International arbitration court orders Russia to pay $50 billion to former Yukos shareholders

The ruling adds to tensions between Russia and the international community at a time when relations are at their lowest ebb since the end of the Cold War.

Former Yukos CEO Mikhail Khodorkovsky, who spent ten years in prison before he was pardoned by Vladimir Putin in December last year, said on Monday that the decision of the Permanent Court for Arbitration in the Hague, Netherlands, ordering Russia to pay more than $50 billion to the former majority shareholders of the now defunct oil company, was “fantastic” for shareholders.

An international court on Monday ordered Russia to pay more than $50 billion to the former majority shareholders of now defunct oil company Yukos, ruling that the state engaged in a ruthless campaign to destroy what was once the country’s biggest oil producer.

In one of the biggest such cases ever, the Permanent Court for Arbitration in the Hague, Netherlands, determined Russia was not acting in good faith to collect taxes when it levelled massive claims against Yukos in 2003, even though some of the company’s tax arrangements might have been questionable. The tax case led to the imprisonment of Yukos CEO Mikhail Khodorkovsky and has been widely seen as retaliation for his support of opposition political parties.

The state took advantage of the tax claims “by launching 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 ruling adds to tensions between Russia and the international community at a time when relations are at their lowest ebb since the end of the Cold War. Following the downing of Malaysia Airlines Flight 17 over eastern Ukraine, the U.S. and European Union are debating further economic sanctions against Moscow because of its support for rebels suspected of launching the attack.

The amount of damages, although half as much as originally claimed, is still colossal, even for a nation with the vast oil and mineral wealth like Russia. It is nearly as much as Russia spent on the 2014 Winter Games in Sochi, the most expensive Olympics in history.

The Yukos takeover was the beginning of a process under which Russia, under President Vladimir Putin, retook control of the country’s energy industry. Yukos’ main assets were sold at auction to a shell company. Just days later, that company was bought up by state-owned Rosneft, making it the largest oil producer in Russia.

In the ruling, which was dated July 18 and announced on Monday, the court described the seizure of the assets as “devious and calculated.”

Russia was ordered to pay the judgment within 180 days or begin paying interest. If Russia declines to pay, shareholders can attempt to seize Russian assets abroad such as commercial properties, travelling art collections or airplanes.

“It’s the end of the beginning,” said Tim Osborne, the executive director of GML, formerly Group Menetap Ltd. whose subsidiaries brought the suit. “We’re over the first and most important hurdle. It’s now a question of enforcing it.”

Russian Foreign Minister Sergey Lavrov, commenting on unconfirmed reports about the ruling earlier on Monday, said that Russia would keep fighting.

“Authorities who are representing Russia in this trial will use all possible legal means to defend their position,” Mr. Lavrov said.

Rosneft said in a statement on Monday that it is not party to the litigation and that it did not expect to be affected by it.

“Rosneft believes that all the deals to purchase former assets of Yukos as well as all its actions regarding Yukos were fully legitimate and were done in line to the legislation at the time,” the company said.

Shares in Rosneft, which is worth $65.7 billion, were down 3.6 per cent on Monday trading in London and 2.7 per cent in Moscow.

GML sought relief from under the Energy Charter Treaty, which creates the legal basis for an open international energy market. The holding company claimed that Russia violated the treaty, which requires swift and fair compensation if assets are expropriated.

Mr. Khodorkovsky, who spent ten years in prison before he was pardoned by Putin in December last year, said Monday that the decision was “fantastic” for shareholders, though he underscored he was not a party to the case and would get nothing personally.

“It is sad that the recompense will have to come from the State’s coffers, not from the pockets of Mafiosi linked to the powers that be and those of Putin’s oligarchs,” he said in a statement.

The Yukos matter has raised questions about whether investors can expect any safeguards in Russia. Analysts suggest that many will be watching how the Russians react.

“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.”