by John B. Tieder, Jr., Senior Partner

In the last newsletter, I related my general impressions of teaching and visiting in Russia.  Now for some more practical advice as to opportunities in the construction field and the legal environment in which those opportunities might be exploited.

Opportunities

Most of you are probably aware of Russia’s tremendous energy resources and the opportunities available to extract, transport, and process oil, gas and coal.  Some of you, I know, are already involved.  There is also a large need for power generation facilities and transmission lines.  This is the obvious and I will not elaborate, but it is only the start.

A first impression on landing in St. Petersburg is that you have reached a small to medium size city with a population of perhaps 500,000- 750,000.  The airport is comparable in size, but considerably more antiquated, than the airports of, for example, Albany, New York or Dayton, Ohio, but St. Petersburg is a city of several million.  Air traffic is expanding and the need for airports and other air travel infrastructure will soon expand.

The area around the airport and the main road into town is the “new St. Petersburg.” There are ultra modern showrooms for every major European and Japanese luxury car, I saw but one American car (a single automobile) during my entire stay; shopping malls, an IKEA store, large hotels (no U.S. chains), and factories, one of which was built by one of our clients, and the uninspired architecture of large apartment/ condo buildings.  This initial impression and further investigation lead to some conclusions about opportunities in the building sector.

The energy companies have plenty to spend and one of the areas where they will spend is on “monument” office buildings.  One of the controversies while I was in St. Petersburg was Gazprom’s plan to build a glass skyscraper near the old city center.  The controversy was a typical preservationist versus progress dispute, but from a construction perspective, the planned building was innovative with a very complex foundation (St. Petersburg was built on a marsh); Scandinavian architect and proposed contractor.

Another area of opportunity is food processing facilities and related transportation.  Food and beverages, other than vodka, are expensive compared to income.  A modest meal for two in a modest restaurant is USD 75.00, okay for a foreign visitor but a twice a year treat for the average Russian.  Fresh fruits and vegetables in the winter are rare and expensive.  Much of the packaged food in grocery stores is imported.  Talking to anyone over the age of 30, the situation is much better than during the Soviet Era, but there is still much to be done.

The largest opportunity, though, must be in the housing sector.  Russia is a huge land mass with a population of approximately 140,000,000; but while space is not a problem, housing is in very short supply, and the housing that does exist, much is in the form of apartments which many characterize as “architecturally uninspired,” large building style.  Several of my students related stories of how their parents, professionals in their 40’s or 50’s, had only recently purchased a two-bedroom flat.  Young people live with their parents until their late twenties.  There is a large demand, but little available housing.  Whoever can unlock the housing market will do very well.

On the civil side, water and sewage treatment systems are antiquated.  St. Petersburg city water is not drinkable, for natives as well as foreigners.  Hot water and heating systems are centralized and antiquated.  Our hotel did not have hot water for four days because the central water heating plant for our district of the city was broken.  The road between St. Petersburg and Moscow is excellent; the ascribed reason is that President Putin is from St. Petersburg and wanted good communications between Moscow and his hometown.  The rest of the country needs work.  The same is true of the railroad system.

In summary, it is a huge market with very little involvement of U.S. contractors.

Legal System

On paper, the legal system and the treaty commitments of Russia make for a very inviting business climate.

The Russian Constitution, Article 15, provides that Treaties and international law are predominant:

•    Article 15

    1.     The Constitution of the Russian Federation shall have supreme legal force and direct effect, and shall be applicable throughout the entire territory of the Russian Federation.  Laws and other legal acts adopted by the Russian Federation may not contravene the Constitution of the Russian Federation.

    2.     Organs of state power and local self-government, officials, citizens and their associations must comply with the laws and the Constitution of the Russian Federation.

    3.     The Laws shall be officially published.  Unpublished laws shall not be applicable…     

    4.     The commonly recognized principles and norms of the international law and the international treaties of the Russian Federation shall be a component part of its legal system.  If an international treaty of the Russian Federation stipulates other rules than those stipulated by the law, the rules of the international treaty shall apply.

Russia has signed several treaties that are conducive to foreign investment.  For example, there is a U.S.-Russia Bilateral Investment Treaty (“BIT”) effective June 2, 1994.  Like other BIT’s, it gives a U.S. company who has a dispute with some categories of Russian public entities a right to have those disputes resolved by the International Centre for the Settlement of Investment Disputes (“ICSID”) located in Washington, D.C. Russia is also a signatory to the 1958 U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the U.N. Convention on Contracts for the International Sale of Goods (“CISG”) and the U.N. Convention on International Bills of Exchange and International Promissory Notes.  Russia has also enacted an international arbitration law which is based almost verbatim on the UNCITRAL Model Law on International Commercial Arbitration.

Russia is a civil law country with a comprehensive Civil Code.  The provisions dealing with contracts (obligations) will be familiar and comfortable to those who have dealt with any other major civil code, e.g. France or Germany.  Articles 421, “The Freedom of the Contract” and 422 “The Contract and the Law,” give the contracting parties broad discretion as to the terms of contracts as long as those terms do not violate mandatory provisions of the Code.  A contract is interpreted based on the literal meaning of its words, Article 431.  This differs somewhat from other civil law jurisdictions where interpretation is based on the intent of the parties rather than the literal meaning of the terms.

Articles 702-768 deal with construction-related contracts.  Article 744, (1) “Introduction of Changes to Technical Documentation,” provides as follows:

    1.     The customer shall have the right to introduce changes to technical documentation, unless related additional works exceed in cost terms 10 per cent of the total estimate cost of construction and change the nature of the works, envisaged in the building contract.

This interesting provision answers a question which U.S. construction lawyers are often asked, “what is the limit of changes within the scope of the contract?”

Another interesting provision is Article 744 (3) which provides:

    3.     The contractor shall be obliged in accordance with Article 450 of this Code to review the estimate, if the cost of the works has exceeded the estimate by not less than 10 per cent for the reasons beyond his control.

The referenced Article 450, “The Grounds for the Amendment and the Cancellation of the Contract,” allows the contract to be amended or cancelled when one of the parties suffers, “losses, to a considerable extent depriving it of what it could have counted upon when concluding the contract.” Reading the provisions together, an overrun in excess of 10% might be basis of a claim to amend the Contract.”

Another provision is Article 747, “The Customer’s (Owner) Additional Obligations under the Building Contract” which provides:

    1.     The customer shall be obliged to provide in time a land plot for construction.  The area and condition of the land plot to be provided shall correspond to the terms of the building contract and in the absence of such conditions shall ensure the timely start of the works, their normal performance and completion on due date.

    2.     In cases and in the procedure, envisaged by the building contract the customer shall be obliged to convey to the contractor for use the buildings and structures necessary for the accomplishment of the works, to transport cargoes at his address, to lay out temporary networks of power, water and steam supply and render other services.

This is a clear delineation of the Owner’s obligations to provide the site and related services.

In summary, the Russian Civil Code seems fair and even somewhat pro-contractor.  The difficulty of working in Russia, however, reflects the difference between the, “law-as-written,” and the, “law-as-applied.” Russia is incredibly bureaucratic.  The public sector is over-staffed and, as a result, too much is required and too little is accomplished.  Simple administrative acts take forever.  My paying of a hotel bill took longer than obtaining a mortgage in the U.S. Obtaining permits from a municipal body can be comparable to shepherding a private bill through the U.S. Congress.  The solution is often bribery.  For U.S. contractors, there is the always fuzzy line between permissible, “grease” payments and illegality as defined by the U.S. Foreign Corrupt Practices Act (“FCPA”).

Even more troubling is the operation of the court system.  Arbitration is final and a U.S. Contractor can contract for and conduct an arbitration outside of Russia, the Stockholm Chamber of Commerce is a favorite, with non- Russian arbitrators.  If, however, the Award is not acceptable to the Russian party, that Award will be extremely difficult to enforce in Russia.  The courts are not reliable.  There is no fuzzy line here; to prevail it takes something more than, “grease.”

There is a lot more to say, of course, but I will conclude with the recommendation that Russia is worth a look.  There is so much potential in both physical and human resources that eventually, a way of working there at an acceptable risk level will evolve.  Do not miss it!

I enjoyed my Russian trip so much, that I have agreed to another teaching stint - this time at the University of National and World Economy in Sofia, Bulgaria.  Bulgaria joined the EU on January 1, 2007 and I am interested to learn what effect this has had on the business climate.  I will keep you informed as the former socialist world becomes an increasingly important market for the U.S. construction industry.


The information or opinion provided in this article is the author's own and not necessarily that of Watt, Tieder, Hoffar & Fitzgerald, LLP. The author is solely responsible for the information and opinion that he or she has provided. The information contained herein does not replace seeking specific legal counsel to directly address individual client needs.

Watt, Tieder, Hoffar & Fitzgerald is one of the largest construction law firms in the world, with a practice that encompasses all aspects of construction contracting, claims and disputes resolution, and transactional legal services. WTHF principally represents large general contractors, design firms, and sureties throughout the country and internationally.