Monday, June 26, 2006

Can Lawyers Be Ethical in Russia?

At the start of July, Rosneft, a huge Russian oil company will launch its plans to raise $10billion on the London and Moscow stock exchanges. It seems Russian prospectuses are somewhat less than transparent when it comes to identifying the histories of companies and who actually owns them, especially other "beneficial" owners.

The prospectuses announce the usual warnings about what could go wrong plus others such as non-executive directors being charged in criminal cases, or occurrences of price-fixing. In the case of Rosneft one of its main assets was acquired from Yukos in a forced auction at a knock-down price--clearly politically maneouvred by the Kremlin after Mikhail Khodorkovsky upset Putin and ended being jailed.

Now one of the biggest tasks that advisers to potential investors in Russia have to undertake are reputation audits where, via a massive trawl through all the posssible information, some semblance of the truth might emerge.

The key thing is that prospectuses are compiled by, among others, corporate lawyers in large law firms. (If you want to see an example have a look at the Kalashnikov Joint Stock Vodka Co. (1947) plc prospectus--I couldn't find another that sounded as though it had been made up.) They know that many of these deals are murky at best, but essentially the lure of the profits to be made in the Russian energy market are too great to provide any inhibition about the bona fides of the oligarchs and others. I think it would be possible to argue that the sins of omission committed by lawyers in these situations are unethical. It's not too far-fetched to imagine a scenario where one of these deals blows up in a big way and the law firms will be implicated. Is it such a large step from Enron to a Russian equivalent? Not really. Every corporate lawyer in Russia is walking a slackwire. It's just a matter of when they fall off.

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