| 23 April 2009By Yevgeny Kiselyov Nearly two months have passed since a second round of charges was brought against former Yukos CEO Mikhail Khodorkovsky. The proceedings in Moscow's Khamovnichesky District Court allege that Khodorkovsky somehow managed to embezzle not only all of the oil that Yukos extracted during the company's existence but also laundered all of the firm's profits, including everything Yukos paid to employees, invested in the modernization of equipment or searching for new oil deposits and the amounts spent on improving the social infrastructure of cities where Yukos was drilling for oil. Now, everyone understands that the absurd charges against Khodorkovsky are politically motivated.
Meanwhile, a completely different "Yukos affair" is unfolding in the West -- one that could inflict even greater harm to Russia's reputation.
Last week, the Stockholm Court of Arbitration agreed to hear a complaint by several Spanish investment funds demanding compensation from Russia for losses caused by the government's forced Yukos bankruptcy. The official sum they are seeking has not been disclosed, but the Covington & Burling legal firm representing the plaintiffs has said more than $10 billion has been lost. This sum covers only investors who held Yukos securities and who live in countries that have bilateral agreements with Russia covering the protection of investments.
Meanwhile, there is a much larger legal claim dating back to 2005, although few people know about this lawsuit because both sides have tried to keep it under wraps. In this case, former Yukos investors are the plaintiffs and Russia is the defendant, and the damages being sought are up to $100 billion. The legal claims rest on Article 26 of the Energy Charter Treaty, which protects investors in the energy sector by prohibiting discrimination as well as biased and arbitrary legal proceedings. According to the plaintiffs, Russia violated Article 26 by dismantling Yukos through the selective application of laws and illegally expropriating the company's assets. This is by far the largest damages claim in the history of international arbitration.
In the event of an arbitration ruling in a foreign court against the Russian government, Moscow won't be able to simply ignore the decision. It is possible through legal channels for plaintiffs to recover damages by selling Russian government property located abroad. Recall the 1998 arbitration decision in Stockholm that awarded German entrepreneur Franz Sedelmayer 4.9 million euros ($6.4 million) after he argued that the Kremlin's property department confiscated his St. Petersburg security company and luxury mansion headquarters in 1994. In a precedent-setting case in March 2008, a German court ruled that Sedelmayer had the right to auction off Russian government property located in Cologne to collect damages. There is a clear difference in size between the Sedelmayer's award and the Yukos investors' claim of $100 billion, but what is important in the Sedelmayer case is the precedent that was set for enforcing a court decision against the Russian government in a foreign jurisdiction. This precedent could help Yukos investors collect damages in the event of a favorable arbitration decision in a foreign court.
The lawsuit was filed with the Permanent Court of Arbitration located in the Peace Palace in the Hague. The process itself is an ad hoc arbitration process, which gathers only in order to review the specific case in question. That is a widespread international practice, specified by the rules of the United Nations Commission on International Trade Law. Three arbitrators consider the merits of the case. The plaintiff selects one arbitrator, the defendant another, and together they choose the third who presides over the process. In this case, both parties agreed upon Canadian Yves Fortier, a lawyer and former diplomat who has a reputation of being the best arbitration judge in the world. For their arbitrator, Yukos investors chose Charles Poncet, a lawyer with 20 years of experience in international arbitration. The Russian government chose as its arbitrator Stephen Schwebel of the United States, former president of the International Court of Justice. Also representing the interests of Yukos investors is the legal team of Shearman & Sterling, headed by arbitration lawyer Emmanuel Gaillard, an acknowledged expert in this field. By the way, it was Gaillard who won a case in Dutch courts in 2008 that set a very important precedent in the Yukos litigation. In this lawsuit, Yukos' liquidators were forced to pay $850 million to Moravel, the Dutch subsidiary of Yukos majority shareholder GML (formerly Group Menatep). The dispute regarded a loan that Yukos failed to repay Moravel once the government dismantled Yukos after a highly questionable bankruptcy auction.
The fact that Russia has hired the prominent law firm Cleary Gottlieb Steen & Hamilton to represent its interests at an annual cost totaling millions of dollars indicates that the Kremlin is very concerned about the case. At issue here is more than just the gigantic sum of the legal damages. The process could set an important precedent in the argument over whether Russia is obligated to obey the provisions of the Energy Charter Treaty that it signed in 1994 but never ratified.
There was a time when the Russian authorities treated the energy treaty seriously, but recently they claim that it is not binding because Russia never ratified the treaty. But Article 45 of the treaty obligates signatories to obey the provisions even while it is waiting to be ratified. What's more, that same clause makes clear that if a country signing the Energy Charter does not want its rules to become applicable prior to ratification, that country must officially declare its reservations at the moment of signing. But Russia never did this. (There are dozens of cases in which Russia has upheld agreements that it had signed but not yet ratified. The classic example is the Baker-Shevardnadze agreement demarcating the international boundaries in the Bering Strait that was signed during the Soviet period.)
The question of whether the Energy Charter Treaty is binding for Russia was the main subject of a preliminary hearing held in the Hague in late November and early December 2008. If the court finds that the energy agreement is not binding, there will be no grounds for the lawsuit brought by former Yukos investors against Russia.
Precedents are important in international arbitration, and one that was established in August does not work in Russia's favor. Arbitrators who convened at the request of a Cyprian company making claims against Bulgaria decided to review the case on the basis of the Energy Charter Treaty, even though Bulgaria -- like Russia -- had only signed the document without ratifying it. Similar decisions concerning the applicability of the agreement prior to its ratification were made in the case of the Petrobart company of Gibralter against Kyrgyzstan, and in the Greek firm Kardassopoulos' case against Georgia. Thus, chances are very good that the case of the Yukos investors' case against Russia will be heard by the Permanent Court of Arbitration in the Hague.
Dutch arbitrators will find it difficult to ignore all of the precedent-setting court rulings supporting the applicability of the Energy Charter Treaty in cases similar to the Yukos investor lawsuit. The ultimate ruling in favor of Yukos shareholders is easy to predict, although it would not come sooner than some time in 2010.
Yevgeny Kiselyov is a political analyst and hosts a political talk show on Ekho Moskvy radio.
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