AFK Sistema unlikely to prevail in lawsuit against RZD if it bases argument on GAAP standards


AFK Sistema is not likely to win its lawsuit against Russian Railways (RZD), if it bases its argument on the fact that Sistema had posted a profit of USD 218m under US GAAP because, as a Russian-headquartered company, it is assumed the group will provide financial information under Russian Accounting Standards (RAS), rather than US GAAP, according to a Moscow-based lawyer and banker.

On 15 November, Sistema filed a suit with the Arbitration Court of Moscow, challenging the outcome of RZD's auction of a stake in First Freight Company (PGK).

RZD did not allow Russian-listed Sistema to participate in the auction for the sale of 25% plus one share in PGK because Sistema produced a loss under Russian accounting standards (RAS), and auction participants were required to be profitable.

A Sistema spokesperson declined to comment on the details of the lawsuit but confirmed that the first hearing for the case is scheduled for 14 January 2013. The court undertook security measures to prevent any deal with the asset until the court's decision is finalized, he added.

If AFK Sistema were somehow to buy the 25% plus one share in PGK, it would not be able to control the company. Sistema would only in that case be able to block decisions taken by PGK shareholder Independent Transport Company (NTK), said Nikita Melnikov, a transport analyst from Russian independent investment group ATON.

For this reason, PGK would prefer from a business perspective to be controlled by Vladimir Lisin’s NTK, which already owns 75% in the company, he added. If Sistema gets a stake in PGK, it could weaken PGK and strengthen Sistema's own transport business, which includes recently purchased SG-Trans, ATON's Melnikov said.

The Sistema spokesperson said that PGK has strong prospects for growth in terms of operational logic as well as stakeholder value. If it were to acquire a PGK stake, it would consider co-developing the company and extracting dividends, the Sistema spokesperson added.

From a competition point of view, it would be better if AFK Sistema manages to buy a stake in PGK but business or competition logic will not concern the court, said Anton Panchenkov, Head of Group in Corporate Practice at Goltsblat BLP, the Russian practice of London-based law firm BLP.

AFK Sistema is unlikely to approach FAS in regards to the case, because there seem to be no clear legal grounds for FAS to initiate a case against RZD or NTK, as there was no formal tender held, he added.

This case is likely to take three to four months, ATON's Melnikov forecasted.

by Natalia Lapotko in London.

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