The Permanent Court of Arbitration (PCA) ruled that Russia must compensate former Yukos shareholders $50 billion. This comes at a difficult time for investors in the Russian economy. More importantly, the ruling revives the ghosts of the abuse of powerful political rivals in Russia.
One would be forgiven for questioning the timing of the Hague Court of Arbitration ruling last month ordering the Russian Federation to pay $50 billion in compensation to three former shareholders of Russian oil company, Yukos, if it had not been such a long time in the making.
In a particularly keen humiliation for the Russian government, the court ruled on July 28th that the expropriation of shareholder assets that led to the bankruptcy and nationalization of Yukos, the largest oil company in Russia at the time, was not only intentional, but politically motivated.
In cases of nationalizing energy assets, states party to the Energy Charter Treaty (ECT) are generally expected to compensate shareholders for accrued losses. The Russian Federation, which was a signatory until 2009, argues Yukos owners misused legal loopholes to accrue illegitimate profits.
Highly unusual both for the size of its award to shareholders, 20 times larger than any previous award issued by the Court, and for its explicit ruling of political motivation, the decision no doubt will come as a shock to Russian politicians and investors, since non-payment of the award, or even new claims by shareholders, could have a deleterious effect on Russia’s credit rating.
What is the ruling about?
First launched in 2005 by three former shareholders in Yukos oil company, Hulley Enterprises Ltd., Yukos Universal Ltd., and Veteran Petroleum Trust, the suit was first deemed admissible by the court in 2009.
In the Kremlin’s eyes, the suit is connected to a second ruling on July 31st by the European Court of Human Rights (ECHR), which awarded an additional €1.86 billion ($2.5 billion) to former shareholders of Yukos.
Under the ECT, which Russia acceded to in 1994 and left in a high-profile decision in 2005, the Russian Federation failed to adequately compensate shareholders after Yukos was driven to bankruptcy through claims on unpaid taxes and a failed merger with Roman Abramovich’s Sibneft in 2003.
From the perspective of PCA prosecutors, two Canadian and one Swiss, the issue of ECT jurisdiction was clarified by Russia’s accession to the treaty during the time period of the matter in question (2003-2005). The Russian Federation also ratified the European Convention on Human Rights in 1998, two years after acceding to the Council of Europe.
In a response, the Russian Ministry of Justice suggested the ECHR ruling was “politically motivated”. Russia’s relationship with the ECHR is far from cosy: in 2010, the ECHR rejected a claim by former Yukos shareholder Mikhail Khodorkovsky, then in prison for tax evasion, that he was a ‘prisoner of conscience.’ Khodorkovsky was pardoned in 2013 and released from prison in early 2014.
Since then, however, the ECHR also issued several rulings, including awarding damages to the victims of Russia’s counter-terrorism operation in a Moscow theatre in 2011, and Russian anarchist band Pussy Riot recently decided to bring a case for unlawful imprisonment against the Russian state.
The response reflects two facets of the official perspective on the rulings in Russia: first, the suspicion of political capriciousness in the dealings of the European Court, and second, the belief that Court of Arbitration failed to acknowledge the financial misdoings of Yukos shareholders that eventually led to the company’s bankruptcy in 2006.
Both claims are worth scrutinising. While Russia’s perceived national prerogative in the face of liberal international law is a cornerstone of its foreign policy, the notion that the country is beset by external enemies is at best misapplied in the arbitration case, which was even led by a prosecutor appointed by the Russian Federation.
Moreover, it is telling that while the Court of Arbitration picked up the charges of political motivation that the ECHR rebuffed a mere five years ago, prosecutors halved the damages sought by the claimants for the very reason claimed by the Russian government when it criticized Yukos shareholders: they had withheld taxes and, through siphoning off money into offshore or from high to low-tax areas in Russia, had withheld money from the government.
What next for the Russian Federation?
The Russian Federation is likely to appeal in the next few months, if not to discourage further shareholders from issuing claims. The damages themselves amount to about 11 percent of Russia’s foreign reserves and 10 percent of its federal budget – a payment Russia can hardly afford, given current circumstances.
Moreover, several outlets have commented that international shareholders with stakes in Rosneft, like British Petroleum, should be concerned about their liabilities in the medium- to long-term. Rosneft, the Russian state oil company that inherited Yukos’ assets, saw its stocks fall 16 percent last month.
Most importantly, the case has the potential to send political shockwaves through Russian society. In the national narrative, the president’s most important achievement was his resolve in prosecuting pro-Western oligarchs during the age of “robber baron” capitalism. Although these oligarchs are unlikely to ever be rehabilitated, the price of their exclusion just might have been the threat to the Russian economy we see today.
