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. Last Updated: 07/27/2016

Courts Fuel Doubts Over Investment

Two recent legal cases involving foreign investors can only have fueled doubts among foreigners as to the ability of Russia's courts to adjudicate complex commercial disputes.

In St. Petersburg, the U.S.-based Subway sandwich company has been struggling for several months to find a court that will enforce an international arbitration court decision granting it $1.2 million in compensation for the collapse of a restaurant joint venture.

And in a much bigger case, Russia's Supreme Arbitration Court has rendered "null and void" a Russian company called Lenzoloto, created in 1992 to mine Russia's largest untapped gold deposit, Sukhoi Log, in remote central Siberia.

The dissolution of the company has come as a shock to Australian Star Mining Corp., which believed it owned a major share and had already invested $72 million in the venture.

The two cases differ in their specifics, but both touch on key legal points that are fundamental to perceptions by foreign investors of the risks in Russia.

In the Subway case, the Russian and foreign partners agreed in a contract that if any disputes arose, they would be arbitrated in an international court. The two sides did fall out and when the matter went to court, the Russian side lost. But now the U.S. investor seems powerless to make a Russian court enforce the judgment.

The question of whether Russian courts will enforce decisions of international arbitration courts has broad significance.

In the case of Star Mining, few will want to take sides in the debate over whether, under the confused conditions of early 1992, the deal that handed the Australian company a stake in a gold mine was in line with Russia's vague privatization laws.

But many will be concerned that the Australian company believed the issue of the legality of its investment had been decided in a Supreme Arbitration Court case several years ago.

Now, five years after the original deal with the government was signed, the same court has returned to the issue and retroactively voided a project in which Star Mining has in good faith invested millions of dollars.

As Russia's legal system starts to play a serious role in arbitrating disputes, domestic and foreign businessmen will want to see judgments on which they can depend.

They will want to see that Russian courts are capable of integrating with the world system of commercial law. They will also want a clear and predictable system of appeals.

If deals are subject to almost indefinitely long scrutiny and enforcement of judgments is patchy, foreign investors will draw their own conclusions and stay away.