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The Yukos Legal Insurgency

When former Yukos shareholders promised a “life-long litigation” for their assets, very few took it seriously. After all, until recently there have been no precedents of successful enforcement of arbitration awards against the Russian Federation. But this perception has been changing over the last last few months, with Yukos shareholders advancing on at least three “legal fronts”. They achieved a series of victories in several domestic jurisdictions, the Permanent Court of International Arbitration and European Court of Human Rights. The Yukos legal struggle is not yet over but it is far from where it began.

Until mid 2000-s, Yukos headed by Mikhail Khodorkovsky was Russia’s biggest oil company. Following a series of tax demands totaling $27bn, the company was declared insolvent and liquidated in 2007. Mikhail Khodorkovsky was imprisoned on charges of economic crimes. The government-controlled Rosneft received the lion share of Yukos assets and became the largest Russian oil company.

Earlier this year, the European Court of Human Rights (ECHR) declared admissible a Yukos complaint against the Russian government. Under the European Convention on Human Rights, which came into force in 1953, the rights of all legal entities are protected, including companies. Yukos claims that the Russian government’s actions were “unlawful, disproportionate, arbitrary and discriminatory, and amounted to disguised expropriation” of the company. The Strasbourg proceedings may take a while and if the Yukos shareholders are successful the Russian Federation will be under obligation to enforce the ECHR judgment.

As a signatory to the European Convention, Russia is bound by any decision of the ECHR. But persuading the Russian courts in Moscow would be much more difficult than persuading Western-educated judges in Strasbourg. If the Russian judiciary is asked to enforce the award of $98bn against the Russian Federation the result is predictable, given the high political sensitivity of the case. But in the light of other recent developments, Yukos aspirations to get compensation are not entirely hopeless.

Yukos shareholders recently succeeded in Dutch courts. The decision of the Amsterdam Court of Appeals dated 28 April 2009 received surprisingly little attention. Nonetheless, the Dutch court has set a precedent by enforcing an arbitration award of more that USD400 million in a Yukos-related matter. The court ruled against Rosneft, a Russian government-controlled oil company which obtained most of Yukos assets.

Although the underlying arbitration award rendered by a Russian Arbitral Tribunal in Moscow had been annulled by the Russian courts, that did not help Rosneft. The court in Amsterdam reasoned that the annulment was politically motivated and rendered by the Russian judiciary, which was not impartial and independent in matters concerning Yukos. Rosneft sought a stay of enforcement in the Netherlands pending its appeal to the Dutch Supreme Court but it failed to provide a bank guarantee of several hundred million dollars requested by the court. As a result, no stay of enforcement has been entered.

Armored with the Russian arbitration award and the Dutch judgment, Yukos shareholders continued their assault across the Atlantic. They applied for recognition and enforcement in the US District Court for the Southern District of New York. Last month, a New York judge ordered an injunction against Rosneft which could jeopardize delivery of up to a fifth of Russia’s oil exports.

According to press reports, this already caused a 3% percent drop in Rosneft share price and raised fears about the Russia’s flagship’s exposure to multiple lawsuits relating to some of its key assets. It has been reported that the Yukos shareholders also won an injunction in a London court on 11 March to freeze some of Rosneft assets in England and Wales.

Yukos shareholders are also advancing on the public international law front. A few months ago, the Permanent Court of Arbitration in the Hague ruled the Energy Charter Treaty – around which the Yukos shareholders have built another case – was binding on Russia. This could pave the way for enforcement of $100bn award against the Russian government assets overseas. Charles Poncet, Stephen Schwebel and Yves Fortier who acts as the tribunal’s chairman are yet to decide the merits of the case. Their decision may lead to the largest arbitration award ever.

Having lost the conventional large-scale legal battle against the Russian government on its territory, Yukos shareholders’ tactics is now akin to a world-wide insurgency. They attack the Russian Federation and its assets in multiple jurisdictions using all available legal means and expose Russia to potential losses of tens of billions of dollars.

Russia was successful winning large battles in Afghanistan and Chechnya, but dealing with insurgency movements there proved to be much more difficult. It appears that frighting the legal insurgency in foreign jurisdictions is not much different.

Yaraslau Kryvoi

About the Author:

Prof Yarik Kryvoi, MCIArb is the founder and co-editor of the CIS Arbitration Forum. He is the Senior Research Fellow in International Economic Law and Director of the Investment Treaty Forum at the British Institute of International and Comparative Law (BIICL). He holds law degrees from Harvard, Moscow and St Petersburg. He has been teaching and practicing international arbitration in Russia, the United States and England for over ten years and is listed as arbitrator by several arbitration institutions. Prof Kryvoi also served as a Co-Chair of the International Courts Committee of the American Bar Association's Section of International Law. He also serves a tutor at the Chartered Institute of Arbitrators in London. See full profile at kryvoi.net.

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