September 10, 2010 / 3:37 PM / in 7 years

Russia held back by corporate governance weakness: fund

MOSCOW (Reuters) - Russia will remain a pariah market for international investors while it falls short of Western corporate governance standards, one of its biggest overseas investors said on Thursday.

“Corporate governance has improved... but when someone really wants to break the rules, unfortunately they can do it. It’s a big concern, as it is causing real losses and damaging investor confidence in this country,” Alexander Branis, director of Prosperity Capital Management, told a conference.

Prosperity is one of the largest overseas investors in Russia and the CIS with around $3.8 billion under management.

Brandis said the group had been on the wrong end of two corporate governance issues in recent years -- at power producers OGK-3 OGKC.MM and TGK-2 (TGKB.MM).

“At OGK-3 millions of dollars were transferred out of the company in exchange for assets of questionable value. There is still no closure to that,” he said.

He was referring to acquisitions made by OGK-3 from Vladimir Potanin’s Interros group two years ago. Interros also controls OGK-3, and according to Renaissance Capital analyst Derek Weaver the move has been criticized by senior government officials as a misuse of funds.

The relationship between Russian company owners and overseas shareholders has been torrid in recent years, crowned by long running disputes between BP (BP.L) and a group of oligarchs over TNK-BP TNBPI.RTS and Norway’s Telenor TEL.O and Russia’s Alfa over mobile group Vimpelcom VIP.N.

Brandis said that while Russia has put corporate governance rules in place, they were difficult to enforce and equally hard to fight for in courts.

    “People do not really get prosecuted, and the courts are unprofessional,” he added.

    He was speaking at Swiss bank UBS’s UBSN.VX annual Russia investment conference at a debate over whether Moscow could become an international financial center.

    The panelists, who included the CEOs of both Moscow stockmarkets MICEX and .RTS agreed that trading infrastructure needed to be improved -- notably with the creation of a central securities depository.

    Others, including Jochem Wermuth, chief investment officer of Wermuth Asset Management, said the city itself needed to be changed, including more English road signs.

    Editing by David Cowell

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