Russia appeals against Hague ruling over $50 billion Yukos payout

Yukos logo. Source: Reuters

Yukos logo. Source: Reuters

Russia has appealed to the District Court of The Hague against a ruling by the Permanent Court of Arbitration, which in July 2014 ordered Russia to pay $50 billion in damages to former Yukos shareholders. According to Russia, the court was not authorized to deal with the dispute, while damages were miscalculated.

The Russian authorities have lodged an appeal with the District Court of The Hague, asking for the court to overturn rulings by The Hague's Permanent Court of Arbitration, which ordered Russia in June 2014 to pay $50 billion to the former shareholders of the Yukos oil company.

According to a statement on the official website of the Ministry of Finance, the appeal was filed on Jan. 28.

Oil and gas giant Yukos, one of the most successful Russian companies of the 1990s, was controversially broken up after its CEO Mikhail Khodorkovsky was arrested in 2003 on fraud charges widely seen to be politically motivated. Yukos’ principal asset, oil production unit Yuganskneftegaz, was subsequently sold off, with the mysterious company that won the auction being acquired by state-owned oil firm Rosneft shortly afterward.

A series of lawsuits was launched against the Russian state in various courts by the former shareholders and management of Yukos in the following years, with the Hague case being filed in 2007.

In the case, the interests of the former owners of the oil company were represented by three offshore companies, Yukos Universal, Hulley Enterprises and Veteran Petroleum.

According to the ruling, Russia's de facto expropriation of the oil company to the benefit of Rosneft in 2004 violated international laws under the Energy Charter Treaty, an international agreement that regulates investments in the energy industry.

However, Russia claims that the arbitration court in The Hague was not authorized to deal with the dispute, while the damages were miscalculated.

Essence of the dispute 

According to the Ministry of Finance, the treaty protects only foreign investments, while the dispute was initiated by the citizens of Russia who control the three offshore companies. Hence, the dispute should have been settled within Russia, the Russian petition said.

Moreover, according to Russia, the arbitration court's stance contradicts the decision of the European Court of Human Rights, which in September 2011 failed to find either political motivation or violations in Russia's tax claims against Yukos.

The position of Russia regarding its appeal to overturn the ruling on Yukos “rests on three pillars,” said Kira Sazonova, an associate professor with the State-Legal Disciplines Chair of the Russian Presidential Academy of National Economy and Public Administration.

First, the claimants initiated their case under Energy Charter Treaty signed by Russia in 1994. However, Russia did not ratify this document; hence its articles were not incorporated into national legislation. Secondly, even the Energy Charter Treaty stipulates that the dispute was to be considered first by the tax authorities of the parties to the trial and only after that could it be transferred to The Hague for arbitration procedures.

"Third, the colossal amount of compensation, which was determined by the court, comes from the hypothetical revenue that Yukos could have received if it had continued to exist for the entire 10 years of the proceedings," said Sazonova. According to her, this method of calculation cannot but raise serious questions from the financial, economic and political points of view. 

Small grounds for optimism

Since Jan. 16, 2015, penalties have been imposed on Russia for failing to follow the decision of the arbitration court – about $1.7 billion a year.

"On the whole, the current political situation and coldness toward Russia by a number of Western countries do not give grounds for excessive optimism about the future decisions of the Hague arbitration court," said Sazonova.

In addition, because the examination of the Yukos case took so long, it may also take quite a long time for the court to consider the appeal, which could make the amount of interest quite tangible if the decision is not taken in favor of Russia.

"These kinds of multi-level complex cases can drag on for a long time - this can be seen at least from the time taken by the court to decide cases," said Anton Soroko, a financial analyst at the Finam investment holding.

He pointed out that although the preliminary results were obtained as early in 2009, the final decision was not made until mid-2014.

Regardless of the outcome, Russian state assets may be seized abroad due to the ruling, Soroko said, adding that while it is unlikely that the assets of state-owned Rosneft will be frozen as part of the case, the possibility exists.

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