REUTERS | Mike Blake

Russian Arbitration Reforms – a case for an attractive venue

“And you, Russia of mine… What does that awe-inspiring progress of yours foretell?” Gogol, Dead Souls.

On 22 March 2017, the Russian Arbitration Association in association with Stephenson Harwood LLP hosted an event entitled Russian Arbitration Reforms – a case for an attractive venue. Expressing their views were a distinguished panel including Alexander Muranov, Managing Partner and head of arbitration at Muranov, Chernyakov and Partners, Vladimir Khvalei in his capacity as Chairman of the Board of the Russian Arbitration Association, Angeline Welsh of Matrix Chambers, Anna Korneva, CIS Group Lead at Stephenson Harwood and event organiser, and Shai Wade, Partner and Head of upstream oil and gas disputes at Stephenson Harwood.

The story of arbitral reform in Russia and its results it seems are not immune to the drama, mystery and leviathan maze of complexity that shrouds most things Russian. Alexander Muranov told of how what had begun as a simple plan to update existing arbitration law became one disgruntled oligarch’s vendetta against the International Commercial Arbitration Court at the Russian Federation Chamber of Commerce and Industry (ICAC) under whose rules in 2011, a tribunal had issued a US $300 million arbitral award against him. The infamous case of Nikolay Maximov (Maxi Group) v Vladimir Lisin (Novoliptskiy Metallurgical Plant) (ICAC Case No. 244/2009) resulted, among other things, in the Russian Supreme Arbitrazh (Commercial) Court declaring, in set aside proceedings, that corporate disputes are non-arbitrable. The anti-arbitration wave caused by this case is said to have been the seed for the far reaching reforms whose transitional period comes to an end in September 2017.

In defence of its existence, ICAC adopted an active role in the reforms together with the Ministry of Justice and, in Mr Muranov’s view, won this war emerging new and improved, strengthened by its merger with the Arbitration Court for Sport and the Economic Arbitration Court for Commonwealth of Independent States (CIS), and with four different sets of rules including special rules for corporate disputes.

Mr Muranov pointed out that the most significant results of the reforms are the administration of arbitration and the arbitrablity of corporate disputes.

In an attempt to do away with the thousands of partial and brazenly corrupt arbitral institutions (“pocket-institutions”) spanning the vast Russian territory, the new law, in addition to introducing a number of restrictions for ad hoc arbitrations, requires all entities wishing to administer arbitrations in Russia or certain types of Russian corporate disputes, to obtain a licence and register as permanent arbitral institutions (PAIs). This includes internationally renowned arbitration centres such as the London Court of International Arbitration (LCIA), International Chamber of Commerce (ICC) and Stockholm Chamber of Commerce (SCC) (albeit they need only obtain a licence). Mr Khvalei noted that those three institutions have already said they would not be obtaining a licence (although some report the LCIA’s position is unconfirmed), while the Hong Kong International Arbitration Centre (HKIAC) and Singapore International Arbitration Centre (SIAC) are considering it and the German Institution of Arbitration (DIS) is said to be soon obtaining its licence.

As for arbitrability, while it is helpful that the arbitrability of corporate disputes is addressed directly (unlike in several other jurisidctions where this is dealt with on a case by case basis), the conditions to which this arbitrability is subject may cause difficulty. As explained by Mr Khvalei, the two types of corporate disputes that are arbitrable are those between contractual parties with no impact on third parties or the relevant legal entity itself, such as might arise under a share purchase agreement (SPA), and those that will affect the rights of third parties and the legal entity, such as might arise under a shareholders agreement (SHA).

While both types of dispute can only be arbitrated if the arbitration agreement was entered into after 1 February 2017 and must be subject to arbitration under the rules of a PAI, disputes under for example, an SHA, must additionally be seated in Russia, be subject to special rules for resolving corporate disputes, and all shareholders of the legal entity and the legal entity itself, as well as all parties to the arbitration, must be parties to the arbitration agreement. (The fact that the PAI must have special rules for resolving corporate disputes means that institutions such as the LCIA could in any event not administer such disputes unless they were also to adopt such rules.) In addition, as Mr Wade noted, potential confidentiality issues could arise from the fact that, according to the new law, special rules for resolving corporate disputes must contain provisions on publishing certain information relating to a dispute.

Anna Korneva considered what these reforms have meant for Russian companies to date. Are they keener to resolve corporate disputes in Russia now that it is possible to do so? And what of the European and US (as well as other) sanctions imposed on Russia and Russians following events in Crimea and Ukraine – have these resulted in a push towards Asian institutions?

The results of a survey conducted by Stephenson Harwood in which Russian corporates were questioned on their dispute resolution preferences appear to reflect the reality of Russian corporate structures. Ms Korneva reported a clear distinction between the changes occurring at the onshore level, where there has been a shift toward ICAC (away from state commercial courts), and the offshore level, which has effectively seen no change with survey respondents continuing to opt for LCIA or ICC. In addition, sanctions were found to have little or no effect on choice of arbitral institutions.

However, whereas Singapore and Hong Kong were considered exotic destinations only some five years ago (as explained by Vladimir Khvalei), Russian companies, including state owned companies, indicated they had selected SIAC and the HKIAC for certain agreements. This was said to be due to increased trade with China (such as the Rosneft/CNPC deal concluded in June 2016), though one cannot ignore the fact that increased trade with Asia came hot on the heels of the Western world no longer wishing to “play” with Russia.

Ms Welsh added that the Russian reforms are unlikely to take business away from London or indeed Asia before it gets there. This is so not least, she asserted, because two of the main factors leading to the rise of the HKIAC in recent years are the impartial judiciary (ranked fourth in the world, as opposed to 108th) and its good enforceability record – Russia’s notorious track record on enforcement needs no introduction. While it may well be too soon to speak of a concrete turn towards Asia, in my view, the extent of any shift will only become apparent once disputes arise… and who knows what may follow once Brexit is added to the mix.

It appears Russian arbitral reform has dealt with the most chaotic aspect of arbitration in Russia pre-2016, namely the administration of arbitration. Some might nonetheless be struggling to see how, in the current political climate with anti-Russian sentiment at an all-time high, Russia could become a more attractive venue for foreign users of arbitration. The reality, on which Messrs Muranov and Khvalei appeared agreed, is that the reforms were primarily intended to make Russia a more attractive venue for Russians. No doubt this can be attributed to the push towards de-offshorisation commenced by President Putin in 2014. Measured against this objective, it is somewhat ironic that thus far the reforms appear to have entrenched fashionable preferences with “real” disputes (as Mr Khvalei called them) as yet, still being decided in London.

Practical Law Arbitration Francesca Albert

Leave a Reply

Your email address will not be published. Required fields are marked *