Russia Stole Yukos and Owes $50 Billion, International Panel Rules

In the largest case of its kind, an international tribunal ruled that the Russian government stole the Yukos oil company a decade ago and ordered Moscow to pay $50 billion in damages to its former owners.

The tribunal’s ruling comes amid escalating economic sanctions on Russia from the United States and Europe for Moscow’s dismemberment of Ukraine, and it could add to the financial pressure already brought to bear on the reeling Russian economy.

After nearly 10 years of legal disputes, an international arbitration panel in The Hague unanimously ruled that the dismantling of Yukos beginning in 2003 was motivated by the Kremlin’s desire to steal valuable assets and destroy a potential political rival.

"The primary objective of the Russian Federation was not to collect taxes but rather to bankrupt Yukos and appropriate its valuable assets," the arbitration panel found.

It awarded the claimants, shareholders of GML Ltd., the former majority shareholders of Yukos, less than the $100 billion they sought in compensation, partly because the tribunal said that Yukos was engaged in some questionable tax practices when it was battling with Russian authorities over control.

"This award is a major victory for us," said Tim Osborne, director of GML, in a statement. "After intense scrutiny, the tribunal confirmed what the claimants have been saying all along."

What comes next is unclear, as is GML’s ability to collect the $50 billion. The claimants’ lawyers said the award is "final and binding" and stressed their right under the 1958 New York Convention to seize assets owned by the Russian government nearly anywhere in the world, except for diplomatic and military assets. In theory, that opens the door to seizing assets belonging to state-owned energy firms such as Rosneft and Gazprom, in addition to other state-owned firms, including Aeroflot. In practice, though, recovering even part of the $50 billion through international seizures will likely be a long and difficult process.

Rosneft, today the world’s largest oil company, acquired most of the Yukos assets when it was broken up. The company said in a statement that it did not expect the ruling to have an adverse effect its operations, according to Bloomberg.

Russian Foreign Minister Sergei Lavrov said Monday, July 28, that Russia would likely appeal the case and vowed to use all legal remedies to keep fighting. One possibility is to appeal the case on technical grounds through courts in the Netherlands, where The Hague is based.

The saga began in 2003 when Moscow targeted Yukos, at the time one of Russia’s largest oil companies, headed by Mikhail Khodorkovsky, a multibillionaire with political ambitions. Claiming that the company had dodged taxes — but rejecting every Yukos settlement offer — the Russian government drove the firm into bankruptcy and imprisoned its top executives. Khodorkovsky spent nearly a decade in prison, including time in Siberia, before he was pardoned by President Vladimir Putin late last year. Khodorkovsky surrendered his stake in the company and, therefore, will see no part of the $50 billion settlement.

The arbitration case began in 2005. The panel in The Hague found that Putin and other top officials in the Russian government orchestrated the assault on Yukos in order to bolster state-owned energy firms. The panel cited Putin telling Khodorkovsky just before the tax harassment began that Rosneft had "insufficient reserves" of oil, while companies such as Yukos "have a surplus of reserves."

A parallel suit brought by other former Yukos shareholders is before the European Court of Human Rights, meaning another multibillion-dollar ruling could come this week.

The landmark arbitration ruling against Russia comes right as the United States and Europe are intensifying their economic pressure in the wake of Moscow’s annexation of the Crimean peninsula and continued destabilization of eastern Ukraine. Washington stepped up sanctions on Russian banks and energy firms this month, and Europe this week could impose another round of sanctions, including closing capital markets to Russian firms and banning the export of key technology needed for the energy sector. Western sanctions are already hammering Russia’s economy, driving down the value of the ruble, scaring off tens of billions of dollars in foreign capital, and sending bond yields soaring.

Lawyers for GML put Monday’s ruling in the context of Russia’s continued defiance of international norms.

"This is a great day for the rule of law: A superpower like the Russian Federation is held accountable for its violations of international law," said Emmanuel Gaillard, head of international arbitration at Shearman & Sterling law firm, which led the Yukos fight.