Court ruling opens door for shareholders of company destroyed by tax claims to seize state-owned assets
Russian President Vladimir Putin's government must pay US$50 billion ($58.5 billion) for using tax claims to destroy Yukos, once the country's largest oil producer, and its Kremlin-critical chief executive, an international court has ruled.
Yesterday's verdict by the Permanent Court for Arbitration increases the economic and diplomatic isolation of Russia at a time when it faces new, potentially painful sanctions from Western powers.
The court, a body that rules on corporate disputes, said the Russian government owes the money - a huge sum, even for such an oil-rich nation - to the former majority shareholders in Yukos Oil Co.
Moscow vowed to fight the decision, raising the prospect of a new round of legal battles as the shareholders seek to enforce the decision by seizing Russian state-owned assets in 150 countries around the world.
They can attempt to seize any assets used for commercial purposes. That means that while embassies are safe, planes, art, commercial property, gas pipelines and oil rigs are not.
"It's the end of the beginning," said Tim Osborne, executive director of GML, formerly Group Menatep, whose subsidiaries brought the suit to the court based in The Hague, Netherlands.
The court said Russia had used tax claims to take control of Yukos in 2003 and silence its chief executive, Mikhail Khodorkovsky, an opponent of Putin who had begun to use his vast wealth to fund opposition parties challenging Putin's power.
Khodorkovsky was arrested at gunpoint as he boarded a plane in Siberia that year and spent more than a decade in prison as Yukos' main assets were sold to a state-owned company. Yukos ultimately went bankrupt.
Yesterday's ruling, one of the largest commercial arbitration awards in history, adds to Russia's economic problems just as the US and European Union are debating further sanctions against the country because of its support for rebels in eastern Ukraine. Though the country has ample reserves, uncertainty over the impact of the sanctions has seen economic growth forecasts plummet and investors are pulling money out of the country at almost twice the pace as last year.
The court's three-member panel, chaired by Yves Fortier, Canada's former permanent representative to the United Nations, determined Russia was not acting in good faith to collect taxes when it levelled massive claims against Yukos, even though some of the company's tax arrangements might have been questionable.
The state launched "a full assault on Yukos and its beneficial owners in order to bankrupt Yukos and appropriate its assets while, at the same time, removing Mr Khodorkovsky from the political arena," the court said.
The blunt verdict accusing the Kremlin of giving the go-ahead to crush one of the nation's biggest companies contrasts sharply with earlier cautious rulings from other international courts, which were carefully phrased to avoid blaming the Russian leadership for destroying Yukos.
The dismantling of Yukos and the arrest of Khodorkovsky were a defining moment in Putin's rule.
It was then that his government began to take back control of the country's energy industry and sought to re-assert itself internationally.
The wake-up call for the West began in the early 2000s, when Putin forged a deal with Russian businessmen who had created empires by snapping up the jewels of the Soviet state in oil, gas and chemicals.
The Kremlin offered its protection for the oligarchs' often murky deals. In exchange, the tycoons pledged not to meddle in government policy. Khodorkovsky was the only man who broke this rule.
After his imprisonment, Yukos' main assets were ultimately bought up by state-owned Rosneft, making it the largest oil producer in Russia.
In the ruling, Russia was ordered to pay the damages within 180 days or begin paying interest. If Russia declines to pay, shareholders can attempt to seize Russian assets abroad.
"We're over the first and most important hurdle," Osborne said. "It's now a question of enforcing it."
The amount of damages, although half as much as originally claimed, is colossal - nearly as much as Russia spent on the 2014 Winter Games in Sochi, the most expensive Olympics in history.
Russia's options are limited. Though the arbitration decision is final, it can seek what is called a "setting aside" of the award before courts in the Netherlands. The threshold for review is high, however, and lawyers for GML said they were confident Russia had no chance on that front.
The Russian finance ministry said it would take that path, fight what it called a one-sided and political verdict in the other courts in the Netherlands.
Foreign Minister Sergey Lavrov said Russian authorities "will use all possible legal means to defend their position".
Leonid Nevzlin, the top beneficiary of a trust controlling GML that has launched the suit, told Ekho Moskvy radio shareholders would search for and freeze Russian assets around the world if Moscow did not pay up.
Nevzlin pointed at a suit won by a Swiss company, Noga, which claimed US$1.1 billion from Russia and led to seizures of Russian assets worldwide in 2008. Eventually Moscow opted for a settlement.
Khodorkovsky, who had given his stock in Yukos to Nevzlin, said the ruling would make a "strong impression" on Putin, saying his lieutenants had sought to downplay the likelihood of such an outcome.
• Permanent Court for Arbitration has ruled the Russian government must pay US$50b to the former majority shareholders in Yukos Oil Co.
• Tax claims were used to take control of Yukos in 2003 and silence CEO Mikhail Khodorkovsky, an opponent of President Vladimir Putin.
• Khodorkovsky was arrested at gunpoint as he boarded a plane in Siberia and spent more than a decade in prison.
• Russia was ordered to pay the damages within 180 days or begin paying interest. If it declines to pay, shareholders can attempt to seize Russian assets abroad.
• Moscow has vowed to fight the decision.