Justice Delayed

Promising Justice and $50 Billion to Yukos Shareholders, Hague Verdict Raises Thorny Questions

Russian Foreign Minister Sergei Lavrov on July 28, 2014, at a Moscow press conference. Source AFP
Sergei Lavrov, Russia's foreign minister, said at a July 28, 2014 press conference in Moscow that Moscow will challenge a Hague court's $50 billion award to shareholders of the former energy firm Yukos.
  • Why it matters

    Why it matters

    The Hague arbitration court’s record penalty against Russia raises questions about the politicization and effectiveness of international judgments.

  • Facts

    Facts

    • The Hague court found that Russia under President Vladimir Putin conspired to bankrupt and seize Yukos and jail its owners.
    • Former Yukos owner Mikhail Khodorkovsky and his shareholders had no recourse in Russia’s corrupt judicial system, but this is not an issue in nations with established, independent judiciaries.
    • An international arbitration clause may be included in the proposed Transatlantic Trade and Investment Partnership between the United States and European Union.
  • Audio

    Audio

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For those who witnessed the dismantling of the Russian oil company Yukos in its home country, Monday was “the great day for justice.”

Those were the words of the lawyer representing financial holding company GML, the former major shareholders of Yukos, after the Permanent Court of Arbitration in The Hague ordered Moscow to pay €38.45 billion ($51.57 billion) in damages to shareholders of the defunct oil giant. The court found that Russian officials under President Vladimir Putin manipulated the legal system to force Yukos into bankruptcy, took over its assets and transferred them to a state-controlled company, and jailed oil tycoon Mikhail Khodorkovsky, who at the time was the richest man in Russia and a political rival to Mr. Putin.

The 2003 criminal proceedings against Mr. Khodorkovsky – who was brought into a Moscow courtroom like a caged beast – had nothing to do with the rule of law. In a rigged compulsory auction in December 2004, the core of his company was transferred to the completely unknown Baikalfinansgrup, which somehow secured a credit line of €1.26 billion from the state-owned Sberbank. From there the majority of Yukos was passed on to the state-owned oil company Rosneft. Consequently, Rosneft is now the world’s largest publicly traded oil company and includes British Petroleum as one of its major shareholders along with several Rosneft executives.

Russia must now pay billions to the victims of its government expropriation. The tribunal's verdict in The Hague also gives hope to those in Russia who oppose Mr. Putin’s policies and actions, but were threatening to capitulate in the face of his domination.

This was Vladimir Putin’s farce to expropriate, humiliate and punish a political enemy. On Monday, it ended in an international court of arbitration’s verdict. It was also an indictment of Russian economic policy.

So far, so good.

Russia must now pay billions to the victims of its government expropriation. The tribunal’s verdict in The Hague also gives hope to those in Russia who oppose Mr. Putin’s policies and actions, but were threatening to capitulate in the face of his domination.

But does the verdict really represent a “great day for justice?”

This should be questioned while the circumstances of the lawsuit are examined. On the one hand, there is the legal basis issue. Russia was taken to court on the grounds of the Energy Charter Treaty, issued by the European Union and signed but never ratified by Russia, which ultimately rejected it outright in 2009.

 

Mikhail Khodorkovsky and former business partner Platon Lebedev during a November 2010 court appearance in Moscow. Source Reuters
Mikhail Khodorkovsky and former Yukos business partner, Platon Lebedev, during a November 2010 court appearance while in custody in Moscow. Source: Reuters

 

On the other hand, the process of arbitration itself raises serious questions. It is good if it allows companies to mount a defense against expropriation in dictatorships with no independent judiciary. Justice must be universal. Mr. Putin’s “power vertical,” his so-called “guided democracy,” does not allow for a free judiciary. International courts of arbitration are the only fair authority in this case.

But what if a U.S. tobacco company was to sue Australia before a court of arbitration for loss of future profits because Australia prints large images of cancerous tumors on cigarette packages and displays the tobacco brand name in small type? That would be an attack on a democratically elected government’s political freedom of choice. But who should decide whether arbitration is right in one country and wrong in another?

When courts of arbitration secure foreign investors’ rights if they suffer injustice abroad, it’s a just cause.

But look more closely at the GML/Yukos case against Russia. Did the action brought before The Hague protect the right party? Are Mr. Khodorkovsky and his partners, who have fled to Israel, foreign investors? And wouldn’t an arbitration clause in the proposed Transatlantic Trade and Investment Partnership (TTIP) between the U.S. and the European Union lead companies to register their business in dubious offshore tax oases, where they could declare themselves “foreign investors?”

As legally and rationally correct as the “Yukos law” might be, it doesn’t justify including arbitration in the TTIP. It undermines the efforts of European governments to establish fair corporate law and fair corporate taxation. In that case, what was a “great day for justice” for Mr. Khodorkovski and his friends is not for us Germans.

One thing is certain. Recourse to courts of arbitration – as included in drafts of the American-European free trade agreement – is simply unacceptable. The European Union and the United States are democracies with a long tradition of independent judiciaries. They do not need courts of arbitration, which assign the role of judges to selected commercial attorneys. Such ideas discredit essential free trade and are an attack on our functioning constitutional state and the rule of law

Mathias Brüggmann is an international correspondent at Handelsblatt. You can reach him at: brueggmann@handelsblatt.com

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