Institute of Modern Russia

In July 2014, the majority shareholders of Yukos won a historic arbitral award of $50 billion, based on the finding that the Russian Federation had violated international law by abusing its system of taxation to force the oil company out of business. Together, claimants Hulley Enterprises Ltd., Yukos Universal Ltd., and Veteran Petroleum Ltd. held 70% of Yukos’ shares. This award represents only one star in a constellation of international decisions against Russia that have found that the government behaved improperly toward the company, including arbitral decisions in favor of Yukos minority shareholders (here and here) and a European Court of Human Rights decision in favor of a Yukos subsidiary. The $50 billion payment was due by January 15, 2015, and because Russia failed to pay it, interest has begun to accrue in accordance with the tribunal’s decision, and the award grows ever larger. Now Russia has petitioned to set aside the arbitral award, but only limited procedural review is available to Russia at this stage—not re-litigation of the case’s merits.

The process of investor-state arbitration is regulated by a series of international agreements. Under international law, a foreign investor, such as the Yukos majority shareholders, may bring a claim against a host state, such as Russia, only when the investor’s state and the host state have so agreed and created this power through treaty. In this case, the Energy Charter Treaty (ECT) served as the vehicle for the shareholders to bring their claims; like many others, this agreement is designed to promote investment in economic development in the host state. When disputes arise from this investment, the ECT provides in Article 26 that investors may, inter alia, submit their claims to arbitration under the Arbitration Rules of the U.N. Commission on International Trade Law (UNCITRAL). Once UNCITRAL has ruled on a case, a disappointed party may challenge that ruling only by applying to the relevant national court to set aside the award. This application is judged according to that court’s domestic law—here, Dutch law.

Following the UNCITRAL system’s instruction that the case be appealed under Dutch law, Russia has argued that both the tribunal’s decision on jurisdiction and its decision on the merits of this case are “fatally flawed” and should be set aside under the Dutch Arbitration Act. This act, in Article 1065, Section 1, outlines five circumstances under which a ruling may be set aside:

• The absence of a valid arbitration agreement
• Constitution of the arbitral tribunal in violation of the applicable rules
• Noncompliance of the arbitral tribunal with its mandate
• An award that is not signed or does not contain reasons
• An award or procedure that violates public policy or good morals

In its petition to the District Court of the Hague, Russia argues that there is cause for the final ruling to be set aside on each of these five grounds.

Of Russia’s arguments, the most significant is its jurisdictional argument under Article 1065(1)(a) of the Dutch Arbitration Act. This argument’s importance and complexity are underlined by Russia’s devotion of almost half of its writ—100 out of 227 pages—to it alone. Russia’s first objection stems from the fact that it signed but never ratified the ECT. Although the treaty allows in Article 45 for provisional application in such circumstances, this is only “to the extent that such provisional application is not inconsistent with [the signatory’s] constitution, laws or regulations.” The disagreement between Russia and the tribunal about whether provisional application should be allowed is rooted in their competing interpretations of what the ECT’s Article 45 means. While the tribunal applies an “all-or-nothing” approach, arguing that the treaty should be applied if provisional application generally is consistent with Russian law, Russia argues both that provisional application must be generally allowed under Russian law and that application in any given case must not be inconsistent with Russian law.

Accordingly, Russia argues that Russian law both prohibits provisional application generally and prohibits provisional application in this case because matters of public law, such as taxation, are not eligible to be arbitrated. The tribunal’s allowance of provisional application and Russia’s challenge thereto are based on competing interpretations of the ECT’s meaning, including whether provisional application is an “all-or-nothing” matter and whether Russian law prohibits provisional application or the arbitration of public law disputes. This ground accordingly may represent one of the ruling’s most significant vulnerabilities. However, the fact that during treaty negotiations Russia supported provisional application, and that in 2009 Russia saw fit to withdraw from this aspect of the ECT, as allowed by ECT Article 45(3), strongly suggest that the tribunal reached the correct conclusion.

On the point of jurisdiction, Russia makes two further arguments. Russia asserts that the ECT does not protect the claimants’ investments because the claimants are not foreign investors under Article 17 of the treaty. This is a weak argument, because the tribunal made a factual finding, which will be difficult to challenge, that the claimants are foreign-controlled. Finally, Russia argues that the tribunal lacked jurisdiction because Article 21 of the ECT carves taxation out from the treaty’s scope. Yet, as the final ruling notes, allowing states to use taxation measures as a shield to expropriate private property would undermine the ECT’s purpose and create perverse incentives its drafters could not have intended.

Also of great interest is Russia’s argument under Article 1065(1)© of the Dutch Arbitration Act that the tribunal failed to comply with its mandate by not properly referring issues to the appropriate tax authorities; by not affording Russia an adequate opportunity to be heard; and by giving an inappropriate amount of responsibility to the arbitral tribunal’s administrative assistant, Martin Valasek. While the last of these arguments has been referred to as “perhaps the most striking of Russia’s grounds” because it touches on a hot issue in the community of international arbitration practitioners, it is the first argument that touches upon the greatest point of vulnerability of the initial decision, because it is another area in which little is settled. Yet the tribunal’s conclusion that referral to the appropriate tax authorities would have been futile, given the enormity of the evidentiary record and their alleged implication in the wrongdoing in question, will be difficult to dispute.

In addition to these grounds, Russia argues that the tribunal was improperly composed, that the ruling does not contain reasons, and that the decision violates public policy under Dutch law. However, these grounds have the distinct appearance of Russia simply trying every argument possible without regard to their viability. In its writ Russia devotes to each argument only a handful of pages and largely conclusory arguments.

A number of aspects of Russia’s writ suggest that the petition is a stalling tactic to delay payment of the $50 billion plus interest. The appearance that Russia is simply stalling by attempting to re-litigate within the constraints of mere procedural review is further strengthened by the fact that, in addition to the two expert reports that Russia submitted with this writ, Russia plans to present ninety-four additional exhibits in the set-aside proceedings, the schedule of which is yet to be determined. Additionally, the fact that Russia did not apply for a suspension of enforcement, as it could have done under Article 1066 of the Dutch Arbitration Act, is surprising and perhaps suggests that the appeal itself may be a tactic, rather than a bona fide legal claim.

How Russia responds to the claimants’ recent offer to reduce the $50 billion award by €1.1 billion will also be telling. This proposed reduction represents the claimants’ 70% stake in the €1.8 billion award the European Court of Human Rights (ECHR) ordered Russia to pay the Yukos company, rather than its shareholders, for violating the European Convention of Human Rights’ protection of property found in Article 1 of Protocol No. 1. Accordingly, the majority shareholder claimants have offered to discount their $50 billion award if Russia pays the ECHR award on time (the Council of Europe has set a deadline of June 15, 2015, for Russia to draw up a payment plan for this latter award).

During the arbitration proceedings, Russia consistently argued that the entire claim should be thrown out, because the ECHR case had already been brought, which meant that the Hague arbitration supposedly violated the ECT’s fork-in-the-road provision in Article 26(b)(3)(i), which requires claimants to choose only one forum in which to bring their claim and sets the basic rule that one should not have to pay more than once for a set of circumstances. single violation. However, Russia lost this argument at both the jurisdictional and the final stages of the arbitration, because the claimants in the two cases were not the same. Russia thus did not raise this objection in its set-aside petition. Perhaps the best understanding of the claimants’ offer, therefore, is as a strategic challenge to Russia to honor its international obligations, though it may also reflect some concern on the claimants’ part that the arbitral tribunal’s decision on the fork-in-the-road provision will be viewed unfavorably in subsequent litigation.

Meanwhile, the claimants are moving forward with enforcement of the ruling in U.S. and European national courts, which have the power to seize Russian assets located in the territory of their respective states as part of payment of the award. Such assets may be physical property or, as more often occurs, financial assets held by banks with offices in the jurisdiction where enforcement is sought. As a matter of international law, under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to which Russia and virtually all states where enforcement might be desirable are parties, recognition and enforcement of the award may be refused only on limited grounds akin to those outlined in the Dutch Arbitration Act. Accordingly, assuming the ruling survives the set-aside proceedings, it would be surprising to see the courts refuse to recognize and enforce it. Yet claimants know they still have a long road ahead, as enforcement actions against state judgment debtors such as Russia face issues of sovereign immunity in foreign courts.

As Russia’s economic troubles and tensions with the West increase, the development of this case is worth continuing to watch.

*Haley S. Anderson is an Institute of International Law and Justice Scholar at New York University School of Law. She holds a B.A. in Russian and East European studies from the University of Virginia, as well as a J.D. from New York University, and she is currently pursuing an LL.M. in international legal studies.