Record award for former Yukos investors after tribunal finds "political motivation" for Russia's actions

Out-Law News | 31 Jul 2014 | 9:45 am | 2 min. read

An arbitral tribunal sitting in The Hague has unanimously held that the Russian Federation breached its international obligations under the Energy Charter Treaty when it liquidated and part-nationalised the former Yukos Oil Company in 2007.

The Permanent Court of Arbitration has issued lengthy awards in favour of three separate groups of former shareholders in what was once Russia's largest oil company in terms of daily production, which was bankrupted as a result of a series of tax claims issued by the Russian government in 2003. State-owned companies Rosneft and Gazprom received the vast majority of Yukos' assets when the company, which was worth more than $60 billion at the time, was liquidated.

In its rulings, the tribunal found that Yukos was "the object of a series of politically-motivated attacks by the Russian authorities that eventually led to its destruction". As part of its aims "to bankrupt Yukos, assign its assets to a state-controlled company" and imprison its owner, Mikhail Khodorkovsky, Russia illegally expropriated the investors' assets, it said.

However, the Russian Finance Ministry intends to appeal the decision, which it said was "politically biased" and "based on current developments" rather than being an "objective, impartial consideration" of the issues in dispute.

Former shareholders Hulley Enterprises Ltd of Cyprus, Isle of Man-based Yukos Universal Ltd and Cyprus' Veteran Petroleum Ltd began their arbitration cases in 2005 under the Energy Charter Treaty, an international agreement which sets rules for cross-border energy co-operation. Russia signed the treaty in 1994 but never ratified it, and withdrew in 2009.

Handing down its awards, the tribunal ordered the Russian Federation to pay over $50bn in damages to the shareholders as well as 75% of their legal fees, with interest due annually if payment is not made by 15 January 2015. However, the awards were reduced by 25% to reflect the fact that "certain facets" of the tax optimisation scheme used by Yukos had made its shareholders "vulnerable" to enforcement action by the Russian authorities.

The awards are enforceable in any one of the 150 states that are party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. However, dispute resolution specialist Yuri Botiuk of Pinsent Masons, the law firm behind, said that the shareholders would likely experience a "real fight" enforcing the awards.

"If payment is not voluntarily forthcoming, exclusions protecting sovereign assets abroad such as embassies and other non commercial state assets could make recovery difficult," he said. "However, there are a large number of Russian Federation assets held abroad that may be worth the shareholders testing the exemptions against, and there are 50 billion reasons for them to want to do so."

"The Kuwait Airways v Iraq Airways litigation, in which it was held that an Iraqi state entity which received assets (seized by the Iraqi state) did not, on the facts of that case, necessarily have state immunity to protect it against claims from the assets' former owners, might possibly provide some grounds for the shareholders to pursue their claims against Russia's Rosneft and Gazprom, which received a share of the Yukos assets. Its possible that the 'political motivation' argument could be extended to the auctions under which they received the former Yukos assets." he said.

Noting the tribunal's comments about Yukos' culpability, Botiuk added that the case was "much more complicated than another story about 'big bad Russia'".

"By taking the Russian Federation's actions in isolation, the rights and wrongs of this case seems simple, but as the tribunal concluded there was some evidence that the Russian Federation's actions were a direct reaction to the Yukos' previous practices and those would be brought to light in an enforcement action," he said.

In a statement on its website Rosneft, which received the biggest share of former Yukos assets, said that the company "does not believe that it may be brought against any claims in accordance with the published rulings or that these rulings can have an adverse effect on its business or assets".

"Rosneft was not a party to, and did not participate in, the arbitrations, is not bound by the published rulings," it said. "Rosneft believes that all of its purchases of former Yukos assets, and all other actions taken by it with respect to Yukos, were entirely lawful and [subject to] proper applicable law."