The Yukos ruling

by J.Y. | MOSCOW 

VLADIMIR PUTIN’S Kremlin often gets what it wants. But on July 28th the Permanent Court of Arbitration in the Hague demonstrated that its triumphs may come at a price: the court ruled that the 2003 prosecution of Mikhail Khodorkovsky (pictured) and the dismantling of his Yukos oil company was in violation of international law. It awarded former Yukos shareholders $50 billion, roughly half what they asked for, but still the largest such compensation package in history. In explaining its verdict, the court wrote, “Yukos was the object of a series of politically motivated attacks by the Russian authorities that eventually led to its destruction.”

The case has been in the works since 2005, although its resolution could not have come at a more precipitous time for Russia. Worsening relations with the United States and Europe over Ukraine—made all the sharper by the shooting down of Flight MH17—have led to falling investment, rising capital flight, and a steady uptick in sanctions, inching closer to targeting entire economic sectors. Although Russia was never likely to accept a ruling in favour of former Yukos shareholders, it is all the more impossible to imagine it paying up now, given the heightened mood of tension and animosity. The fate of Mr Khodorkovsky and his oil company has long been a topic of symbolic importance in relations between Mr Putin and the West; these days, more than ever, Mr Putin would be loth to be seen having lost that tug-of-war.

So what happens now? Russian officials, including Sergei Lavrov, the foreign minister, have already indicated that Russia plans to appeal. But it has shaky legal ground to do so. The best it can try to argue is that it is not a party to the Energy Charter Treaty, under which the court made its ruling, but that is unlikely to yield much. The Kremlin’s lawyers will claim political bias in the court’s ruling, even though Russia appointed one of the arbiters to the three-person court, which issued its verdict unanimously.

According to the decision, Russia has until January 2015 to pay or face interest on what it owes. With $175 billion in state reserves, Russia has enough cash to pay, yet it is a sizeable sum all the same. The Russian business daily RBK calculated that $50 billion was equal to 13% of state budget revenue for 2014, or 58.2m average Russian salaries, 162m monthly pension allotments, or 14,000 T-90 tanks. Political factors as much as economic ones mean that Russia is unlikely to part with the money willingly.

That leaves the claimants in the case—a collection of former Russian shareholders in Yukos along with the company’s employee pension fund—to seek compensation elsewhere. Technically the ruling was made against the Russian state, not Rosneft and Gazprom, the state-owned energy companies that benefited from the dissolution of Yukos, meaning it is Russian state property abroad that will be vulnerable to seizure. Yet diplomatic and military property is exempt, and it will be a long and difficult slog to win back a significant portion of the $50 billion. That sum will take years to gather piece by piece, if at all.

The ruling is perhaps most important as precedent. Future suits in national courts targeting Rosneft and Gazprom are likely, as claimants will use the Hague ruling to demonstrate their culpability. They are more vulnerable than the state itself, with more property and investments exposed around the world. Certainly the two companies will find it harder to access funding in international markets, and may well have difficulties in accessing much-needed foreign technology. And although the 55,000 former minority shareholders in Yukos did not directly benefit from the ruling, the court’s decision will give momentum to the many individual cases working their way through civil and arbitration courts on their behalf. The news is not good for BP either, which owns 19.75% of Rosneft. The danger of more wide-ranging sanctions has already caused BP to issue a warning of "material adverse impact" to its business, and the prospect of sustained, worldwide litigation against Rosneft in the wake of the Hague ruling only adds further cause for uncertainty and concern.

If anything, the ruling is an expensive lesson. Vladimir Milov, a former deputy energy minister and now opposition politician, wrote that he hopes the Russian government may reconsider its central systemic weaknesses: its indifference to fulfilling its responsibilities and willingness to break past agreements. “If after this decision all present and future rulers of Russia will have a reason to think seriously whenever they decide to arbitrarily violate their own commitments just because they felt like it, then yesterday's decision by the Hague arbitration court can become a truly historic day for our country,” he wrote. /economist