Arthur Zurabyan, of ART DE LEX, commented on Russia’s position in the Yukos case
How to beat Yukos
The Yukos case has become an instrument of international pressure on Russian interests. However, there are means of fighting in the legal field.
The Yukos shareholders’ impoundment of Russian property in Belgium and France coincided with the opening of the Nineteenth St. Petersburg International Economic Forum. This was no accident. It was a quite straightforward reminder to foreign visitors of the illusory nature of Russia’s international isolation and of the claim that Moscow owes “foreign companies” USD 50 billion plus interest if it does not execute the decision of the arbitration tribunal and does not respect the interests of foreign investors. For business, that signal is clear. Russia really finds itself in a difficult legal situation due to the pen stroke of an anonymous official, who, a decade ago, consented to involve Russia in an international court case over Yukos.
The situation is difficult but not hopeless. The Russian side has tools to fight in the legal field, despite the obvious politicization of the process and advice of a number of experts to surrender or withdraw property from foreign assets. Expert has a document that sheds light on how Russia plans to counteract the effects of the international arbitration decision.
Illusions of the nineties
The impoundment of Russian property in Belgium and France provoked an international scandal and sparked angry comments from the Russian political and business elite, but it was a logical consequence of the decision of the International Court of Arbitration in The Hague. A year ago, the court ruled that Russia has to pay USD 50 billion to three offshore companies, Yukos Universal Limited (Isle of Man), Halley Enterprises Limited (Cyprus), and Veteran Petroleum (Cyprus). All are subsidiaries of GML (Group Monotype Limited), under the ownership of the former shareholders of Yukos. Moscow refused to pay, and the plaintiffs appealed to the national courts to enforce the arbitral award.
Judging by the calm reaction of some officials in Moscow, Russia refused to believe that any seizure of property would take place. Though, in France, the Court of First Instance in Paris issued a positive decision in the Yukos case on 1 December 2014. European partners were just waiting for a convenient excuse to put the Russian nose out of joint, and there are more than enough excuses to do so, given the current acute phase of the international confrontation.
The damage the Belgian and French courts caused mainly affects Russia’s reputation. It is not completely clear what kind of property is locked. For example, the authorities impounded the accounts of diplomatic missions and lifted it soon as there was proof that they had diplomatic immunity. In Belgium, bailiffs demanded that, within two weeks, companies and all the major banks inform them about the existence of Russian assets or property. The UK is considering a similar order. Meanwhile, the preparation of documents for litigation is taking place in the Netherlands and Germany.
On June 22, Russia received a summons to appear in a District of Columbia (Washington) court at the request of Halley Enterprises Limited and Veteran Petroleum. The plaintiffs asked the United States to confirm the decision of The Hague arbitration court, arguing that “the Russian Federation does not have immunity from the jurisdiction of the court, since there are at least two exceptions to sovereign immunity.” First, the international New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards governs the arbitration award. Second, Russia’s agreement to arbitration in The Hague meant an indirect waiver of sovereign immunity.
The line of defense on the Russian side is not entirely clear or structured. In November 2014, Russia appealed to the District Court in The Hague for the annulment of the decision of the Hague tribunal. Probably, domestic lawyers will seek the annulment of the impoundment of Russian property in every national court separately. Russian President Vladimir Putin commented on the standpoint of the country: “Our position is well known: regarding issues and cases of such kind, the Hague Arbitration Court has jurisdiction only with respect to those countries that have signed and ratified the European Energy Charter. Russia has not ratified the charter, so we do not recognize the jurisdiction of this court, and we will prove this through judicial procedures. We were in litigation with Mr. Gaon, of the Noga company, for many years, but in the end, all the problems were solved. I think this case is going to work the same way.”
In 1994, Russia signed the Energy Charter Treaty (ECT), which Vladimir Putin mentioned, but it did not ratify the treaty. At that time, Russia expected–time proved that the hopes were in vain–that the treaty will help to increase investment and advance technology in the Russian energy sector. However, Russia did not take into account that it will be a two-way affair. ECT, in particular, protected the interests of foreign capital, while the fourth section of “Dispute Resolution” provided for the resolution of disputes through international arbitration.
Former shareholders of Yukos used these technicalities in 2005, when they applied to the Hague tribunal, with a claim of 114 billion against Russia. Two years ago, the Russian justice system filed tax claims against the company, which it was unable to repay, resulting in the sale of oil assets. At that time, the owner of Yukos was an offshore holding company, GML (Group Menatep Limited), which became the main plaintiff.
People engaged in the withdrawal of assets from the Russian jurisdiction appeared to court as foreign investors investing money in the Russian economy. These “investors” were going to prove that the tax-evasion charges against Yukos were politically motivated and unjustified and that they pressured the company into bankruptcy.
How to lose USD 50 billion
The most amazing fact is that Russia agreed to participate in the process, although it could have ignored it. First, the shareholders of Yukos were not foreign investors, and the tax investigation itself was 100 percent under Russian jurisdiction. Second, Russia has not ratified the Energy Charter Treaty (ECT); therefore, it was not obliged to obey its provisions.
If the Russian side refused to participate, the process probably would not have taken place. The Hague Court of Arbitration acts on the basis of the “Hague Convention for the Pacific Settlement of International Disputes,” Article 53 of which states: “The Permanent Court is competent to settle the ‘Compromis,’ if the parties are agreed to have recourse to it for the purpose.” The same article cites two exceptions, providing for the review of a case at the request of only one party. The first reason for this exception stems from wording in an agreement regarding the settlement of a dispute by arbitration. In other words, the first exception occurs if the parties in a conflict had agreed to arbitration in advance, even if one party changed its mind. The second exception occurs when a dispute is about collecting debts that an arbitral tribunal already considered. Article 37 states that “recourse to arbitration implies an engagement to submit in good faith to the award.” In other words, the spirit and the letter of the Hague Convention addresses the need for the voluntary acceptance of both parties of the intervention of the Permanent Court of Arbitration.
Nevertheless, the Russian Federation inexplicably decided to participate in the arbitration. During the preliminary hearing, the parties signed a document agreeing to a trial by this court and concurred that the Energy Charter Treaty will be the basis for resolving the dispute.
To represent its interests, Russia hired the US law firm Cleary Gottlieb Steen & Hamilton LLP. Mikhail Barshchevsky, plenipotentiary representative of the Russian government in the higher courts, said that, “according to my information, none of the Russian lawyers took part in this case, that is, in my opinion, an unreasonable manifestation of admiration for the West.”
The questioning of the witnesses for the plaintiff involved more than a dozen people, including the co-owner of GML, Leonid Nevzlin, GML’s shareholder, Vladimir Dubov, as well as the politicians and human rights activists Andrei Illarionov and Sergei Kovalev. These individuals were members of the opposition who expected to get USD 114 billion. Naturally, they unanimously asserted that, in this case, the tax claims of the state were politically motivated. The Russian side, according to a number of lawyers, botched the case. High-status witnesses did not appear in the court–politicians, businessmen, and government officials. These could have presented arguments for the defense with a broad sociopolitical position and not just their narrow expertise.
Dmitry Gololobov, a visiting professor at the University of Westminster and the former head of the Yukos legal department, remarked: “The court proceeded from the provided facts, while the Russian side offered only experts or expert opinions. There was a [lost] opportunity to invite a large number of witnesses who could have demonstrated that the claim was politically motivated. The arbitration court was unable to question witnesses with an alternative point of view, and that was an insult to the court.”
Proceedings schemed against Yukos
Today, some lawyers credit the lawyers from the US for having decreased the amount of the claim from USD 114 billion to USD 50 billion. The opposite camp is convinced that the Americans deliberately lost the case for political reasons. Sources for Expert claim that there was negligence on the part of Russian officials, who did not provide assistance to the foreign lawyers. They did not find or did not want to find the time to ask (or to insist if needed) that politicians and businessmen participate in the proceedings.
As a result, the arbitration court, taking into consideration the arguments of both parties, decided that, in spite of Yukos’s tax violations, Russia’s actions had been political. On 28 July 2014, the court published the decision, according to which the Russian Federation has to pay USD 50.02 billion to three offshore companies plus court costs in the amount of USD 65 million. Beginning on 15 January 2015, interest, at a rate of 1.89 percent per annum, began accruing on the unpaid amount at the rate of almost a billion dollars each year.
Having gotten into quite dubious litigation, the Russian side did not make every effort to win the case. Given these circumstances, it is not surprising that officials hardly commented on the situation and did not wish to talk about what had happened. The reluctance to discuss this topic even spread to many lawyers since the Russian line of defense, under the new circumstances, is still unclear.
Tools to fight Yukos
At the moment, Russia has taken the only position possible: not to recognize the decision of the Hague tribunal. Under no circumstances should it pay, and the real issue is not about the USD 50 billion, although the sum is considerable, even for such a wealthy country as Russia. If Russia capitulates, it will set a dangerous precedent, and many “partners” will take advantage of it immediately. It is an attempt to weaken the country’s sovereignty because it applies an unratified international treaty that is invalid, according to Russian law. Critics can see any legal decision, on the part of Russia, in the framework of national law, as “politically motivated,” and claim that any demand for compensation is juggling international law at one’s discretion. In Russia, they see the existence of a huge group of “witnesses for politically motivated decisions” who will testify, with pleasure, at a trial.
The problem is still relevant, because the norms of international law and international treaties prevail over Russian national legislation. At the moment, there is a debate about whether the constitution should be changed to provide Russia with absolute sovereignty in the legal plane. The chairman of the Investigative Committee, Alexander Bastrykin, and the head of the Constitutional Court, Valery Zorkin, already expressed their opinion on this subject. At the same time, there is another side of the question: who will risk concluding international agreements with Russia that may not be executed on the basis of domestic law?
In the case of Yukos, Russia has a petition against the decision of the International Arbitration Court, filed in a US District Court on 10 November 2014. The only chance to achieve positive results is to prove that the International Arbitration Court had no jurisdiction to hear the 2005 case. Expert has a copy of an extensive document, which the Ministry of Finance sent to the Netherlands last autumn.
Russia’s position consists of the following key arguments:
1. The arbitral tribunal had no jurisdiction, as the Russian Federation had not ratified the Energy Charter Treaty. In any case, the ECT only protects foreign investors (the plaintiffs are the company, representing, in fact, Russian capital). Furthermore, the signers of the ECT cannot regulate matters of taxation of a state.
2. The arbitral tribunal went beyond its mandate and authority. It was not properly constituted, since an assistant of the arbitral tribunal, not the arbitration staff, played a significant role in assessing the evidence and drafting the decision. The court violated the procedure of the assessment of arguments regarding expropriation, and it applied its own method of calculating losses resulting from claims, a violation of the adversarial principle.
3. The decision was in violation of public policy of the Netherlands since a significant part of the decision had its basis in subjective assumptions of the arbitrators, who were biased in their understanding of what Russian tax legislation should include but in fact does not include.
Arthur Zurabyan, the head of International Arbitration and Litigation Practice of ART DE LEX, commented on the Russian position: “Of course, the most powerful portions, in terms of the law, are the first and third blocks. Keep in mind that the first block did not involve Russian objections to the arbitration proceedings, which may provide a formal basis for rejecting the relevancy of these documents to the substance of the dispute. As for the third block, there is hardly any question about the obvious political basis in the legal grounds for the claims of the beneficiaries of Yukos. That means the bias and partiality of the arbitrators will face scrutiny through this prism.”
One can balk at the fact that Russia has not ratified the Energy Charter Treaty, although it has signed it, but it was not obliged to follow its provisions on arbitration. However, there is the legal concept of “conclusive action,” that is, the existence of obligations in a situation when a country does not ratify an international treaty but consistently fulfills its conditions. Here, the Russian position in 2005 was very weak. Furthermore, according to the agreement, the basis of considering the case was the ECT.
More promising would be a proof that the official, who in 2005 signed the document of consent to participate in international arbitration, was not entitled to do so. That is, he did not have the competency to do so, was incapacitated, was under investigation, or committed forgery. The trouble is that, in ten years, Russia has not learned the name of this hero. Senior officials have remained silent, but in Russian legislation, unfortunately, there is no clear guidance on the authority responsible for the formation of Russia's position in international arbitration.
According to Arthur Zurabyan, “a consideration of the request may last from year to a year and a half. If the Supreme Court of the Netherlands overturns the decision of the arbitral tribunal, it will be canceled completely. No place in the world would accept the decision of the International Arbitration Court for execution. The practice of canceling international arbitration decisions in national courts exists. However, the Netherlands never before has cancelled arbitration decisions ad hoc [arbitration specifically created for consideration of a case–Expert] of the Permanent Court of International Arbitration, as an appointed body.”
In the footprints of Noga
While the decision of the international arbitration remains in force, Russia seems to be engaged in litigation in national courts around the world, seeking the removal of impoundment orders on property and counting on the fact that, sooner or later, the shareholders of Yukos simply will run out of money.
Future events can be implied from the example of the case involving the Swiss firm Noga. In 1997, the arbitration court in Stockholm ruled that Russia had to pay USD 27 million to the Swiss. Moscow did not admit defeat, and Noga started a quest to impound Russian property worldwide. However, after 16 years of litigation, the company abandoned these attempts because it simply exhausted its financial resources. It should be noted that the claims, in Noga’s case, were much more modest than of the Yukos shareholders (the West admits this as well).
At the moment, the cost to the former Yukos shareholders in numerous courts, according to experts, already has exceeded USD 100 million. At the present, they have failed to get a single penny. Russian Federation property that diplomatic immunity does not protect is almost nonexistent. Property of companies may move to impound property if the state is the main shareholder. However, authorities always can release such assets from impoundment. To do otherwise would be a violation of the interests of private property owners. According to Finance Minister Anton Siluanov, the country’s international reserves stored abroad should not be impounded since the Bank of Russia is not a part of the government and is an independent organization. However, on one occasion, Noga managed to seize the accounts of the Central Bank because there are accounts of the Reserve Fund and National Welfare Fund that the Ministry of Finance manages.
For the Russian side, it would be a serious mistake to rely on the limited budget of the shareholders of Yukos or the independence of the Western system of justice. In this case, in contrast to the historic president of the Noga firm, politics has come to the fore. The courts in Europe and in the United States may behave differently than they did 15 years ago. The anti-Russian campaign expanded the notions of the West about what is permissible behavior against our country. The formal reason for the impoundment of any Russian property is available at any time, and for the former Yukos shareholders, litigation with Russia is not just a question of money but personal revenge. They easily will find sponsors, due to the large funds in question, and the proceedings will drag on for years.
