The Hague’s Court of Arbitration (the ‘Court’) has ruled that Russia must pay former shareholders of the now defunct Russian oil company, Yukos, $50 billion (£25.9 billion). The $50 billion award is the largest ever handed down by any arbitration court.
The Court found that Russian officials, under Vladimir Putin, had manipulated the legal system in order to force Yukos into bankruptcy and imprison its boss, Mikhail Khodorkovsky.
Created by the Russian Federation in 1993 as part of a large-scale re-organization of the Soviet oil production and processing industry, Yukos was once one of the largest and most successful oil companies in the world. In May 2002, Yukos was the only Russian company to be ranked among the top 10 largest oil and gas companies by market capitalisation worldwide.
In 2003, however, Russian authorities began the process of breaking up and selling off Yukos.On 11 July 2003, the first of a series of large-scale raids was carried out by Russian authorities on Yukos. Bruce Misamore, Yukos’ then Chief Financial Officer, described the raid as ‘an incredible scene full of armed, masked officers – during which they trawled through our computer records for approximately 17 hours. This was to begin a wave of raids on Yukos’ Moscow headquarters…by investigative officers…sometimes accompanied by heavily armed police officers’.
Subsequently, on 25 July 2003, Mr Khodorkovsky, Yukos’ owner and Russia’s richest man at the time, was arrested at gunpoint by an armed special forces unit in a Siberian airport, and was taken to Moscow where he was charged and sentenced for a number of economic crimes, including fraud, tax evasion and embezzlement. President Putin justified the move by saying, ‘A thief must be in jail’.
In December 2003, following a tax re-audit conducted by Russian tax authorities, Yukos was issued with tax claims that exceeded its revenues for 2002 and 2003. At the same time that tax re-assessments were being filed against Yukos and its subsidiaries, Russian authorities also began freezing shares and other assets belonging to Yukos and related entities.
Eventually, in March 2006 bankruptcy proceedings were commenced against Yukos, placing it under external supervision, and on 4 August 2006, the company was declared bankrupt.
After being imprisoned for 10 years, Mr Khodorkovsky received a pardon from President Putin and was released from jail on 20 December 2013. Responding to the Court’s final award, Mr Khordorkovsky said it was ‘fantastic’ that shareholders were ‘being given [the] chance to recover assets’.
The arbitral dispute between former Yukos shareholders and Russian authorities has rumbled on for over a decade, but the Court’s ruling appears unlikely to mark the end of the matter. Russia’s Foreign Minister, Sergei Lavrov, has suggested that Russia could appeal against the decision. Mr Lavrov said, ‘The Russian side, those agencies which represent Russia in this process, will no doubt use all available legal possibilities to defend its position’.
However, one of Yukos’ lawyers, Professor Emmanuel Gaillard, said there would be no opportunity for Russia to contest the decision. Professor Gaillard stated, ‘As to appeal, there is no appeal…The tribunal has listened to both parties…the Russian Federation had ample opportunity to be heard in this case, the judgement is there. After 10 years of battle, the tribunal says they violated international law’.
The compensation awarded to Yukos' former shareholders is half of the original $103 billion claim by subsidiaries of Gibraltar-based Group Menatep, which previously controlled Yukos. Group Menatep now exists as holding company, GML. GML director, Tim Osborne, said, 'We couldn't be happier with this result'.
Russia, which potentially faces tough new economic sanctions from Europe following the downing of Malaysian Airlines flight MH17, has until January 2015 to pay the compensation and will be charged interest on any late payments.
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