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A Victory for Holders of Yukos


December 2, 2009, 3:01 am

An arbitration panel has ruled that shareholders in the former Yukos oil company, which was disbanded by the Russian government in 2007, are entitled to seek an estimated $100 billion in damages from the Russian government, lawyers for the Yukos shareholders said on Tuesday.

The decision, issued Monday, clears the way for a full airing of the dispute, in which lawyers are expected to argue that the Russian government had improperly expropriated Yukos under the pretext of collecting unpaid back taxes, Andrew E. Kramer writes in The New York Times.

While a final ruling is not likely for at least two years — and collecting any award would prove exceedingly difficult — the decision to let the case go to a hearing where it will be judged on its merits is a significant legal victory for the owners of oil assets that were effectively nationalized during Vladimir V. Putin’s term as president.

The implications go beyond Yukos. The European oil giants Royal Dutch Shell and BP and a number of private Russian companies have been compelled to renegotiate contracts or walk away from assets worth billions of dollars. A spokesman for Shell said the company would not comment on the decision.

From 2004 until the onset of the global financial crisis last year, the Russian government engineered a series of forced sales and bankruptcies in the oil and natural gas industry.

The decision holds the potential to shift leverage, however slightly, from Moscow toward companies in the tug of war over access to reserves and profits in Russia’s energy sector. Russia would not be able to act by fiat or without fear of paying a cost.

At issue is an interpretation of the 1994 Energy Charter Treaty, an international agreement that Russia signed but never ratified. The charter obliges Russia to provide equal legal protection for energy investors. At the time of the signing, Russia pledged to abide by the treaty’s terms provisionally, even without parliamentary ratification.

The arbiters on an ad hoc panel established by the treaty ruled that a pension fund for former Yukos employees and two companies that own Yukos shares can seek payments from the Russian government, according to Emmanuel Gaillard at Shearman & Sterling, who is representing Yukos shareholders.

Russia withdrew from the treaty entirely on Oct. 19. But a treaty provision requires the government to continue to uphold property rights in the oil and natural gas sector for 20 years after the formal abrogation, or until October 2019. That is ample time for other oil companies to come forward with claims.

“It’s a huge turning point,” Tim Osborne, the director of GML, the holding company created by Mikhail B. Khodorkovsky, the Yukos founder, said by telephone. Mr. Khodorkovsky is serving an eight-year sentence for tax evasion and fraud, and is on trial in Moscow on a separate charge of embezzlement.

“Russia finally has to stand up and be counted on its merits,” Mr. Osborne said. “A court has found it must. There is no wiggle room. It must stand its grounds and fight its corner on the merits. That is what we are looking forward to.”

The decision by the judges was not published. Lawyers at the Paris office of Cleary Gottlieb Steen & Hamilton, which is representing the Russian government, did not return a call seeking comment. A spokesman for Mr. Putin, who is now Russia’s prime minister, also declined to comment.

Russian courts, obsequious even in more mundane cases, had unfailingly sided with prosecutors in the highly politicized cases against Yukos and its executives.

Lawyers for Yukos say the $100 billion they are seeking would be the largest arbitration award ever, though analysts unrelated to the case say the chances of collecting a sum equal to about 10 percent of Russia’s gross domestic product are slim.

Chris Weafer, chief strategist at UralSib Capital, an investment bank, said the decision would most likely be shrugged off in Moscow, though it would surely harm Russia’s already less than flattering image among investors. “That is how most investors and government officials will view it for now,” he said.

Yukos shareholders characterized the $100 billion as the estimated value of Yukos in 2007 when it was finally disbanded, had the Russian government not opened a prosecutorial assault on what they called trumped-up tax evasion charges that caused its stock price to collapse three years earlier.

Mr. Osborne said it would be difficult for the Russian government to participate in the arbitration, then later deny the legitimacy of the tribunal. If the government did not pay an award, shareholders could seek to seize state assets outside of Russia, like real estate or art.

“It would take a long while to collect $100 billion, but it would start to make life very difficult for the Russian Federation,” Mr. Osborne said.

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