Yukos Owners Win $50 Billion in 10-Year Fight With Russia

By Irina Reznik, Henry Meyer and Jessica Morris  

July 28 (Bloomberg) -- Tim Osborne, head of GML Ltd., former holding company of Yukos Oil Co., discusses the $50 billion award against Russia for the confiscation of what was once the nation’s largest oil company. He also speaks about the possible consequences for state-run OAO Rosneft. Osborne talks with Ryan Chilcote on Bloomberg Television's "The Pulse." (Source: Bloomberg)

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Former majority owners of Yukos Oil Co. won a landmark $50 billion ruling against Russia for the confiscation of what was once the nation’s largest oil producer and now face another lengthy legal battle to claim their award.
The Permanent Court of Arbitration in The Hague found that Russia is liable to pay just under half of the $114 billion sought, GML Ltd., the holding company for Yukos’s main owners, said today. The decision showed the campaign against Yukos was “politically motivated,” GML head Tim Osborne said in London.
The ruling marks a fresh headache for President Vladimir Putin, who faces intensifying U.S. and European sanctions aimed at forcing him to help end the separatist war in neighboring Ukraine, which has claimed more than 1,000 lives.

“Russia has the money to hire the best international lawyers who won’t give up without a fight,” Dmitry Gololobov, former chief attorney for Yukos, said by e-mail. “So the Yukos affair could easily go on for another 10 years.”
Russia will appeal the ruling in the Dutch courts, the Finance Ministry said on its website, adding that it expects a fair decision. The ministry criticized what it termed a “politically biased” judgment, saying it had “serious flaws” and describing the damages as “unprecedented.”

Photographer: Carsten Koall/Getty Images

Mikhail Khodorkovsky, once Russia’s richest man with a fortune of $15 billion when he... Read More

Russia must pay the award by mid-January or face penalties, according to GML. The possibility for appeal in the Netherlands is limited to “technical” issues, Emmanuel Gaillard, one of GML’s lawyers, said in London.

Not ‘Pyrrhic’

“It will take a long while to collect $50 billion but we didn’t go into this to get a Pyrrhic victory,” Osborne said in an interview with Bloomberg Television. “We went into it to get compensation for our shareholders.”
The decision risks dragging Russia’s two biggest corporations by market value, oil producer OAO Rosneft (ROSN) and natural gas exporter OAO Gazprom (OGZD), into extended legal wrangling. The state-run companies may be targeted because they were beneficiaries of expropriated Yukos assets, said another GML lawyer, Yas Banifatemi. Rosneft and Gazprom both declined about 3 percent in Moscow trading, before paring losses.
Putin’s government dismantled Yukos in 2004 to 2007 over $27 billion in tax charges after imprisoning Chief Executive Officer Mikhail Khodorkovsky. The former owner, who isn’t party to the award, said in a statement today that it was “fantastic that the company shareholders are being given a chance to recover their damages.”

Photographer: Simon Dawson/Bloomberg

Emmanuel Gaillard, one of GML’s lawyers, said, “A superpower like Russia has been... Read More

Most of Yukos’s largest assets were acquired in a series of forced sales by Rosneft, which has since become the world’s largest publicly traded oil company by output. Gazprom bought stakes in former Yukos natural gas assets that Eni SpA and Enel SpA won at auction in 2007.

Rosneft Assets

Rosneft complied with the law in acquiring Yukos subsidiaries and doesn’t expect the decision to “negatively affect its commercial activity or assets,” the oil producer said in a website statement. Gazprom declined to comment.
The Yukos shareholders have the right to go after state assets around the world if Russia doesn’t pay, Osborne said. “I don’t think that Rosneft can be 100 percent confident that all their assets in the West will be secure,” he said.
Russia has refused to pay damages in similar rulings before and seizing state assets abroad is a difficult task. Noga Import & Export SA, a Geneva-based trading company, won a series of court rulings in Europe to enforce payment for goods including baby food and pesticides that it supplied to Russia in exchange for oil in 1991 and 1992.

Russian Defense

Over the course of a decade, Noga won the temporary seizure of Russian assets abroad including fighter jets at the Paris Air Show and Pushkin State Museum artworks on loan in Switzerland over what it claimed was $680 million of debt.

Photographer: Nicholas Kamm/AFP via Getty Images

Leonid Nevzlin is beneficial owner of slightly more than 70 percent of GML, while four... Read More

“Russia will use all available legal means to defend its position,” Foreign Minister Sergei Lavrov said at a televised briefing after the Yukos ruling.
Khodorkovsky, once Russia’s richest man with a fortune of $15 billion, was freed in December by a presidential pardon after serving a decade in prison camps. He has called the charges against him revenge for his financing of opposition parties. The Kremlin denies the claim, saying the case was purely a matter for the courts.
The ruling found that “that the primary objective of the Russian Federation was not to collect taxes but to bankrupt Yukos and appropriate its underlying assets for the benefit of the state in the guise of Rosneft,” Osborne said.

‘Very Pleased’

Khodorkovsky, who’s living in Switzerland, said he isn’t entitled to any part of the damages because he transferred his Yukos stake to fellow shareholder Leonid Nevzlin to protect the company when he became a target of the Russian courts.
Nevzlin is the beneficial owner of about 70 percent of GML, while four other partners -- Platon Lebedev, Mikhail Brudno, Vladimir Dubov and Vasily Shakhnovsky -- each have a about 7.5 percent. GML used to own 60 percent of Yukos.
Nevzlin, who now lives in Israel, along with Brudno and Dubov, said he was “very pleased” that the tribunal had recognized that Russia acted “in breach of international law and illegally expropriated Yukos Oil Co.,” according to an e-mailed statement.
GML initiated its case in 2005 under the Energy Charter Treaty, an international agreement that in part regulates investments in the energy industry. Russia signed but never ratified the treaty. The Hague tribunal ruled in 2009 that it would hear the case.

100 Countries

The Yukos plaintiffs will have the right to go to arbitration courts in about 100 countries that are party to the 1958 New York Convention to enforce the ruling, according to Gus Van Harten, a professor specializing in arbitration at York University’s Osgoode Hall Law School in Canada.
Because it will be hard to seize Russian government assets, which are mostly protected by diplomatic immunity, state companies such as Rosneft and Gazprom would make easier targets, Van Harten said.
Putin is confronting mounting international pressure after the downing of a Malaysian passenger jet in eastern Ukraine, which killed 298 passengers and crew. The Obama administration has accused pro-Moscow rebels of shooting the plane down with a Russian-supplied launcher. They deny involvement, and Russia is pointing the finger at Ukraine.
Putin has said his opponents are using the crash for “selfish political gains.” The EU last week warned that it may restrict the country’s access to capital markets and sensitive energy and defense technologies. The bloc is considering banning European purchases of bonds or shares sold by Russia’s state-owned banks, according to a proposal presented to the 28 member states.
The European Court of Human Rights will decide this week on a $38 billion claim for “just satisfaction” filed by former Yukos managers that would benefit all former shareholders, Claire Davidson, a spokeswoman for the former managers, said by phone today.
Today’s ruling in favor of the ex-Yukos owners is “yet another form of sanctions against Russia,” Vladimir Pligin, head of the constitutional affairs committee of the lower house of parliament, said on the website of the ruling United Russia party. “These measures against our country are unacceptable.”