Client Alerts

Yukos shareholders win largest arbitration award ever against Russia

Volterra Fietta Client Alert
1 August 2014

On 18 July 2014, an arbitral tribunal constituted pursuant to the 1994 Energy Charter Treaty (the “ECT“) and the 1976 UNCITRAL Arbitration Rules rendered final awards (the “Final Awards“) in three parallel arbitrations instituted in February 2005 by the three majority shareholders (the “Claimants“) of the now defunct OAO Yukos Oil Company (“Yukos”). The tribunal found that the Russian Federation (the “Respondent“) had expropriated the assets of Yukos and awarded more than US$50 billion to the shareholder claimants. In financial terms, the awards collectively constitute the largest ever investment arbitration award, or indeed arbitration award of any kind, to date.


Yukos was part of a group of enterprises created by presidential decree in 1993 to develop the oil and gas sector in Russia. During the large-scale privatisations of the early 1990s, Russian businessman Mikhail Khodorkovsky acquired a majority stake in Yukos.

Under Khodorkovsky’s management, Yukos quickly became one of the largest privately owned companies in Russia and at its peak produced more than 1 million barrels of oil per day. In October 2003, the company successfully merged with Sibneft, another leading Russian oil company, thereby creating the world’s fourth largest oil producer behind BP, ExxonMobil and Shell.

In late 2003, following Khodorkovsky’s increasingly active participation in Russian politics, Russia took a series of actions which culminated in “the destruction of the company by the Russian Federation and the expropriation of its assets for the sole benefit of the Russian state and state-owned companies Rosneft and Gazprom” (Final Awards, para. 1180).

The Russian government embarked upon an intimidation campaign against Yukos by conducting extensive searches and seizures and harassing legal counsel, auditors and other employees (para. 820). Yukos then became the subject of abnormally large tax demands from the Russian Government. By 2004, Yukos faced a tax claim of more than US$24 billion, of which approximately US$10.6 billion constituted allegedly evaded revenue-based taxes (including interest and fines) and the remaining US$13.6 billion consisted of VAT and related interest and fines (para. 92). In related proceedings, Khodorkovsky and another Yukos director, Platon Lebedev, were charged with fraud and tax evasion and were sentenced to 10 years in jail.

Russia began to freeze shares and other assets belonging to Yukos and its related entities, allegedly in order to satisfy Yukos’s tax obligations. Yukos’s assets, including Yuganskneftegaz, its main production subsidiary, were broken up and sold “far below the fair value” (para. 1020) through what the tribunal found to have been a rigged auction procedure to Baikal Finance Group, a newly incorporated entity, which was then bought by Russian state-owned company Rosneft. Yukos eventually filed for bankruptcy in 2006 and was liquidated in 2007.

The arbitral proceedings

Following an unsuccessful attempt to resolve the dispute via amicable negotiations as mandated by ECT Article 26(1), each of the Claimants – Hulley Enterprises Limited, Yukos Universal Limited and Veteran Petroleum Limited – initiated a separate arbitration claim against the Respondent pursuant to ECT Article 26(3). The Claimants and the Respondent appointed a common arbitral tribunal to hear the three claims and the Tribunal heard all three claims in parallel. The Tribunal consisted of Yves Fortier as Chairman, Charles Poncet as arbitrator appointed by the Claimants and Judge Stephen M. Schwebel as arbitrator appointed by Russia.

The proceedings began with a preliminary phase on jurisdiction and admissibility. During this phase, which commenced in early 2006 and ended on 30 November 2009 with interim awards on jurisdiction and admissibility, the Respondent argued that the Tribunal lacked jurisdiction on the basis that Russia had signed, but not ratified, the ECT, and that the claims were inadmissible on the basis that the Claimants were ultimately owned by Russian nationals. The Tribunal rejected each of these arguments, reserving other objections made by the Respondent to the merits phase.

The decision

The Respondent maintained its objection to the Tribunal’s jurisdiction on two main grounds. First, according to the Respondent, the Tribunal lacked jurisdiction because the Claimants had “unclean hands” and were therefore deprived of their right to protection under the ECT. Second, the Respondent argued that since the taxation exception contained in Article 21(1) of the ECT applied, the Tribunal was left without jurisdiction (para. 261).
The unclean hands objection
As to the “unclean hands” objection, the Tribunal concluded that:

  • there was no compelling reason to deny altogether the right to invoke the ECT to any investor which had breached the law of the host State in the course of making its investment (para. 1355);
  • “unclean hands” does not exist as a general principle of international law which would bar a claim by an investor (para. 1363); and
  • the Respondent had failed to demonstrate that the Claimants’ alleged illegalities were sufficiently connected with the transaction by which the investment was made by the Claimants (para. 1370).

The taxation carve-out objection

Article 21(1) of the ECT provides that “[e]xcept as otherwise provided in this Article, nothing in this Treaty shall create rights or impose obligations with respect to Taxation Measures of the Contracting Parties. In the event of any inconsistency between this Article and any other provision of the Treaty, this Article shall prevail to the extent of the inconsistency”.

According to the Respondent, the taxes imposed on Yukos were covered by ECT Article 21(1) and therefore fell outside the scope of the Tribunal’s jurisdiction (para. 109). The Claimants on the other hand argued that Article 21(1) did not apply to expropriatory actions carried out under the guise of taxation (para. 1375). The Tribunal concluded that, on the facts of this case, the tax regime imposed by Russia on Yukos was “aimed at paralyzing Yukos rather than collecting taxes” (para. 1444) and therefore was not covered by the carve-out provision contained in Article 21(1).

Accordingly, the Tribunal dismissed both of the Respondent’s preliminary objections and found that it had jurisdiction to hear the Claimants’ claims.


The Tribunal held that even though the Respondent had not explicitly expropriated Yukos or its shareholders, the measures that the Respondent had taken had had an effect “equivalent to nationalization or expropriation” (para. 1580). According to the Tribunal, the Respondent had “launch[ed] a full assault on Yukos and its beneficial owners in order to bankrupt Yukos and appropriate its assets while, at the same time, removing Mr. Khodorkovsky from the political arena” (para. 515). The Tribunal further noted “that the Russian Federation was not engaged in a true, good faith tax collection exercise but rather was intent on confiscating the most valuable asset of Yukos and effectively transferring it to the Russian State” (para. 985).

Other alleged substantive breaches

In the Tribunal’s finding, the Respondent’s expropriation of Yukos amounted to a breach of the Respondent’s treaty obligations under ECT Article 13. The Tribunal thus found it unnecessary to consider whether Russia’s conduct also violated Article 10 (Promotion, Protection and Treatment of Investments) (para. 1585).


Importantly, the Tribunal determined that the Russian Federation was “responsible for its organs, executive, judicial and administrative, in the actions that they took against and in relation to Yukos and its stockholders”. The Tribunal also noted that “while proof of specific state direction is lacking, it may reasonably be held that the highest officers of Rosneft who at the same time served as officials of the Russian Federation in close association with President Putin acted in implementation of the policy of the Russian Federation” (para. 1480). The fact that Rosneft was found to be responsible for the destruction of Yukos (albeit at the direction of Russia) will no doubt be particularly relevant at the enforcement stage.

Valuation and contributory fault

The Tribunal found that, as this had been an illegal expropriation, the Claimants were entitled to choose between a compensation valuation as of the expropriation date and as of the date of the award (para. 1769). The Tribunal deducted 25% from its evaluation of the loss suffered by the Claimants on account of contributory fault on their part. This contributory fault consisted of “the sham-like nature of some elements of [Yukos’s] operations in at least some of the low-tax regions” (para. 1611). This deduction reduced the amount awarded from US$66.694 billion to US$50,020,867,798. Finally, the Tribunal ordered reimbursement by the Respondent to Claimants of US$60 million as part of their costs (approximately 75% of Claimants’ grand total of costs for both the jurisdiction and merits phases) (para. 1887).


The Final Awards are certainly extremely significant. They demonstrate that investment arbitration tribunals do not shy away from addressing conflicts between corporate and political interests even where the highest stakes are involved. At the same time, the Tribunal’s approach does not, in essentials, differ from the approaches adopted by tribunals which have ruled on similar investor claims in prior decisions, including under the ECT, and including notably the decision by the Tribunal in Kardassopoulos v. Georgia1, another ECT case involving provisional application.

This applies in particular to the Tribunal’s approach with respect to liability under ECT Article 10 (Promotion, Protection and Treatment of Investments) and Article 13 (Expropriation) and to the claimed requirement of legality of the relevant investment.
The Yukos awards contain some interesting and, no doubt, new reasoning with respect to ECT Article 21 (Taxation).
Although the awards are neither highly novel nor entirely unexpected in their approach, they highlight the conflict between investor expectations and unbridled state power. They demonstrate that the Russian decision in August 2009 not to ratify the ECT and to withdraw from its provisional application has not ended investors’ right to protection, at least for existing investments. We can expect to observe a significant number of similar claims against the Russian Federation by investors who have been awaiting the Tribunal’s decision on the merits of the Yukos claims.

(1) Ioannis Kardassopoulos and Ron Fuchs v. The Republic of Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15, Award, 3 March 2010.