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By John Helmer in Moscow

In Russia it is traditional for the tsar to invite the culpable to assist him in finding and punishing the culprits; or to bargain for scapegoats.

On Thursday last, October 15, Prime Minister Vladimir Putin told the regular weekly session of government ministers that he has ordered the Prosecutor General to investigate corruption in the state bureaucracy.

On Wednesday of this week, October 21, President Dmitry Medvedev invited a group of Russia’s oligarchs and figures of the Russian Union of Entrepreneurs and Industrialists to give him their thoughts on government action to deal with the economic crisis.

According to the record of remarks published by Prime-TASS – the Kremlin has not published an official text but does not dispute the press versions — when it came turn to speak for Oleg Deripaska, owner of United Company Rusal, as well as auto, construction and other companies, Deripaska told Medvedev that it is impossible to get a fair ruling from the law courts without paying bribes. “The courts have become overgrown with the institutution of intermediaries and deciders (решалами),” Deripaska said, “without whom it is impossible to get a fair solution. Everybody knows you have to pay for it”.

“They should be put in prison,” Medvedev reportedly said with indignation. “It is the maximum form of corruption when such outgrowths appear in the judicial system. I suspect these are often the businessmen who are paying [bribes] to them [courts]. The businessman’s duty in this situation is to write an application to the Office of the General Prosecutor, to the Ministry of Internal Affairs, to the FSB.”

“This phenomenon did not appear yesterday or the day before yesterday,” Medvedev went on, remembering that in 1995 he was acting as a lawyer in a case from St. Petersburg, and faced this form of corruption when he came to a Moscow court for an appeal. “Then it absolutely astounded me. At the entrance to the court there was a small room below which there was a special kind of lawyer. He invited claimants to his car, and while making several circuits around the court he offered his services.”

Medvedev assured Deripaska that to struggle against such corruption of the courts “is our common task with you.”

A study of cases filed by or against Deripaska’s companies in the Russian Arbitrazh court system — identifiable through the website posting of the court case archive — reveals either that Deripaska, with more debts than anyone else in Russia, is the biggest victim of the Russian courts, or the biggest perpetrator.

The number of Arbitrazh Court cases involving Rusal – most of them, non-payment and property claims against Rusal – is unusually high at all levels – especially, at the first- instance ruling level (resheniye suda), and in the pending case list. This might be interpreted as evidence for the relative openness of the court system, and the readiness of claimants to pursue their claims against Rusal, without fear of favoritism, intimidation, or corrupt rulings.

This interpretation might also be reinforced by the number of instances in which the rulings favour the claimant, and in which Rusal has been ordered to make restitution of property or cash payment.

On the other hand, a closer examination of the case list and rulings reveals that the overwhelming majority of cases involves the state-owned Russian Railways Company (RZD), and its regional operating divisions. When these claims are examined in detail, it is evident that the legal proceeding is a form of protection for Rusal from having to meet its freight and transportation payment obligations.

Rusal benefits from protracted legal proceedings – at a rate of more than 1 case considered per day — in several ways. The company gains delay in having to make payment. It gets relief from the more serious sanction which RZD could introduce of a cutoff of rail service. And, most importantly perhaps, the regionalization of the railway claims appears to have protected Rusal and Deripaska from a concerted, centralized effort by the RZD leadership in Moscow.

The large number of cases also suggests that inside Russia, Rusal may be trading with insufficient cashflow to meet its obligations – in short, in practical and legal terms, it may be insolvent. Under Russian bankruptcy law, in such cases the management of a company has the legal obligation to apply to the court for voluntary bankruptcy administration. If it does not, it is legally liable for such consequences as may ensure for creditors. By waging an intensive, daily campaign of cases in the arbitrazh courts, Rusal management may be utilizing the court to protect itself from having to disclose voluntary bankruptcy.

As Rusal’s chief executive, this is Deripaska’s personal responsibility, and his personal liability.

The Russian bankruptcy law also requires non-voluntary bankruptcy to be made on the application to the court by a verified creditor. In the early history of forced bankruptcies, in which asset takeovers were arranged corruptly in the Russian metals sector, debts for transportation, gas, electricity, and other inputs were often used by creditors to achieve court rulings on bankruptcy, and the subsequent transfer of management, followed by asset transfer. It appears from the latest records that RZD might be in the position to consolidate Rusal’s debts, and apply to the Arbitrazh Court for a non-voluntary bankruptcy order.

However, when asked why RZD is filing so many cases in so many jurisdictions at the first level of the court system, RZD in Moscow refuses to answer. RZD in Moscow also refuses to say whether RZD’s chief executive, the politically influential Vladimir Yakunin, has met with Deripaska in recent months to discuss Rusal’s debts to the railway system. The tentative conclusion is that RZD, a state enterprise, is favoring Deripaska by the type of court claim strategy it has been pursuing at the regional level.

There are other potential creditor claims from the state. The evidence of Rusal’s operating cash position, and of its payment arrears to municipal, regional and federal budgets, is now available to the government through the Accounting Chamber audit that was conducted between December 2008 and January 2009. Such evidence has never existed before. However, the Accounting Chamber is now categorically refusing to disclose what it has learned; and what results were gathered from the audit of the cashflow and debt position and Rusal’s debts to the state budget. The Chamber has also stopped short of reaching recommendations, or is concealing what they are. This is tantamount to protection for the company and its chief executive from the bankruptcy law.

The President’s spokesman was asked if Medvedev had analyzed the court records for claims against Deripaska’s companies, before he spoke to Deripaska this week. Here is the link to the case data, which Medvedev was asked to assess: http://www.arbitr.ru/bras/index.asp

And here is the summary of Rusal’s position in the courts: http://johnhelmer.net/wp-content/uploads/2009/10/Rusal-Arbitrazh-Court-7-month-case-summary.doc

Rulings in cases involving United Company Rusal (or affiliates) as defendant and plaintiff in the files of the federal and regional Arbitrazh Court system, first level (resheniye suda), November 1,2008 to May 31, 2009

 Total number of cases introduced at the first level: 144
 Rate of decision: 1.125 cases decided per working day
 Number of cases in which Rusal is defendant: 126 (88%)
 Number of cases in which Rusal is plaintiff: 17 (12%)
 Number of cases involving Russian Railways Company (RZD): 91 (63%), of which 87 in which RZD is plaintiff, 4 in which Rusal plaintiff
 Total value of claims: Rb342,796,595.30 (equivalent to $10.7 million)
 Number of cases in which Rusal claim favored: 17 (12%)
 Almost all RZD claims are granted, but with a reduction of amount and/or elimination of penalty in Rusal’s favor
 Smallest claim for payment Rusal refused to pay, resulting in court claim: Rb3,917.16 ($124) from RZD
 Largest claims against Rusal: Rb133,996,094.40 ($4.2 million)
for construction work by SpetsTNStroy
Rb74,904,026.95 ($2.5mn) for electricity supply
 Average value per claim: Rb2,380,531.91 ($74,392)
 Number of claims for less than Rb320,000 ($10,000): 36 (25%)

Rulings in cases involving United Company Rusal (or affiliates) as defendant and plaintiff in the files of the federal and regional Arbitrazh Court system, appellate level (postanovleniye), November 1,2008 to May 31, 2009

 Total number of cases decided at the appellate level: 35
 Number of appeals initiated by Rusal: 10 (29%)
 Of which Rusal won 3, and lost 7
 Number of appeals initiated by other claimants: 25 (71%)
 For which the outcome can be counted a win for Rusal: 18 (72%)
 Total outcomes favourable to Rusal: 21 (60%)

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