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London Fund Slams 'Minority Abuse' in Russia

CNBC.com
Friday, 15 Oct 2010 | 12:10 PM ET

A London-based asset manager slammed a decision by Russia's Supreme Commercial Court Friday to uphold a refusal by a Russian businessman to buy out minority shareholders in a privatized energy company.

Is it Safe to Invest in Russia?
Liam Halligan, chief economist at Prosperity Capital Management talked to CNBC about a decision by Russia's Supreme Commercial Court's which reignites the debate over Russia as a foreign investment destination.

Click here to watch the full interview with Liam Halligan, chief economist at Prosperity Capital Management

Prosperity Capital Management(PCM), which says it controls investments across Russia and the former Soviet Union worth around $4.5 billion, said in a statement the decision was the "worst minority abuse since Yukos" and warned that it will discourage foreign investors in Russia.

The ruling reignites the debate over Russia as an investment destination and criticism that its government takes arbitrary decisions without regard for foreign investors.

The Supreme Commercial Court of Russia rejected the appeal launched by PCM, which has a 26 percent stake in thermal power plant TGK-2, and other minority shareholders. They argue they are owed about $350 million by Russian businessman and Senator Leonid Lebedev.

The dispute goes back to March 2008, just before the start of the economic crisis, when Lebedev’s Kores group bought a controlling stake in TGK-2.

Kores was legally required to offer to buy out TGK-2 minority shareholders at the same price at which they bought the majority stake.

PCM tendered its shares, but by the time Kores was due to pay out, stock prices had fallen.

PCM has accused Kores of creating legal diversions to avoid paying what it owes TGK-2 minorities together with other minorities it has worked to overturn the rulings backing Kores in several courts of appeal.

“This case shows that, despite big improvements, Russia’s legal system can still be circumvented by the well-connected,” said PCM.

“This can only discourage foreign investment”.

Russia’s Supreme Commercial Court was not available for comment.

Kores insists it is not a Russian company and therefore should have never been permitted to take control of TGK-2 in the first place.

It cited this as its main argument in refusing to pay minority shareholders; Russia's Strategic Investment Law says foreign companies should obtain approval before investing in energy firms.

Kores' argument is that the offer to minority shareholders is invalid, since its parent company has several offshore affiliates which make it a foreign company, according to PCM.

"This is a farcical argument," PCM's Chief Investment Officer, Alexander Branis, said in the statement.

"Kores is domiciled in Russia and controlled by a Russian citizen – Lebedev, who sits in the Upper House of Russia’s Parliament." Besides, when Kores took majority control in the company, power generators were excluded from the Strategic Investment Law to attract foreign investors, Branis added.

A spokesman for PCM said the company would take further legal action.

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