Law, Moscow, Medvedev and Me.
Paul Backer, J.D.,
LL.M. Securities Regulation,
LL.M. International Finance
Member, NYS Bar
+7(495)766-5208

“Luck is what happens when preparation meets opportunity.” Seneca.

SYNOPSIS: Due to the unique aspects of Russia/CIS legal environment, investors and companies transacting here can dramatically increase their chances of success through rigorous implementation of legal and compliance best practices. I think that these best practices can be condensed in a (hopefully) useful, topic specific format and are worth sharing and (hopefully) facilitating their discussion. A sort of “survival guide” to corporate and finance legal practice.

I firmly believe that folks who dismiss the prevailing legal and business environment in Russia/CIS as ‘dysfunctional’ miss the history, background and the point. In my experience, doing so usually winds up costing them a great deal of money or their business. Put more succinctly, in Russia ‘organized’ beats ‘smart’ 9 out of 10 times. Everything written reflects only personal opinion, experience, including apocryphal stories, anecdotes and made up stuff.

As an international corporate and finance lawyer, I practiced public and private law for over 15 years in two dozen nations including U.S., U.K., Netherlands, Vietnam, PRC, Russia, most of the “stans”, with a focus on Russia/CIS. My first time in the Former Soviet Union was in Kazakhstan in the Summer of 1994. Today, I live in Moscow. I don’t think any amount of money or effort could replicate the experience of living and working in the CIS during much of the past 15 years.

It has been a fascinating experience including transactions and helping write and develop corporate and securities laws and regulations in several jurisdictions. Kazakhstan in 1994, with the only clean stairwell in the entire country in the U.S. Embassy where any U.S. national could go for lunch at the cafeteria, use the commissary or just hang out. Good luck trying that now at a U.S. Embassy. For a laugh, try the U.S. Embassy in Moscow where the Russian police, with Embassy consent, decide which U.S. citizen may enter.

Russia in 1998 during the financial implosion. Russia today with employees suing not to be paid in the fa(i)lling dollar, $22 pots of tea (Coffeemania Cafe) or a $22 glass of Rum and Cola (Club Famous) or Euro 2,000 to 3,000 tickets for a soccer match. A multi-car traffic incident near my home involved a Bentley and a Maybach. Progress. It’s been fun. It’s been very instructive. A lot of things have changed, some haven’t. Some never will.

Professionally, experience ran the gamut from $16.5 billion project finance transaction (Yukos), the first Mortgage Backed Security (MBS) in the CIS, Eurobonds, M&A, oil and gas PSA and acquisitions, telecom, gaming, biotech, spirits and along the way, helping develop a few dozen laws and regulations, 4 law books and over 50 seminars. By my best count, over 200 million people in the CIS, Vietnam and other nations are influenced by legislation (banking, securities, finance, factoring, real estate and other) supported by me and the teams that I worked on in cooperation with the local governments and grantor agencies. The extent to which they are ‘influenced’ by these laws is perhaps an open question.

Throughout that time, for a lot of reasons, it was never a good time to write about my experiences with the applied practical aspects of regional law. If you serve as lead counsel to a “vertically integrated financial entity”, you are not exactly encouraged to share professional experience. If you work for projects sponsored by IMF, World Bank, ADB, USAID, EuropeAid, the Russian or other governments, etc., their PR departments speak on behalf of the projects. If you run a boutique international corporate and finance law firm in Moscow, well… is it wise to give away advice that you can sell? Any corporate lawyer who experienced the giddy joy of selling the “do you need a LLC or a CJSC?” memo to a client, knows what I mean about the joy of reselling the same workproduct the 6th, 12th or 18th time. It’s a question of time, there often just isn’t enough of it. At the same time, what led me into law is a fascination with how it actually works and sharing experience. I suspect it’s what leads people into teaching law, the pleasure of interacting with those who are actually interested in law as an intellectual exercise and model rather than just a means of procuring a stamp or a signature.

Throughout the past 15 years I have been struck by the nonsense promulgated about the Russia/CIS legal and regulatory environment. From the coverage it would appear that every business in Russia is ruined by corruption, seized by raiders, nationalized, courts completely dysfunctional, ad nauseum. It has been a source of lasting amazement to me to routinely see references to the Russian legal and regulatory system as wholly nonfunctional and/or corrupt from folks who never encountered it. The ham fistedness of the RF Government effort to present a positive image through tragi-comic efforts like Russia Today doesn’t exactly help.

The inability to meaningfully articulate realities of practicing law and doing business in Russia and the CIS gave rise to a phrase in virtually every professional product generated about the CIS: “It must be noted that Russian law is non-transparent, punitive and frequently contradictory...” Well, to quote Homer Simpson, “D’uh”. Law is always non-transparent, punitive and frequently contradictory. That’s why folks go to law school and study the practice of law. Except of course, in Russia where an attorney or a judge diploma is part of a college degree, and professional practice may begin at the age of 17 or 18, more on that later.

The CIS, and particularly Russia present unique challenges. This environment represents unique history and processes. It is worth noting that thousands of businesses with foreign ownership appear to function effectively in the CIS, make money, pay taxes, generate jobs for employees and comfortable lifestyles for their owners and have done so, in many cases, for many years. Others dramatically failed. Having seen many of each, the successful businesses share many of the same legal and regulatory best practices. As a Russian classic wrote, “All happy families are happy in the same way, all unhappy families are unhappy in different ways.”

Implementing best practices can produce reasonable returns for clients. To date, my professional experience includes no lost cases (12 and 0), no clients successfully raided, no tax penalty successfully upheld on appeal. Bought and sold oil and gas fields, concluded telecom agreements, received telecom and gaming licenses, etc. Not a single client who failed to register a company, no failed company registration, no foreign client who failed to get needed documentation or a Russian/CIS client whose Eurobond, real estate or project finance transaction failed for legal/regulatory compliance reasons.

Sadly, the tales of companies in Russia/CIS registered, at a saving of a few hundred dollars to dead people or to locations where several hundred companies are registered in a same one room apartment are not apocryphal. Perhaps, that should also be my first piece of practical advice, relying on over a dozen years of local experience: don’t register your company to a dead person. It’s bad karma. Go the extra step, only transact with the living.

With the readers’ kind permission, I will write about ‘raiding’ (aka hostile takeovers), ‘nationalization’ (aka tax and regulatory compliance), litigating in Russia, Russians’ efforts to go abroad (taking companies public or taking listed companies dark), PPPs (public private partnerships), tax refunds/compliance, effective interaction with Russian/CIS clients and other areas of corporate law practice in and emanating from Russia/CIS. If there are areas of special interest, please write to me at pauljbacker@gmail.com, and I will try to address them. I will try to do 1 or so article a week until either I or the readers lose interest, whichever comes first.

As to Medvedev. In my personal opinion the impact of the RF President or Prime Minister on your business is likely to be greatly over-rated unless you run TNK BP, then… well, no comment at this time. Anyway, my 5 cents’ worth. I am not a ‘fan’ of Putin or Medvedev. It’s just hard for me to imagine a rational middle aged professional as a fan of a nation’s head executive. Most adults are busy living our lives and servicing our clients, not cheerleading for a President. As a life long Republican who has endured the relentlessly dreary Bush administration, I have to go back to Ronald Reagan to remember a President that I was a fan of, and well… I was in my teens at the time.

At the same time, from my perspective as an attorney, the election of Medvedev as President was both contested and a historically positive event for the Rule of Law in Russia. With whatever respect may be owed to OSCE, the U.S. State Dept. and/or other alphabet soup entities in the U.S. and Europe which gave coverage to the Russian election every bit as fair and balanced as that usually reserved by the yellow press for serial killers, they got it wrong. If there is interest, I am happy to expand, but in a nutshell, Medvedev’s election was arguably the first time in roughly a century in Russia when executive power was transferred in a competitive environment with significant compliance with prevailing law, without social disaster or disruption while employment and tax base continue to grow, quality of life of rank and file Russian citizens is improving, and the currency is appreciating. It would be nice if Medvedev could be given a fair shot to succeed.

As one of the great men of Russian history, Prime Minister Petr Stolypin memorably said a century ago: “You gentlemen need great upheavals, we need a great Russia”. As a legal professional whose profession is impacted by the Russian/CIS economic strength and growth, and as someone who knows and cares about friends in virtually every CIS country, I second that sentiment. A great, stable and increasingly politically competitive Russia would be a very fine thing indeed.

For the record, everything I write is solely my personal opinion, and is not intended to nor in any way reflects or refers to activities of past or current clients.

Next article, on raiders and business in Russia. If you have any questions or comments, write to pauljbacker@gmail.com.