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The Russians Are Coming Too

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Sovereign-owned or controlled enterprises (SOEs) from questionable countries have no business in the boardrooms of Canada or other free enterprise nations.

Indications are the Prime Minister and his government understand this and are devising nuanced "net benefit" criteria regarding foreign takeovers designed to let in desirables and keep out the others.
Undesirable SOEs are those that serve political not commercial agendas; do not offer reciprocal investment privileges to Canadians in their countries and that believe they enjoy sovereign immunity from Canadian laws.

For instance, Sinopec Shanghai Engineering's Canadian subsidiary last month belatedly pleaded guilty to several counts of negligence in the deaths and injuries of six workers in Alberta. This was after years of China's refusal to let it be served Alberta court documents then after the Supreme Court of Canada this summer refused to hear its sovereign immunity defense. The workers or families remain unpaid by Sinopec.

But this concern about SOEs is not just about China. Russia is another questionable regime with companies investing here and all over the world that are owned by The Kremlin or by oligarchs who answer to it. The following case involving Russian government companies is another example why SOEs should be banned from controlling anything in Canada.

A Canadian uranium company, Khan Resources Inc., had a joint venture in Mongolia with a Russian government entity called Atomredmetzoloto JSC (ARMZ). In 2009, ARMZ made an unsuccessful hostile takeover bid for Khan. Then, due to disagreement and damages involving a joint venture, Khan sued ARMZ for $300 million.

The merits of the case are a matter for courts to decide, but the Russians are using a section of the Hague Convention, a treaty, to stymie the lawsuit. Khan's lawyers asked the Russian Ministry of Justice to serve the litigation papers but it refused, citing Article 13 of the Hague Convention that allows a government to refuse documents "if it deems that would infringe its sovereignty or security."

In March, a Canadian judge was told that if the Russians were not served the case would be on hold. No service of documents, no case. The company appealed that decision in September and awaits a ruling.
Khan's CEO Grant Edey put his company's predicament in context to me:

"Khan believes it unfair that ARMZ can come into Ontario and avail themselves of our capital markets through actions such as initiating a take-over bid in 2009 for Khan and acquiring a controlling 51% interest in Uranium One, but now hide behind the Russian Government and thereby avoid having to defend their conduct before an Ontario court."

An article in the Advocates' Quarterly in Canada by Toronto lawyer Ken MacDonald corroborated this serious precedent:

"A Russian lawyer with Baker and Mackenzie gave evidence that success would be unlikely because the Russian government owns 80% of the defendant companies and would likely interfere in the proceeding," wrote MacDonald. "The Ontario Superior Court of Justice has effectively stymied a Canadian company's attempts to sue two Russian government-owned companies in Ontario. Canadians with claims against defendants in countries whose courts are subjected to political interference and/or corruption can thereby be denied access to justice."

The Russians and others used the Hague Convention to frustrate justice in the US and UK but their courts unceremoniously ignored the gambit and the cases continued.

As Khan's Edey said: "If the [Russian] company is successful in avoiding service, it reinforces the position that state national companies can avoid the Canadian justice system even while being able to carry on business here in Canada."

The Government of Canada must wade into this court case, or any others if they exist, immediately. It should have waded into the Sinopec fiasco: Instead Investment Canada granted Sinopec permission to buy a huge chunk of Syncrude, Canada's premier oil sands operation.

All governments must examine, clarify, or rewrite legislation, to insure that no court case will ever again be derailed as a result of manipulation of international treaties by foreign companies or countries that impede Canadian legal rights.

The Sinopec and ARMZ cases illustrate why Canada must simply prohibit foreign buyouts by any company owned or controlled by ruthless regimes. (Foreign investment from countries like the US or UK or EU should be allowed if in the "national interest, as should investments by Statoil or other government-owned entities where laws, transparency, cooperation and ownership reciprocity exist.

But China's proxy, and Sinopec's sister company CNOOC bidding $15 billion to take over Nexen, should be denied permission.

But the ARMZ case points out that Canada's Investment Canada must act retroactively now concerning foreign buyouts that have already been allowed. It should scrutinize foreign buyers after they have been allowed in, and make permission in future conditional on meeting specific prescribed terms forever.
Then, if these companies are deemed to not be a "net benefit" to Canada, they should, like an abusive dinner guest, be asked to disinvest and leave.

SOEs are the Trojan Horses of the global economy, and two of them have already, to the extent they've been granted access, attempted to ride roughshod over our constitution and way of life.
An outright ban on such SOEs is not protectionism. It's about protecting our boundaries and values.