Yukos Winning Award: Will Russia Avoid Arbitral Enforcement Again?

PCAOn 28 July 2014 a historic award in Yukos v. The Russian Federation rendered by the arbitral tribunal seated in The Hague finally became publicly available.

The tribunal ordered Russia to pay more than 50 billion US$ for its expropriation of Yukos, making this award the biggest one in the history of international arbitration.

Considering the circumstances, it is hard to believe that Russia will pay voluntarily. Although history has witnessed a successful attempt to obtain ordered compensation from Russia (as happened in the Sedelmayer case), this was an exception rather than a rule.

Interestingly, some commentators suggest the winning party in the Yukos arbitration has good chances to enforce the award by trying to go for Russia’s foreign refineries and the pipelines of Rosneft and Gazprom. On the other hand, no one can guarantee that Yukos will not become a second Noga saga.

Trying to Get Money

Before starting the enforcement proceedings against Russia, the winning party should consider the list of potential places where it can enforce and execute the award.

Considering Russia’s territory as a place where the party will certainly find assets, it shall obviously think of Russia as the first choice. However, having Russia as a place of enforcement, the winning party should deal very carefully with the identification of the ownership of assets which it is going to seize.

According to Article 127 of the Civil Code of Russian Federation:

…the particularities of the liability to be borne by the Russian Federation in the relationships governed by the civil legislation and involving the foreign legal entities, citizens and states are involved, shall be established by the Law on the Immunity of the State and of Its Property.

However, such Law is not adopted yet in Russia.  In absence of special rules, general rules shall be applicable.

Such general rule may be found in Article 126 of the Civil Code of Russian Federation, providing as follows:

The Russian Federation… shall be answerable by their obligations with the property they possess by the right of ownership, with the exception of the property that has been assigned on the right of economic domain or the right of operative management to the legal entities, created by the state … and also of the property that shall be owned exclusively by the state or municipalities.

Therefore, any state property assigned to legal entities under either the right of economic domain or the right of operative management is shielded from attachment to satisfy awards rendered against Russia.

Moreover, Russia adopts a highly controversial policy with regard to enforcement of arbitral awards, widely using the public policy exception as a ground for rejection of enforcement.

An even more persuasive argument is that Russia’s courts lack the necessary independence. Several decisions of foreign courts have recognised this to be the case. Interestingly, in the case of Yukos Capital against Yuganskneftegaz, the Dutch court confirmed the awards that had been annulled by the Russian courts and determined that the Russian judiciary was not independent and impartial when it came to Yukos.

Having recalled that, the winning party will waste its time and money if decides to start proceedings in Russia.

State Immunity

As the Yukos arbitration was conducted under the UNCITRAL Rules, it gives the winning party a right to enforce the award in around 150 countries under the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”).

Although Article V of the New York Convention contains an exhaustive list of grounds for rejection of enforcement of an award, the main pitfall in enforcing an award against a state still remains the state immunity defence.

State immunity is not one of the explicit grounds on which a court can refuse to enforce an arbitral award under the New York Convention. However, a state can claim the state immunity defence through the public policy exception in Article V (2)(b) of the said Convention.

More often, as an immunity defence, states use Article III of the New York Convention, which provides that contracting parties shall enforce arbitral awards in accordance with the rules of procedure of the territory where the award is relied on.

Thus, the winning party should carefully consider and analyse domestic immunity laws of the place where the possible assets are located.

Exceptions to sovereign immunity vary depending on the jurisdiction. National laws generally prohibit enforcement measures against foreign states. In many countries execution is only possible against sovereign assets used for commercial purposes. Regarding non-commercial property, execution is possible only if the State has waived its sovereign immunity.

It has long been accepted that a waiver of State immunity from the jurisdiction of an international tribunal does not encompass any automatic waiver of immunity from the execution of a resulting award (see FG Hemisphere v. Democratic Republic of Congo case).

Could Yukos Become the Second Noga?

Everyone familiar with international arbitration knows the story of the Noga case.  Some even suggest that Yukos could repeat Noga’s fortune and eventually will confirm that seizing state assets abroad is an almost impossible task.

To recall, Noga Import & Export SA, a Geneva-based trading company claimed Russia owed it $680 million in unpaid debts from oil-for-food deals signed in the early 1990s. In 1997 the Stockholm Arbitration Court confirmed Russia’s debt to the Swiss firm and ordered Russia to pay for compensation.  Even though Noga had obtained a winning arbitral award it had several unsuccessful attempts to enforce it.

Russia’s resistance against arbitral awards in favour of Noga rests at the core of a series of court decisions in a number of countries including France, Switzerland and the USA, which test the limit of State immunity.

The company tried to seize the accounts of the Russian Central Bank, a Russian ship and two Russia military jets. Later Noga even tried to go for Russia’s painting collection. None of these attempts were successful, even though the agreement between Noga and Russia contained a waiver from immunity.

The reasoning of the courts illustrates that it would probably be hard to seize certain Russian government assets, because they are mostly protected by state immunity.

Generally courts all over the world adopt the pro-immunity approach and the Noga case is a perfect example of this. In this regard, the Noga case could be used as an illustration of what assets the Yukos winning party should exclude from the list of its prospective targets.

Any Luck With State-Owned Companies?

Although Yukos enforcement proceedings will definitely take a lot of time and effort, Yukos may not repeat the Noga saga.  Taking into account lessons learned from Noga case, the Yukos winning party shall try to target assets of state-owned companies.

Some practitioners argue that in attempts to seize assets of Russia abroad the winning party should start with Rosneft and Gazprom.

However, in case the party decides to initiate proceedings in the UK, it should consider the impact of the recent UK judgment in a case brought by FG Hemisphere against La Générale des Carrières et des Mines, a mining company owned by the Democratic Republic of Congo.

This judgment establishes clear principles and circumstances in which state-owned company assets may be equated with the state.

In its judgment the Privy Council held that an entity’s constitution, control and functions were relevant, but that “constitutional and factual control” and “the exercise of sovereign functions” do not transform a separate entity into an organ of the state.  It ruled that:

where a separate juridical entity is formed by the State for what are on the face of it commercial or industrial purposes, with its own management and budget, the strong presumption is that its separate corporate status should be respected, and that it and the State forming it should not have to bear each other’s liabilities.

Further, for a state-owned entity to be assimilated with a state, the affairs of the entity and the state would have to be “so closely intertwined and confused” that the entity could not properly be regarded for any significant purpose as distinct from the state.

Returning to Yukos, in attempts to identify whether Rosneft assets could be equated with the State, the winning party will definitely use the argument that in the award itself the tribunal has attributed the actions of Rosneft to the Russian Federation.  Moreover, the tribunal established that Rosneft is not a commercial company with a passive state shareholder. It confirmed that Rosneft has acted as an instrument of the state.

However, even if the tribunal came to this conclusion, each court in each jurisdiction will decide on its own. In the case of the UK, it would take time to find out whether Rosneft would pass the test of “close intertwinement and confusion” established by La Générale des Carrières et des Mines v. FG Hemisphere judgment.

So, will Russia escape enforcement again? It is hard to give the right answer.  In terms of lengthy and costly enforcement proceedings, the winning party could try to save time and money by learning lessons from the Noga story. However, a state immunity defence used carefully could help Russia to avoid arbitral enforcement again.

Courts’ pro-immunity approach will eventually work in Russia’s favour. Recent trends in state immunity display that even state-owned companies enjoy a high level of protection nowadays. Of course, in attempts to seize the assets of Rosneft and Gazprom a lot depends on jurisdiction, but, in any case, 50 billion US$ is a stake that makes it worth it for the winning party to try.

About the Author:

Maria Tsarova is a PhD candidate at the Legislative Institute of the Verkhovna Rada of Ukraine (investment arbitration). She holds a cum lauda law degree from Kiev National Taras Shevchenko University and an LL.M degree in International and European Business Law from Leiden University. In 2013 she attended the Arbitration Academy in Paris. Maria is a member of ICC Young Arbitrators Forum.

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