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. Last Updated: 07/27/2016

Not All Crystal Clear When Investing in Russia

MTSawyer's lawyer, Anna Murray, believes the company's takeover was done illegally.
Before deciding to invest in Russia -- as President Vladimir Putin recommended to 350 business leaders at the World Economic Forum in Moscow this week -- foreign enterprises should listen to the story of Sawyer Research Products, the No. 1 U.S. crystal quartz producer, which says it lost $8.2 million after investing in a plant in the Vladimir region.

The company was thrown out of the plant in July after a local court invalidated the lease of one of the factory's workshops, where Sawyer developed quartz crystals. The company still can't recover $1.2 million worth of inventory and $3 million worth of equipment.

A court ruling Tuesday forbade Very Pure Quartz Glass -- the Russian company that took over the Vladimir plant -- from using Sawyer's equipment, but the U.S. company's lawyer, Anna Murray, said VPQG has not obeyed the order.

The future looked rosy back in 1997, when Sawyer founded the venture at the plant, at the time known as the Gus-Khrustalny Quartz Glass Plant. Without external investment, the plant was doomed for closure after running up $8.5 million in debt. A Vladimir court appointed an external manager to the plant, which was to have been carved into eight units and then leased piecemeal by a special holding company.

Then Sawyer paid off some of the debts, rebuilt the plant's main workshop, which it leased for 25 years, and installed its own equipment, helping resume operations.

Four months ago, however, a Vladimir court invalidated the lease, saying it was out of procedure with the external management's plans, which had been approved by the plant's creditors.

Dmitry Vasilyev, a former chairman of the Federal Securities Commission who now heads the Institute for Corporate Law and Corporate Governance, called the reason for the lease's invalidation a "perhaps minor violation of bankruptcy legislation that does not contradict the spirit of the law."

"Using this approach, one could revise most such deals or at least hassle entrepreneurs -- which happens quite often," he said.

Furthermore, the takeover was done improperly said Murray.

"From that time until Sept. 12, none of us -- or even bailiffs who tried to take inventory of our equipment and machinery left at the plant -- were allowed into the workshop," said Murray.

When bailiffs and Sawyer representatives were finally allowed to visit the plant, Murray said, only 348 items of machinery and tools out of 568 were still in place, and most of those were damaged -- with inventory plugs ripped off or electronic parts replaced with simpler mechanical devices.

"As for our nine machine-tools -- mechanical saws for cutting crystals, each of which cost $50,000 -- three of them were missing and the rest were painted green so that our labels were not visible," Murray said.

Dmitry Dorokhin, a lawyer for VPQG, said the owners of the plant had the right to use the facilities and the sales inventory -- and have the support of the local government.

"They [Sawyer] must agree that the Russian side should keep the equipment -- we consider it all ours," said Dorokhin. "The profit they have made has been several times what they have invested."

Vasilyev said that Vladimir authorities and prosecutors have interfered in the dispute, taking the side of the Russian company, a typical problem for foreign investors.

"As an example of a foreign investment in Russia, all this looks very bad -- and especially stupid in a situation when the overall attitude of investors towards Russia is improving. The consequences may go far beyond Sawyer's $8 million," he said.

Sawyer still hopes to resolve the issue peacefully.

This summer, Sawyer president Gary Johnson began seeking assistance from both the Russian and U.S. governments. The dispute was among several similar cases that U.S. Commerce Secretary Donald Evans discussed with the Economic Development and Trade Ministry during his visit to Russia in mid-October.

The issue was passed on to the office of the presidential representative to the Central Federal District, Georgy Poltavchenko.

"I hope very much that Poltavchenko's office will help resolve the conflict," said Murray.

The issue is a bellwether for the foreign investment climate, said Johnson. "Russian leaders should show the political will necessary to provide existing investors equal protection under the law. The Vladimir investment dispute represents a clear and practical opportunity for Russia to demonstrate its commitment to improving the investment climate," he said Wednesday by e-mail.

"U.S. government officials advise me that reversing the Vladimir expropriation is a critical test case of Russia's commitment to an independent judiciary and that they have requested the Russian government urge Sawyer's investment and property be returned."

However, it is not yet clear how Poltavchenko's office will settle the dispute.

A source in the Vladimir government, who asked not to be identified, said the region has no proof of Sawyer's large investment into the venture.

"There is no documented proof that they are a strategic investor and put millions of dollars in the plant," the source said. "What we see is that the American firm took control over the strategic workshop very impudently."

"Now that they lost, they are trying to use a standard thesis about the bad investment climate in Russia and biased authorities."

Victoria Lavrentieva contributed to this report.