[A version of this article appeared in the East/West Executive Guide, Vol. No. 9, January 31, 1999.]

 

<Side bar:

 

In the view of some, the Russian financial crash was triggered in part by the Asian financial crisis and the resulting nervousness of fund managers, but it also had its own significant indigenous factors.  What is unique about the situation in Russia is the role that the U.S. and Western governments (and multinational institutions) had in advising the Russian government on its transition from communism to "reform" and the prominence of American professionals and investors in the Russian economy.  Although per capita foreign direct investment in Russia has been low compared to countries like Poland and China, Americans were among the leading foreign investors in Russia.>

 

BUSINESS LOSSES IN RUSSIA: THE INEVITABLE

SEARCH FOR ACCOUNTABILITY AND DEEP POCKETS

 

Ethan S. Burger, Member, Ludwig & Robinson, P.L.L.C.

Joe R. Reeder, Partner, Greenberg & Traurig LLP

Steven M. Schneebaum, Partner, Patton Boggs LLP

Geoffrey K. James, Assistant General Counsel, USI Net,[1]

I.          Introduction

            Not so long ago, business was bullish on Russia.[2]  Moscow was experiencing a construction boom driven by multinationals and local entrepreneurs demanding office space.  In 1996, the Russian stock market was up about 120%[3];  it continued to climb in the first quarter of 1997.  Foreign mutual funds specializing in Russia were among the best performers.  Returns on Russian state bonds (GKOs)[4] routinely exceeded 100%.   Overall, Russia was a hot emerging market.[5]

            Long-held hopes about Russia nourished this dynamic, notwithstanding considerable evidence that the country had yet to establish the rule of law, a critical prerequisite for any state to become a true market economy.  The end of Communism, inexhaustible and ready-to-be-tapped natural resources, a well-educated population, and seemingly insatiable consumer demand for western products suggested a market primed for foreign commerce and ready to generate endless profits for investors. 

            By mid-1997, however, Russia was already showing signs of political gridlock and economic stagnation.  The anticipated boom could not be sustained for several reasons:  a continuing lack of political leadership;  absence of consensus on fundamental issues of land ownership, federalism, and protection of domestic industry; and, most critically, the government's chronic inability to collect tax revenues.[6] Collecting taxes in Russia was as much a bureaucratic complexity as it was a burden on cash-strained entities.  An example of bureaucracy can be found in some of the oil companies who have to pay taxes to as many or more than 30 different tax officials, ranging from local municipal authorities to national authorities.

            The events of August 17, 1998 demonstrated to the West that the weaknesses of Russia's economy are structural.  On that day, the Russian government devalued the ruble, defaulted on part of its debt, and ordered a 90-day moratorium on foreign debt payments.  When account-holders predictably, immediately, and en masse withdrew their funds, Russian bank liquidity evaporated.

            Further, the value of GKOs, which represented a major portion of bank portfolios, was wiped out overnight.  Compounding the problem “were forward contracts ... into which Russian banks had entered with their Western counterparts.  Because GKOs are denominated in rubles, foreign banks sought to protect themselves against the risk of a currency devaluation by buying forward a ruble-dollar rate which would protect them....  Unfortunately, the ruble fell so far that Russian banks have been unable to pay off the forward contracts....”[7]  By the end of the year, in fact, the ruble had plummeted from 6 to 21 to the dollar.  The value of Russian equity inevitably fell with it.[8]

            Skeptics[9] who previously had warned of pervasive corruption,[10] capital flight,[11] lack of regulatory enforcement, hidden unemployment, and declining industrial production, only to be branded anti-Russian "Cassandras,"[12] were proved correct.  It is safe to say that, in light of the arctic post-August 17 economic climate, future skepticism will not be ignored so readily.

            Nonetheless, Russia's 1998 market crash presents to Western companies and investors two types of opportunities, one to address losses suffered, the other to seek future profits.  Despite the current state of the Russian economy,  there will continue to be occasions for trade and investment.  But the events in Russia in 1998 should have made it all too apparent that rigorous commercial and legal due diligence, this time performed by knowledgeable and experienced professionals before entering that market, is imperative.  Lower domestic costs (e.g., for labor, machinery, property), and a chastened psychology on the part of Russians as well as Western investors, may be additional intangible benefits arising out of Russia's economic crisis.

            Retrospectively, however, there remains unresolved the question of accountability on the part of the advisors to Western business executives who suffered enormous losses:  the lawyers, accountants, and consultants from whom the investors had sought advice before venturing into the post-Communist Russian market.  Is there a theory of liability under which traditional avenues for recovery -- litigation, arbitration,  mediation -- might mitigate the financial injuries suffered in Russia? 

 

II.          The Scope of the Damage

 

            The Institute for Economic Analysis in Washington estimates at $70 billion the overall losses on GKOs held by foreign and Russian investors.  The European Bank for Reconstruction and Development (EBRD) in London projects at $169.50 million its own losses in Russia for the first nine months of 1998.[13]  Estimates of American pre-tax commercial and investment banking losses arising from activities in Russia exceed $1 billion.[14]

            Anecdotal evidence suggests that only the most savvy and, perhaps, the best politically connected, escaped unscathed.  Goldman Sachs, which played a prominent role in helping Russia to develop its bond market and to borrow billions from foreign investors, successfully protected itself by closing out its positions, worth hundreds of millions, just prior to the collapse of the ruble on August 17.[15]

            Yet as late as July 1998, Goldman Sachs arranged a $6.4 billion bond swap, a transaction the firm touted to clients by buying ruble-denominated securities.  It reportedly collected a $56 million fee.[16]  The many investors who lost money on that deal, which closed just a month before the August 17 debacle, can be forgiven if they wish to scrutinize Goldman Sachs's disclosures carefully for misrepresentations and omissions relative to the true nature of the investment risk.        

            Also of interest is the story of the $200 million lost on GKOs by a fund manager from Texas named Dana McGinnis.[17]  He had invested after being shown the equivalent of a Potemkin Village[18], beginning with a whirlwind, Morgan Stanley-sponsored visit to Moscow in late 1994.  To the detriment of his investors, more than 100 of whom had invested a minimum of $1 million each in his hedge fund, he apparently failed to keep himself apprised of economic and financial developments in Russia and has since filed for Chapter 11 bankruptcy protection.  A week later, III Offshore Advisers decided to liquidate a $450 million fund, largely due to losses suffered in Russia.  But the MORE common story was George Soros, whose Quantum Fund lost close to $2 billion dollars betting on GKOs.[19]       

            Direct foreign investment also took a hit.  In a September 1998 survey of its members by the American Chamber of Commerce in Russia (AmCham), 72% of the respondents stated that, as a result of bank restructuring and other actions by the Russian government in connection with August 17, their funds had become inaccessible.  In addition, 58% reported non-payment of receivables;   the same number indicated a decline in demand for their products or services;  28% reported the full or partial collapse of their distribution network;  and 36% were forced by the crisis to delay payments to their own creditors.[20]  In a follow-up survey by AmCham, the 50 businesses responding estimated their losses, in the aggregate, at $500 million.[21]   

            To be sure, some companies did insure themselves against commercial risk.  But more often than not — particularly in cases of large-scale direct investment using project finance — companies limited coverage to political risk insurance from OPIC, the Multilateral Investment Guarantee Agency (MIGA),  Ex-Im Bank, or private insurers, only to suffer commercial losses outside the scope of their policies.

 

 

III.         What Gave Rise To Such Losses?

            When Russia still looked bright, Western executives and investors concerned themselves primarily with issues of market penetration and returns on investment, and generally believed that asset value and market potential justified the risks involved.  Mundane matters like the financial and ethical reliability of joint-venture partners or the commercial viability of acquisition targets and customers often were glossed over.

            Frequently, Western businesspeople relied on information supplied by Russian enterprises, but prepared by Western accounting firms, for decisions on whether to enter a joint venture or licensing deal.  When Western accountants gave their imprimatur to the representations made by a potential Russian partner, the information frequently failed to disclose fully such details as the quality of the Russian enterprise's accounts receivable or the insolvency of its own customers.  Further complicating the situation was an effectively demonetarized Russian economy, in which 46% of transactions were barter, 32% were based on promissory notes, and only 25% resulted in an exchange of currency.[22]

            Enthusiasm was fueled, too, by the political rhetoric emanating from Western capitals and international financial organizations.  The IMF, World Bank, and EBRD, each for its own institutional reasons, tended to emphasize opportunities while downplaying risks.  World Bank Group President James Wolfensohn, for example, who spoke of  "drastically" improved results in Russia, was highly confident:  the Bank, he said, intended to make available "real financial resources" for a "real commitment" to Russia.[23]

            The West in general believed that Russian President Boris Yeltsin would guarantee political and macroeconomic stability, even as foreign investment transformed the country.  The consensus was that the institutions and attitudes necessary for a viable economy and civil society would spring up spontaneously in Russia, if only the country had a stable ruble and low inflation.[24]   

            Western investors who suffered serious losses in Russia are likely to start asking some questions of the most basic sort.  Satisfactory answers to such questions as these are potentially embarrassing, but will  be decisive in determining whether, and how, an investor should consider proceeding with any loss-recovery effort. 

 

·        What was the process by which the decision was made to invest in a country with a weak, inconsistent, or non-existent record of regulatory enforcement, particularly in areas like taxes and customs duties?

 

·        What was the extent of decision makers' and their advisors' knowledge of the uncertainties surrounding Russia's legal and business environment, particularly with regard to frequently changing laws, uncertain regulatory enforcement, and regional differences?

 

·        On what facts did the investor rely in evaluating the financial health of the proposed Russian joint venture partner, customer, bank, or securities broker?

 

·        Was the Western investor aware, before committing itself, both of the remedies available in the event of a default and of the procedural and practical hurdles in the way of pursuing those remedies?

 

·        To what extent did the Western company make its own assessment of the expertise of the attorneys, accountants, and consultants guiding them in their transactions?

 

·        To what extent did attorneys, accountants and/or advisors induce their clients to believe in the stability of the legal and business environment in Russia, and to what extent did they conceal actual or constructive knowledge of the extent of corruption there?

 

·        What was the understanding of the applicable standard of care as to the professional advice and business judgment of management?

 

·        What records does the Western investor have of specific representations made to it concerning the risks posed by their deal?

IV.  Where To From Here?

            Western companies, banks, and investors have been evaluating what went wrong, and are considering their futures in the Russian market.  In some instances, companies have withdrawn from Russia entirely.  Others are rigorously reassessing objectives, the means required to achieve them, and the current economic, political, and legal realities.  

            Regardless of what companies choose to do or not to do in Russia in the future, however, they, their shareholders, fund managers, and bankers will be reluctant simply to shrug off the losses already incurred if there is a reasonable likelihood of a full or partial recovery.  Depending on the facts of each case, the attorneys, accountants, and business consultants who played a role in commercial or investment transactions in Russia may find themselves held to account for failing to meet the requisite standard of care.[25]

            In principle, clients in the West who, either directly or indirectly, paid the fees, had every reasonable expectation of obtaining legal and accounting professional services conforming to a Western standard of care.  In reality, however, many professionals offering advice on business activity in Russia were either Western attorneys with a dearth of expertise in Russian law  — not a surprising phenomenon, given the profound changes in the Russian legal system in the early 1990's[26] — or local talent whose chief asset was often proficiency in English, but who had only a weak understanding of Western legal and business concepts and, therefore, of their clients' needs.[27]

            Dispute resolution clauses contained in contracts accepted by Western investors offer an example of the intricacies with the potential to cause serious mischief.  Under Article IX of Russia's 1993 Law On International Commercial Arbitration, a party is presumptively entitled to conservatory measures (injunctive relief) from a Russian court even where the parties had agreed by contract to resolve disputes through international arbitration.  Neither the Civil Procedure Code nor the Arbitration Procedure Code, however, confers authority on the Russian courts to grant conservatory measures unless they have jurisdiction over the entire case. 

            Companies owed significant sums may choose to pursue their remedies for losses in Russia aggressively by way of claims brought in local courts or, if the contract permits, before an international arbitral tribunal.[28]   There are considerable obstacles, however, to enforcing a judgment or arbitral award.[29]  Where the defendant-debtor is a Russian company or bank, it is likely to be insolvent, albeit sometimes with assets tucked away offshore or transferred to hard-to-reach subsidiaries.

            Lehman Brothers' early and quick success in getting the British High Court to freeze Inkombank[30] and Uneximbank assets in the U.K. pending resolution of a dispute over a default on forward contracts and swaps was a rare exception to the general rule.[31]  Although there probably are substantial Russian assets overseas, and while more banks are reported to be ready to take legal action against them,[32] one may assume that, by this time, any potentially exposed assets either have already been seized or, more probably, have been stashed in some other, even less accessible, place. 

            Seeking means of recouping at least some of what investors lost will result in one of several scenarios being played out.  The underlying legal theories in each case would be based in the conventional contracts-negligence-fraud paradigm, depending on what the facts warranted.

            Scenario I involves claimants with losses from commercial operations in Russia who are not interested in remaining in the market, and who, therefore, face no political impediment to filing suit against a Russian entity for its default on a contract.  The existence and known location of assets to satisfy a judgment are obvious prerequisites to bringing a useful claim, whether in Russia or in the West. 

            Scenario II concerns claimants who may have suffered losses in Russia, but who nonetheless see a long-term future there.  They do not want to burn bridges to Russian customers or joint venturers, and want to preserve their ties to attorneys, accountants, and consultants.  They may also fear the consequences of certain facts' becoming public in the course of litigation, as well as the legal uncertainties surrounding the applicable standard of care, as well as questions of governing law, venue, and jurisdiction.    

            Scenario III involves claimants with either operations or investment losses in Russia who intend to continue doing business there, and/or who know from the outset that their Russian defendant is in no position to pay a judgment.  Rather than pursuing their claims in a cumbersome and unpredictable Russian court system, with no real prospect of recovery in any event, they will explore the possibility that their attorneys, accountants, and/or consultants may be found liable in a Western court on a negligence theory, i.e., for malpractice and for failure to provide adequate warnings as to the real risks of their investment in Russia.[33]  

            In Scenario IV, an investor — who invested directly or as a shareholder of a Western company doing business in Russia — pursues company management, which, in turn, looks to hold the professional advisors liable, via third-party claims, for their respective failures to meet the standard of care.  Buyers of American Depository Receipts (ADRs),[34] for example, may have claims against accountants for their representations in statements to the SEC regarding the financial health of a security's issuer, or for any other report upon which they could anticipate that an investor would rely.  In the case of banks and pension funds, there may also have been breaches of by-laws forbidding ownership of foreign equity on the basis of ADR-like documents. 

            Claimants of the type described in Scenario I will pursue their partners in the normal way, through the courts of whatever jurisdiction in which they can find valuable assets.  Claimants in Scenario II may prefer mediation, in order to obtain at least some relief while avoiding (or at least reducing) embarrassment and the risk of harming later opportunities.  But those described in Scenarios III and IV may have rights to pursue causes of action that have heretofore received little attention.

 

V.        Mediation May Be the Most Effective Solution in Certain Cases

 

            In light of the time and expense that litigation and even arbitration represent, mediation — a potentially quick, discreet, "win/win" process in which an independent third party helps the disputants to negotiate a compromise agreement to resolve their differences — may offer a viable alternative.[35]  Mediation differs from, and in this way is superior to, adjudication and arbitration, in that, unlike a judge or arbitrator, the mediator does not impose a resolution on the parties.  The parties themselves, on the strength of their own chosen willingness to be flexible and a presumably clear-eyed assessment of long-term objectives, craft the outcome to their dispute.[36]  It also is less disruptive both to commercial relationships and business operations.

            Mediation is particularly appropriate where the parties have commercial and professional relationships they want to protect from the fall-out of legal combat.  Where a multinational uses the same accounting firm all over the globe, it will be reluctant to destroy a possibly long-standing relationship solely on the basis of substandard services that may have been rendered in Russia.   The risk that compromising, confidential information may be leaked is an additional incentive for not litigating against the company's  lawyers, accountants, or consultants. 

            Of course even where mediation is the dispute resolution method of choice, a thorough factual investigation, and possibly the initiation of a lawsuit, may be unavoidable.  Attorneys, accountants, securities issuers/dealers, fund managers and other professionals with malpractice exposure may be prepared to enter seriously into any mediation effort only when faced with a comprehensive assessment of their potential liabilities.

 

VI.        What Would a Claim Against Professionals Look Like?

 

            Negligence and fraud claims against professionals who provided advice on investment in Russia which did not satisfy the applicable standard of care, if brought in the U.S., benefit from familiar judicial and procedural protections.  In addition, United States law presents the additional advantage of containing a better-stocked legal arsenal, including federal and state statutes as well as common law principles.

            Claimants alleging misrepresentations or omissions in registration statements and prospectuses, for example, can look to 15 U.S.C. § 77k, which essentially holds accountants (among others) strictly liable, subject to the twin caveats that the plaintiff must be able to show the materiality of any misstatement or omission, and that the defendant be unable to demonstrate that the decline in stock value was unrelated to it.[37]  Plaintiffs need not establish scienter on the part of the defendant; a material misstatement or omission suffices.[38]

            Should the facts warrant it, a plaintiff may also look to 15 U.S.C. § 78j (and 17 C.F.R. § 240.10b-5), although these do require either actual knowledge of material falsity combined with an intent to deceive investors, or such recklessness that the intent to deceive may be inferred, as well as the plaintiff's reliance.[39]  Statements in annual reports or no-default letters could fall under this section.

            Common-law negligent misrepresentation theories offer another route to potential recovery from financial advisors and accountants.  Where the professional has breached his duty of care through common-law negligence, he is liable.  The plaintiff in such a scenario has to prove that there was a breach of the duty of care, and that the breach caused injury.  In the event of a shareholder's claim, privity or a relationship approaching privity must be shown.[40] 

            Nonetheless, while it is clear that any agreement for routine accounting services implies that the accountant will at a minimum meet his professional standard of care, the proceedings perk up considerably in instances where an accountant can be deemed to have assumed a fiduciary obligation vis-à-vis his client.  Facts that may trigger such a heightened duty include the providing of investment advice, recommendations for complex financial transactions, structuring deals, and performing audits.[41]

 

VII.       The Nature of the Professional Who May Now Be Liable

 

            If Western investors in Russia were blindsided by the apparently sudden downturn in fortunes there, this occurred at least in part because of the attitude of some that "business is business," and that the intricate nuances of a place like Russia were only secondarily, if at all, important.[42] The precipitous and sometimes even cavalier  manner in which some Western investors and companies leaped into the Russian market is reflected in the scanty qualifications of the purported  professional "experts"[43] they chose to guide them.[44]  

            Many Western professionals — lawyers, accountants and consultants — claiming an expertise in Russia came in three varieties: (i) area studies specialists and Russian-born individuals living in the West, with a close knowledge of Russian culture but often with little business experience;  (ii) experienced international business types who simply saw Russia and the surrounding countries as the next promising market to be exploited;[45] and (iii) ambitious and aggressive "Young Turks," without many years of relevant experience, who, perceiving favorable market conditions and casual management oversight, advanced projects — and took on substantial risks — often without the vitally necessary due diligence.

            The excitement, even the frenzy, of being involved in the transformation of post-Communist Russia, along with frequently generous expatriate benefits packages, brought an initial rush in the early to mid-90's of Western professionals to Russia seeking a special niche.  It is safe to say, however, that they hardly could be deemed experts on Russia notwithstanding their routinely holding themselves out as such.  Without real expertise in local customs, practices, and laws, then, and without a Western pool of qualified, legitimate experts on whom to rely, Western investors frequently were rolling the dice.  And it should come as a surprise to no one with experience that in Russia, as in most cases in which gamblers play the game without adequate preparation, the house always wins.

*   *   *   *   *   *


[1] Mr. Burger has been advising clients on corporate and commercial matters in Russia and Ukraine, since the demise of the Soviet Union.  He is a trained mediator and serves as an arbitrator for the D.C. Bar's Attorney/Client Arbitration Board.

 

Mr. Reeder, former Undersecretary of the Army and Chairman of the Board, Panama Canal Commission (1993-1997), specializes in professional liability law and related complex litigation.

 

Mr. Schneebaum is an international law and litigation partner at Patton Boggs LLP.  He is on the adjunct faculty of both George Washington University School of Law and Johns Hopkins School for Advanced International Studies.

 

Mr. James is an international transactional lawyer and a securities litigator who previously worked as a Vice President in trading companies that sold products to the Soviet Union.

 

[2]See, e.g., CNN Financial Network, "Russian rally expected," www.cnnfn.com/markets/9612/04/russia; and  Alexander Elder, "Rubles to Dollars: Making Money on Russia's Exploding Financial Frontier" (New York: Institute of Finance, 1998).

 

[3] It is worth noting that most Russian stocks trade over-the-counter (not in a stock market forum).  The Russian method of registration of stock ownership is perhaps one of the most worrisome stages of settling the buying or selling of Russian securities, especially equities. 

 

The actual rates of return in the Russian Stock Market for 1996 (from January 9 to December 31, not annualized, denominated in dollars), was:

 

-          Moscow Stock Exchange ASP Moscow Times Index <ASPMT> 164.0144%

-          Moscow Stock Exchange ASP General Index <ASPGEN> -- 164.0144%

-          CS First Boston Russian Stock Market Index <ROS> -- 127.5796%

-          Russian Trading System Index <RTSI> -- 129.5363%

 

In the first quarter of 1997, the Russian stock market climbed another 49.84%.

 

[4] Gosudarstvennyie Kratkosrochnyie Obligatsii, or State Short-Term Obligations.  GKOs were nicknamed “Gekkos” bearing the same unfortunate name as the greedy Michael Douglas character in Oliver Stone’s film “Wall Street.”

 

[5] See, Kirsten Vance, "Banking on Russia's Mutual Funds," Russia Review, November 17, 1997, Vol. 4, No. 22, p. 8;  Gary Peach, "Investing in Russia in 1998," Russia Review, January 30, 1998, Vol. 5, No. 1, p. 14.

 

[6] Moody's made the same point in slightly more circumspect language, citing "political instability, continued economic depression, and an inhospitable socio-juridical environment."  "Moody's Report on the Russian Economy," June 1997; www.iep.doc.gov/bisnis/country/rusmoody.htm.

 

[7] Garrett Pettingell, "Banking in Post-Crisis Russia," AmCham Newsletter, November-December 1998.

 

[8] "What Went Wrong?"  Special Crisis Report, Russia Review, Vol. 5, No. 17 (September 25, 1998).

 

[9] Most prescient were those who cited the difficulties of transforming Russia into a functioning market economy.  Clifford G. Gaddy (Brookings Institution), Barry W. Ickes (Penn State University), David J. Kramer (Carnegie Endowment), and Marshall I. Goldman (Harvard University/Russian Research Center) have been consistently  skeptical about Russian economic reform and the wisdom of U.S. support for it.  See, Gaddy and Ickes, "Russia's Virtual Economy," Foreign Affairs, September/October 1998;  Goldman, "Lost Opportunity-- What Has Made Economic Reform So Difficult" (New York: W. W. Norton, 1994; paperback, New York: W. W. Norton, 1996); and Kramer, "Dubious Deals with Gazprom," Washington Post, November 25, 1997.

 

[10] Stephen Handelman, “Comrade Criminal: Russia’s New Mafia”, (New Haven: Yale University Press, 1995), Kinnerton Research Center, "Don't Play Corruption Game," AmCham Newsletter, January-February 1998, http://www.amcham.ru/news21/7.htm;  V. Radayev, "On the Role of Force in Russian Business Relationships,"  Voprosy Ekonomiki, No. 19, October 1998.

 

[11] See, Lawrence H. Summers, Presentation to US-Russia Business Council, Russia Business Watch, Vol. 5, No. 2, September 1997.

 

[12] See, M. McFaul, "The Sky Is Not Falling," Washington Post, May 19, 1998.

 

[13] "Russian Economic and Financial Developments For Week Ending September 11, 1998," issued by U.S. Embassy, Moscow.

 

[14] "Russia Turmoil Hits Banks," CNN Financial Network, September 3, 1998, http://www.cnnfn.com/markets/9809/03/banks.

 

[15] Joseph Kahn and Timothy L. O'Brien, "Easy Money: A Special Report; For Russia and Its U.S. Bankers, Match Wasn't Made in Heaven," New York Times, October 18, 1998.

 

[16] Id.

 

[17] See S. Mueson and D. Hoffman, "Russian Crash Shows Risks of Globalization; Speculators Ignored Economy's Realities," Washington Post, November 8, 1998.

 

[18] In 1787, the Empress Catherine II of Russia undertook a tour of southern Russia. Having claimed far greater development successes in the region that he could actually demonstrate, Count Grigory Potemkin set about to deceive the Empress.

 

Potemkin's energetic staff created mobile facades for a peasant village.  As soon as the Empress passed by, the Potemkin staff would dismantle the "village" and race to set it up again on a site further along on her itinerary.

 

Coincidentally, the current Chairman of the Moscow Interbank Currency Exchange (MICEX) is Alexander Ivanovich Potemkin.

 

[19] Chrystia Freeland, “Idle Speculation”, The New Republic, February 8, 1999.

 

[20] U.S. Department of Commerce, Business Information Service For the NIS, http://www.iep.doc.gov/bisnis/country/amcham2.htm.

 

[21] See A&M Logos International, Inc., Expert, Vol. 1, No. 4, 1998.

 

[22] Grigorii Yavlinksy, Interview, Russia Business Watch, Vol. 5, No. 3, Summer/Fall 1997.

 

[23] James Wolfensohn, at 6th Annual U.S.-Russian Trade & Investment Forecast Conference, Russia Business Watch, Vol. 6, No. 2, Spring 1998.

 

[24] For insights into how the Russian crisis surprised U.S. policy makers, see, Carnegie Endowment for International Peace, Russian and Eurasian Affairs Program, “Russia in Turmoil”, transcript of October 1, 1998, Panel Discussion Speakers: Arnold Horelick, Thomas Graham, Anders Aslund, and Martha Alcott; http://www.ceip.org/programs/ruseuras/ruseuras.htm.

 

[25] The Russian standard of care for attorneys -- as opposed to the intricacies of licensing them – has been and remains ill-defined.  See, Russian Federation Government Decree No. 344 “On Regulations on the Licensing of the Activity of Rendering Paid Legal Services on the Territory of the Russian Federation” (these Regulations required individuals lawyers either to possess a Ministry of Justice-issued license or to be employed by a legal entity with such a license (such entities, in turn, could employ foreign lawyers)); and Ministry of Justice Order No. 19-01-40-97, “On Regulations on a Composite Register of Licenses for the Rendering of Paid Legal Services on the Territory of the Russian Federation”, dated March 19, 1997.  However, with the adoption of the Russian Federal Law "On the Licensing of Certain Types of Activities", dated September 25, 1998, it is not clear whether the Ministry of Justice still has authority to license lawyers which has abolished the department that had been registering providers of paid legal services.

 

For accountants, it appears that compliance with relevant Russian tax and securities legislation, as well as  the Law "On Accounting", dated November 21, 1996, defines the standard of care  For attorneys not engaged in judicial or arbitral proceedings (who are currently regulated by Soviet-era norms), Russian Civil Code provisions relating to liability for harm caused, and to attorney-client contracts, would seem to be relevant.   See Russian Civil Code (Part II), Article 1064, and Russian Civil Code (Part I), Chapter 27.

 

By contrast, a plaintiff claimingmalpractice under U.S. law must show employment of an attorney, the attorney’s failure  to exercise ordinary skill and knowledge, and  injury proximately caused by that failure.  See Transcraft v. Galvin, Stalmack Kirschner & Clark, 39 F.3d 812, 815 (7th Cir. 1994), cert. denied, 115 S. Ct. 1990 (1995).  For claims against American lawyers arising from activities in Russia, causation generally will be the most difficult element to prove.

 

[26] Part I of the country's Civil Code was adopted only in October 1994, and Part II December 1995.

 

[27] This implicates additional issues related to the negligent failure to supervise and train personnel, as well as principles joint/several liability and respondeat superior. 

 

[28] See, M. Mathieu-Fabre-Magnan and S. Marinich, "Recovery of Debt Owed by Russian Companies: The Litigation Option," East/West Executive Guide, Vol. 8, No. 12, December 1998.

 

[29] See, Ethan S. Burger, "New Legislation On Enforcement of Judicial and Arbitral Decisions in Russia," Russia Business Watch, Vol. 5, No. 3, Summer/Fall 1997;  R.B. Perkins, "The Potential of Business Workouts in Russia," East/West Executive Guide, Vol. 8, No. 12, December 1998.

 

[30] In this bank's shiny 1997 Auditor's Report, KPMG represented that the audit had been conducted "in accordance with International Standards on Auditing," and gave the bank a clean bill of health.  Less than a year later, the bank lost its license and was deemed insolvent.

 

[31] "Methods Offered To Collect Debts From Russia," Russia and Commonwealth Business Law Report, Vol. 9, No. 14, October 21, 1998.

 

[32] "Foreign Banks Raise Spectre of Lawsuits to Collect on Debt," RFE/RL Newsline, December 12, 1998, www.rferl.org/newsline/1998/12/211298.html.

 

[33] The high cost of legal and accounting services, which resulted from the time involved in thoroughly researching questions of Russian law that were not readily accessible or intelligible, as well as the need to prepare documents in dual-language originals, all played a role in making Western investment less effective in Russia.  Over time, these discouraged corporate personnel (clients) from asking questions of their outside advisors, who often lacked the factual basis of their clients’ particular situations.  Obtaining advice to answer relatively simple questions cost large amounts of money.  And the answers were often "there is no simple answer."  Clients thus frequently became reluctant to use their lawyers and accountants, since they felt that they were not getting value for their money.  Completing the circle, outside advisors, sensing that they were not valued, felt no obligation to keep clients informed of new developments.

 

[34] ADRs are negotiable instruments in certificate form evidencing ownership of  non-U.S. company shares.  Denominated in U.S. Dollars and issued in the U.S. by a depository bank, there are three types of ADRs.  Level I may be traded over-the-counter but not listed on a national exchange in the U.S.  Level II may be listed on any national exchange but not publicly offered.  Financial statements for Level II ADRs must conform with Generally Accepted Accounting Principles, or identify in what respects they do not comply with GAAP.  Level III may be offered to the public, but SEC filing and reporting requirements are more extensive than for Levels I and II.  For a discussion of ADRs in Russian companies, see, Jeffrey Hyde, "Can ADR's Make A Comeback?," East/West Executive Guide, Vol. 8, No. 2, February 1998.

 

[35] See, J. Michael Keating, Jr., "Getting Reluctant Parties to Mediate: A Guide for Advocates," CPR Institute for Dispute Resolution, Alternatives, Vol. 13, No. 1, January 1995, p. 10.

 

[36] See, Ethan S. Burger, et al, "Resolution of Commercial Disputes in Russian and Ukraine: Is Mediation a Viable Option?," East/West Executive Guide, Vol. 8, No. 2, February 1998, and "Making Mediation Viable in Russia and Ukraine: The Need for an Appropriate Legal Framework," East/West Executive Guide, Vol. 8, No. 9, September 1998. 

 

[37] Greenapple v. Detroit Edison Co., 618 F.2d 198 (2d Cir. 1980).

 

[38] Herman & MacLean v. Huddleston, 459 U.S. 375 (1983).

 

[39] Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57 (2d Cir. 1985).

 

[40] Revak v. SEC Realty Corp., 18 F.3d 81 (2d Cir. 1994); Credit Alliance Corp. v. Arthur Andersen Co., 483 N.E.2d 110 (N.Y. 1985).

 

[41] Fleet Nat'l Bank v. H&D Entertainment, Inc., 926 F. Supp. 226 (D. Mass. 1996), aff'd, 96 F.3d 532 (1st Cir. 1996);  Burdett v. Miller, 957 F.2d 1375 (7th Cir. 1992); In re DeLorean Motor Co., 56 B.R. 936 (Bankr. E.D. Mich. 1986).

 

[42] Eventually, investors’ recognition of the lack of political stability destroyed their confidence in the Russian economy.

 

[43] It should be noted that there were and still are a number of Russian experts in economics and law who are ideally suited for professional engagement. The more
successful companies (Mars, Xerox, to name two) used plenty of locals.  In fact, investment banking executives from CS First Boston saw the trend to use indigenous expertise and jumped-ship to join a Russian Bank.

[44] The private sector has no monopoly on myopia.  Failure to understand local conditions also has undermined the effectiveness of U.S. Government assistance programs — investment funds in particular — in Russia and other countries in the region.  See Janine R. Wedel, "Collision and Collusion: The Strange Case of Western Aid to Eastern Europe, 1989–1998" (New York: St. Martin Press, 1998), pp. 179-181. 

 

[45] What this group might have lacked in professional and language skills, it made up for in effective bureaucratic politics and salesmanship.  It was not uncommon for individuals whose careers theretofore had been unremarkable and who were faced with the "Go to Russia or else" dilemma, being given significant management responsibilities in Russia.  The absence of trained local personnel, at least initially, also contributed to this dynamic.