Ilim Pulp sues Russia tycoons in London court

Russia's largest pulp maker is turning to a private London-based arbitration court to help fend off powerful local business tycoons whom it alleges are trying to take control of a key mill. It is the most significant example of a Russian company seeking redress in an international court against what it sees as a campaign by powerful business magnates, known in Russia as "oligarchs", to muscle in on its interests. St Petersburg-based Ilim Pulp, set up in 1992, is by far Russia's biggest pulp and paper firm with 61 percent of the market. A spokesman for Ilim Pulp, Svyatoslav Bychkov, said his firm was hoping the London Court of International Arbitration (LCIA) would settle a dispute with a group of firms backed by prominent oligarchs, Roman Abramovich and Oleg Deripaska. Ilim Pulp wants Basic Element, Deripaska's industrial holding, to abandon a campaign to take over one of Ilim's major mills, Bratsk Paper Mill, and to pay compensation for a previous attempt to acquire the company. A spokesman for Basic Element says the company has done no wrong. Extreme examples of practices that have been used by other businessmen include raids on companies by gunmen holding legal writs from compliant courts. Such action was rampant in the 1990s, when new-born capitalists accumulated vast wealth using strong-arm methods. The chosen method was for a predator to buy a minority stake in a target company, call an extraordinary shareholders meeting without the knowledge of the owners and install a new board. Raiders would then obtain a writ from a court in a remote part of the country allowing them to swoop on their target with the help of the police, eject existing managers from their offices and replace them with their own executives. A wave of thuggery has since gradually given way to gentler methods but the practice has not died out. And doing business in Russia is still not for the faint-hearted, said Oleg Osipenko, head of the Rinkon-Gamma consulting firm in "The mentality of medium-sized and big business, which usually resort to such methods, is still not civilised enough," he said. "They see other people getting away with it and wonder: why can't I do the same, if I have the right connections?" He said a key problem was the inefficiency and weakness of the Russian legal system, where ill-paid judges are often easily bought off by the richer party in a dispute. "It is very difficult to stand up to powerful magnates penetrating companies," Osipenko said. "The court system is in a very poor state and needs very radical reform. My lawyer's instincts tell me to go to court if one cannot reach a compromise, but there are no guarantees of an impartial decision." In 2001, Basic Element installed its managers in Ilim Pulp's Bratsk Paper Mill and removed Ilim's team. Ilim appeared to reach a settlement in 2002 under a broad-ranging deal it signed with a representative of a web of offshore companies, linked to Deripaska and Abramovich. Deripaska controls Basic Element. The deal called for Basic Element to pull out of Bratsk and pay Ilim $15 million in damages. Another clause stipulated the offshore firms would not venture into the timber industry in the Siberian region of Irkutsk, where the disputed factory is located, for two years. Ilim Pulp also agreed to buy Ust-Ilimsk Mill from the firms. Such agreements are allowed under Russian competition law under certain conditions. But Bychkov said only one point of the deal - selling Ust-Ilimsk - was honoured. Bychkov said Basic Element's timber arm, Continental Management, later bought shares in Bratsk Pulp and Paper Mill and Bratsk Complex Holding, two other timber plants in the Irkutsk region putting it in breach of the agreement. This year Basic Element and Continental Management again tried to take over the Bratsk Mill and put a new director in charge, but the attempt was rebuffed, he said. "We consider it a breach of the agreement," Bychkov said, adding the suit had been filed last Wednesday. But Basic Element said it had not reneged on the deal. "We fulfilled all our obligations under the agreement," said spokesman Alexei Drobashenko. He said Continental Management was only 30 percent owned by Basic Element and his company was not in full control of Continental's decisions. "Only those companies which want to go out of business in Russia sue Basic Element. Those who want to continue business here, sue in Russia," Drobashenko said. Abramovich-controlled Millhouse Capital, which with Basic Element jointly manages Russian Aluminium, refused to comment. "We have turned to an international court because we consider it more independent in its decisions than local courts," Bychkov said. He also said the London Court of International Arbitration was the place stipulated in the 2002 agreement as the body to turn to in case of a new conflict. But corporate lawyer Osipenko said that even if Ilim won the case in London it would not necessarily bring it final victory. "From what I see court decisions taken outside our country are implemented slowly and with much difficulty," he said.