Yukos shareholders awarded US$51 billion from Russia by Hague arbitration court

Hague court awards the compensation to shareholders in defunct oil giant, but now comes the battle to enforce the ruling

PUBLISHED : Monday, 28 July, 2014, 10:33pm
UPDATED : Tuesday, 29 July, 2014, 4:22am

The Hague's arbitration court has ruled that Russia must pay a group of shareholders in oil giant Yukos US$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 US$114 billion claim, going some way to covering the money they lost when the Kremlin seized Yukos, once controlled by Mikhail Khodorkovsky (pictured).

"The award is a slam dunk. It is for US$50 billion, and that cannot be disputed," said Tim Osborne, director of GML. "It's now a question of enforcing it."

But Foreign Minister Sergey Lavrov said Moscow would probably appeal against the decision, so shareholders, who have battled through the courts for a decade, might have longer to wait.

"The Russian side, those agencies which represent Russia in this process, will no doubt use all available legal possibilities to defend its position," he said when news of the award leaked ahead of the official announcement yesterday. 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."

The ruling hits Russia at a time when it faces 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.

Separately, The European Court of Human Rights in Strasbourg is expected on Thursday to announce a separate decision on Yukos' multibillion-dollar claim against Russia, ruling on "just satisfaction" or compensation, a Yukos spokeswoman said. Yukos's application in the court, 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.

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."

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. Any funds claimed will be shared among the shareholders. The biggest ultimate beneficial owner is Russian-born Leonid Nevzlin, a business partner who fled to Israel to avoid prosecution. He has a stake of around 70 per cent.

Khodorkovsky ceded his controlling interest in Menatep, which owned 60 to 70 per cent of Yukos, to Nevzlin after he was jailed. Khodorkovsky, who is not a party to the legal action, was arrested 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, adding he would not seek to benefit financially from the outcome.

Khodorkovsky's company, once worth US$40 billion, was broken up and nationalised, with most assets handed to Rosneft, a company run by Igor Sechin, an ally of Putin. Putin pardoned Khodorkovsky in December after he had spent 10 years in jail. He now lives in Switzerland.