Yukos shareholders sue Russia for $100 billion

If you thought that, just because Yukos doesn’t exist anymore, Yukos would leave the front pages – well, you were wrong.

Yukos may no longer exist, but it’s shareholders do. And they want the Russian government to give them their money back. All $100 billion of it.

Yukos’ angry shareholders have given up on the Russian legal system, and decided to take advantage of the Energy Charter Treaty, which came into force in 1998. The Treaty specifically notes that companies cannot be nationalised without compensating its owners and goes on to impose legally binding arbitration on signatory states.

There’s just one problem – no one is quite sure whether arbitration applies to all of the states who have signed the treaty, or just those who have actually ratified the treaty. And Russia being Russia, of course, has yet to ratify the treaty.

The Telegraph outlines the various arguments for and against:

So does Russia have to submit the Yukos dispute to binding international arbitration? Look at the wording of the treaty, say the Russians: arbitration is compulsory only for states that are contracting parties; a contracting party is defined as a state that has consented to be bound by the treaty and for which the treaty is in force; and provisional application applies, by definition, only to countries where the treaty is not yet in force.

Not so, say the Yukos investors. If you look at the text of Article 45 and the treaty as a whole, it is clear from the context that “contracting party” was meant to include countries that have agreed to apply the treaty provisionally. Provisional application does not violate the Russian constitution, they insist, and Russia should not be permitted to escape its obligations now.

Ordinarily, I could see this becoming a massive wrangle which would either tie the arbitrators themselves in knots or just give the Russian government the opportunity to refuse to take part, and to then ignore any eventual verdict.

But, surprising everyone, the Russian government seems perfectly happy to submit to arbitration, regardless of whether or not it is actually obliged to.

At first glance, this seems like a big risk – if the arbitrators ruled against Russia, debt collectors could pursue any Russian assets held worldwide with the exception of those that hold diplomatic immunity, such as embassies.

Presumably, Russia has taken a good hard look at previous international arbitrations, and seen that they rarely come up with shock decisions – particularly when the government party can make a reasonable argument that it followed due process domestically.

I would expect the Russian government to make a case that the sale of Yukos was to cover the debts of the company (and, by implication) its shareholders. The settlement of those debts they will argue was, therefore, adequate compensation for the seizure of Yukos and its assets.

Compared to this, I think the Yukos’ lawyers are going to be fighting an uphill battle…