Fishing for Investments

Joining the World Trade Organization is a matter of economic life and death to Russia. The country needs the access to developed countries' markets and foreign investment that WTO membership would bring. To reach these goals, the Russian government has passed over a dozen major laws this year reforming various parts of its economy, in theory making it more transparent and attractive to foreign investment.

Once the United States and the European Union recognized Russia as a market economy last June, the investment rain should have poured over Russia. However, the volume of the U.S. investment in Russia still remains at some $6.3 billion — the same as in that of tiny Costa Rica. The experiences of American businessman William L. Davies serve as an example of why "the dream still fails to match the reality," to quote a senior U.S. diplomat — and why the Americans are still wary of investing here.

Back in 1990, Davies sold his wholesale interior designs showroom in Tempe, Arizona, and invested all his money in the launch of Kola Salmon Marketing Inc. in the Lovozero district of the Murmansk region, some 2,000 km north of Moscow. By 1995, Davies was running three world class salmon fly fishing tourist camps on the pristine rivers of the scenic Kola peninsula, an area of stunning natural beauty that under the Soviet regime had been closed to foreigners because of its top secret nuclear submarine and long-range bomber bases. Hundreds of fishermen from the U.S., Britain, Germany and Scandinavian countries went through his facilities, enjoying the scenery and sport, and bringing stable and solid income both to Kola Salmon and the region.

All that changed in January 1995, when the Lovozero district administration cancelled their contract with Kola Salmon, and signed a new contract with a rival company. Davies took the district administration to court, but the Russians insisted that the dispute be submitted to the Stockholm Arbitration Institute as stipulated in his contract. But on June 22, 1995 — while a court decision was still pending — a helicopter hovered over Davies' camp on the banks of the Varzina River and a squad of black-masked riot police equipped with Kalashnikovs leapt out. They kicked out the tourists and staff, and once Kola Salmon employees and the cops were gone, the camp was looted.

Such high-handed treatment of a foreign investor is a nationwide pattern not just an individual provincial case. Last year in the Vladimirski region in central Russia, local authorities effectively handed control of a quartz glass plant to the Russian partners of Sawyer Research Products of Cleveland, Ohio, which has since fought a bitter court battle to recover the $8.2 million Sawyer claims to have invested in the plant. In Primorski Krai, in the Far Eastern Region of Russia, the U.S.-based Euro Asia Investment Holding has been fighting court battles for years to recover assets it claims were drained from its investment in a flour company that dominated the regional market. There is a case upon a documented case of such takeovers all over Russia, often with threats of violence.

Davies shifted his base of operation back to Arizona, and runs only a very low-key sports-fishing facility in the Murmansk region, no match for his once thriving enterprise. He continues to wage a stubborn and desperate fight to recover some of the $945,000 he says is due him for his business, arbitrarily ruined by what he calls "the complete arrogance and unfettered power of regional officials."

The law seems to be on Davies' side. In October 1996, the Stockholm Arbitration Tribunal awarded Kola Salmon the $945,000 judgement, the estimated worth of the company when it was taken over, and expressed its belief that the Russians would pay promptly. "The Russians told us point-blank they wouldn't pay, but would harass us out of this country should we persist in 'making a scandal,'" says Davies. The Federal Tax Police filed a suit against Kola Salmon, a team of eight auditors ransacked its office, and the Murmansk region filed an appeal in Sweden, taking the case all the way to the Swedish Supreme Court. The Swedish courts rejected the Murmansk region's appeals, so regional officials appealed the Stockholm rulings all the way to the Russian Supreme Court. Again, Kola Salmon prevailed, but Davies had to sell his two remaining fishing camps at a fraction of their value to fund his defense. Finally, in February 1998, the Murmansk General Court issued a writ for collection of the money due to Davies. That should have ended the dispute. Instead, it opened up another front.

Murmansk regional authorities prevented Federal bailiffs from collecting the money owed to Kola Salmon, obstructed decisions of the Supreme Court and had regional courts pass new rulings in their favor. The Russian Supreme Court overruled them all. The most bizarre ploy came when the Murmansk Arbitration Court ruled the original Kola Salmon contract illegal, thus canceling the entire Stockholm arbitration process. The Supreme Court of Russia cancelled that ruling too. To date, Davies hasn't seen any money at all. Last month, the Murmansk regional court passed yet another ruling, impeding payment. Now, Kola Salmon has to appeal to the Russian Supreme Court all over again.

Antonina Podolskaya, a spokesperson for the governor of the Murmansk region, disclaims any liability: "The governor believes it's between Kola Salmon and the Lovozero district, not us." According to Nikolai Brylev, head of the Lovozero district, "It's not about who is right or wrong. It's about our insolvency, really." Lovozero's entire annual budget is $5.5 million — not enough to cover the wages of educational, medical and other state-paid workers. "We pay Kola Salmon — we're finished," he says.

U.S. diplomats warned Yuri Yevdokimov, Governor of the Murmansk region that they won't "actively promote any American investment in the Murmansk region until the dispute with Kola Salmon is resolved in accordance with Russian law." "Yevdokimov could care less about American warnings or Swedish courts decisions," comments one Murmansk businessman. Davies is pessimistic. "The dirty little secret about Russia today," he says, "is that if you have any dispute whatsoever with the Russians — you lose." Not a great recommendation for WTO membership.