US investor runs shy of Russia's wild east

EAIH reaped a poor harvest from its investment in Russia's far east

By James Schofield In Moscow

Moscow is basking in the afterglow of recent US and EU recognition of market economy status and hopes to join the WTO as early as next year.

But despite the good news, a US agricultural investment gone bad in Russia's far east is a depressing reminder of the dangers investors face when doing business in the country.

These disputes scare off others who might otherwise consider investments in Russia

Alexander Vershbow, US ambassador to Russia

Since 1997, US-owned Euro Asian Investment Holding has invested $12m in PKP, a once-promising grain company in the remote Primorye region near Japan.

Initially relations between the parties were good and the venture looked to be a success. PKP controlled 75% of the local flour market and EAIH took a 20% stake in the concern.

But following the Russian financial crisis in 1998, relations soured, sales plummeted and debts have mounted.

Hopes evaporate

In March, after years of wrangling, the main assets of PKP were quietly revalued by the company's Russian directors and sold off at rock-bottom prices, according to Henri Bardon, who runs EAIH.

Mr Bardon believes the company's assets, which he sees as being sold according to the letter if not the spirit of the law, ended up in firms controlled by PKP's Russian management and senior officials in the local administration.

Mr Bardon learned of the disposals only after the sale and says that shareholders and creditors have received none of the $5.4m in proceeds, yet have been saddled with the company's liabilities.

"The administration has supported, by its inaction, the alienation of assets," Mr Bardon says.

"They are fully aware that the assets are being liquidated for cents on the dollar."

The Ussurisk milling complex for example, the main asset of PKP, was sold for 61m roubles, or just $1.6m. The mill was independently valued at $6m, according to Bardon.

Adding insult to injury, as Bardon fights to recover the stripped assets, he has even been forced to rent offices in a building PKP once owned.

Officials for the regional Primoyre administration have declined to comment on Bardon's claims.

Poor investment climate

The story is a depressingly common one in Russia where personal relations with government officials are often worth far more than signed contracts.

Alexander Vershbow: Investor confidence warning

Abuse of minority shareholders rights, especially foreign investors, is a widespread problem, while Russian legislation remains peppered with loopholes.

It is a business culture that severely limits foreign investment in the country, which amounted to a tiny $2.4bn during the first five months of this year.

After a decade of dramatic decline, Russia is enjoying economic growth once again.

But to sustain the revival it needs billions of dollars of investment in sectors as diverse as energy, manufacturing and agriculture.

Jealous local interests

Bardon has since lobbied the US government to bring pressure on Moscow to resolve the dispute.

Both the US ambassador to Russia, Alexander Vershbow, and the US consul general to the country's far east have taken the matter up with the governor of Primoyre, so far with little success.

The federal authorities seem powerless to act in the Russian far east

Henri Bardon, EAIH

In a statement in May, Mr Vershbow said that while US businessmen recognised Russia's tremendous potential, the country had failed to attract significant amounts of investment.

One reason for that, he said, was the frequency of unfair treatment from "jealous local interests" that some investors have experienced.

"These disputes scare off others who might otherwise consider investments in Russia," Mr Vershbow said.

"Investors will go elsewhere until they have greater confidence that they will be treated fairly and that they can defend their interests in court if they are not."

Poor message to investors

No doubt keen to minimise the damage the dispute is causing to Russia's investment image, the country's president, Vladimir Putin, has ordered his personal envoy to the region, Konstantin Pulikovsky, to look into the matter.

But Mr Pulikovsky has no authority to get involved in commercial disputes, and Mr Bardon sees little hope of recovering either his investment or assets.

The involvement of federal authorities may indeed send the right message to investors that the government is prepared to fight to protect their rights.

But the need for intervention from the highest echelons of government to resolve the dispute is also a depressing comment on the system of government in Russia, where officials, rather than rules, still wield enormous power.

"The federal authorities seem powerless to act in the Russian far east," Mr Bardon said.

"Russia needs to resolve these embarrassing disputes in order to show that this sort of behaviour is no longer acceptable - Russia needs to get back to work."