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Monckton Chambers secures largest ever award from European Court of Human Rights in second historic Yukos ruling

In what becomes the second multibillion dollar award against Russia in the space of a week, the European Court of Human Rights in Strasburg has ruled that the country must pay 50,000 Yukos shareholders €1.9bn ($2.5bn) for unlawful tax penalties and disproportionate enforcement in the run up to the oil company’s bankruptcy.

Yukos, which was controlled by Russian oligarch Mikhail Khodorkovsky (pictured) and was in 2003 Russia’s largest oil producer, was bankrupted in 2006 after a $27 billion tax bill from the Russian government which also jailed Khodorkovsky for fraud and auctioned off the company’s assets to state-owned oil companies Rosneft and Gazprom.

The award, handed down by a chamber of seven judges, is 21 times the value of the court’s previous record award, when in May this year the European court of Human Rights ordered Turkey to pay €90m in compensation for its 1974 invasion of Cyprus.

The court awarded Yukos, which had instructed Piers Gardner from Monckton Chambers as lead advocate, €1.3bn in compensation for the unfair tax penalties levied against it during the early 2000s and €567m in reparation for ‘disproportionate character of the enforcement proceedings’ that was charged at 7%, rather than the 4% deemed appropriate.

Russia, which instructed as lead advocate Michael Swainston QC of Brick Court Chambers, has six months to provide a comprehensive plan for distribution of the award of just satisfaction. Russia, which has never refused to pay an award given by the European Court of Human Rights, could be instructed by a committee of presidents and leaders of the European Union to pay the award if it refuses to do so voluntarily. If Russia doesn’t pay then, it could be removed from the Council of Europe, which it joined in 1996 but recently had its voting rights suspended after it stoked violence in Ukraine and annexed Crimea.

The compensation, which follows a record $50bn arbitration award secured against Russia by Yukos’ majority shareholder GML, would have been much higher had the court decided that Yukos shareholders were entitled to damages for a breach of the European Convention’s right to a fair trial. The court ruled: ‘The Court could not speculate as to what the outcome of these proceedings might have been had the violation of the Convention not occurred. It therefore found that there was insufficient proof of a causal link between the violation found and the pecuniary damage allegedly sustained by Yukos. There was accordingly no ground for an award in this respect.’

Russia was also ordered to pay €300,000 costs and expenses to the Netherlands-based Yukos International Foundation, which was created by Yukos with a view to distributing to its shareholders any funds it would receive.

Yukos’ former chief executive, Steven Theede, said: “This is by multiples the largest award that the ECtHR has ever made, although the award is substantially less than the claim submitted by Yukos. All Yukos shareholders will benefit from this decision. The pursuit of this case, originally filed in April 2004, was to ensure that Yukos shareholders obtained recompense for the wrongful acts of the Russian Federation. It has been worth the effort.’

Bruce Misamore, former chief financial officer of Yukos, added: ‘The ECtHR has failed to recognise the true economic losses sustained by Yukos shareholders. In particular, the judgment says nothing about compensation for the rigged auction of Yuganskneftegaz, despite the ECtHR’s 2011 ruling that the decision to auction YNG “was capable of dealing a fatal blow to Yukos’ ability to survive the tax claims and to continue its existence”. Inevitably the Just Satisfaction award is based on the ECtHR’s restrictive merits judgment of September 2011, which fails to recognize the illegitimate methods and motives of the Russian Federation in destroying Yukos.  This goes against all other independent court and arbitral findings, the most prominent of which was just announced on Monday from the Permanent Court of Arbitration in The Hague.’

The chamber of seven judges was made up of president Christos Rozakis, Greece’s former Deputy Foreign Minister, Luxembourg’s Dean Spielmann, Croatia’s Nina Vajić, Azerbaijan’s Khanlar Hajiyev, Norway’s Sverre Erik Jebens, Switzerland’s Giorgio Malinverni and Russia’s ad hoc judge Andrey Yuryevich Bushev.