Moscow as International Financial Centre: Final Report of UK-Russia Liaison Group

The Moscow International Financial Centre (the “MIFC”) initiative has selected Alternative Dispute Resolution in Russia as one of its key themes. In June 2012 the ADR Workstream of the UK-Russia Liaison Group on Moscow as an International Financial Centre prepared its Final Report (the “Report”) concerning ways in which to improve ADR mechanisms in Russia.

The Final Report based on the earlier contributions of the members of the ADR Workstream summarises the final recommendations and advice. As the Report considers the task of enhancing ADR in Russia from three main perspectives (institutional, reform of laws and rules, educational), we will give some core findings in the same sequence.

A prerequisite to reform is identifying institutions instrumental to enhancing the resolution of financial and other business disputes in Russia. Therefore the institutional issues are addressed in the Report first. Apart from improving ADR institutions, one discussed innovation is establishing a special court for resolving financial disputes within the system of existing state commercial courts. The members of ADR Workstream propose to extend its jurisdiction to all disputes related to the activity of the MIFC.

Such a specialised financial court would function side by side with universally understood methods of ADR (arbitration, mediation and expert determination). That is why it is essential to define the relationship of the financial court to an ADR institution which sits within the MIFC. The Report states that “the process of developing dispute resolution in the MIFC should maximize the benefits which may be obtained from the role of the state courts on the one hand and ADR on the other”.

Attention to arbitration is perceived as a first step further to which improvements in other forms of ADR such as mediation and expert determination will follow. The Report refers to the problem of the location of the supervisory court(s) over arbitration matters.

In some typical situations it is necessary to recourse to a court with supervisory responsibilities (such as challenges to the jurisdiction of the arbitral tribunal, applications to set aside an arbitral award etc). A significant number of the courts (within each of the 83 constituent entities of the Russian Federation) have such supervisory jurisdiction in Russia. Arguably, this situation leads to a so called “diffusion of responsibilities”.

The Report recommends a transfer of all competences to the Moscow Commercial Court or a new financial court. Such a court would have all supervisory powers in relation to international arbitration and would be responsible for recognising and enforcing incoming foreign arbitral awards. The proposed measure aims to exclude the possibility of local influence over the court.

One of the main aims of the MIFC is to promote Moscow as a world-class seat of international arbitration. With this aim it is necessary to ensure the existence of an arbitral institution in Moscow which is a strong competitor to top global institutions such as for instance the International Court of Arbitration of the International Chamber of Commerce (the “ICC”) and London Court of International Arbitration (the “LCIA”).

The question therefore arises as to whether the ICAC at the Russian Chamber of Commerce and Industry should be the means of boosting the position of Moscow as a leading seat of international arbitration, or whether an entirely new ADR institution should be established. The ICAC is sometimes unjustly perceived as connected with the Russian state, in spite of it having proved itself capable of independently resolving high profile cases, such as, for instance, the Maksimov v. NLMK case. It is definitely reasonable to first and foremost do all that is possible to enhance the already existing institution (the ICAC).

Of course, the goal of attracting more large cases to the ICAC requires significant improvements to its structure, outlook, law and practice. The ADR Workstream proposes to amend the ICAC Rules and profile so as to, for instance, introduce foreign representation in its Presidium and to increase the number of non-Russians in its list of arbitrators, and to expressly encourage the choice of language in the ICAC model arbitration clause.

Finally, there is a proposal to establish courses and training programmes for the judges involved in international arbitration cases. These courses could be organised with participation of one or more leading arbitral institutions and members of the legal profession and judiciary from other countries.

To achieve the goals indicated in the Report it is necessary to resolve other issues not mentioned in it. Thus, it is crucial to improve the way Russian tax regulation is applied to arbitration. In particular, 30% profit tax is imposed on the compensation for travel and other expenses of arbitrators. This ill-founded practice is an obstacle to international arbitrators’ involvement and must be terminated.

Also, the mechanism of double taxation avoidance for international arbitrators’ fees, as follows from the Russian Tax Code (Article 232.2 in particular), is too complicated and formalistic. In order to not to be subjected to Russian taxation (at 30%) regarding his/her fees, the arbitrator must submit the certificate of his foreign residence (apostilled and translated into Russian) to the Russian revenue authority, rather than, e.g., to the Russian Chamber of Commerce and Industry as the tax agent for ICAC cases. This is very burdensome and needs to be changed.

Besides, the rules of the Russian Tax Code are formulated in a way which makes it unclear whether the Russian Chamber of Commerce and Industry as the tax agent for ICAC cases, even in the case of submission of the above certificate, must abstain from withdrawing tax on international arbitrators’ fees. The option of refunding the withdrawn tax provided by the Russian Tax Code is not practicable for international arbitrators.

These issues must be successfully resolved for international arbitration to develop in Russia.

Dmitry Davydenko, Dinara Yalaletdinova

Muranov, Chernyakov & Partners Law Firm