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Pedestrians walk through Red Square in Moscow, Russia.


A probe by Swedish police into suspected bribery at Bombardier Inc.'s rail division related to a contract in Azerbaijan has laid bare a curious fact: The company's biggest investor doesn't share its appetite for doing business in that part of the world.

While Bombardier's train unit has sold wares into Russia and other former Soviet republics for years from an office in Stockholm, its largest shareholder, pension fund Caisse de dépôt et placement du Québec, won't do any deals in the region.

"There are a lot of geographies that we're just not willing to go to," Caisse chief executive Michael Sabia told reporters at the pension fund's annual results news conference in February. "For instance, Russia is a country where we're not going nowhere near right now."

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The reasons for the Caisse's skittishness mirror many of the market challenges highlighted by Export Development Canada and the U.S. Department of Commerce in recent country reports on Russia. Among them: widespread corruption, lack of transparency, inconsistent application of laws and regulations, a continuing geopolitical crisis and deteriorating relations between Russia and the West. Another factor is the Kremlin's say in any investment in what it deems "strategic sectors" of the Russian economy.

Five years after the Caisse was forced to publicly defend its sizable investment in engineering firm SNC-Lavalin Group Inc., then embroiled in a corruption scandal involving former senior management, the pension fund manager now finds itself entangled in another unfolding legal drama – this one at Bombardier.

Then, as now, the Caisse may be pressing behind the scenes to make sure senior Bombardier leadership has a handle on the situation. It might also push for a discussion over whether potential returns from contracts in the former Soviet Union continue to justify the risk. Countries in the region, including Russia and Azerbaijan, rank among the world's most corrupt, according to Transparency International's latest index.

"At the Caisse, they're probably irritated," said Karl Moore, a corporate strategy specialist at McGill University's Desautels business school. "But they knew [Bombardier] was doing business there."

The Caisse owns a 30-per-cent stake in Bombardier's rail business, known as Bombardier Transportation, which it bought in 2015 for $1.5-billion (U.S.). As part of the deal, it also won a say in the selection of independent directors at parent Bombardier Inc. and agreement by the parent to maintain a $1.25-billion minimum cash reserve at all times.

Prosecutors in Sweden earlier this month detained an executive from Bombardier's Swedish office and questioned two others on suspicion of bribery. The country's National Anti-Corruption Unit believes the Swedish arm of Bombardier Transportation colluded with government officials in Azerbaijan in bidding to win a $340-million contract in the former Soviet republic in 2013. The contract involved supplying and installing signalling systems on a portion of the rail line on the Kars-Baku corridor connecting Asia with Europe.

Bombardier said in a statement March 17 that it is assisting Swedish authorities in their probe and conducting its own internal review. The company said a consortium of which it was a part won the contract after a fair and open competition.

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"Thus far, we have no information of any unlawful behaviour and we stand behind the work we are doing to help modernize Azerbaijan's rail infrastructure," Bombardier said in the statement. "Should we discover any improper activity, we will of course take the necessary and appropriate actions to set things right."

Caisse spokesman Maxime Chagnon declined to provide any further explanation on the pension fund's view of the Russia region or its investment in Bombardier's rail business, reiterating a previous statement saying it would be premature to comment at this time.

The Caisse has been expanding its investments overseas; at last count, 59 per cent of its exposure was outside Canada. Of the pension fund manager's $270-billion (Canadian) in net assets at the end of 2016, none were located in Russia.

Its last investment in the country dates back to 2013, when its Ivanhoe Cambridge real estate unit sold a 60-per-cent interest in the high-end Vremena Goda shopping centre in Moscow. When it bought into the mall in 2008 together with Austrian real estate fund manager Europolis, the Caisse considered Russia a promising new property market. Eventually, the investment became more than the Caisse was willing to put up with.

"You wouldn't believe the stuff that's happening," Ivanhoe vice-president Bill Tresham told a reporter at the time. "The sanitation department has called us and said, 'Well your toilets aren't working. Got a cheque for me?' Guys are running around with guns. And now they're after us because we have a bar in the mall and there were some rowdy people in the bar. To me, that's sell."

The Caisse isn't the only group bitten by the Russian bear. There is a long list of Western multinationals that have run into trouble in the country and wider region after flouting accepted international business practices.

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Technology supplier Hewlett-Packard Co.'s Russian subsidiary pleaded guilty in 2014 to a violation of the U.S. Foreign Corrupt Practices Act for using a company slush fund to bribe Russian government officials to win a large government contract. The company was fined $58.7-million (U.S.).

More recently, Deutsche Bank agreed in January to pay $630-million to settle U.S. and British probes into a trading scheme allegedly used to potentially launder $10-billion out of Russia between 2011 and 2015. At the centre of the ploy were so-called mirror trades, whereby Russian clients bought securities in rubles through the bank's Moscow office and sold others of the same value for foreign currency through its London bureau.

Bombardier's own internal controls and compliance will come under similar scrutiny in the weeks ahead as the Swedish probe unfolds, said Marc Tassé, a professor at the University of Ottawa and senior instructor with the Canadian Centre of Excellence for Anti-Corruption.

Mr. Tassé said: "No anti-bribery/anti-corruption compliance program can control the lack of ethics and greed driving some individuals to commit these crimes but it would certainly make it more likely and easier for companies to prevent, deter and detect such occurrences."

Doing business in Russia today isn't for the weak. Still, it's a market of 143 million people that offers tremendous opportunity for those willing to invest the effort, said Lou Naumovski, a former Canadian diplomat in the country who recently retired from his post as director general of the Moscow office at miner Kinross Gold Corp.

Companies operating there face the challenge of understanding the basic rules of the game, which did not exist in the early 1990s and have been slow to reform, Mr. Naumovski said. In case of disputes, foreign investors in Russia do have the ability to challenge rulings by the country's customs service or tax authorities in court. And many have been successful doing so, belying the myth that Russian courts are all corrupt, Mr. Naumovski said.

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"What never makes [the news] is the fact that there are hundreds if not thousands of Western companies working successfully in Russia," Mr. Naumovski said, including well-known names such as Coca-Cola Co. and Procter & Gamble Co. and lesser known ones such as Canadian grain-handling equipment manufacturer AG Growth International. "The story is much more positive than these scandalous issues that emerge from time to time."

Bombardier once had much more ambitious plans for Russia. It was in talks with Russian state giant Rostec to set up assembly operations in the country for Q400 turboprop planes but suspended the project in 2014 as Western sanctions took hold in the aftermath of Russian's invasion of Ukraine and its annexation of the Crimean Peninsula.

Bombardier general counsel Daniel Desjardins later told Canadian Lawyer magazine that "if the environment changes, both from a sanctions point of view and from an economy point of view in Russia, we will start to re-engage."

Russia, a petro-state, has been battered by the decline in oil prices in recent years. The effects of the current crisis have been felt most acutely in the consumer sector, where the purchasing power of Russians has fallen in tandem with the drop of the ruble.

Chris Murray, a managing director at AltaCorp Capital in Toronto, said he wondered whether there will be a formal re-evaluation at Bombardier Transportation about the jurisdictions in which they're willing to operate, similar to the risk mitigation that's been done on the aerospace side since Alain Bellemare joined the company as chief executive officer in early 2015.

"It's a difficult and complicated business environment that they face globally," Mr. Murray said. "And they've always acknowledged that."

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Russia is one of the more important developing-world markets for Bombardier, but it is a small piece of the company's global business. In 2016, it earned $255-million in revenue in the country, or 1.6 per cent of its $16.3-billion in revenue. It lists ownership of only $2-million worth of property, plants and equipment in Russia. (The company does not disclose revenue or assets for other individual former Soviet republics.)

In 2011, Bombardier said it bought a stake of just less than 50 per cent in Elteza, a Russian manufacturer of rail equipment. Although the company has never disclosed a purchase price, one document obtained via Standard & Poor's Capital IQ indicated that it paid approximately $64-million for that stake. Documents in the Swedish court case and obtained by The Globe suggest that Bombardier's true stake in Elteza may be considerably smaller than 49.9 per cent. The company has declined to answer questions on Elteza.

Nicholas Heymann, who tracks Bombardier equity for William Blair in New York, noted that any decision on whether to abandon Russia and former Soviet states has to be balanced with what is clearly a major market with pressing requirements for new transportation infrastructure. "It's a huge place and they have a massive need," he said.

Bombardier employs about 2,000 people in Sweden. The office in the capital, Stockholm, is the global headquarters of Bombardier's Rail Control Solutions Division (RCS), which manufacturers signalling equipment, and also functions as the hub for the company's rail operations in Russia and the rest of the former Soviet Union.

In a presentation to investors in March, 2014, Peter Cedervall, president of the rail control solutions unit, described the business as a fast-growing part of the larger train division. Originally part of Swedish technology company Telefon AB LM Ericsson, Bombardier RCS is largely a software company employing people in Thailand, Russia, India and Poland, he said.

Mr. Cedervall said one of the most promising geographies for RCS growth was the Commonwealth of Independent States, which includes nine of the 15 former Soviet republics including Russia and Azerbaijan. Through a joint venture with Russian Railways, he said RCS built an estimated 55-per-cent market share in Russia and a 54-per-cent share in the rest of the CIS. The 2010 acquisition of a "significant stake" in Elteza, Russia's biggest signalling equipment manufacturer, further boosted RCS capability, he said.

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"It is the best growing region within our sales right now," Mr. Cedervall said of the CIS. "And it's definitely a significant part of the business now, with good returns."

At the time the Bombardier executive spoke, Russia had just dispatched troops to Crimea, sparking international condemnation and sanctions from countries including the United States. Asked how RCS was responding to the crisis in the region, Mr. Cedervall said one short-term remedy the company was thinking about was bypassing Russian soil in order to get paid at some other location.

"We are preparing our plans," he said. "We have a number of people looking at worst-case [scenarios]."

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