Russia Panicking Over Yukos Lawsuits

yukos11.jpgThe second show trial of Mikhail Khodorkovsky on trumped up charges is one thing, but the worldwide legal assault on those in the Russian government who illegally stole his former company, Yukos, is an entirely different set of concerns for the kingmakers of the Kremlin.  According to this opinion column by Evgeny Kiselyov in the Moscow Times, certain unscrupulous individuals within the State do indeed have quite a lot to fear, as the chances for these multiple hundreds of billions in arbitration decisions linked to the Energy Charter Treaty are looking more and more likely.

The fact that Russia has hired the prominent law firm Cleary Gottlieb Steen & Hamilton to represent its interests at an annual cost totaling millions of dollars indicates that the Kremlin is very concerned about the case. At issue here is more than just the gigantic sum of the legal damages. The process could set an important precedent in the argument over whether Russia is obligated to obey the provisions of the Energy Charter Treaty that it signed in 1994 but never ratified.

There was a time when the Russian authorities treated the energytreaty seriously, but recently they claim that it is not bindingbecause Russia never ratified the treaty. But Article 45 of the treatyobligates signatories to obey the provisions even while it is waitingto be ratified. What’s more, that same clause makes clear that if acountry signing the Energy Charter does not want its rules to becomeapplicable prior to ratification, that country must officially declareits reservations at the moment of signing. But Russia never did this.(There are dozens of cases in which Russia has upheld agreements thatit had signed but not yet ratified. The classic example is theBaker-Shevardnadze agreement demarcating the international boundariesin the Bering Strait that was signed during the Soviet period.)

The question of whether the Energy Charter Treaty is binding forRussia was the main subject of a preliminary hearing held in the Haguein late November and early December 2008. If the court finds that theenergy agreement is not binding, there will be no grounds for thelawsuit brought by former Yukos investors against Russia.

Precedents are important in international arbitration, and onethat was established in August does not work in Russia’s favor.Arbitrators who convened at the request of a Cyprian company makingclaims against Bulgaria decided to review the case on the basis of theEnergy Charter Treaty, even though Bulgaria — like Russia — had onlysigned the document without ratifying it. Similar decisions concerningthe applicability of the agreement prior to its ratification were madein the case of the Petrobart company of Gibralter against Kyrgyzstan,and in the Greek firm Kardassopoulos’ case against Georgia. Thus,chances are very good that the case of the Yukos investors’ caseagainst Russia will be heard by the Permanent Court of Arbitration inthe Hague.

Dutch arbitrators will find it difficult to ignore all of theprecedent-setting court rulings supporting the applicability of theEnergy Charter Treaty in cases similar to the Yukos investor lawsuit.The ultimate ruling in favor of Yukos shareholders is easy to predict,although it would not come sooner than some time in 2010.