Business | The Yukos affair

A ghost bites back

Shareholders in what was once Russia’s biggest oil company scent victory

YUKOS once epitomised the transformation of Russian business from its chaotic, robber-baron state in the 1990s to something approaching international norms. But the downfall in 2003 of the country’s largest and best-run oil firm exemplified something else: the way in which the Kremlin was seizing control of the commanding heights of the economy. A series of dubious lawsuits and auctions bankrupted and dismembered Yukos. Its boss, Mikhail Khodorkovsky, went to jail and most other managers fled abroad.

That left the company’s shareholders hugely out of pocket—and furious. But after a decade of litigation to establish jurisdiction and applicability of international law in the case, they are beginning to gain redress. Their biggest victory came with a $50 billion judgment against Russia last year by the Permanent Court of Arbitration in The Hague. Russia had signed an international agreement called the Energy Charter, which protects cross-border investment. Though Russia never ratified its membership and has now withdrawn from the treaty, the judges (including one nominated by Russia) ruled unanimously that it had breached the charter’s terms and must compensate the investors.

Russia has refused to pay up (and is still trying to contest the ruling on technical grounds). But under an international convention on arbitration judgments, signed in 1958, they can be enforced in any signatory country. So the investors are seeking court orders to freeze, and ultimately seize, Russian state assets all over the world. Though diplomatic bank accounts, embassy buildings and the like enjoy special protection, other assets, such as those used for commercial purposes, do not. Tim Osborne, a lawyer who represents the plaintiffs, says his team is starting with “low-hanging fruit” such as bank accounts and property owned directly by the state. But in future he will look at state-controlled companies, such as Rosneft, an oil giant which ended up with many of Yukos’s assets.

Russia has reacted furiously. After a court in Brussels froze some bank accounts this month, it bawled out the Belgian ambassador in Moscow for what it termed an “openly unfriendly act” and a “gross violation of the universally recognised norms of international law”, threatening “reciprocal measures”. The court later unfroze the accounts, accepting that they were covered by diplomatic immunity. Also this month, French officials froze funds in a local subsidiary of VTB, one of Russia’s biggest banks, and in other Russian companies. Mr Osborne’s team has also lodged applications in Britain and America; Germany will be next, in a few weeks, he says.

To make matters worse for the Kremlin, the judgment in The Hague is just one of several lawsuits in which Yukos-related litigants have won, including a case at the European Court of Human Rights in Strasbourg, in which Russia was ordered to cough up €1.9 billion ($2.1 billion). It is refusing to pay that too.

Identifying relevant assets and preventing them from being moved out of the country is easier than actually seizing them. Russia has plenty of experience in fending off creditors: Franz Sedelmayer, a German whose business in Russia was nationalised, spent 20 years fighting 140 court cases. He eventually got his money after seizing property belonging to Russian trade missions. Enforcing judgment in the Yukos cases is also likely to be slow. “We are in for the long haul,” says Mr Osborne.

However, Anders Aslund, an expert on the Russian economy at the Atlantic Council, a think-tank, says that the impact of the legal tussles on Russia will already be “massive”, as its state banks will be unable to operate normally abroad. Critics of Vladimir Putin’s regime are cheering. So too are lawyers—on all sides. Insiders estimate the plaintiffs’ costs so far at $100m, and Russia’s at $200m, with many years of juicy litigation ahead.

This article appeared in the Business section of the print edition under the headline "A ghost bites back"

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