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Court orders Russia to pay investors over $50B for expropriation of Yukos oil company

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LONDON - Russia has been ordered to pay over $50 billion for expropriating what was once the country's largest oil producer, Yukos, in a court ruling that said President Vladimir Putin's government used tax claims to destroy the company and its CEO, a political opponent.

Monday'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 Ltd., 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 CEO, 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.

Monday's ruling, one of the largest commercial arbitration awards in history, adds to Russia's economic problems just as the U.S. 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 as a force to be reckoned with rather than a crumbling post-communist shell. Putin most recently went on to assert Russia's claims over Crimea, annexing the peninsula on the Black Sea in March, and to offer support to rebels in Ukraine's east.

But 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 to not 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 Monday's ruling, which was dated July 18, 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 doesn't pay up.

Nevzlin pointed at a suit won by a Swiss company, Noga, which claimed $1.1 billion from Russia and led to seizures of Russian assets worldwide in 2008. It eventually forced Moscow to opt for a settlement.

Khodorkovsky, who had given his stock in Yukos to Nevzlin, said the ruling will make a "strong impression" on Putin, saying his lieutenants had sought to downplay the likelihood of such an outcome.

"I'm sure that they haven't told Putin how disastrous the ruling will be, and I'm very happy today," he said on Ekho Moskvy.

Though the case has been a decade in the making, the timing of its release is unfortunate for Russia, experts said. Between the crisis in Ukraine, the possibility of sanctions and the payment of a massive judgment on Yukos, investors in Russia now face "the perfect storm," said Gianna Bern, who teaches finance at the University of Notre Dame in Indiana.

Bern said that while Russia could probably handle paying $50 billion, not paying could prove more problematic.

"Foreign investors are going to be on the sidelines waiting to see how they handle this," she said. "They will look at this and see if the Russian Federation respects the rule of law." The main stock index in Moscow fell almost 2 per cent on Monday.

Rosneft said in a statement it is not party to the litigation and it did not expect to be affected by it. It believes the deals to purchase former assets of Yukos "were fully legitimate." Shares in Rosneft were down 3.6 per cent in trading in London.

Monday's decision is not the only one facing Russia this week. The European Court of Human Rights is set to rule Thursday on another Yukos lawsuit — one involving 55,000 shareholders that were not part of the GML group. This group includes $6 billion in investments by U.S. pension funds and other institutions.

No one involved seems to think this is even close to over, with lawyers on all sides taking up positions.

"The Yukos affair is likely to come back to haunt the Russians," said Anders Aslund, a senior fellow at the Peterson Institute in Washington and a long-time Russia watcher. "You don't steal companies."

___

Nataliya Vasilyeva and Vladimir Isachenkov in Moscow contributed to this report.

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