DISCLAIMER: all opinions in this column reflect view of the autor(s), not of Vocal Europe
by Gregoriana Tudoran*
The history of how the leasing company Caterpillar Financial has succeeded in surviving the whirlpools of the Russian leasing market through its continuing success in having the lawsuits brought against it cancelled.
The Arbitration Court of the Moscow District recently came across a dossier which has been causing several headaches over the last few years, the notorious “Caterpillar Financial”. For the second time, the Moscow subsidiary of the American public company has undergone a trial to obtain the cancellation of court decisions which proved its liability for unlawful confinement charges after its withdrawal from its customer, Caterpillar Construction machinery. As it turns out from the trial’s judicial decision documents (which lasted more than three years), Caterpillar Financial and the lessee (a large construction company employing more than 500 workers and constructing large key infrastructural facilities in the north of Russia) signed 29 lease agreements. The first difficulties with the repayments occurred a year before the termination of the contract. In total, from the initial 22 million dollars foreseen in the contract, the leasing company received only approximately 70% of the total amount of the lease payments, i.e. 15.5 million dollars. Hence, in the Court Process, the lessee was forced to refund the leasing charges to the company and, as a result, was left with nothing and went to ruin.
However, some issues concerning Caterpillar Financial and the selling price of the equipment have arisen and hint at strange oddities. Caterpillar Financial is not only specialised in the production of the equipment, but also sells it worldwide: hence, the complete lack of expertise shown in this circumstance is unrealistic. Furthermore, Caterpillar Financial sold the equipment with a 70% discount on the procurement prices; although it was apparently agreed in the contract, several experts maintain that the price was extremely low in comparison to the asset’s value. As it turns out from this case, the Russian Federation’s Supreme Court cannot prevent the abuses perpetrated by leasing companies in seizing property, seen that no safeguard measures are granted for the lessee.
This case is just one of a long series of cases in which Caterpillar Financial has benefitted through the blind spots of the Russian judicial system. It managed to acquire the equipment of the lessees and to illegally withhold payments of up to the half of the transaction’s value without ever being harmed by the legislation. One of the most striking displays of the company’s ability to counterturn events occurred last year. Having lost a lawsuit by 12.5 million dollars the former year, Caterpillar Financial managed to reverse the verdict in the third instance and to exit unscathed by the controversy.
A plethora of lawsuits pointing out the company’s responsibilities have since followed and have been tackled in Court. Caterpillar Financial has managed to win data disputes in almost the entirety of the cases, thereby smashing the rights of the Russian companies and pushing them upon the brink of bankruptcy.
The Russian leasing market-opportunities, but also bureaucratic labyrinths and judicial grey areas
The issue of the termination of a leasing contract that has occurred due to the lack of payment of the due sum by the lessee, represents a constant element of discussion in the current unstable economic conjuncture in Russia, and has been widely debated in the judicial environment. The Supreme Arbitration Court of Russia has adopted a series of documents aiming to restore the equilibrium between the interests of the parties in cases involving the termination of a leasing transaction. In 2011 in particular, the Court sentenced the illegality of the common practice of seizure of the previously leased construction equipment and required a revision of this unlawful approach perpetrated by leasing companies. However, although in principle, the status quo should have been re-established, in practice the legislation finds itself in a deadlock on the following three grounds: First of all, the absence of a clear authority leads to the perpetration of untidiness in the judicial system. Secondly, no protection is granted to the lessees. And last but not least, the lessee keeps powerless struggler in the Russian leasing market.
Undoubtedly, there is a need for the Russian Federation to establish a state regulator for the leasing sector which is based on the same model as the banking sector hierarchy, where the Central Bank of Russia led by Elvira Nabiullina exercises complete control on banking feuds. There is no need to reinvent the wheel, international supervision mechanisms for the leasing market have already established good practices ready to be transposed and adapted in the Russian system (e.g. the successful example of the surveillance actions exercised by The Bureau of Consumer Financial Protection- The Federal Reserve in the US, in the European Central Bank, or by the National Central Banks in Europe).
It is undeniable that someone willing to do business in Russia has to be aware of the uniqueness of the Russian leasing market, of its opportunities, but also of its bureaucratic labyrinths and of its judicial grey areas. Nonetheless, the power games played by Caterpillar Financial and other chasers for disproportional financial advantages, in the Russian leasing market panorama, have gone way beyond its enclosure. Therefore, the Russian authorities should act to contrast the kind of behaviour that has so far been displayed: companies that have managed to crash all the juridical hindrances crossing their path and have been succeeding to nudge any circumstance as a Nautilus of the modern times.
*Gregoriana Tudoran is a Senior Finance Consultant, specialized in finances and bankruptcy/insolvency. She holds a PhD in the management of financial institutions.