Arthur Zurabyan, of ART DE LEX, assessed the possibility of claims against Russian property in the Yukos case

Pay for Yukos: How to find the Russian billions

Russia did not provide the Council of Europe with a plan to pay former shareholders of Yukos USD 186 billion to fulfill the terms of last summer’s decision of the European Court of Human Rights (ECHR).

Judging by the statement the Council of Europe made last week, Moscow does not plan to execute this verdict. Further proof of Russia’s decision to ignore the court order comes from a statement of Alexander Konovalov, the minister of justice. Probably, there will be a lot of wrangling between Russia and the Committee of Ministers of the Council of Europe, which controls the execution of the decision. Meanwhile, each month tens of millions of dollars of fines linked to other Yukos-related decisions continue to accumulate.

At the end of July 2014, the Arbitration Court in The Hague ruled that the company GML, which unites the heirs of the once most powerful oil company in Russia, must receive compensation in the amount of USD 50 billion. The main difference between that case and the claim filed at the ECHR is that GML now can attempt gain compensation from Russian assets throughout the world. High-profile court cases on impoundment and penalties are imminent.

The Russian authorities are expecting unpleasant surprises. A few months ago, talking to reporters, Platon Lebedev, the former head of GML, which was a shareholder of Yukos, very specifically alluded to the fact that Russia’s failure to comply with record-scale compensation verdict will be very painful for the Russian authorities.

But how? That is the 50-billion-dollar question. The saga of the Swiss company, Noga, provides some examples of penalties linked with the Russian state. The company, whose name is comical to the Russian ear, supplied products and fertilizers to Russia and gave multimillion dollar loans to the Soviet Union. Having discovered that Russia did not execute the conditions of the loan properly, Noga appealed to the Stockholm Arbitration Court in 1997 and won the case.

Nearly ten years of attempting to get compensation payments from Moscow followed. Noga famously seized the Russian sailing ship, Sedov, and two destroyers. Additionally, it blocked the accounts of VTB Bank and the RIA Novosti information agency and impounded the collection of the Pushkin Museum. None of these cases to recover funds were successful. For many, the story of Noga is a proof of the futility of any attempt to get anything from Russia. However, this view is not entirely true. The litigation Franz Zedelmeyer had with Russia is less known to the public, and Zedelmeyer is the only one who managed to execute a decision for compensation from Russian.

Zedelmeyer was a German businessman whose cooperation with Russia started at the end of 1980. He advised the police and supplied special equipment for the St. Petersburg police department. However, in 1994, the state seized Zedelmeyera’s property on Stony Island, in St. Petersburg. Zedelmeyer’s good relationship with Vladimir Putin, who was the deputy mayor of St. Petersburg at the time, did not help the entrepreneur to regain his property.

In 1998, Zedelmeyer won a case in the Stockholm Arbitration Court that awarded him USD 2.3 million in compensation. As in the case with Noga, Russia refused to pay. Then the businessman began to look for Russian property to impound. Now, 17 years later, these searches appear to be an exciting though expensive idea because there is no standard about what can and cannot be impounded. Such cases are rare, and courts in different countries can evaluate the same asset in different ways.

Most know that those who want to take part in such a treasure hunt should not waste their time on buildings decorated with Russian flags.

“Abroad, the Russian Federation has mainly diplomatic or other assets that have a public function, that is, not private,” explained Arthur Zurabyan, the head of International Arbitration Practice of ART DE LEX. “What belongs to the Russian Federation has the protection of state immunity.”

However, the list of Russian property abroad is not confined to the embassies. In 2003, Zedelmeyer found that Russia owns a residential complex in Cologne. A court case on the use of these buildings as compensation ensued, and in 2006, the court decided in favor of the plaintiff. In 2008, the houses went up for sale, and Russia had to buy them back. As a result, Zedelmeyer received EUR 1 million. The interest resulting from of noncompliance linked with the compensation by that time amounted to EUR 4 million, so Zedelmeyer continued searching. “It’s simple. One has to dig a lot,” Zedelmeyer said. “The most simple is real estate, but it may be money in the hands of third parties to whom Russia is indebted, securities, and accounts–it all depends on the individual case. In my proceedings, I basically took the simpler goals, rather than the difficult cases.”

An example of a simple target on which Zedelmeyer focused was another building that housed the Russian trade agency in Stockholm. Despite the protests of Moscow, a Swedish court ruled that state immunity does not apply to this property. In February 2014, the building sold for EUR 2.3 million. Another blow to Moscow’s position occurred when an appeal’s court rejected Russia’s attempts to reverse the decision to sell the building.

Zedelmeyer said that, while each of the solutions recovered a percentage of what Russia refused to pay court costs, he is not going to give up on such opportunities to recover his money. After 20 years of proceeding, the amount the German received far exceeds the initial payment. However, compared to the 50 billion that should go to the creditors of Yukos, the money is insignificant. Assuming that Russia is not going to pay, lawyers working for GML have to work hard. Where exactly? The answer to this question largely depends on the thoroughness and ingenuity of specialized “financial detectives,” who will look for “Russian tracks” around the world.
Interviewed lawyers agree that the best prospects are the companies with full or partial Russian state participation that have major assets abroad. There are only a few in Russia, and the first companies that come to mind, of course, are Rosneft and Gazprom.

It may seem that a settlement agreement between Rosneft and the minority shareholders of Yukos, which emerged on 1 April, takes the heat off the Russian oil giant. This is not true because the agreement only concerns mutual claims. Rosneft was trying to seize the assets of two Dutch foundations, which had part of the remaining property of Yukos abroad, and the other party was to receive USD 550 million in compensation for loans to companies that Rosneft now owns. These claims are removed, but, as experts note, this does not apply to the search for USD 50 billion awarded to GML.

Franz Zedelmeyer sees no great difficulties in proving Russian state control over Rosneft. It is enough, he said, to look at the dual role of its CEO, Igor Sechin.

Sabina Konrad, a partner in the Frankfurt division of the law firm McDermott, Will & Emery, said that the main task for the court is to obtain evidence that companies are a “tool” of the state’s will. According to Konrad, “compensation in the Yukos case critically assesses the role of Rosneft in the expropriation of Yukos, which makes it easier for its prosecution.” However, the lawyer added, in a decade after the collapse of Yukos, Rosneft has changed. “Now BP owns 20 percent of its shares, so it will be much more difficult to characterize Rosneft as a ‘tool of the state.’”

Chris Weafer, a senior partner of the consulting company Macro Advisory, agrees: “[After the arbitration decision] creditors of Yukos spoke about the companies in charge of Russia’s exports. In this sense, Russia does not look like a typical OPEC oil companies with significant minority shareholders.” Weafer suggests that, theoretically, a way to get compensation is to impound “black gold,” which Transneft, a fully state-controlled company, transports to the West. However, its tankers have a share of oil that the private firms Lukoil and TNK produce.

Arthur Zurabyan, of ART DE LEX, evaluated the possibility of impounding funds the Russian government has invested in so-called US Treasuries. Even with the recent large-scale withdrawal of these securities, the Russian central bank still holds about USD 65 billion in US Treasury securities. There also are Deutsche Bank and British bonds. The main question for the court in this case is whether the investment is a sovereign act of state or a commercial enterprise.

Sabina Konrad noted that, in the UK and France, these investments are immune from impoundment.

Among assets that Franz Zedelmeyer was trying to recover from Russia were payments the airline Lufthansa listed for flying over Russian territory. His explanation was that such contributions from the Western airlines transfer to a private company, under the mediation of the Russian state-controlled Aeroflot. Therefore, they are subject to being impounded and could serve as compensation. The German Supreme Court applied a different logic, comparing these payments to fees for crossing the boundaries of European air space that Eurocontrol, the organization responsible for coordinating EU aviation traffic, levies. In this case, payments are not subject to penalties. The interpretation, in each court case, of what immunity can and cannot protect varies and affects many billions of dollars, euros, or pounds.

The scope for research is huge. Can the Rosatom deal for the construction of a nuclear power plant in Finland be a target? Why not, concludes Sabina Konrad from Frankfurt. However, she noted, “I will be surprised if the Finns and Rosatom do not structure the payments in such a way as to protect them from persecution.”

Does the long trek for compensation that Franz Zedelmeyera made mean that it is useless to look for something suitable? Not at all, according to the German businessman: “We were looking for something that is easy to take. To look behind the ‘corporate veil’ of Rosneft requires both time and money. Precedents in such cases are absent.”

Fights will last long

“After all these stories with Noga and Zedelmeyer, Russia used immunity to cover everything possible,” remarked Dmitry Gololobov, a former head of the Yukos legal department and now the main partner of the London law firm Gololobov and Co.

Gololobov is in the camp of those who think that GML’s chances to recover from anything from Moscow, based on the decision of The Hague, are low. “It is unlikely that uncovered assets exceed one to two billion worldwide, and in order to bring about foreclose, it is necessary to do so in several jurisdictions. Finding assets to enforce . . . is a long struggle.” He believes that efforts spent on digging Russian assets in a dozen different jurisdictions may deplete the Yukos shareholders’ assets faster than the first victories will yield.”

In any case, the lawyer thinks that the most important thing will be the first attempt to impose a penalty on Russian property. “My observation is this: the outcome of any other meetings will depend on the outcome of the first round of this fight.” Gololobov continued: “If Russia succeeds in defending its assets, everyone will take this decision about the Yukos case far less seriously.”

All experts agreed that the search for suitable assets and the battle for them can last for decades. This does not mean that sensational claims may not follow in a week, month, or year. A claim to impound the property or accounts, before any proceedings, can occur immediately, without waiting for the decision of the District Court of The Hague to respond to Russian protests. As an example, the Boeing jet carrying the prince of Thailand was subject to impoundment when it arrived in Munich in July 2011. The debate about the connection of the plane to attempts of German construction company, Walter Bau AG, to receive payment from the Thai authorities still remains to be decided, but authorities released the aircraft after the Thai authorities made a deposit of only EUR 38 million. Three and one-half years pasted, and the case along with the deposit still are in a Berlin court.

To find a target significant enough to force Moscow into talks to avoid losing an asset is the task of a specialized investigative agency and lawyers working with GML. Franz Zedelmeyer, after years of litigation with Russia, launched such a consulting company that specializes in searching for assets and compensation. He offers the following advice: “When you are dealing with Russia, do not stop to beg. If Moscow decides to act seriously, it will make an offer and pay, but if one simply prefers negotiations, he will lose.”

Interestingly, in a year, two years, or 20 years, the former Yukos shareholders will be able to add to this advice.