Yukos vs. Russia: Bonanza for lawyers and investors
Photo: Sidik iz PTU / CC-BY-SA-3.0
  • Amount demanded: US$114 billion
  • Outcome: US$50 billion
  • Treaty invoked: Energy Charter Treaty
  • Sector: energy
  • Issue: democracy

by CEO, TNI (edited by bilaterals.org)

Yukos was a Russian oil and gas company. It was acquired from the Russian government during the controversial “loans for shares” auctions of the mid-1990s, whereby some of the largest state industrial assets were leased (in effect privatized) through auctions for money lent by commercial banks to the government. The auctions were rigged and lacked competition, and effectively became a form of selling for a very low price. In 2003, the Yukos CEO was arrested on charges of fraud and tax evasion and the following year, Yukos’ assets were frozen or confiscated.

In 2014 the arbitrators in three related ECT claims (commonly referred to as the Yukos cases) ordered Russia to pay a whopping US$50 billion in compensation to former shareholders of now-defunct oil giant Yukos. The tribunal held that measures by the Russian Government which had led to the dismantling of Yukos in 2006/07 amounted to an illegal indirect expropriation. The ruling was annulled by a Dutch court in 2016, which found that the arbitrators had lacked jurisdiction, but an appeals court overturned that decision in 2020. In the meantime, the former Yukos shareholders have tried to seize Russian assets in several European countries, while the second wave of Yukos claims is ongoing (by the company’s former management).

The case is remarkable because...

... the colossal amount of money at stake: The US$50 billion order against Russia – roughly equivalent to the GDP of Slovenia – is the largest award in the history of investment arbitration. The total legal costs related to the case – US$124 million, out of which Russia was ordered to pay nearly US$103 million – are as remarkable. Yukos’ lawyers (from Shearman and Sterling, subsequently named “the $1,065 per hour lawyers” by the media) alone billed over US$81 million for legal representation and assistance. Three arbitrators put over €5.3 million into their own pockets; their assistant walked away with nearly €1 million – about 10 times the annual salary of a judicial clerk for a US Supreme Court Judge.

How could the tribunal’s assistant walk away with US$1 million? How much do ordinary people have to work to make that much money?

... Russia lost despite never having ratified the ECT: Russia signed the ECT in 1994, but the Russian Duma never ratified it. Still, the arbitrators accepted the claim, arguing that the ECT applied provisionally to Russia from the date of its signature (until its subsequent withdrawal). While the Dutch court later scrapped this reasoning (arguing that the ECT’s dispute resolution provisions were at odds with the Russian Constitution and therefore not part of the provisional application), this decision does not bind future tribunals. Some have already ignored it and – again – accepted jurisdiction over ECT disputes against Russia.

… abuse by shell companies: It is notable how easily the tribunal accepted the Yukos shareholders as non-Russian foreign investors that could sue Russia under the ECT. The arbitrators had “some sympathy” for Russia’s claim that the investors were mere shell companies, owned and controlled by Russian oligarchs and hence not foreign investors. But they refused to lift the corporate veil of the companies, considering it enough that they were incorporated elsewhere (ie in Cyprus and the UK). In the words of one investment lawyer:

“The Energy Charter Treaty – which was designed to protect the interests of foreign investors in host states – was in fact used to protect interests of national investors against their own state.”

… the ECT’s inconsistency with the rule of law, which rests on the idea of equal treatment – that every individual, regardless of wealth and power, has an equal right to bring a case to court. The ECT however creates a parallel justice system that is exclusively available in practice to certain wealthy investors. This creates the absurd situation wherein a repressive regime like Russia, rich tycoons have an extra track for legal redress not available to say, victims of torture or other human rights violations. Rather than advancing the rule of law, this unequal treatment can undermine it even further, for example, by reducing incentives to improve host states’ laws and court systems.

last update: April 2021

Fuente: CEO, TNI