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. Last Updated: 07/27/2016

Investor Fights Porcelain Verdict

A U.S. government-backed shareholder in the Lomonosov porcelain factory pledged Tuesday to fight to the bitter end a court decision to renationalize the well-known plant, calling the ruling a serious blow to Western confidence in Russia.

The U.S. Russia Investment Fund, set up in 1994 to promote direct investment in the Russian economy, said it would appeal the St. Petersburg Arbitration Court's verdict Monday that voided the majority stake it owns together with U.S.-based Kohlberg Kravis Roberts & Co.

"We will appeal this decision [and] will continue to fight this in a legal manner," fund vice president Alistair Stobie said at a news conference.

However, under Russian law the fund may not be able to appeal directly to the court because Monday's ruling was made on a case between the State Property Ministry and the Lomonosov factory. The State Property Ministry had asserted that the proper paperwork had not been drawn up to privatize the factory in 1993.

The court ruled that Lomonosov had illegally been set up as a joint stock company when it was privatized. Western investors later bought some of those shares.

Stobie acknowledged that it may be difficult to reverse the court's decision, but said that the fund's legal experts are studying the ruling and a decision on how to pursue the matter would be made within a month.

As the court ruling stands, The U.S. Russia Investment Fund looks to lose the $4.25 million it has spent since it started snapping up Lomonosov shares in September 1998. The fund owns a 19.95 percent stake and expects to get an additional 5.5 percent stake registered this month.

The other potential big loser is KKR, which through a holding company called the International Porcelain Co. owns a blocking stake of just over 25 percent, which was purchased for $4 million.

The remainder of Lomonosov is owned by two offshore companies and the factory's employees.

"[With this kind of court ruling] it will become harder and harder to convince investors to take the risk of investing in Russia," Stobie said.

"It becomes just impossible to formulate an investment strategy when you are not even sure that the assets that you're investing in are not going to be stolen away from you."

A number of control disputes over the past year has already dealt a blow to Western investors. In one of the more high-profile cases, investor Kenneth Dart is waging a war in the Russian courts over a share issue proposal by Yukos that would dilute his stake in one of the oil giant's subsidiaries. BP Amoco is vying to save its $500 million investment in another oil company, Sidanko.

The U.S. Russia Investment Fund found support Tuesday in Russia's securities watchdog, the Federal Securities Commission, which protested the court decision to the State Property Ministry.

"From our viewpoint, this precedent taken by the ministry will lead shareholders and investors to question whether the state protects them," commission chief Dmitry Vasilyev wrote the ministry, Interfax reported.

"It also calls into question their ownership rights to bonds and shares in any Russian enterprise formed as a result of privatization."

Lomonosov had asked the state to take back the factory when it learned that foreigners had acquired a majority stake. Plant officials call the 255-year-old Lomonosov a national treasure and accuse the Western shareholders of not having an investment plan and of wanting to loot the factory museum's collection of priceless porcelain.

Stobie retorted Tuesday that Lomonosov was sitting on the edge of bankruptcy and that the Western investors were the only shareholders willing and able to bail it out. In addition, he said, Russia should not look to the West as the one stripping the factory.

"The great claim is that [the court decision] is protecting Russian assets, but the reality is that finished and unfinished products are being stolen by workers in the factory every day," he said.

Stobie added that the Russian factory should focus its efforts on matters such as reviving production and regaining rights to its trademarks, which are owned by an offshore company.

The factory has barred Western investors from entering, and they have not been invited to any shareholders meetings. Lomonosov will hold a shareholders meeting Oct. 31 to appoint a new board of directors.