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Intellectual Property and Investment Risk in Russia

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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.

 

Governance & Anti-Corruption

World Bank Institute

 

Indicators of Governance & Institutional Quality

World Bank Institute

 

Doing Business - Economy Rankings

World Bank

Doing Business 2009

 

Doing Business - Russian Federation

World Bank

Doing Business 2009

 

Russian Economic Survey

Keith Bush, Research Director

US-Russia Business Council

October 2008

 

Doing business and investing in the Russian Federation, 2008 edition

PricewaterhouseCoopers

2008

Ruissian Federation thumbnail summary

 

2008The Russian Economic Survey - ALL ISSUES

Comprehensive review of the Russian economy, produced monthly by Keith Bush, the Council's Director of Research.

 

Corporate Governance and Emerging Markets: Lessons from the Field

Cally Jordan, Mike Lubrano

U of Melbourne Legal Studies Research Paper No. 356

July 29, 2008, Last revised: September 19, 2008

 

Russian Economic Report

The World Bank in Russia

No 16, JUNE 2008

 

Governance Matters VII: Aggregate and Individual Governance Indicators, 1996-2007

Daniel Kaufmann, World Bank Institute; Aart Kraay, World Bank - Development Research Group (DECRG); Massimo Mastruzzi

World Bank Policy Research Working Paper No. 4654

World Bank Institute

June 24, 2008

 

2008 CORRUPTION PERCEPTIONS INDEX

Persistently high corruption in low-income countries amounts to an "ongoing humanitarian disaster"

Against a backdrop of continued corporate scandal, wealthy countries backsliding too

Transparency International

2008

 

The Global Competitiveness Report 2008-2009

The Global Competitiveness Index rankings and 2007-2008 comparisons

World Economic Forum

PDF

2008

 

Russian market special commentary

BNP Paribas

Flash Report

July 2008

 

Worldwide Governance Indicators: 1996-2007

World Bank

Released - June 2008

 

Governance Indicators: Where Are We, Where Should We Be Going?

Daniel Kaufmann, Aart Kraay

The World Bank Research Observer, vol. 23, no. 1 (Spring 2008)

 

Expanding Overseas: The Best Large Markets

by Jennifer Alsever

Bnet

April 2008

 

Dmitri Medvedev, in His Own Words

Excerpts of speeches by and interviews with Dmitri A. Medvedev, President Vladimir V. Putin's hand-picked successor, as posted in English on his campaign Web site.

New York Times

February 28, 2008

 

INTELLECTUAL PROPERTY: Risk and Enforcement Challenges

Statement of Loren Yager, Director, International Affairs and Trade

Testimony Before the House Judiciary Subcommittee on Courts, the Internet, and Intellectual Property

GAO-08-177T

October 18, 2007

MIRROR

 

Transparency of Russian companies: results of the study conducted by Standard & Poor's with the support of the MICEX Stock Exchange in 2007

MICEX

November 15, 2007

 

A Decade of Measuring the Quality of Governance

The International Bank for Reconstruction and Development / The World Bank

Governance Matters 2007

Worldwide Governance Indicators, 1996-2006

 

New Concerns in an Uncertain World

Foreign Direct Investment Confidence Index

A.T. Kearney

2007

 

Deloitte Study: Emerging Market Innovation

The management consultancy surveyed 446 top executives to profile business practices of U.S. companies in developing countries

by Reena Jana

Deloitte Touche Tohmatsu

Page Last Updated: July 23, 2007

 

Asia/Pacific Cities Among Frontrunners in MasterCard Ranking of the World's Centers of Commerce

New MasterCard Research Explores Strategic Role of Cities in Driving Global Commerce

Report Names 50 Cities as Hubs of the New Worldwide Economy

Auckland, 13 June 2007

 

Special Report: Russia Post-2008: Road To Riches Or Slippery Slope

RatingsDirect

Reprinted from http://www.ratingsdirect.com/

Jan 19, 2007 22:50 Europe/London

Publication date: 19-Jan-07, 17:50:41 EST

 

Global Threat Research Report: Russia

Eli Jellenc, Senior Threat Intelligence Analyst

Kimberly Zenz, Senior Threat Intelligence Analyst

An iDefense Security Report

Jan. 10, 2007

 

Bribe Payers Index 2006

Transparency International

2006

 

INTERNATIONAL PROPERTY RIGHTS INDEX (IPRI) 2007

International Property Rights Index (IPRI)

By Alexandra C. Horst

2006

 

A Decade of Measuring the Quality of Governance

Worldwide Governance Indicators

Governance Matters 2006

 

World Bank Puts Russia on Par With Swaziland

Russia is comparable to Swaziland, Zambia and Kazakhstan in how it governs, according to a World Bank report released Friday.

Moscow Times

18 September, 2006

 

Timeliness of Financial Reporting in the Russian Energy Sector

Robert W. McGee

Florida International University - School of Accounting

April 2006

 

Global Sourcing: Destination Russia

Eugene Kublanov, Paul Melling, Art George, Michael Mensik

Baker & McKenzie LLP

February 23, 2006

 

Corporate Governance in the Oil and Gas Industry

Cases from Poland, Hungary, Russia and Ukraine in a Comparative Perspective

Andreas Heinrich, Aleksandra Lis and Heiko Pleines

Koszalin Institute of Comparative European Studies (KICES)

KICES Working Papers

ISSN: 1895-0450

No. 3, December 2005

 

International Trends in Corporate Governance

Justin Reynolds

ISS Europe

Vienna, 4 October, 2005

 

Russian Companies Show Themselves Only by Half

Kommersant Moscow

Sep. 23, 2005

 

Russian IT Seasons Seminar
Arthur L. George
Partner, Baker & McKenzie, Chicago
Chicago, September 22, 2005

 

Corporate Governance and Corruption: A Cross-Country Analysis

XUN WU, National University of Singapore

Governance: An International Journal of Policy, Administration, and Institutions, Vol. 18, No. 2, pp. 151-170

ISSN 0952-1895

April 2005

 

Russia BusinessWatch

US-Russia Business Council

Vol 13, No 1

January-March 2005

 

Transparency And Disclosure By Russian Banks: Disclosure Practices Of Russian Banks Currently Dismal

Julia Kochetygova, Nick Popivshchy, Oleg Shvyrkov, Levon Atanassian, Elena Pastukhova

Standard & Poor's Governance Services

October 26, 2005

 

Transparency And Disclosure By Russian State-Owned Enterprises

Standard & Poor's Governance Services

Julia Kochetygova, Nick Popivshchy, Oleg Shvyrkov, Vladimir Todres, Christine Liadskaya

Prepared for the Roundtable on Corporate Governance

organized by the OECD in Moscow on June 3, 2005

June 2005

 

Russia: Investment Destination

A survey of foreign investors

Conducted by PBN

Foreign Investment Advisory Council (FIAC)

March 2005

 

The links between intellectual property crime and terrorist financing

Text of public testimony of by Ronald K. Noble,

Secretary General of INTERPOL

Before the United States House Committee on International Relations

One hundred eighth congress

July 16, 2003

 

An American Compliance Officer at a Russian Bank

For Your Information

Bankers' Association for Finance and Trade (BAFT)

Volume 8, Number 1

February 2003

 

Corporate Governance in Russia

Investor Perceptions in the West and Business Reality on the Ground

SRU Limited

October 2002-January 2003

 

Gordon Housworth



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