The Yukos case involved a Russian oil company that grew rapidly in the 1990s and early 2000s under its majority shareholder, Mikhail Khodorkovsky. The Russian government accused Yukos of tax evasion and seized its assets in 2004. Three Yukos shareholders brought arbitration claims against Russia, resulting in a 2014 award ordering Russia to pay $50 billion in damages. However, Russia has refused to pay, arguing the tribunal was politically motivated. The case demonstrates that private property rights can be vulnerable to political interests between states.

1. YUKOS: REMARKABLE
LESSONS ABOUT ECONOMY
AND POLITICS
By Shahram Shirkhani
Image courtesy of
Roman Boed at
Flickr.com

2. Yukos case is probably one of the most notorious
arbitrations of the 21st Century; a case to be studied in
the future by political scientists, international lawyers and
economists. It has been the most expensive investment
treaty ever signed.
The conflict that gave rise to the case began on April 23,
2004. After ten years of legal proceedings, the Court issued
a millionaire award on July 18, 2014, of fifty billion dollars
just in damages, sixty millions of legal fees and 5.6 millions
of costs, but the Claimants have received less than the
50% of the initially claimed amount because of the Russian
government intervention.
Yukos: Remarkable lessons about
Economy and Politics

3. Background
After the dissolution of the Soviet Union, the privatization
process of the Russian Industry made considerable
progress. The OJSC “Yukos Oil Company”, founded in Moscow
in 1993, grew tremendously from the mid 1990s to the beginning
of the 2000s. It was already the major oil and Gas Company of
the Russian State, but after it was acquired by the oligarch
Mikhail Khodorkovsky, it became one of the top-ten oil
companies worldwide: In the early 2000s, the company owned
six refineries, around ten hundred thousand employees and a
thirty-three billion dollars capitalization.
In order to foster economic development, Russia adopted a
low tax region policy. To some corporations were given tax
exemptions and Yukos was one of them. The company could
extract and sell crude oil to trade companies at really cheap
prices; they sold it back to Yukos refineries at market prices, and
then Yuko bought it once refined for selling it at market prices.

4. The Russian government accused the company of tax
evasion, embezzlement and fraud, but Yukos contended that
they just took advantage of the current tax legislation. The
government of Putin sent Khodorkovsky to jail, the control of his
shares passed to the Baron Jacob Rothschild and three
shareholders brought three different arbitrations against the
Russian government in 2005 (they owned together the 70% of
Yukos). Three awards were issued almost ten years later.
Image courtesy of
Amanda Graham at
Flickr.com

5. Expropriation
Russia paralyzed Yukos thanks to the criminal accusations of the
directors of the shareholders. The government proceeded to
reevaluate the files of Yukos and declared that they owned twenty four
billion dollars in taxes by 2006. Russia seized the shares of the
company and sold its main production subsidiary in an auction for
covering Yuko’s taxes. The production subsidiary, YNG was sold to
Baikal, a front company (financed by the state company Rosneft. In
2006, Yukos was finally bankrupted and liquidated a year later.
Russia condemned Alexei Pichuguin, the former Security Chief, and
Platon Levedev, the close associate of Khodorkovsky. The
accusations included selective murders to Russian businessmen.
Khodorkovsky claimed that the real reasons behind his imprisonment
were political, because of his tense relations with the Kremlin: he
openly affirmed that Russia needed a stronger Parliament and a
weaker President. Some people assured that he wanted to become
Prime Minister and Putin pulled the strings to neutralize him when it
was a known fact that Khodorkovsky financed the opposition against
Putin’s power.

6. Arbitration and politics
In 2014, the International Court of The Hague ordered
Russia to pay fifty billion dollars to the former Yuko’s
shareholders; days later, the European Court of Human
Rights ruled for the Russian government to pay 2,51 billion
dollars to the shareholders in compensation for unfair
proceedings.
The important lesson to learn is that when it comes to
politics and global power, the concept of private
property and civil rights walk on tightrope. Russia has
set aside proceedings, arguing a lack of valid arbitration
agreement. The Russians affirmed that the Tribunal
followed a political agenda, and even though they had until
January 2015 to pay, Russia has refused to compensate.

7. Economic implications for Russia
According to the Arbitration Court, Russia violated the
Energy Charter Treaty in 2004, and claimed that the
expropriation process was illegal. Nevertheless, the Russian
government claimed that the Federation has never ratified the
Energy Charter and declared that the Court of The Hague has
no jurisdiction over the Yukos case. Several investors went out
of Russia after the award of the Court, and just that: the
implications for not following the orders of the Court included that
the former shareholders of Yukos could seek Russian assets
abroad to sell them, which actually happened in Belgium and
France last year.
On the other hand, Putin announced that those detentions
were illegal and the case will be solved in favor of Russia
through legal proceedings. The conflict escalated to the
Supreme Court of Sweden in 2012, but on January of the current
year it upheld the Russian appeal: The Arbitration Institute of the
Stockholm Chamber of Commerce has no jurisdiction over the
case.