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Is There a Way to Collect $50bn in Damages Russia was Ordered to Pay to Yukos Shareholders?

01.08.2014

Dmytro Shemelin, lawyer at Ilyashev & Partners Law Firm
Source: The Liga

On Monday, July 28, Russia was ordered to pay $50bn in damages to the shareholders of Yukos, the now-defunct oil company that was broken up a decade ago after its boss fell foul of Vladimir Putin. 10 days ago, a Tribunal of the International Investment Arbitration acting under UNCITRAL rules and under the aegis of the Permanent Court of Arbitration in the Hague partly granted the application of Yukos former shareholders against the Russian Federation and has ordered Russia to pay $50 billion in damages for illegally seizing the assets of the oil giant.

But winning a case does not automatically mean getting compensated. Ilyashev and Partners’ Dmytro Shemelin told LigaBusinessInform what chances are there to collect the restitution from Russia.

Investors under protection

An arbitration to protect investors from the acts of a state under a bilateral investment treaty alone is nothing fancy. Every year courts in The Hague, Washington, Stockholm, Paris and London hear dozens of such cases and, as in any other litigation, the victory can go to applicant or to defendant. By the way, Yukos itself had filed a number of investment disputes like this (RosInvest Co. v. Russia, Quasar de Valores SICAV SA and others v. Russia). Of course, the amount in question in each of those cases was not as exorbitant as in this one – a matter of several million dollars. Applicants have won both cases, although there were no high-profile media reports about these awards.

However, even after winning in court, victims do not always receive the awarded amount. Most countries voluntarily pay awarded compensations. Ukraine is not the exception, by the way: all restitutions awarded under investment arbitration have been paid, or will soon be paid to the investors in full). There are, however, countries that radically refuse to comply with such arbitration awards, and the process of collecting the debt is delayed for years. Russia and Argentina are classic examples.

Quite often the government that is losing the case tries to reach a settlement with the applicant – say, to reduce the agreed amount of compensation in return for immediate payment. In many cases such agreement is beneficial to the injured party, since there is no need to waste time and resources to enforce the judgment and collect the debt. In this case, taking into account the general negative attitude of the Russian Federation to investment arbitration, a settlement between Yukos shareholders and the Russian Federation is very unlikely. Therefore, the applicant will have to look for the avenues to collect the money awarded.

How to make Russia pay its debts

Of course, the arbitration award in the Yukos case can be enforced in any country that signed the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). A local court can make an order to seize certain debtor’s property and sell it in order to repay the debt. However, in practice it can be quite challenging.

First of all, according to the arbitration award against a state, penalties should apply to the property of the state and not state-owned corporations, even with 100% government share. In other words, one cannot automatically foreclose on the assets of Gazprom or Rosneft.

However, practice shows that locating state property of Russia abroad, even for a total worth of few million dollars, can be problematic, not to mention the USD 50 billion.

For example, a German investor Franz Sedelmayer who received a $2 million award against Russia in 1998, was not able to actually enforce it, although he does not lack ingenuity in finding the ways of doing so. So, for example, Sedelmayer tried to levy an attachment upon payments intended for the Russian Federation for flights through Russian airspace, to foreclose on the residential complex of Russian security service, FSB, in Cologne, on Russian property at the Hannover exhibition and at the aircraft air show in Berlin, etc.

The second problem is the sovereign immunity. Even if the Russian state property outside Russia will be located, it is very likely that local courts will recognize that it is protected from penalties by sovereign immunity (there is a similar rule in Ukraine). Accordingly, the applicant will not only need to find the state property of the Russian Federation abroad, but the assets which are not covered by the immunity, which is even harder.

In search of justice

There are several ways of ensuring that justice is served and collecting the money awarded by the tribunal in The Hague. First one is to find buyers for Russian debt. If the discount will be quite significant (and such high-priced award can afford it), it will attract a lot of people willing to look for Russian assets abroad and in their home countries. For example, the debt of the Russian Federation may be interesting for companies or private individuals from whom Russia is trying to collect a significant amount in any type of litigation. Likewise, it could be any parties interested in limiting Russia’s influence in this or that country: having purchased a debt, they will be able to freeze Russian property, goods or vessels, to seek the seizure of assets by the court, etc.

The second way is trying to prove that the property of the Russian Federation as the state should be treated as including the properties of separate Russian companies with state capital. From the legal point of view, it is relatively difficult and there appears to be no case law with respect to Russia so far. However, this kind of treatment is not impossible, if the level of control the Russian Federation exercise over the business of a particular company is rather high, or the company is used in order to avoid foreclosure on the state property, or in some other cases. Therefore, theoretically, the assets of Gazprom and Rosneft, Sberbank and VTB are not all safe, as they may be seized by the court to secure the repayment of debt.

It should be noted that none of the previous applicants trying to foreclose on the property of Russia had the resources comparable to those that of the ex-shareholders of Yukos. They can afford the best lawyers with great expertise. Besides, the amount in question is more than substantial and is a weighty argument to continue the dispute. So, it is possible that investors’ counsel will try to prove that in fact the Russian oil giant’s multimillion assets abroad can be an ” extension” of the Russian state, and therefore their assets can be frozen and seized in the framework of enforcing this historic arbitration award.

 
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