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Russia Profile
December 2, 2009
An Old Grudge Revived
The Russian Government Has Much More to Fear from Strasbourg than from the Hague

By Roland Oliphant

The ruling by an ad-hoc arbitration tribunal in the Hague on Monday, stating that Russia is bound by the European Energy Charter Treaty, opened the way for Yukos shareholders to sue the Russian government over the state’s takeover of the once-powerful oil company. Group MENATEP Ltd. (GML), the holding company that owned Yukos, called it victory and plans to sue the Russian government for $100 billion. Most commentators are skeptical that the court would award that much or that Moscow would pay up if it did. But the ruling also has implications for other foreign investors in Russia.

The decision turned on whether or not Russia, which signed but never ratified the treaty, is bound by the terms of the European Energy Charter, a multilateral investment protection treaty drawn up in the early 1990s to offer protection to European investors interested in financing the energy sector in former communist countries.

Russia signed the treaty in 1994, but refused to ratify it until issues related to certain areas of the wide-ranging treaty - the trade in nuclear materials, which was excluded from the scope of the Energy Charter Treaty, an additional investment protocol and the transit protocol ­ were settled.

Speaking to the Financial Times on Tuesday, an unnamed Russian government spokesman questioned whether the charter could be applied to Russia when “it is not legally in force.” But according to the tribunal’s finding, the treaty had provisional force ­ that is, it came into effect “provisionally” from the moment the document was signed, a device not uncommon in multilateral treaties where the ratification process is likely to be lengthy.

Even more importantly, the tribunal found that even though Russia had left the treaty completely in October, any investments made during the provisional period (between 2004 and 2009) are protected by the treaty for 20 years.

But Monday’s decision only says that the former Yukos shareholders can sue ­ not that they will win. To do that, GML must convince the court that the tax claims that bankrupted Yukos, which was once Russia’s largest oil company, were in fact an act of appropriation on the part of the Russian state. Or, as GML director Tim Osborne told the Kommersant daily, that Yukos was destroyed by “a coordinated attack by the Russian state using fabricated giant tax claims, asset freezes, the forced sale of the underlying asset (a 76.79 percent stake in Yganskneftegaz sold in December of 2004) at a very low price, and an artificial bankruptcy with the auction of assets at low prices.”

The investors contend that not only was the attack “coordinated” by the state, but that it directly benefitted ­ most of the assets Yukos lost at the end of this process ended up in the state-owned oil company Rosneft.

GML reportedly wants some $100 billion from the Russian government, but it is unlikely that the court would award such a huge sum. “The compensation would have to be based on a fair price for the shares they lost. But what’s a fair share price?” asked one lawyer who asked not to be named. “It would be discounted by the tax claims, anyway, so it’s definitely going to be less than they’re talking about.”

Seeing as Russia walked out of the European Energy Treaty earlier this year, and considering its previous behavior with regard to all things connected with Yukos, it is extremely unlikely that the government would pay up even if the tribunal ruled in GML’s favor. The ad-hoc tribunals established to hear cases brought under the Energy Treaty have few coercive means of enforcing their verdicts. There is a possibility that the plaintiffs could have the ruling enforced abroad by seizing Russian assets of equivalent value in other countries. “But that’s very difficult. Diplomatic assets ­ embassies and so on ­ are untouchable. So maybe you could find shares a Russian state-owned company holds abroad. But then you’ve got to prove that the shares belong to the Russian government, or that the company that does own them is de facto identical with the government. It would be a very arduous process,” said the lawyer.

Meanwhile, the European Court of Human Rights in Strasbourg is to begin hearing a case brought by Yukos itself. The hearing, set to open on January 14, will consider the claims that the Russian authorities violated several rights and freedoms enshrined in the European Charter on Human rights, including the right to a fair trial, protection of property, and freedom from discrimination. The bankrupt company is seeking $32 billion ­ less than the investors at the Hague, but still a record sum for the Strasbourg court.

This has implications for the Hague hearing because questions of jurisdiction will arise if both courts try to award damages on the same issue. But more importantly, the Strasbourg court has powerful coercive means at its disposal. Refusal of a state to pay entails eviction from the Council of Europe. In the past, this threat has always been enough to make the Russian state pay compensation when the court has ruled against it. “But then, the amounts concerned were relatively small,” noted the lawyer. Thirty-two billion dollars is another matter. At that point, the question will leave the courtroom and become a diplomatic one.

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