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Intellectual Property and Investment Risk in Russia



Intellectual Property and Investment Risk in Russia was presented 30 October, 2008.


Individuals and firms that are used to a US or EU business and legal assumptions are at a great disadvantage in the Russian Federation. It it still difficult to listen to skilled attorneys describe an "effective compliance program" for a US and Russian relationship but the reality is that the compliance program is for the US Sarbanes Oxley, SEC, FCPA side of the relationship.


The Institute of Corporate Law and Corporate Governance (ICLG) is correct to say that "no due attention is paid to corporate governance risks" and that the "fundamental problem in the area of corporate governance in Russia is the fact that company insiders (managers and controlling shareholders) abuse their position to the detriment of minority shareholders, including expropriation of assets" through transfer pricing, asset stripping, capital dilution, restructuring/mergers, and lack of transparency.


We would add brazen cash stripping to that list but it still understates the Russian condition as things are much more fluid and opaque on the Russian side. A European colleague schooled in Russia and skilled in dealing with Russians advised thusly:

If you want to protect your IP in Russia, don't bring it. If you want to protect your asset in Russia, don't invest...


Every law exists... on paper... Everything is possible [in Russia]; everything is impossible...


[You are] wasting time and money trying to go to court with a Russian company. [You must] Use Russian strong points; use Russian weak points... If you use US or British law you will pay, pay, pay and pay.


[Largest corruption risk is] any business condition where cash exists. No cash and you are [a] little safe.

For those of you who must invest or must bring IP, read Intellectual Property and Investment Risk in Russia. You must:

  • Question everything you hear.
  • Listen for what you do not hear, what is omitted.
  • Treat minor steps (such as connecting to a "nearby" power drop) as a rigorous supply chain analysis.
  • Test every assumption of what will work or not work, how long it will take and at what cost.

Even the simplest steps in any given transaction become opportunities for unexpected cost-ups. The same issue, something as simple as documentation and certification of goods becomes an opportunity to incur repeated costs on the same item.


You will need assistance. And that assistance will need to be working solely on your behalf and not unknown counterparties. The analogy is relying on the counterparty's translator during a negotiation. What is translated and how it is translated are at the whim of the counterparty and not your side.


Beyond traditional financial support in regulatory compliance, you will require non-financial support in regulatory compliance and corporate governance programs:

  • Establish third party valuation, handling non-financial aspects (undisclosed valuation-relevant issues, such as liabilities relating to key personnel).
  • Structure investments and engage new counterparties (interests, background, reputation, litigation, and other factors that may transfer risk to you).
  • Mitigate exposures beyond reach of contractual and financial risk management options.
  • Support requirements for governance, FCPA) and Patriot Act (funds, contacts, customers, and adverse relationships with unseen third parties).

In terms of business strategy you will require assistance in: 

  • Actionable, timely information about specific industries, markets, prospects, and counterparties.
  • Monitoring specific risk areas.
  • Business facilitation support, due diligence on local staff, and support for development personnel as they review in-country prospects.
  • Vetting local partners and identify undisclosed issues to build good local relationships operating under optimal terms.

You will need assistance in realistic IP protection as opposed to "feel good" security steps that will lull you into complacency. Russian law requires that you set up "trade secrets regime" at your Russian workplace otherwise your trade secrets do not legally exist. (IP law in Russia is now in Part Four of the Civil Code.)


In what amounts to your identifying a target set to an IP collector, you must state the IP, state who has access to the IP, identify it as such to all employees, and then establish workplace rules that are reflected in your workplace labor agreements. All this must occur under the cumbersome Russian union canopy.


It is refreshing to see some attorneys acknowledge Russia's systematic commercial corruption and its effect on legal matters. (Medvedev has made a public effort to improve the legal environment but Russians do not take his actions seriously. At best these steps are seen to be directed internally rather than externally.)


Problems still occur when Western attorneys reflexively apply US concepts to the Russian environment. For example, when asked what was the "optimal stake" to acquire in a Russian entity, a good, Russian speaking US attorney replied "100% as you then have full control." The reality is that '100% control' leaves you vulnerable as you own 100% of the responsibility. Not a recommended condition in Russia.


You will need assistance going to Russia. Call us.


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InfoT Public  Intellectual Property Theft Public  Risk Containment and Pricing Public  Strategic Risk Public  


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