An international arbitration tribunal in Stockholm has found the Russian Federation liable for expropriating the investment of a minority shareholder in the embattled OAO Yukos Oil Company.

In a heretofore unpublicized development, arbitrators ruled in September of this year that Russia breached the terms of a bilateral investment protection treaty between the United Kingdom and the Russian Federation.

The arbitrators, a pair of UK barristers and a retired German law professor*, ruled that Russia, must pay $3.5 Million U.S. to RosInvestCo UK Ltd., an affiliate of the prominent U.S.-based hedge fund Elliot and Associates.

The ruling marks the first instance where an international court or tribunal has ruled on the merits of an expropriation claim filed against Russia by former Yukos investors.

A series of international claims have been brought against Russia alleging that the government effectively nationalized Yukos by using a series of fraud and tax evasion charges to drive the company into bankruptcy. Russia has insisted that its treatment of Yukos was a “legitimate exercise of (its) power to tax and to take measures to enforce tax laws.”

Modest damages may disappoint claimant

While the arbitral ruling in the RosInvestCo case marks the falling of a first domino, the financial reverberations are decidedly modest.

In fact, the tribunal’s $3.5 Million award will likely come as a disappointment for the claimant - which had initially sought some $75 Million (US) in compensation, and with later press reports indicating that the company was demanding up to $200 Million (US).

The late acquisition by RosInvestCo of the Yukos shares may explain the low valuation placed on them by arbitrators. Indeed, it was a matter of public record that lawyers for the Russian Federation had objected to RosInvestCo’s claim on the grounds that the company bought some 7 Million shares in Yukos at the eleventh hour when its share value had already declined precipitously as a result of a series of highly-publicized tax audits and criminal charges.

Other claims still pending

Whatever RosInvestoCo’s return on its investment, the expropriation finding by the arbitral tribunal is likely to be seized upon by other claimants pursuing parallel claims against Russia, including the majority shareholder Group Menatep who are seeking tens of Billions of Dollars in a trio of arbitrations under the Energy Charter Treaty. While not strictly binding in other legal proceedings, the recent tribunal ruling – which has yet to be published - could be hotly debated in other pending cases.

Apart from RosInvestCo’s claim, and the Group Menatep claims mentioned above, Russia faces at least two further international proceedings arising out of the alleged expropriation of Yukos. A ruling in a claim brought by the Yukos company is expected in the coming months from the European Court of Human Rights in Strasbourg. Meanwhile, a claim by a bloc of minority shareholders in Spain is currently being heard by a separate international arbitration tribunal.

Spotlight in RosInvestCo case now shifts to Swedish courts

The Russian government has yet to comment publicly on September’s arbitral ruling, however lawyers for the Russian Federation have recently applied to the Swedish courts to set aside the arbitral award. Under Swedish law, the award can be challenged on certain narrow grounds prior to its becoming enforceable against the Russian Federation.

Indeed, Russia is already seeking to set aside an earlier 2007 jurisdictional ruling which paved the way for the arbitrators to reach their recent ruling on the merits. In the latest development in this ongoing challenge to the 2007 jurisdictional ruling, the Swedish Supreme Court ruled in November of this year that a lower court can hear the merits of a challenge lodged by Russia, which maintains that arbitrators lacked jurisdiction to hear RosInvestCo’s claim.

Collection battle could loom if award is upheld

In the event that RosInvestCo’s victory is upheld in the Swedish courts, it remains to be seen what success the investor will have in collecting the arbitral award. As has been well chronicled, the Russian Federation has declined to pay an earlier arbitral ruling in favour of a German investor who was expropriated by Russia in the 1990s. That individual, Franz Sedelmayer, has fought for more than a decade to seize sufficient Russian assets in various jurisdictions in order to collect on his award.

* Prof Karl-Heinz Boekstiegel, a Professor Emeritus at the University of Cologne, chaired the arbitration. Meanwhile, RosInvestCo nominated The Right Hon. The Lord Steyn to the arbitral tribunal. Russia nominated Sir Franklin Berman KCMG QC

Source: Investment Arbitration Reporter by Luke Eric Peterson