Is Going to Court a Waste of Time for Russian Firms?

At a recent Kennan Institute lecture, Kathryn Hendley, Professor, Department of Political Science and School of Law, University of Wisconsin, Madison; former Fellow, Woodrow Wilson Center; and former Title VIII-Supported Research Scholar, Kennan Institute, challenged the conventional wisdom that going to court is a waste of time for Russian firms.

Hendley conducted survey research on firms that have used the Russian Arbitrazh Court system to collect on overdue payments. Nonpayment cases, Hendley explained, provided the best survey subject because they were very simple cases; they were the most common cases; and, because they involved relatively small amounts, were not a rich target for corruption. In order to measure differences by court size, her research looked at three cities: Moscow, Ekaterinburg, and Saratov.

Hendley found that the use of the Arbitrazh Courts is expanding quickly in Russia. Since 1994, the caseload has expanded by 258.3 percent in Moscow; 218 percent in Ekaterinburg; and 315.5 percent in Saratov (the smallest of the three). The principle reason for going to court, according to the surveyed firms, was to recover money. Other reasons included tax and accounting purposes and to send a message to other customers that nonpayment was not acceptable. The vast majority of the cases are in favor of the plaintiff, although only about half receive a judgment for the full amount.

The challenge for the plaintiff then becomes collecting on the court's decision. After a one-month "hold" period for appeals, plaintiffs may then obtain a court order that they can take to the defendant's bank to obtain the funds—however, it is not uncommon to encounter accounts with several such outstanding court orders. The next step for a plaintiff is to apply to the state bailiffs to seize the defendant's property. This step is not frequently employed, however, as it is perceived as a particularly aggressive step, it requires persistence on the part of the plaintiff to pester the bailiffs, and the bailiffs have discretion over which court judgments they enforce.

Hendley found that, after a successful verdict, two-thirds of all plaintiffs actually receive money from the defendent, and on average they receive at least half of what they are owed. This, she contended, is a better than expected result for a country widely perceived to have a completely corrupt court system. The Russian courts are perceived by Russian businesses as a reliable method of obtaining payment, if only as a last resort.

Hendley concluded that court system cannot bear the burden of adjudicating conflict alone. She noted that fewer than 10 percent of defendants pay voluntarily upon a negative verdict, necessitating a court order. A typical western country sees only 30 percent of cases going on to require a court order for repayment. Hendley stated that weak financial institutions are often the cause for the difficulty plaintiffs have in obtaining funds through court orders. Weakness in other social institutions, from banks to the absence of credit rating agencies and better business bureaus to the cultural attitude towards paying bills, all hamper the ability of the court system to function effectively in Russia.