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Shearman & Sterling secures historic $50bn arbitration award in epic Yukos dispute

Russia has been ordered to pay $50.08bn to the majority shareholders in Yukos Oil Company, once Russia’s largest oil producer, by an arbitral tribunal sitting in The Hague under the auspices of the Permanent Court of Arbitration (PCA).

The tribunal held unanimously that Russia breached its international obligations under the Energy Charter Treaty (ECT) by destroying Yukos Oil Company and appropriating its assets in an historic award rendered on 18 July.

The award is 20 times larger than the previous record for an arbitral award, the $2.16bn secured by Dow Chemical Company against Kuwaiti Petrochemical Industries Company over a failed joint venture in 2013.

The tribunal ruled that ‘Yukos was the object of a series of politically-motivated attacks by the Russian authorities that eventually led to its destruction’, with the Russian Federation’s aim being ‘to bankrupt Yukos, assign its assets to a state-controlled company, and incarcerate [Mikhail Khodorkovsky, once Russia’s richest man and a Yukos executive (pictured)] who gave signs of becoming a political competitor.’

At its peak, Yukos had around 100,000 employees, six main refineries and a market capitalisation of about $33bn.

The tribunal also ordered the Russian Federation to pay GML $60m in legal fees, 75% of the fees incurred in these proceedings less a discount based on Yukos’ own liability for the destruction of the company based on aggressive tax optimisation, and €4.2m in arbitration costs.

A Shearman & Sterling Paris-based team made up of Emmanuel Gaillard, who heads the firm’s 80-lawyer international arbitration practice, Yas Banifatemi, partner in charge of the firm’s public international law practice, and counsel Jennifer Younan represented GML, the holding company that indirectly owned the majority of Yukos’ shares.

Gaillard said at a press conference this morning (28 July): ‘There is no appeal. There is only limited action to set aside the award in the Netherlands. The judgment is there after 10 years of battle. The award is unanimous and that will carry a lot of weight in courts around the world. If you look at history and the history of awards against states, at the end of the day they pay.’

The arbitration lasted for nearly a decade with the original claim made in October 2004 for $114bn. Proceedings involved a ten-day hearing on jurisdiction and admissibility in 2008 and a 21-day hearing on the merits in 2012, attended by over 50 party representatives as well as fact witnesses and experts. The parties’ written submissions exceeded 6,500 pages and the transcript of the hearings is over 3,300 pages long. Over 11,000 exhibits were filed with the tribunal.

New York-based partner at Cleary Gottlieb Steen & Hamilton, Lawrence Friedman, and Paris-based Claudia Annacker represented the Russian state alongside Baker Botts’ London-based co-head of international arbitration Jay Alexander and Texas-based partner Michael Goldberg.  

The tribunal was chaired by Yves Fortier, formerly Canada’s representative on the UN Security Council. Russia appointed judge Stephen Schwebel, former president of the International Court of Justice, and the claimants appointed Charles Poncet, partner at CMS von Erlach Poncet in Geneva.

GML’s legal team argued that the expropriation of Yukos, liquidated in 2007, was achieved through a series of steps that included paralysing the company through the arrest, imprisonment and harassment of its management and employees and the enforcement of $24bn tax bill manufactured to take the company’s assets, which were later transferred to Russia’s state-owned companies Rosneft and Gazprom. The team from Shearman & Sterling stated that this allowed Rosneft, which has a market capitalisation of $67bn, to become the nation’s largest oil producer. Russia’s actions culminated in the liquidation of Yukos in November 2007, and the complete and total deprivation of Shearman’s clients’ investments.

‘This award is a major victory for us. After intense scrutiny, the tribunal confirmed what the claimants have been saying all along, namely that Yukos was destroyed, and its assets expropriated, for political reasons’ said Tim Osborne, director of GML.

Gaillard added: “This is a great day for the rule of law: a superpower like the Russian Federation is held accountable for its violations of international law by an independent arbitral tribunal of the highest possible calibre.’

Russia has until 15 January 2015 to pay the award in full. The award is final and binding, and if Russia fails to voluntarily pay the award then the award can be enforced in 150 states under the 1958 New York Convention. After that, interest will start accruing and be compounded annually.

Enforcement of the arbitration award can be made against Russia’s commercial assets, but not sovereign assets, in the event that Russia does not comply.

David Clark, chair of The Russia Foundation and former special adviser to Robin Cook at the UK Foreign Office between 1997 and 2001, said: ‘The Yukos affair was in many ways Putin’s “original sin”. It was the moment when it became clear that he was determined to centralise political power and dismantle any democratic or legal safeguards that stood in his way. Drawing a line under the affair might become a symbol of Russia’s willingness to put relations on a more business-like footing.’