Vindication for Yukos Oil

In 2003, Russian President Vladmir Putin began to seize and dismantle the Yukos Oil company to politically sideline Mikhail B. Khodorkovsky, a powerful oligarch who was not likely to share bread and salt with his country’s leader. Rather than pursuing a policy of nationalization for the betterment of the Russian Federation, Putin’s aggressive economic move was unsurprisingly illegal. On July 28, 2014, the Permanent Court of Arbitration in The Hague ruled that Putin’s grab of Yukos was in breach of the Energy Charter Treaty and “in effect a devious and calculated expropriation.” The majority shareholders of the now-defunct Yukos oil company were awarded $50.2 billion, an unprecedented amount to date. With six months to comply, Russia ignored the ruling and prompted the shareholders to legally pursue the enforcement of the ruling in other nations. Nine years since the seizure of 2% of the world’s oil was completed, Diplomatic Courier sat down with Mr. Tim Osborne, director of the Yukos holding company GML and lawyer, to discuss the status of the ruling’s recognition, enforcement, and implications. ----- Legally, Russia is behaving predictably and refusing to pay the award. Osborne has pursued the recognition of his majority shareholder’s claim under the 1994 Energy Charter Treaty and enforcement under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards or New York Convention. As recognition comes before enforcement, the case hinges on the more recent Energy Charter Treaty, which Russia claims is invalid. Regardless, the Energy Charter Treaty provides a binding dispute resolution mechanism and thus allowed GML to sue Russia, a strategic point that Osborne finds “vital to our success.” Osborne expands: “the Treaty specifically says that you cannot take somebody’s assets without paying fair compensation.” When Russia seized Yukos, it did so using “the tax laws in a discriminatory fashion” and failed to pay compensation. To that point, Osborne emphasized that no one was taxed like Yukos, and this was a far cry from Russia exercising its “sovereign right to collect taxes.” No, Osborne confirms and the Hague Tribunal agreed, this was expropriation: “no right minded government would have done all these things if it wanted to collect taxes. It was clearly trying to put this company out of business, take over its assets, and get rid of the people.” Osborne is confident and methodical: “we won the argument before the Tribunal and we will win it in every country because is pretty clear - the Energy Charter Treaty says if you sign it you are bound on a provisional basis unless either your constitution doesn’t allow you to be bound on a provisional basis or you opted out.” Russia never opted out the Energy Charter Treaty and is left asserting “some very convoluted arguments which nobody yet has bought into except the Russian Federation. They say you look at [prior laws and commitments] clause by clause and day by day.” [caption id="attachment_6720" align="alignleft" width="300"] Mr. Tim Osborne, director of the Yukos holding company GML and lawyer[/caption] In the arguing of Yukos, the national courts do not seem to be buying the Russian logic, which is where the New York Convention becomes critical. With more than 150 nations party, the New York Convention is the legal heavyweight that allows the shareholders represented by Osborne to collect non-diplomatic assets piece-by-piece across most of the world. Though Russia signed and ratified the New York Convention Treaty, they claim not to be bound by it in this case and are largely ignoring it, ostensibly claiming that Yukos’s case is a non-starter. Starting with the United States, United Kingdom, France, Belgium, and Germany, Yukos has begun the process of collecting at least few hundred million against the more than $50 billion owed thanks to the New York Convention. Coupled with appeals and complex legal filings that could take over a decade, Osborne has a multi-tier strategy, in the case of France and Belgium, to also file in civil law countries that allow for immediate enforcement. In Belgium, a court-appointed notary will auction off recognized real estate, placing the money in escrow Osborne’s clients. Most recently on December 17, the Paris Court of Appeal also voted in favor of the majority shareholders, paving the way for more enforcements. “We are delighted by this decision which is an important step in the enforcement process of the Awards in a major jurisdiction,” affirms Osborne. Osborne is prepared to continue the battle step-by-step, and have these legal, not political, arguments before the courts in every country where—after recognition—they attempt to collect Russian non-diplomatic assets. Lest all parties die of old age prior to the realization of the award, Osborne has a plan for next steps: “If we are allowed to go against the assets owned in the state-controlled companies like Gazprom and Rosneft, then we will be able to get much closer to that $50 billion.” Russia’s counter-argument is predictable. According to them, Gazprom and Rosneft, among other state oil giants, should be considered “proper” commercial operations that just happen to be controlled by the state. The good news for Yukos, however, is that their Tribunal specifically held that Rosneft is an agent of the state, doing the state’s bidding. Under common law in the US and UK, where Osborne is seeking recognition and “chipping away” at Russia, this is very good news indeed, though he stressed twice that it is “a well-established principle of law that a company and its shareholders are different entities.” Yukos marches ahead “trying to pierce the corporate veil,” as Osborne explains, knowing it will likely fall short of the total amount. Thus far, Yukos has spent approximately $100 million getting the award, and is likely to easily spend another $100 to $150 million in collection. Crossing $250 million will be the second financial success, whereas the first was the landmark ruling. Yukos will be doing quite well when they reach the high single digit billions. Beyond the legal idiosyncrasies, the Yukos case has a number of economic, political, stability, and human rights implications. Contrary to Putin’s opinion, the ruling against the Russian Federation could have been good for business. Had Russia paid, Osborne believes this would have assisted investment as companies saw the process for “if and when things went wrong,” also having confidence in the legal mechanisms for dispute resolution and compensation. As Russia went through the entire process, lost, and said, in Osborne’s words, “sorry, we’re putting national interests first, we’re not going to pay it,” they damaged relations with prospective investors. This leave only the mega companies who would “decide the risk of not investing is greater than the rest of investing.” As for the rest of us, Osborne thinks you would have better luck in Nevada: “you may as well just fly to Las Vegas and put it all double zero on the roulette table.” Politically, the domestic implications are slight while the international ones are significant. This case has very little impact on Russian domestic politics, not least because the government controls the media and thus the public’s knowledge of the case. Internationally however, Osborne thinks Russia is “between a rock and a hard place” politically because they responded to the Energy Charter Treaty notice in 2005. Rather than disregarding all international obligations, their early decision to acknowledge the courts landed them firmly on a bandwagon that is very difficult to disembark: “now they truly don’t have a choice but to engage” to try and stop the recognition of the case in the aforementioned countries. Osborne, if Russia does not stop him, will keep going, will get the judgements and the enforcements, and will get many of the Russian assets. With respect to international stability, Osborne finds the behavior of INTERPOL to have been a disgrace, even more so than the way Russia has been conducting itself: “Russia is just being Russia, INTERPOL should have more sense.” What Osborne is referring to is the way INTERPOL has allowed itself to be manipulated by Russia to issue Red Notices on political individuals Putin would like to extradite and try for alleged crimes, one way he is pushing back against the rulings. INTERPOL’s failure to recognize the political nature of Russia’s requested arrest warrants is a significant blow to neutrality and their policy of insulating recognized political refugees from a wanted list. Regional stability and bilateral relations with Russia may go un-phased. Osborne does not see that “…any government is really going to the wall on international law when it can get practical help in things that it really care about…It’s a shame.” Thankfully as he well knows, Osborne does not have to pander to politics as the hearings take place in nations with fair trials where there is a separation between the court and the government. The human rights dimension is trickier and has two pieces: the European Court of Human Rights and the bullying of courts. The European Court of Human Rights has had a bit of trouble with the Yukos case because it is not really a court, rather a political body to settle political questions. While not completely ineffective, the European Court of Human Rights starts from the premise that governments and witnesses tell the truth, it hears no oral testimony, and there is no chance to challenge a witness. Using a “margin of appreciation,” the Court will almost always side with the government unless is it “absolutely convinced” that it should not, allowing very little examination of the actual human rights at stake. Even still, the Court awarded some $2 million to Yukos. The intimidation of courts and judges reads straight out of an old Soviet playbook. Russia issued a letter to the US courts, threatening that, in Osborne’s words, “if the US government allows its courts to enforce the award against Russian assets, then Russia will take appropriate retaliatory action against the assets of the US government, citizens, and companies in Russia.” Leaving to the side the fact that the US government is constitutionally forbidden from interfering with the judicial system, Russia’s bold threat underscores its quick recourse to intimidation and bullying. They sent a similar letter to the French, who were outraged and undeterred. Regardless of the legal proceedings and filings, Yukos is a test for how nations behave in an interconnected world where, often, diplomacy is more powerful than a sword and international law matters. Osborne simultaneous believes that the international community needs to encourage Russia and to press them to implement the rule of law for business development, while recognizing that they are not going to simply cut a check for $50.2 billion and “cannot be trusted on international matters.” He does not see these items as mutually exclusive, and perhaps this is where the hope lies. Though Osborne believes Russia has done a U-turn and is worse than before Mikhail Gorbachev, countries should be “encouraging Russia to abide by the rule of law…to become more western and democratic…[by] enforcing obligations under international treaties.” At the end of the day, Osborne thinks that Russia will be pulled back in line through the legal process, and its adherence to legally binding agreements with dispute mechanisms. This is the world’s legal test. It is possible, however, that a grand strategy for Yukos has just a tiny amount of politics involved, too. For Osborne, “the government in the countries where we are taking action [should] understand the situation and have the facts proper presented. If they only hear the Russian side, they’re going to have a very warped view of what is going on.” So Osborne patiently tells their case to Capitol Hill, the US Department of State, and others lest politics and law begin to work against each other. He travels the world faithfully representing his clients, and being a champion for legal rights. Even the lawyer has to play the grand chess game with the elephants, donkeys, and bears. There is much bigger picture to this case than oil, a Russian bully, and $50.2 billion dollars. Osborne is fond of saying: “if not this, then what? If not now, when?” The point of international law is to have it and use it. Yukos is not about manipulation of tax law to illegally bring down a company. This is about the larger issues of the supreme rule of law. This is about accountability, and leveraging international legal power to bring nations like Russia into the fold. Even Catherine the Great, with her appreciation of Enlightened ideas, might be the tiniest bit impressed. As a bottom line, Osborne is steadfast in his conviction: “we will enforce this judgement, we will get paid. Now whether we get $50 billion or we run out of steam before we get there is another question. But we will get paid.” Russia will run out of stall tactics and, asset by asset, will be punished under international law. They will pay for their wrong and justice will prevail. From the moment the first ruling came down, Yukos was vindicated.   Kathryn H. Floyd (@khfloyd) is the Vice President of Medauras Global and lectures on international politics for the College of William & Mary.