Court in The Hague Orders Russia to Pay $50Bln to Former Yukos Shareholders
The Hague’s Permanent Court of Arbitration has reached the conclusion that Yukos was prevented from settling its alleged tax debts or discharging them in full, awarding compensation of more that $50 billion to a group of shareholders comprising Hulley Enterprises, Yukos Universal and Veteran Petroleum. Russia will have to pay $50 billion damages and additional $65 million for legal fees and arbitration costs within 180 days.
“It is the largest arbitration award ever,” said Tim Osborne, Director of GML, a financial holding company established in 1997 that owned strategic assets in Russian companies, including Yukos.
The shareholders originally claimed $100 billion and, despite getting around 50% of their original request, they cried victory. New York-headquartered law firm Shearman & Sterling who is following the case referred to the Court’s decision as an “historic arbitral award.’
According to GML’s lawyers, the award is final and binding, with little room for changes.
“This is a great day for the rule of law: a superpower like the Russian Federation is held accountable for its violations of international law by an independent arbitral tribunal of the highest possible calibre,” Emmanuel Gaillard, Head of Shearman & Sterling’s International Arbitration Group, commented during a press conference that took place in London on Monday.
According to Gaillard, the final award is 20 times larger than the second largest arbitral award (Dow - Kuwait, USD 2.5 billion) and 30 times larger than the 3rd largest award (Occidental - Ecuador, USD 1.7 billion).
BANKRUPTCY DRIVEN BY POLITICAL MOTIVATIONS, SAYS RULING
The tribunal said that Yukos’ bankruptcy has to do with politics: Yukos’ destruction was said to be a deliberate decision of Russian authorities for the benefit of State-owned companies like Rosneft and Gazprom.
“The totality of the bankruptcy proceedings … were not part of a process for the collection of taxes but rather, as submitted by claimants, indeed the ‘final act of the destruction of the company by the Russian Federation and the expropriation of its assets for the sole benefit of the Russian State and State-owned companies Rosneft and Gazprom,” said Gaillard, speaking about the final award of 18 July 2014 during the conference.
According to the Court, the bankruptcy has also to do with a political arm-wrestling between Russia and Yukos’ former managers, in particular Mikhail Khodorkovsky.
‘The harsh treatment accorded to Messrs. Khodorkovsky and Lebedev remotely jailed and caged in court, the mistreatment of counsel of Yukos and the difficulties counsel encountered in reading the record and conferring with Messrs. Khodorkovsky and Lebedev, the very pace of the legal proceedings, do not comport with the due process of law. Rather the Russian court proceedings, and most egregiously, the second trial and second sentencing Messrs. Khodorkovsky and Lebedev on the creative legal theory of their theft of Yukos’ oil production indicate that Russian courts bent to the will of Russian executive authorities to bankrupt Yukos, assign its assets to a State-controlled company, and incarcerate a man who gave signs of becoming a political competitor,’ reads a document uploaded on the Court’s website.
According to the Tribunal, the expropriation of Yukos was achieved in 3 overlapping steps.
‘First, the paralysis of the company; second, the manufacturing of a pretext for the taking of the company’s assets, namely, the fabrication of debt; finally, the use of that pretext to take Yukos’ assets piece by piece, including its most valuable asset, Yuganskneftegaz, and transfer them to the State-owned companies Rosneft and Gazprom. Each of these steps was accompanied by serious due process violations.’
KHODORKOVSKY
Khodorkovsky, the former head of Yukos who was also named Russia's wealthiest man in 2004 according to Forbes, commented on the news on his website, expressing satisfaction for the decision of the Court of Arbitration.
‘It is fantastic that the company shareholders are being given a chance to recover their damages. It is sad that the recompense will have to come from the State’s coffers, not from the pockets of Mafiosi linked to the powers that be and those of Putin’s oligarchs. I am taking this opportunity to confirm that I am not a party to these legal proceedings and I do not seek to benefit financially from their outcome,’ he wrote.
FUTURE: REINFORCEMENT, LEGAL BATTLES
As stated previously, Russia must pay by mid-January or face penalties. Doubts remain on the timing and the amount of money that Russian authorities are willing to transfer into the shareholders' pockets. Nonetheless, the lawyers and the shareholders appeared positive.
“Firstly, we don’t have a reason to think that Russia will not satisfy its international obligation,” Gaillard said commenting on the possibility of future legal battles between the Kremlin and Western countries.
“Second, in the unlikely event they do not, we have the law, in particular the New York Convention,” he added, explaining that there is no appeal, but “limited action” within the Hague’s Permanent Court of Arbitration.
According to Gaillard, there would not be a review on the merits of the ruling announced on Monday. Similarly, GML's Osborne show some confidence.
“We believe we will have a realistic chance of collecting this award,” GML’s Osborne explained.
With respect to reinforcement mechanisms, Gaillard explained that the shareholders “can attach commercial assets of the State and its instrumentalities.” This clearly translates into a threat for Rosneft, as the company led by Sechin has been considered an instrumentality.
“The Tribunal has found that Rosneft was the alter ego of the Russian Federation in relation to this particular case,” Shearman & Sterling’s Yas Banifatemi confirmed.
On the other hand, despite these positive comments, lengthy legal battles likely remain. According to several analysts contacted by Natural Gas Europe, legal proceedings could take years. According to the Russian Minister of Finance, the Kremlin intends on appealing the ruling. It is clear that the Russian government is likely to recur to the best international lawyers to limit the damage.
ROSNEFT AND BP
According to the ruling, Russian authorities transferred Yukos’ best assets into Rosneft. That is why, during the conference, it seemed clear that the company led by Sechin could be forced to contribute.
In this context, relations between UK-based BP and Rosneft further complicate the jigsaw. BP does indeed control 19.75% of Rosneft, with BP's CEO Bob Dudley also holding a seat on the board of Rosneft.
Logically, in case Rosneft was called to pay, BP could be affected in two different ways.
Firstly, BP's stake in Rosneft would lose value. Secondly, since the final award represents 74% of today’s market capitalisation of Rosneft, the company's capital might not be enough and BP might be called to contribute. Some commentators also hypothesised legal actions of GML against the British company.
In this context, the questions are: Will the company led by Bob Dudley react to minimise the loss? How? Will it capitalise on its relations with the British government? Will it further complicate Russian relations with Western countries?
GOOD NEWS FOR GML, POTENTIALLY BAD NEWS FOR INTERNATIONAL COMMUNITY
Yukos was controlled by Group Menatep, which still exists under the name GML. According to the Financial Times, GML is now controlled by Israel-based Leonid Nevzlin, a former Yukos VP who owns 70% of GML. Other oligarchs, including Platon Lebedev, still hold a stake in GML. Apparently Khodorkovsky is not one of them.
The ruling, which does not benefit either the former minority shareholders of Yukos, is indeed good news only for GML’s shareholders, Hulley Enterprises, Yukos Universal and Veteran Petroleum.
However, this could mean bad news for the international community, as it adds another layer of complexity to the already tangled relation between Russia and Western countries. Now, much depends on Russian reactions and the coming subtle diplomatic games. Western sanctions are a key factor in this confrontation.
On the Russian side, Moscow keeps sending conciliatory messages. On Monday, Russian Forieng Minister Sergei Lavrov commented said that the Kremlin will not impose tit-for-tat measures.
"We can't ignore it. But to fall into hysterics and respond to a blow with a blow is not worthy of a major country,” said Lavrov.
In this arena of conflicting declarations, American and Western strategy seems clear, while the Russian approach appears to be more difficult to understand. The only two certainties are that an escalation would be dangerous for everybody and that it will take months for shareholders to eventually collect the award, as it will equally take time for Russia to put into practice its plans.
Sergio Matalucci