The Saga of the largest Investment Arbitration case – Yukos Shareholders v. Russia

famous Kremlin in Moscow

In 2021 we might witness the continued battle of one of the largest Investment Arbitration cases in the planet in terms of damages awarded. At 50 Billion Dollars awarded against Russia, this is the highest amount awarded in an International Investment arbitration or any kind of Arbitration for that matter. While the final arbitral award was issued in 2014. Shareholder still have not been able to collect the award. So what is this case all about?

Facts of Yukos Shareholder v. Russia

Yukos was established in 1993 as a joint stock corporation and privatized in 1995, with activities spanning the oil and gas sectors; Yuganskneftegaz (YNG) served as the company’s primary development subsidiary. Yukos was Russia’s main oil and gas firm in 2002 and was ranked among the world’s top ten oil and gas firms by market capitalization. The plaintiffs alleged that, beginning in July 2003, Russia implemented a set of policies that resulted in Yukos declaring bankruptcy in August 2006. Yukos was subsequently deregistered and its properties nationalized in November 2007. Gazprom and Rosneft, both state-owned Russian firms, purchased Yukos’ remaining properties.

Among the measures claimed to have violated the ECT was the company’s and its management’s criminal prosecution. The accusation and conviction for offences like embezzlement, bribery, forgery and fiscal avoidance is made by Mikhail Khodorkovsky (the CEO of Yukos and a Russian member of the opposition parties), Platon Lebedev (Hulley Enterprises Director and Yukos Universal), Vasily Shakohvsksky (Yukos Moscow President). Other executives fled Russia, like Leonid Nevzlin, for escaping similar charges (Deputy Chairman of the Yukos Board of Directors).

Throughout the arbitrations, Russia referred to Khodorkovsky, Lebedev, and Nevzlin as “oligarchs”—the plaintiffs’ private owners—and stressed their involvement in a variety of illicit practices. Russia defined Yukos as a “criminal organization” that engaged in embezzlement, tax avoidance by the use of special low-tax zones inside Russia, tax fraud and schemes to evade the enforcement of tax liens, as well as transfer pricing schemes to funnel profits from the selling of oil to offshore shell companies controlled by “oligarchs.”

According to the plaintiffs, Russia has levied tax reassessments, VAT taxes, fees, and asset freezes on Yukos; threatened to withdraw its licenses; annulled its merger with Russian oil giant Sibneft; and compelled Yukos to sell YNG, its primary production plant. They contended that, in addition to the intimidation of Yukos executives, Russia’s actions constituted a denial of the ECT’s equal and equitable care (FET) standard and an indirect expropriation of the claimants’ investment in Yukos in violation of ECT Article 13. (1).

What Happened in the Arbitration Proceedings and Subsequently

In 2005, GML Ltd. (formerly Group Menatep), the original owner of 60% of Yukos, lodged a complaint against the company before a tribunal at The Hague’s Permanent Court of Arbitration under the Energy Charter Treaty.

While Russia did not ratify the treaty in its entirety, these treaty provisions remained legally binding for a number of years as part of the draft framework. European investments in Russian energy projects made before Russia decided to withdraw from the treaty remain covered under the treaty’s investment protection clause. As a result, the three-member tribunal chaired by Canadian lawyer Yves Fortier decided in 2009 that the appeal must be heard and that the Veteran Petroleum Trust, a private pension fund representing 30,000 former Yukos workers, as well as two firms that hold Yukos stock – both of which are represented by GML – could demand payments from the Russian government.

GML sued Russia for more than $100 billion, having formerly been the largest shareholder of Yukos. Since the core shareholders’ stake was reported to be worth $25 billion at the time Yukos was dissolved, the litigants sought a multiple of that figure to represent Yukos’ estimated post-expropriation capitalisation and interest. As a result, the lawsuit became the world’s largest-ever arbitration.

On July 28, 2014, the Permanent Court of Arbitration issued a nearly 600-page judgement containing the opinion of the three arbitrators named in the case – in addition to Fortier, Judge Stephen Schwebel of the United States (appointed by Russia) and Charles Poncet of Switzerland (appointed by the claimants). They found in favour of the largest owners, paying them $50 billion in damages against Russia, less than half of their demand but more than 20 times the existing average for an arbitration decision. Additionally, the Russian Federation was directed to repay Yukos stakeholders for 75% of their legal costs, totalling $60 million.

The court overwhelmingly determined that there had been an expropriation, with Russia expropriating the Yukos oil corporation in a sequence of politically orchestrated assaults in violation of Article 13(1) of the Energy Charter Treaty. The panel specifically stated that Russia was not motivated by tax collection when it auctioned off a key company, but rather by the need of the state to purchase Yukos’ most precious commodity. However, the arbitrators deducted 25% from the amount they assigned to the confiscated properties.

Leonid Nevzlin, who owns slightly more than 70% of GML, and four other ex-Yukos owners – Platon Lebedev, Mikhail Brudno, Vladimir Dubov, and Vasily Shakhnovsky – who each hold slightly less than 7.5 percent. Khodorkovsky is not among the owners, having signed over his majority interest in Yukos to Nevzlin during his 2005 trial in order to fend off the company’s assault, and has renounced that charge. Other significant beneficiaries include the Veteran Petroleum Pension Scheme, which was established in 2001 for about 30,000 retired Yukos workers and is due to obtain an additional $8.2 billion from Russia.

Russia has until January 2015 to compensate or risk interest on the debt. In the Netherlands, courts have the authority to set aside awards only on technical grounds. If Russia fails to pay, the plaintiffs can seek Russian sovereign commercial properties via court-ordered seizures in any of the 150 countries that are parties to the 1958 New York Convention on imposing arbitration awards; Russia is a signatory to the convention.

Russia has petitioned the court to vacate the arbitration decision on legal grounds and has skipped a January 2015 deadline to compensate the entire amount.

When Russia failed to compensate the damages, the shareholders were compelled to register the grant in other New York Convention states and obtain judicial rulings freezing, and then seizing, Russian state properties.

The German Federal Foreign Office said in a statement on the ruling on 28 July 2014 that “the ruling is correct, and the Federal Government will adhere to it.” GML applied to the German courts for approval of the arbitration award in the summer of 2015.

In France, law enforcement agents confiscated approximately 40 Russian state accounts in approximately eight or nine banks, as well as eight or nine buildings. Several of these properties were eventually unfrozen after the courts ruled that they were immune from state prosecution. However, in November 2016, the Paris Tribunal de Grande Instance refused to disclose 12 non-diplomatic Russian properties, rejecting Russia’s argument that the compliance proceedings could be impacted by the District Court of The Hague’s decision to vacate the prize.

On June 17, 2015, Belgian court bailiffs notified 47 Belgian and Russian companies and nongovernmental organizations registered in the Brussels region that the Russian government was freezing all Russian state assets in their possession – mostly bank accounts and real estate – as well as any debts they might owe to the Russian government, totaling approximately 1.65 billion euros ($1.65 billion). Russia’s Foreign Ministry summoned Belgium’s ambassador to Moscow, Alex Van Meeuwen, in reaction to the freezes, warning that Russia would take reciprocal measures against Belgian accounts and property in the region. By 2016, GML had accused Belgium’s government of capitulating to Russia’s “bullying” after the government failed to stop court-ordered seizures of non-diplomatic Russian state properties.

GML filed a case in the District of Columbia in the summer of 2015 to uphold the arbitration award. The US then gave Russia until August 21, 60 days after the letter was released, to react or object.

Sergei Lavrov, Russia’s foreign minister, said in televised remarks that Russian institutions impacted by the moves were planning to sue to compel the freezing of the properties of “foreign firms with government interference” in Russia.

On 20 April 2016, the District Court of The Hague vacated the PCA’s decisions, finding that the court lacked authority because the temporary implementation of the ECT arbitration clause breached Russian rule. The District Court’s verdict was reversed in February 2020 by The Hague Court of Appeal [nl], reinstating the Russian government’s enforcement of the arbitration award. Russia’s Justice Ministry has announced that it intends to appeal.  

What can happen?

Russia has appealed in the Supreme Court of Netherlands. There are parallel cases between the parties concerning the enforcement that are being fought in various courts and arbitration tribunals around the world. The case was also arbitrated in Stockholm Chamber of Commerce (SCC). While the Stockholm Chamber of Commerce (SCC) had ruled in favour of the Shareholders, The Swedish appeals court has ruled that the Stockholm Chamber of Commerce tribunal lacked the authority to evaluate expropriation claims brought against Russia by a group of Spanish investment companies that related to the demise of Yukos Oil Co. This was a blow to the shareholders but courts in UK, US and several other countries have upheld the arbitration ruling. As the case is pending before the Supreme court in Netherlands the legal community awaits the outcome of the case.

Do you have an International Investment Arbitration matter that you need to discuss? Rattsakuten’s expert team of lawyers will be able to help you. Contact Us today.

Fredrik Jörgensen

About Rattsakuten

Rattsakutten is a leading law firm focused on Commercial Arbitration and Dispute Resolution. Based in Sweden, Rattsakuuten handles dispute resolution and Arbitration matters before the SCC ( Swedish Chamber of Commerce ), ICC, HKIAC and several other Arbitration tribunals

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