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Property Dispute Becomes Symbol of Problems for Foreign Investors in Russia - 2002-08-13

A long-running dispute between a Russian property company and the foundation of billionaire philanthropist George Soros is focusing attention on the problems Western investors can run into when doing business in Russia. A Moscow court recently ruled in favor of the Soros Foundation's Open Society Institute in the dispute, but instead of ending the matter tensions have only increased.

The dispute centers on the allegation that the Russian property company changed a lease agreement with the Soros Foundation after it was signed, forging a stipulation that the foundation had to buy the building.

The court ruled that the foundation had no such obligation and may simply lease the building.

But rather than end the matter, tensions increased this past week when private security guards brought in by the landlord occupied the Central Moscow building.

Yekaterina Geniyeva is the Director of the Soros Foundation's Open Society Institute in Moscow. She describes what happened. "When I arrived early in morning, I saw the gate locked, our cars being prisoners in the yard, and militia men standing with their guns close to the gate," he said. "These people also tore the sign of the Soros Foundation off the gate. And at some point I gave the orders to knock down the lock off the gate."

Ms. Geniyeva says more than a week later the armed guards are still on the scene, though some, if not all, padlocks have been removed. She says the landlord's actions make the building unusable and have forced the foundation to suspend meetings with visitors indefinitely.

Ms. Geniyeva says she is worried what might happen next and has begun hoarding water and alternate sources of power for the building, in the event such services are eventually cut off by the landlord.

The landlord, Kantemir Karamzin, disputes Ms. Geniyeva's contention. He says the building is still accessible to visitors and that the Soros Foundation is only closing it to the public for publicity reasons.

He says he is the true victim in the case. Mr. Karamzin says his company has no claims on the property but that the Soros foundation owes ten months of charges for water, electricity, sewage and the parking lot rent. Until they pay, he says, they will not be getting any of those services.

Ms. Geniyeva says the dispute has been such a distraction that the foundation has been unable to implement some $10 million worth of programs on projects ranging from fighting tuberculosis in prisons, to judicial and media reform, anti-corruption programs and book distribution.

She also says in view of the developments founder George Soros plans to come to Russia in October to review funding for the 40 existing projects in Russia.

In the 15 years the Open Society Institute has worked in Russia, it has spent $1 billion throughout the country on programs aimed at helping teachers, students, scientists, journalists, prisoners and women and children, among others.

In view of the problems the Soros Foundation has had, Ms. Geniyeva says western investors should be careful in all real estate dealings in Russia.

"The most important thing for us is not the building, of course, it's the principle, it's the rule of law, and to continue our work in Russia to continue fulfilling our mission, which is civil society, rule of law, education, culture, and [improving the] health of Russians," he said.

Mr. Karamzin states a different set of priorities, when asked if he was worried such cases could scare off lucrative potential future investment in Russia.

He says, of course he cares for Russia and its image, but he says he cares for his own pocket more.

Mr. Karamzin has appealed the recent court ruling and says he is confident he will ultimately be found in the right.

Meanwhile, Russia's Interfax news agency reports a group of prominent writers and public figures has written to Russian Prime Minister Mikhail Kasyanov asking him to intervene in the case. The letter says the dispute can only have a negative effect on foreign investment in Russia.

Alexei Moiseev, Vice President of Renaissance Capital Investment Group in Moscow, agrees. Mr. Moiseev also says Russia still has a long way to go toward ensuring compliance with international fair business practices.

"In terms of protection of the legal system and protection of property, not only for foreigners, we all know, obviously, that the legal system is not as strong as it probably should be," he said. "And we do see it is being manipulated by various interests. So, I wouldn't make any difference between foreigners and domestics, it is just not particularly efficient anyway."

Meanwhile, potential and present investors are watching this case to see how it is resolved, if at all. They are not alone. Scores of other people who receive assistance from the Soros-funded programs also watch with anticipation and interest.