The Hague's arbitration court ruled on Monday that Russia must pay a group of shareholders in oil giant Yukos $51.6 billion for expropriating its assets, a big hit for a country teetering on the brink of recession.
The arbitration panel in the Netherlands said it had awarded shareholders in the GML group just under half of their $114 billion claim, going some way to covering the money they lost when the Kremlin seized Yukos, once controlled by Mikhail Khodorkovsky, a decade ago.
"The award is a slam dunk. It is for $50 billion, and that cannot be disputed," said Tim Osborne, director of GML. "It's now a question of enforcing it."
Russia's Finance Ministry called the ruling "flawed",
"one-sided" and "politically biased" and said it would appeal the decision. It comes as Russia and the West are in their biggest stand-off since the Cold War over Moscow's actions in Ukraine.
Russia argued that the court ignored tax violations by Yukos and said it was senseless and speculative to value Yukos so long after the events. Lawyers, however, said there were only limited grounds on which to appeal.
The panel of judges, which has been reviewing the case since 2005, concluded that officials under President Vladimir Putin had manipulated the legal system to bankrupt Yukos.
"Yukos was the object of a series of politically motivated attacks by the Russian authorities that eventually led to its destruction," the court said. "The primary objective of the Russian Federation was not to collect taxes but rather to bankrupt Yukos and appropriate its valuable assets."
ECONOMIC IMPACT
The ruling hits Russia at a time when it faces international sanctions about its role in Ukraine and anger over the downing of a Malaysian airliner over eastern Ukraine, where Moscow-backed rebels are fighting a separatist campaign. The country is also grappling with slowing economic growth.
"This decision affects the assessment of the long-term financial stability of Russia and could become the basis for arguments for revising Russia's ratings by international rating agencies," said Credit Suisse economist Aleksei Pogorelov.
The $50 billion represents about 2.5 pct of Russia's total GDP worth, or 57 pct of Russia's Reserve Fund, which is earmarked to cover budget holes.
The ruling hit Russian stocks. The RTS index <.IRTS> of Russian shares was down 3.1 percent by 1400 GMT.
The European Court of Human Rights (ECHR) in Strasbourg is expected on Thursday to announce a separate decision on Yukos's multi-billion-dollar claim against Russia, ruling on 'just satisfaction' or compensation, a Yukos spokeswoman said.
Yukos's application in the ECHR, which is on behalf of all Yukos shareholders, argued that Yukos was unlawfully deprived of its possessions by the imposition of bogus taxes and a sham auction of its main asset.
RECLAIMING ASSETS
GML may now face a battle to claim the money from Russia.
"The question is whether Russia will pay that award, which I very much doubt," said Jan Kleinheisterkamp, an Associate Professor of Law at the London School of Economics. "This means that ultimately the shareholders will start to chase Russian assets abroad, which is a very tedious and usually not very fruitful business."
Antonios Tzanakopoulos, a law professor at Oxford University, said if assets were to be seized, they would have to be purely commercial in nature to be expropriatable, meaning it would not be possible to get an order that an embassy building or a docked Russian warship should be handed over.
Russia must pay the compensation to subsidiaries of Gibraltar-based Group Menatep, a company through which Khodorkovsky, once Russia's richest man, controlled Yukos.
Group Menatep now exists as holding company GML, and Khodorkovsky is no longer a shareholder in GML or Yukos.
"We didn’t go into this for a pyrrhic victory to make a point ... We still believe that we will ultimately collect on this award," said Osborne.
Former Russian presidential advisor Andrei Illarionov said if Russia avoided payment it could face asset arrests around the world.
Chris Weafer, senior partner at Macro-Advisory consultancy in Moscow, said GML may try and target revenues from Russia's energy exports.
The ruling leaves Russia with few options to fight back, experts said. The arbitration court's rules call decisions on awards “final and binding”.
"The Kremlin's lawyers will be looking at any way to appeal this," said Weafer.
Tzanakopoulos said any appeal would effectively amount to a new arbitration procedure, which both parties would have to agree to. Russia could, and would be likely to, challenge enforcement claims in the many national courts around the world where such proceedings would be launched, he said.
Experts said fighting the decision could be a lengthy and uphill process.
"Appeals are difficult - it is a private arbitration," said one Moscow-based lawyer who declined to be named, adding that any counter-action would likely be a "long shot".
NO CASH FOR KHODORKOVSKY
Any funds claimed will be shared among the shareholders. The biggest ultimate beneficial owner is Russian-born Leonid Nevzlin, a business partner who had fled to Israel to avoid prosecution. He has a stake of around 70 percent.
Khodorkovsky ceded his controlling interest in Menatep, which owned 60 to 70 percent of Yukos, to Nevzlin, after he was jailed. Khodorkovsky, who is not a party to the legal action, was arrested at gunpoint in 2003 and convicted of theft and tax evasion in 2005.
"It is fantastic that the company shareholders are being given a chance to recover their damages," Khodorkovsky said in a statement, adding he would not seek to benefit financially from the outcome.
Khodorkovsky's company, once worth $40 billion, was broken up and nationalised, with most assets handed to Rosneft, a company run by Igor Sechin, a Putin ally.
Putin pardoned Khodorkovsky in December after he had spent 10 years in jail. He now lives in Switzerland.
"I am very pleased the international tribunal in the Hague decided that Russia violated international laws and illegally nationalised Yukos," said Nevzlin.
The other four ultimate beneficial owners, each of whom owns an equal stake, are Platon Lebedev, Mikhail Brudno, Vladimir Dubov and Vasilly Shaknovski.
Rosneft, which is not a defendant in the case, said it expected no claims to be made against the company and that the ruling would not have a negative impact on its "commercial activity and assets".
Rosneft bought the bulk of Yukos assets through auctions after the company was declared bankrupt. Its shares were down 2 percent.
The arbitration panel in the Netherlands said it had awarded shareholders in the GML group just under half of their $114 billion claim, going some way to covering the money they lost when the Kremlin seized Yukos, once controlled by Mikhail Khodorkovsky, a decade ago.
"The award is a slam dunk. It is for $50 billion, and that cannot be disputed," said Tim Osborne, director of GML. "It's now a question of enforcing it."
Russia's Finance Ministry called the ruling "flawed",
"one-sided" and "politically biased" and said it would appeal the decision. It comes as Russia and the West are in their biggest stand-off since the Cold War over Moscow's actions in Ukraine.
Russia argued that the court ignored tax violations by Yukos and said it was senseless and speculative to value Yukos so long after the events. Lawyers, however, said there were only limited grounds on which to appeal.
The panel of judges, which has been reviewing the case since 2005, concluded that officials under President Vladimir Putin had manipulated the legal system to bankrupt Yukos.
"Yukos was the object of a series of politically motivated attacks by the Russian authorities that eventually led to its destruction," the court said. "The primary objective of the Russian Federation was not to collect taxes but rather to bankrupt Yukos and appropriate its valuable assets."
ECONOMIC IMPACT
The ruling hits Russia at a time when it faces international sanctions about its role in Ukraine and anger over the downing of a Malaysian airliner over eastern Ukraine, where Moscow-backed rebels are fighting a separatist campaign. The country is also grappling with slowing economic growth.
"This decision affects the assessment of the long-term financial stability of Russia and could become the basis for arguments for revising Russia's ratings by international rating agencies," said Credit Suisse economist Aleksei Pogorelov.
The $50 billion represents about 2.5 pct of Russia's total GDP worth, or 57 pct of Russia's Reserve Fund, which is earmarked to cover budget holes.
The ruling hit Russian stocks. The RTS index <.IRTS> of Russian shares was down 3.1 percent by 1400 GMT.
The European Court of Human Rights (ECHR) in Strasbourg is expected on Thursday to announce a separate decision on Yukos's multi-billion-dollar claim against Russia, ruling on 'just satisfaction' or compensation, a Yukos spokeswoman said.
Yukos's application in the ECHR, which is on behalf of all Yukos shareholders, argued that Yukos was unlawfully deprived of its possessions by the imposition of bogus taxes and a sham auction of its main asset.
RECLAIMING ASSETS
GML may now face a battle to claim the money from Russia.
"The question is whether Russia will pay that award, which I very much doubt," said Jan Kleinheisterkamp, an Associate Professor of Law at the London School of Economics. "This means that ultimately the shareholders will start to chase Russian assets abroad, which is a very tedious and usually not very fruitful business."
Antonios Tzanakopoulos, a law professor at Oxford University, said if assets were to be seized, they would have to be purely commercial in nature to be expropriatable, meaning it would not be possible to get an order that an embassy building or a docked Russian warship should be handed over.
Russia must pay the compensation to subsidiaries of Gibraltar-based Group Menatep, a company through which Khodorkovsky, once Russia's richest man, controlled Yukos.
Group Menatep now exists as holding company GML, and Khodorkovsky is no longer a shareholder in GML or Yukos.
"We didn’t go into this for a pyrrhic victory to make a point ... We still believe that we will ultimately collect on this award," said Osborne.
Former Russian presidential advisor Andrei Illarionov said if Russia avoided payment it could face asset arrests around the world.
Chris Weafer, senior partner at Macro-Advisory consultancy in Moscow, said GML may try and target revenues from Russia's energy exports.
The ruling leaves Russia with few options to fight back, experts said. The arbitration court's rules call decisions on awards “final and binding”.
"The Kremlin's lawyers will be looking at any way to appeal this," said Weafer.
Tzanakopoulos said any appeal would effectively amount to a new arbitration procedure, which both parties would have to agree to. Russia could, and would be likely to, challenge enforcement claims in the many national courts around the world where such proceedings would be launched, he said.
Experts said fighting the decision could be a lengthy and uphill process.
"Appeals are difficult - it is a private arbitration," said one Moscow-based lawyer who declined to be named, adding that any counter-action would likely be a "long shot".
NO CASH FOR KHODORKOVSKY
Any funds claimed will be shared among the shareholders. The biggest ultimate beneficial owner is Russian-born Leonid Nevzlin, a business partner who had fled to Israel to avoid prosecution. He has a stake of around 70 percent.
Khodorkovsky ceded his controlling interest in Menatep, which owned 60 to 70 percent of Yukos, to Nevzlin, after he was jailed. Khodorkovsky, who is not a party to the legal action, was arrested at gunpoint in 2003 and convicted of theft and tax evasion in 2005.
"It is fantastic that the company shareholders are being given a chance to recover their damages," Khodorkovsky said in a statement, adding he would not seek to benefit financially from the outcome.
Khodorkovsky's company, once worth $40 billion, was broken up and nationalised, with most assets handed to Rosneft
Putin pardoned Khodorkovsky in December after he had spent 10 years in jail. He now lives in Switzerland.
"I am very pleased the international tribunal in the Hague decided that Russia violated international laws and illegally nationalised Yukos," said Nevzlin.
The other four ultimate beneficial owners, each of whom owns an equal stake, are Platon Lebedev, Mikhail Brudno, Vladimir Dubov and Vasilly Shaknovski.
Rosneft, which is not a defendant in the case, said it expected no claims to be made against the company and that the ruling would not have a negative impact on its "commercial activity and assets".
Rosneft bought the bulk of Yukos assets through auctions after the company was declared bankrupt. Its shares were down 2 percent.
