruption, the country is still struggling to throw off a shadowy past.

Contract killings are far more prolific than the number reported in the media suggest, says Carlo Gallo, of Control Risk Group in London, who advises companies considering investing in Russia.

“Contract killings may have decreased in frequency since the 1990s and the day of wild capitalism, but they are still occurring regularly in Russia, though they rarely make the headlines,” he told Forbes. “Victims tend to be journalists operating at a local level or local administrators involved in handing out permits, or land allocation.”

Russia’s problem with corruption is widely acknowledged. President Dmitry Medvedev himself has pledged to stamp out the problem. (See  “Russia’s $120 Billion Elephant: Corruption.”)  

However, the problem remains, and the troubles in the court system mean that the normal legal routes for solving business disputes or battles over planning permission are rarely effective.

“The low level of reliability of the court system means that business players look for other methods of resolving dispute, and this can include violent methods,” said Gallo.

“The killings will continue as long as the shadowy side of the economy prevails,” says Elena Panfilova, director of Transparency International in Moscow. “It’s not at all good for the business climate and business community.”

A loss of business confidence is something Russia simply can’t afford at this stage. The Russian economy has already been severely dented, with the war with Georgia and a high profile dispute with BP hurting the enthusiasm of foreign investors, while its financial market was battered when hedge funds and western institutional investors withdrew billions of dollars. On top of that falling demand for oil and metals and dented the profits of some of the countries biggest energy firms and miners, forcing them to cut production and sending unemployment soaring.

Contract killings rarely directly involve foreign investors, says Gallo. “Victims are overwhelmingly Russia,” he said. “However it does underscore the need for serious due diligence by foreign investors thinking of entering deals with local partners, if nothing else but to preserve the brand name.”

Due diligence.  Ya think?  Or, maybe a full psychiatric examination would be a more appropriate recommendation for anybody thinking of entering deals with the locals.

If you need further convincing, check out this site.  There, you’ll find:

Bribe solicitation in  Russia  was most frequently extortionate in nature (63%), involving requests to secure the timely delivery of a service to which the reporter was already entitled (e.g., clearing customs, having a telephone line installed); to avoid some outcome or consequence harmful to the reporter or their business; or to secure payment for services already rendered. Bribe demands for gaining a personal or business advantage were less common, accounting for only 16%.

    Nature of Bribe Demands in Russia

    35%      Timely delivery of a service to which reporter entitled
    22%      Avoid harm to self or business interests
    21%      Other
    6%       Receive payment for services rendered
    6%       Inappropriate favorable treatment
    5%       Winning new business
    5%       Exercising influence with or  over another official



Bribe demands in  Russia  were predominantly for cash and generally for relatively small amounts of  US$1,000  or less, with the most common amount demanded falling between  US$20 and US$100. More than half (56%) of individuals reporting bribe demands were solicited by the same source more than once, with the most common frequency being two to five times.

“The relatively low dollar amount of these demands and their extortionate nature mean that they are all too often simply dismissed as the ‘cost of doing business.’ However, given their recurrence, these demands become a significant, cumulative toll on – and risk for – both large and small businesses operating in  Russia,” said Wrage.


Pay up “to avoid harm to self.”  Boy, that sounds enticing.

Three years ago I titled one of my first posts, about the legal risks of doing business in Russia, “A Fool and His Money.”  That still holds.  Legal nihilism is still the only rule of law in Russia.  As North et al argue, Russia will remain an economic and social backwater–and pariah–until that changes.

Print Friendly, PDF & Email


  1. Remember the thuggish extortion and murder in the East where a Chinese vessel was destroyed and eight of its crew killed? That incident beagan with the Russian purchaser of a cargo of rice attempting to “renegotiate” the price by claiming the rice was of inferior quality. The vessel was forbidden to leave port (hostage) but, left anyway and was attacked by the Russian Navy.

    Comment by Max — March 14, 2009 @ 1:33 pm

  2. There was another protest in Vladivostok with a thousand in attendance this weekend. Putin announced today with the revised budget he’ll spend $43 billion on social services. His worse nightmare as I see it is the pensioned babushkas turning on him.

    It’s getting pretty obvious the siloviki are becoming fearful that events will get out of control. They are reacting to events rather than controlling them at this point.

    Comment by penny — March 16, 2009 @ 1:02 pm

  3. Once an unknown British Islands-registered company, Farimex is now a key player in a drama starring Telenor and Altimo, Alfa Group’s telecoms unit. Surprisingly, the only character noticeably absent is VimpelCom itself, in which Altimo is also a shareholder with a 40 percent stake.

    “This is a test case for how serious the Russian government is in encouraging foreign investment in the post-crisis world,” said Roland Nash, head of research at Renaissance Capital.

    Melgaard of Telenor fear that the outcome would not be pretty. “At this point, a divorce is the best way out, in our minds,”

    Comment by Peter Olsen — March 25, 2009 @ 4:06 am

RSS feed for comments on this post. TrackBack URI

Leave a comment

Powered by WordPress