How the Russian legal system protects foreign investors

According to the Supreme Court of the Russian Federation (SC), the number of cases involving foreign businessmen in Russian courts is growing: in the first half of the year it increased by 60%, with foreigners winning 93% of the disputes. The Supreme Court insists on observing the principles of equality and free access to justice, and also speaks of supporting foreign investors in disputes with Russian government agencies in approximately half of the cases. However, lawyers paint a different picture – “it has become much more difficult for foreigners in the courts of the Russian Federation,” and even counterparties from friendly countries insist on resolving disputes in foreign arbitrations.

During the 12th International Legal Forum of the Asia-Pacific Region, which was held on October 5 in the format of a web conference, Chairman of the Russian Supreme Court Vyacheslav Lebedev said that the total number of economic disputes involving foreign entities considered by the courts of the Russian Federation in the first half of the year increased by 60%, up to 10.6 thousand. Foreign participants won 93% of disputes, the head of the Supreme Court emphasized.

In challenging the actions and decisions of Russian customs and tax authorities, Mr. Lebedev admitted, the situation is not so rosy for foreigners: the percentage of victories of foreigners was 52% and 49%, respectively. In practice in such cases, “the principle of compliance with the legitimate expectations of investors is implemented,” that is, “the tax authority is not allowed to arbitrarily change its position on the application of tax benefits and preferences applied to investment profits,” the head of the Supreme Court assured. In general, according to him, the Supreme Court “orients the courts to the need to eliminate the excessive administrative burden on business.”

Vyacheslav Lebedev noted that the criterion for the effectiveness of justice in cross-border disputes is “assistance and control” in relation to arbitration courts and international commercial arbitrations. In total, in January-June, courts executed 1,118 requests for legal assistance from foreign courts (an increase of 19%). Also, the state courts of the Russian Federation satisfied 68% of applications for recognition and execution of decisions of foreign courts and arbitrations and 74% of requests for writs of execution for forced execution of decisions of arbitration courts.

Lawyers interviewed by Kommersant believe that Mr. Lebedev wanted to “calm down foreign, primarily Asian,” investors. “To make foreigners less afraid, to show that everything is fine in Russia, that the courts will protect them,” notes Andrey Panov, an adviser at the Allen & Overy law firm. He clarifies that foreigners have previously won the majority of cases in Russian courts (according to the Supreme Court, in 97% of cases in 2022), “whether partial satisfaction of the claim is considered a win is another question.”

To obtain an objective assessment, “a correct analysis of the obtained statistical results is required, and not just operating with data in order to give weight to the thesis about the dynamic development of the domestic judicial system,” emphasizes Pen & Paper partner Sergei Uchitel. According to Mr. Panov’s observations, in fact, “now it has become much more difficult for foreigners in the courts of the Russian Federation than before.”

Lawyers explain the increase in the number of disputes with foreigners for several reasons. Firstly, it is partly related to sanctions and the inability to fulfill obligations under contracts. Secondly, we may be talking about “deferred demand, since at the beginning of 2022 everyone froze in shock and did not know what to do, and then came to their senses a little and went to court,” says Andrei Panov. Usoskin Arbitration lawyer Sergei Usoskin notes that some of the disputes are somehow related to the departure of foreign companies from the Russian market: “But their share is not large, and foreigners obviously do not win in 90% of cases.”

Basically, statistics are provided by transactions with counterparties from friendly jurisdictions, where there are many indisputable demands, for example, about payment for goods, says Sergei Usoskin. Also, he clarifies, many lawsuits are filed by foreigners seeking compensation for violation of their trademark rights, “they are simple, straightforward and, as a rule, satisfied by the courts.” But if separate records were kept of claims from businesses from friendly and unfriendly countries, “the progress would be very different.”

In practice, there have been cases when courts motivated the refusal of a foreign party to a dispute by citing an unfriendly country of origin (see “Kommersant” dated May 6, 2022).

The share of recognition of arbitration awards could be higher, lawyers say. “Contrary to all promises, even after the arbitration reform and clearing of the market, state courts continue to review decisions of arbitration courts on the merits,” says Mr. Usoskin. “This primarily hinders Russian business, which pays counterparties an additional premium for the unpredictability of the courts.”

As for the enforcement of foreign court and arbitration decisions, the recognition rate of 68% is the “average figure,” notes Maxim Kuzmin, advisor to the cross-border disputes practice of BGP Litigation: “In European countries it can reach 90–95%, and in less pro-arbitration jurisdictions (for example , in Vietnam) is reduced to 50%.” At the same time, the lawyer admits that “in the courts of the Russian Federation, unfortunately, there are still ambiguous approaches to the execution of foreign court and arbitration decisions.” According to Andrei Panov, a large share of 32% of court refusals to enforce foreign decisions concern Western arbitration centers.

“In general, the statistics are sad, and it is significant that even for such a performance they did not find more beautiful figures,” believes Sergei Usoskin. The degree of trust in domestic justice, according to Mr. Uchitel, is evidenced by the fact that “even counterparties from friendly countries insist on resolving disputes under contracts with Russian businesses in foreign arbitrations.”

Anna Zanina