Yukos Universal Limited v Russian Federation, Final Award, PCA Case No AA 227, IIC 652 (2014), ICGJ 481 (PCA 2014), 18th July 2014, Permanent Court of Arbitration [PCA]
- Yukos Universal Limited (Isle of Man [im])
- Russian Federation
- L Yves Fortier (President); Charles Poncet (Claimant appointment); Stephen M Schwebel (Respondent appointment)
- Counsel for Party One:
- Professor Emmanuel Gaillard (Shearman & Sterling LLP); Dr Yas Banifatemi (Shearman & Sterling LLP); Jennifer Younan (Shearman & Sterling LLP)
- Counsel for Party Two:
- Dr Claudia Annacker (Cleary Gottlieb Steen & Hamilton LLP); Lawrence B Friedman (Cleary Gottlieb Steen & Hamilton LLP); David G Sabel (Cleary Gottlieb Steen & Hamilton LLP); Matthew D Slater (Cleary Gottlieb Steen & Hamilton LLP); William B McGurn III (Cleary Gottlieb Steen & Hamilton LLP); J Cameron Murphy (Cleary Gottlieb Steen & Hamilton LLP); Michael S Goldberg (Baker Botts LLP); Jay L Alexander (Baker Botts LLP); Dr Johannes Koepp (Baker Botts LLP); Alejandro A Escobar (Baker Botts LLP)
- Procedural Stage:
- Final Award
- Previous Procedural Stage(s):
- Interim Award on Jurisdiction and Admissibility; Yukos Universal Limited v Russian Federation, PCA Case No AA 227; IIC 416 (2009), 30 November 2009
- Related Development(s):
- Case of Oao Neftyanaya Kompania Yukos v Russian Federation, Just satisfaction, App No 14902/04, ECHR, 31 July 2014 (On 31 July 2014, the European Court of Human Rights ordered the Russian Federation to pay €1.866 billion to all former Yukos shareholders.)
- Arbitral Rules:
- UNCITRAL Arbitration Rules, UN Doc A/31/98; 31st Session Supp No 17, UN General Assembly, 1976
- Investment-backed expectations (expropriation and) — Police powers (expropriation and) — Prompt, adequate and effective compensation (Hull Formula) — Public purpose (expropriation and) — Regulatory expropriation (or regulatory taking) — Takings, legal and illegal (confiscatory measures) — Investment ‘in accordance with host state law’ — Tax measures — Due process — Fair and equitable treatment standard — Good faith — Procedural equality — Transparency — State entities and attribution — Damages — Fork in the road clause — Causation — Costs and expenses — Discounted cash flow (DCF), anticipated future profits — Interest — Interest, compound/simple — Interest, post-award — Interest, pre-award — Interest, rate of — Interest, temporal aspects — Valuation
- Core Issue(s):
- Whether similar proceedings before the European Court of Human Rights would expose the respondent to double recovery contrary to ‘fork in the road’ provision
- Whether the ‘clean hands’ principle or ‘legality’ requirement could be read into the Energy Charter Treaty (‘ECT’), and constitute a general principle of international law
- Whether the taxation ‘carve-out’ and ‘claw back’ in the ECT applied.
- Whether taxation assessments, fines, investigations, and legal proceedings relating to a tax optimization scheme amounted to an expropriation
- Whether, and to what extent, the Claimants contributed to their losses.
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F1 In the 1990s, the Russian Federation established low-tax regions to foster economic development in impoverished areas. These low-tax regions were able to encourage investment in the region through exempting taxpayers from federal corporate profit tax.
F2 OAO Yukos Oil Company (‘Yukos’) had a tax optimization scheme that used trading companies located in low-tax regions as intermediaries between Yukos’ core oil-producing entities and its customers. Through adopting this structure, Yukos was able to capture profits from the sale of oil to customers in the low-tax regions, and thus received substantial tax savings.
F3 Prior to 2003, few of the audits of the trading companies resulted in tax assessments (and any transgressions identified were minor). However, Yukos had some concerns about the legality of trading operations in certain low-tax regions, as the practice of certain companies were acting in conformity with the relevant legislation in form only and not in substance. From at least 1999, these entities were being investigated by the tax authorities in the low-tax regions, and were suspected of being ‘shams’. The Russian Federation argued that these investigations (and subsequent tax assessments) were based on a jurisprudential ‘bad faith taxpayer’ doctrine, the content and existence of which was disputed by Yukos before the Tribunal.
F4 Starting in December 2003, the Russian tax authorities issued the first of five tax assessments against Yukos based on the alleged abuse by Yukos of its tax optimization scheme in the low-tax regions. The basis of the tax assessments was that Yukos had allegedly operated a tax evasion scheme through the use of ‘sham dependent entities’ in the low-tax regions.
F5 The Russian taxation authorities targeted Yukos directly, rather than the trading companies set up in Yukos’ tax structure, based on their determination that Yukos itself was ‘the actual exporter’ of oil products and it was Yukos (and not the trading entities) that was required to qualify and file tax returns to benefit from the tax exemptions in the low-tax regions. In doing so, the Russian tax authorities ‘re-attributed’ to Yukos the revenues of all its trading companies. The assessments also imposed VAT liabilities and fines on Yukos on the same basis. Before the tribunal, Yukos argued that this remedy was unprecedented and had no basis in law, and formed part of a punitive campaign against Yukos.
F6 Yukos also argued that the Russian Federation carried out a campaign of harassment and intimidation of Yukos, its management, external advisors and associates with a view to destroying the company and removing Mr Mikhail Khodorkovsky (the CEO of Yukos) as a political threat. This included a series of investigations against members of Yukos’ management, searches and seizures of Yukos’ offices and documents, the arrest and trial of Mr Khodorkovsky, and complaints of harassment and intimidation directed toward Yukos executives, employees, lawyers, and external advisors.
F7 In April 2003, Yukos announced plans to merge with Sibneft (another large Russian oil company) into a new entity, and steps were taken to effectuate the merger between April and October 2003. However, in November 2003, Sibneft shareholders announced their intention to halt the merger, the share exchange agreement was invalidated in Russian courts, and Sibneft was subsequently acquired by the Russian Federation through the State-owned company Gazprom. The Claimants argued that this was ‘one of the first casualties’ of the Russian Federation’s assault on Yukos, and that the Russian Federation was responsible for unwinding the merger.
F8 In 2004, Yukos made several attempts to settle its tax debts with Russian authorities, all of which were unsuccessful. The Russian Federation argued that the settlement offers could not be accepted as Yukos’ offers were flawed. The Respondent argued that Yukos contributed to its own demise by failing to file amended VAT and tax returns in its own name
F9 In December 2004, having failed to discharge its tax debt, Yukos auctioned its core asset, the oil production company Yuganskeftegaz (‘YNG’), which was subsequently acquired by the State-owned Rosneft. The Claimants characterised this auction as the ‘fatal blow’ to the survival prospects of Yukos.
F10 Yukos was subsequently declared bankrupt by the Moscow Arbitrazh Court in August 2006 and was removed from the companies’ register in November 2007. The Claimants alleged that the Russian Federation pushed Yukos into bankruptcy in order to redistribute its remaining assets. The Russian Federation disputed this, alleging that the bankruptcy and liquidation of Yukos was the inevitable consequence of ‘consistent and repeated lawlessness and reckless misconduct’ of Yukos management.
F11 A related issue concerned the withdrawal by Yukos’ auditors, PricewaterhouseCoopers (‘PwC’), of Yukos audits. The Claimants alleged that the audits were withdrawn because of pressure from the Russian Federation. The Russian Federation denied this, arguing that the decision to withdraw the audit opinions arose from a concern that the audits were tainted by newly discovered representations.
F12 The Respondent raised three preliminary objections: (1) the Claims were barred by the ‘fork in the road’ provision under Article 26(3)(b)(i) of the Energy Charter Treaty (17 December 1994) 2080 UNTS 100; (1995) 10 ICSID Rev—Foreign Investment L J 258, entered into force 16 April 1998 (‘ECT’); (2) the Claimants came to the Tribunal with ‘unclean hands’, which deprived them of protection under the ECT; and (3) the Tribunal lacked jurisdiction over the claims due to the ‘carve out’ from the ECT for ‘taxation measures’ under Article 21(1) and the ‘claw back’ for Article 13 of the ECT in relation to ‘taxes’ in Article 21(5).
F13 The Claimants argued that the Respondent violated its obligations under Article 10(1) of the ECT by failing to accord the Claimants’ investment fair and equitable treatment and by impairing the Claimants’ investments by discriminatory measures. In doing so, the Claimants argued that the fair and equitable treatment standard in the ECT was an autonomous standard that was broader than the customary international law international minimum standard of treatment. The Respondent denied it had breached Article 10(1), and argued that the standard in the ECT corresponded to the international law minimum standard of treatment of foreign investment.
F14 The Claimants further argued that the Respondent completely and totally deprived the Claimants of their investments in Yukos, which constituted an expropriation contrary to Article 13 of the ECT. The Respondent submitted that the Claimants’ failure to establish any of the challenged measures constituted an expropriation.
H1 At the time that the Russian authorities issued their ‘Field Audit Tax Report’ in December 2003, the legal basis for the scrutiny of Yukos’ entities in the low-tax regions was based on the ‘bad faith taxpayer’ doctrine which had been recognised and applied in some Russian court decisions, and empowered tax authorities to reassess tax liabilities where a taxpayer acted unreasonably and not in good faith. (paragraphs 494–499, 611–614)
H2 A the time of the tax assessments, there was no precedent for re-attribution of revenue in the Russian Federation under Russian law. While the inability to apply a re-attribution formula could in principle ‘eviscerate’ the Russian anti-abuse doctrine, such issues were not relevant on the present facts, and the Russian authorities used the re-attribution formula not only to collect revenue-based taxes, but also so as to establish a basis for imposing massive VAT liability and excessive fines. Therefore, the novel and arbitrary use of this re-attribution doctrine could not be considered a bona fide exercise of taxation powers. (paragraphs 625–627)
H3 The primary objective of the Russian Federation was not to collect taxes but rather to bankrupt Yukos and appropriate its valuable assets. (paragraph 756)
H4 While the Russian Federation had the power to conduct searches and seizures as part of its ongoing criminal investigations, the investigation of Yukos was carried out ‘with excessive harshness’ and supported Yukos’ central argument that the Russian authorities were undertaking ‘a ruthless campaign to destroy Yukos, appropriate its assets and eliminate Mr Khodorkovsky as a political opponent’. (paragraph 811)
H5 The intimidation and harassment disrupted the operations of Yukos but also contributed to its demise and thereby damaged the Claimants’ investment. (paragraph 820)
H6 The Russian Federation did not cause the demerger, as it was ‘abundantly clear’ that Sibnef wanted to abandon the merger upon the arrest of Mr Khodorkovsky. The Claimants therefore did not establish a basis that would allow them to claim damages based on the assumption that the merger would have been successful. (paragraphs 887–888)
H7 The totality of the bankruptcy proceedings were not part of the process for the collection of taxes, but rather an expropriation of Yukos’ assets for the benefit of the Russian State and State-owned companies Rosneft and Gazprom. The bankruptcy proceedings were undertaken with the intention to deprive Yukos of its assets. (paragraphs 1178–1180)
H8 While PwC was not on trial before the Tribunal, the pressure mounted by the Russian authorities against PwC, which led to PwC’s eventual withdrawal of its audits and to a PwC auditor testifying against Yukos executives in their trial, informed the Tribunal’s view that Yukos ‘was the subject of politically-motivated attacks by the Russian authorities that eventually led to its destruction’. (paragraph 1253)
H9 The Respondent’s raised an identical objection to jurisdiction at an earlier stage of the proceedings, which had been rejected in Yukos Universal Limited v Russian Federation, Interim Award on Jurisdiction and Admissibility, PCA Case No AA 227, IIC 416 (2009), 30 November 2009. Thus, the Tribunal saw no reason to reopen the issue and thus rejected the Respondent’s argument that it lacked jurisdiction pursuant to the ‘fork in the road’ provision. (paragraph 1271)
H11 However, an investor who obtained an investment in the host State by acting in bad faith or in breach of laws of the host State should not be allowed to benefit from the ECT, notwithstanding the absence of a ‘legality’ clause. However, this extended only to illegality in the making of the investment, not to the performance or conduct of the investment. (paragraphs 1349–2356)
H12 The Tribunal was not persuaded that there existed a ‘general principle of law recognised by civilised nation’ that would bar a claim pursuant to an investment treaty if the claimant had ‘unclean hands’. The Respondent’s ‘unclean hands’ argument therefore failed as a preliminary objection. (paragraphs 1357–1363)
H13 The tax authorities’ ‘re-attribution’ formula was not only used to collect revenue-based taxes against Yukos but also to impose on Yukos massive VAT liabilities and fines, and amounted to a ‘full assault on Yukos’ in order to bankrupt Yukos and appropriate its assets. (paragraph 1404)
H14 Even if the ‘carve out’ in Article 21(1) of the ECT applied, the Tribunal would have jurisdiction pursuant to Article 13 of the ECT pursuant to the expropriation ‘claw back’ in Article 21(5). This was because any referral to the Russian tax authorities would have been futile, thus re-enlivening the Tribunal’s jurisdiction pursuant to the ‘claw back’ clause. (paragraphs 1417–1429)
H15 The ‘carve out’ in Article 21(1) of the ECT only applied to bona fide taxation measures. As the tax assessments levied against Yukos were designed to impose massive liabilities based on VAT and fines, and were aimed at paralysing Yukos (rather than collecting taxes), the Respondent’s measures were not captured by the ‘carve out’. (paragraphs 1430–1444)
H16 Having earlier concluded that the primary objective of the Russian Federation was not to collect taxes but rather was to bankrupt Yukos and appropriate its assets, the measures were considered to have an effect ‘equivalent to nationalization or expropriation’ for the purposes of Article 13(1) of the ECT. (paragraphs 1575–1580)
H17 As to the lawfulness of the expropriation it was ‘profoundly questionable’ whether the destruction of Yukos, the leading oil company and largest taxpayer, was in the public interest of the economy, polity and population of Russia. The harsh treatment afforded to Messrs Khodorkovsky and Lebedev, coupled with the mistreatment of Yukos’ counsel, did not accord with due process of law, nor was the expropriation accompanied by compensation. Based on the totality of evidence, the Respondent was in breach of its obligations under Article 13 of the ECT. (paragraphs 1581–1585)
H19 While the totality of evidence suggested that the Respondent’s conduct was not directed at the collection of taxes but rather to bankrupt Yukos, Yukos’ tax arrangements in some of the low tax regions were abusive and formed the basis of the Respondent’s campaign against Yukos. Using ‘its wide discretion’, the Tribunal found that the Claimants contributed 25 percent to the prejudice which they suffered, and apportioned responsibility accordingly. (paragraphs 1607–1637)
H20 In the exercise of its discretion, the Tribunal considered it appropriate to award the Claimants interest on a rate based on 10-year US treasury bond rates. It was just and reasonable to award the Claimants simple pre-award interest and post-award interest compounded annually if the Respondent failed to pay damages in full. (paragraphs 1676–1689)
H21 The Claimant suffered damage due to the breach by the Respondent of Article 13 of the ECT to the value of USD 66,694,000,000 (this being the date of valuation of 30 June 2014, the larger of the two amounts between the date of the expropriation and the date of the award). After reducing the damages by 25 percent to account for the Claimants’ contributory fault, the amount of damages to be paid by the Respondent amounted to USD 50,020,867,798. (paragraphs 1825–1827)
A1 This award is the most recent consideration by an arbitral tribunal of the collapse of the Yukos oil empire. his award paints a similar picture to other tribunals considering the Yukos case (Quasar de Valores SICA V SA and ors v Russian Federation, Award, SCC Arbitration, 20 July 2012; RosInvestCo UK Ltd v Russian Federation, Final Award, SCC Arbitration V (079/2005), 12 September 2010). This award, like the others, is critical of the conduct of the Russian Federation in its treatment of Yukos and the role it played in the company’s demise.
A2 Although the award itself totals over 600 pages, the legal analysis by the tribunal is notably short. The Tribunal’s decision on liability under the ECT only occupies roughly five pages of the judgment, with the overwhelming majority of the award being devoted to an analysis of the facts and recital of the parties’ submissions.
A3 On the one hand, this meticulous consideration of the facts negated the need for lengthy consideration of some of the legal issues raised by the parties: for instance, the Russian Federation argued that there was no liability under the expropriation provision in ECT, Article 13(1), on the legal basis, inter alia, that a distinction must be drawn between expropriatory measures breaching the ECT and the legitimate exercise of State regulatory power, including taxation power. (paragraph 1545) Having concluded during the factual analysis that ‘the primary objective of the Russian Federation was not to collect taxes but rather to bankrupt Yukos and appropriate its valuable assets’ (paragraph 756), the Tribunal did not need to engage in the legal argument raised by the Respondent on this point, including the relationship between the regulatory powers of the State (which are not explicitly covered in the ECT) and the expropriation provision in Article 13(1). This can be contrasted with the approach of some other Tribunals, such as in Burlington Resources Inc v Ecuador, Decision on Liability, ICSID Case No ARB/08/5, 14 December 2012, where the Tribunal analysed (at (paragraphs 391–395)) the relationship between expropriation under the treaty and the regulatory power of States to impose and enforce taxation under customary international law, and the relevance of those customary international law rules to the dispute.
A4 Similarly, the Tribunal did not reach conclusions on certain legal arguments raised by the parties that were not integral to its decision. For instance, the Tribunal articulated, over 14 pages, the arguments made by the parties concerning liability under the fair and equitable treatment provision in Article 10 of the ECT, including the disagreement between the parties as to whether Article 10(1) was an autonomous standard that is broader than the customary international law minimum standard for the treatment of aliens (as argued by the Claimants) or whether the provision corresponded to the international minimum standard (as argued by the Respondent). (paragraphs 1481–1527) However, after concluding that the Respondent had breached Article 13 of the ECT, the Tribunal did not ‘need to consider whether the Respondent’s actions [were] also in breach of Article 10’. (paragraph 1585). This avoidance of a particularly vexing question of international investment law will undoubtedly be disappointing to some scholars, however it is consistent with other tribunals (such as the North American Free Trade Agreement tribunal in Glamis Gold Ltd v United States of America, Final Award, UNICTRAL, 8 June 2009) that emphasise the case-specific mandate of investor-State dispute settlement, and the reluctance to engage in more systemic arguments that are not critical to the resolution of the dispute.
Instruments cited in the full text of this decision:
Cases cited in the full text of this decision:
International Centre for the Settlement of Investment Disputes
International Centre for the Settlement of Investment Disputes
Stockholm Chamber of Commerce
Stockholm Chamber of Commerce
Ad hoc Arbitration
Ad hoc Arbitration
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Decision - full text
10. Mr. Yuri Schmidt
VII. ISSUES FOR ANALYSIS
List of Defined Terms
2000 Audit Report
Field Tax Audit Report No. 08-1/1, dated 29 December 2003, finding that Yukos operated a tax evasion scheme
Decision No. 14-3-05/1609-1, dated 14 April 2004, holding Yukos liable for a tax offense and reassessing approximately USD 3.48 billion in taxes against Yukos for the year 2000
Decision No. 30-3-15/3, dated 2 September 2004, holding Yukos liable for a tax offense and reassessing approximately USD 4.1 billion in taxes against Yukos for the year 2001
Decision No. 52/896, dated 16 November 2004, holding Yukos liable for a tax offense and reassessing approximately USD 6.7 billion in taxes against Yukos for the year 2002
Decision No. 52/985, dated 6 December 2004, holding Yukos liable for a tax offense and reassessing approximately USD 6 billion in taxes against Yukos for the year 2003
2003 Interim Dividend
Yukos’ declaration of a USD 2 billion interim dividend in November 2003
Decision No. 52/292, dated 17 March 2006, holding Yukos liable for a tax offense and reassessing approximately USD 3.9 billion in taxes against Yukos for the year 2004
American Depositary Receipt
USD 1 billion loan entered into on 24 September 2003 by Yukos from the Western Banks and secured by certain of Yukos’ oil export contracts and by YNG
April 2004 Injunction
Ruling by the Moscow Arbitrazh Court dated 15 April 2004 prohibiting Yukos from alienating and encumbering its assets
Baikal Finance Group, the entity which purchased YNG at auction and which was bought by Rosneft
Behles Petroleum S.A., Baltic Petroleum Trading Limited and South Petroleum Limited
USD 1.6 billion loan entered into on 30 September 2003 by Yukos from Société Générale S.A. and fully collateralized in cash by GML
Letters from Jean Chrétien to Prime Minister Fradkov, dated 6 and 15 July 2004, and to President Putin, dated 30 July 2004, 10 September 2004 and 17 November 2004
Hulley, VPL, and YUL
Claimants’ Post-Hearing Brief
Claimants’ Post-Hearing Brief, dated 21 December 2012
Claimants’ Skeleton Argument, dated 1 October 2012
Confidential Sale Agreement
Confidential sale agreement between the Western Banks and Rosneft dated 13 December 2005
Respondent’s Counter-Memorial on the Merits, dated 4 April 2011, as corrected 29 July 2011
Agreement Between the Government of the Republic of Cyprus and the Government of the Russian Federation for the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital, signed on 5 December 1998
Discounted Cash Flow
ZAO Dresdner Bank
Dresdner Summary Letter
Dresdner Summary Valuation Opinion Letter dated 6 October 2004
Dresdner Valuation Report
Dresdner Valuation Report of YNG dated 6 October 2004
Earnings before Interest, Taxes, Depreciation and Amortization
European Convention on Human Rights
ECT (or Treaty)
Energy Charter Treaty, 2080 UNTS 95, signed on 17 December 1994
European Court of Human Rights
ECtHR Yukos Judgment
OAO Neftyanaya Kompaniya Yukos v. Russia, ECtHR, Appl. No. 14902/04, Judgment, 20 September 2011
Extraordinary General Meeting
BNP Paribas S.A. v. Yukos Oil Company, High Court of England and Wales, Case No. HC 05 C0 12 19,  EWHC 1321 (Ch), Judgment, 24 June 2005
GML Limited (formerly named Group Menatep Limited), a company incorporated in Gibraltar and parent company of YUL
Final Awards in these three arbitrations (PCA Case Nos. AA226 (Hulley), AA227 (YUL) and AA228 (VPL)) (including the present Award)
Hearing on the Merits (or Hearing)
Hearing on the merits held at the Peace Palace in The Hague from 10 October to 9 November 2012
Hulley Enterprises Limited, a company organized under the laws of Cyprus and Claimant in PCA Case No. AA226, owned by YUL
International Court of Justice
International Law Commission of the United Nations
ILC Articles on State Responsibility
ILC Draft Articles on Responsibility of States for Internationally Wrongful Acts, 2001
Interim Awards on Jurisdiction and Admissibility issued on 30 November 2009 in these three arbitrations (PCA Case Nos. AA226 (Hulley), AA227 (YUL) and AA228 (VPL))
Law of the Republic of Mordovia No. 9-Z, which is the framework by which Mordovia offered tax benefits to corporate entities operating in the region
Claimants’ Memorial on the Merits, dated 15 September 2010
Moravel Investments Limited
Notices of Arbitration and Statements of Claim
Claimants’ Notices of Arbitration and Statements of Claim by Hulley and YUL, dated 3 February 2005; and by VPL, dated 14 February 2005
New York Stock Exchange
Respondent’s style of reference to the individuals who have or had a beneficial interest in the trusts behind Claimants, namely Messrs. Khodorkovsky, Lebedev, Nevzlin, Dubov, Brudno, Shakhnovsky, and Golubovitch
Claimants and Respondent
Permanent Court of Arbitration
Permanent Court of International Justice
PricewaterhouseCoopers, the former auditor of Yukos
PwC’s Withdrawal Letter
Letter from PwC to the bankruptcy receiver, Mr. Eduard Rebgun, dated 15 June 2007, by which PwC withdrew its Yukos audits
Quasar de Valores SICAV S.A. et al. v. The Russian Federation, SCC Arbitration, Award, 20 July 2012
Rehabilitation plan the in context of bankruptcy proceedings proposed by Yukos’ management and approved by a majority vote during an EGM on 1 June 2006
Respondent’s Rejoinder on the Merits, dated 16 August 2012
Claimants’ Reply on the Merits, dated 15 March 2012
Resolution No. 53
Resolution of the Plenum of the Supreme Arbitrazh Court No. 53, dated 12 October 2006
The Russian Federation or Russia
Respondent’s Post-Hearing Brief
Respondent’s Post-Hearing Brief, dated 21 December 2012
Respondent’s Skeleton Argument, dated 1 October 2012
RosInvestCo UK Ltd. v. The Russian Federation, SCC Arbitration V (079/2005), Final Award, 12 September 2010
Russian State-owned entity that bought Baikal
Russian Civil Code
Civil Code of the Russian Federation
Constitution of the Russian Federation
Russian Tax Code
Tax Code of the Russian Federation
Share Exchange Agreement
Agreement pursuant to which Yukos would acquire 72 percent (plus one share) of Sibneft shares from Sibneft’s principal shareholders in exchange for 26.01 percent of the fully diluted share capital of Yukos
Share Purchase Agreement
Agreement pursuant to which Yukos would acquire 20 percent (minus one share) of Sibneft shares from Sibneft’s principal shareholders for a cash consideration of USD 3 billion
Russia’s fifth largest oil company in 2003 when it agreed to a merger with Yukos
Stichting Administratiekantoor Yukos International
Stichting Administratiekantoor Small World Telecommunication Holdings B.V.
Stichting 1 and Stichting 2
Temporary Restraining Order
Arbitration Rules of the United Nations Commission on International Trade Law, 1976
United States’ Generally Accepted Accounting Principles
Law of the Russian Federation governing Value Added Tax
Vienna Convention on the Law of Treaties, 1155 UNTS 331, signed on 23 May 1969
Veteran Petroleum Limited, a company organized under the laws of Cyprus and Claimant in PCA Case No. AA 228
Syndicate of Western banks led by Société Générale S.A. and including BNP Paribas S.A., Citibank N.A., Commerzbank Akziengesellschaft, Calyon S.A., Deutsche Bank A.G., Hillside Apex Fund Limited, ING Bank N.V., KBC Bank N.V., Stark Trading, Shepherd Investments International Limited, Thames River Traditional Funds PLC (High Income Fund), UFJ (Holland) N.V. and V.R. Global Partners L.P.
Yuganskneftegaz, Yukos’ core production subsidiary
Yukos (or OAO Yukos Oil Company)
OAO Yukos Oil Company, a joint stock company incorporated in Russia in 1993
Yukos CIS Investment Limited
Yukos Finance B.V.
Yukos International U.K. B.V.
Yukos Universal Limited, a company organized under the laws of the Isle of Man and Claimant in PCA No. AA 227, shareholder of Yukos
Zakrytoe Administrativno-Territorial’noe Obrazovaniye, or Closed Administrative Territorial Unit.
1. In February 2005, three controlling shareholders of OAO Yukos Oil Company (or “Yukos”)—Hulley Enterprises Limited (“Hulley”), a company organized under the laws of Cyprus, Yukos Universal Limited (“YUL”), a company organized under the laws of the Isle of Man, and Veteran Petroleum Limited (“VPL”), a company organized under the laws of Cyprus (collectively, “Claimants”)—initiated arbitrations against the Russian Federation (“Respondent” or “Russia”), which together with Claimants constitute the “Parties.”
2. The three arbitrations were heard in parallel with the full participation of the Parties at all relevant stages of the proceedings. Mindful of the fact that each of the three Claimants maintains separate claims in separate arbitrations that require separate awards (the “Final Awards”), the Tribunal nevertheless shall discuss these arbitrations as a single set of proceedings, except where circumstances distinct to particular Claimants necessitate separate treatment.
3. The Final Awards address: (a) those of Respondent’s objections to jurisdiction and admissibility that remain to be decided after the Interim Awards on Jurisdiction and Admissibility of 30 November 2009 (the “Interim Awards”);1 (b) Claimants’ claims on the merits; and (c) quantum.
4. By any standard, and as will be seen, these have been mammoth arbitrations. At the highest, Claimants are claiming damages from Respondent of “no less than US$ 114.174 billion.”2 Since February 2005, the Tribunal has held five procedural hearings with the Parties and issued 18 procedural orders. In the fall of 2008, the Tribunal held a ten-day hearing on jurisdiction and admissibility in The Hague and, in November 2009, issued three Interim Awards, each over 200 pages. A twenty-one day Hearing on the Merits (or “Hearing”) took place in The Hague from 10 October to 9 November 2012. The written submissions of the Parties span more than 4,000 pages and the transcripts of the hearings more than 2,700 pages. Over 8,800 exhibits have been filed with the Tribunal.
5. The facts of this dispute have been the subject of attention in the media for more than a decade, involving as they do, as central actors, Mr. Vladimir Putin, the President of the Russian Federation, and a Russian “oligarch”, Mr. Mikhail Khodorkovsky, who, at the outset of the dispute, was the principal shareholder and Chief Executive Officer of Yukos, then the largest oil company in Russia and one of the largest oil companies in the world.
6. Throughout this lengthy and heavily contested arbitration, in circumstances that were often trying and stressful, counsel for the Parties acted in a highly professional way. The Tribunal is most grateful for their assistance. The Tribunal particularly acknowledges the grace and acuity of the participation of Mr. Robert Greig, who was forced by ill health to retire in the midst of the proceedings.
I. Procedural History
8. The Interim Awards recount in detail the procedural history of the arbitrations from their commencement up until the date those Awards were issued. The Tribunal has also issued 18 procedural orders, each of which contains a relevant procedural history. In this Part of the Final Award, the Tribunal recalls only the key procedural details from the early phase of the proceedings and summarizes developments since November 2009.
A. Commencement of the Arbitration
9. On 2 November 2004, all three Claimants delivered to the President of Russia notifications of claim with respect to Russia’s alleged violation of its obligations under the Energy Charter Treaty (“ECT” or “Treaty”) and sought to settle the disputes amicably pursuant to Article 26(1) of the ECT.3
10. Having failed to settle their disputes amicably within the three-month period prescribed under Article 26(2) of the ECT, on 3 February 2005, Hulley and YUL initiated arbitration proceedings through Notices of Arbitration and Statements of Claim against Respondent. Subsequently, through a Notice of Arbitration and Statement of Claim dated 14 February 2005, VPL initiated arbitration proceedings against Respondent. Claimants’ requests for arbitration against Respondent were made pursuant to Article 26(4)(b) of the ECT and the Arbitration Rules of the United Nations Commission on International Trade Law, 1976 (“UNCITRAL Rules”).
B. Constitution of the Tribunal
12. The history of the constitution of the Tribunal is recounted in detail in the Interim Awards. The Tribunal is composed of Judge Stephen M. Schwebel (appointed by Respondent on 8 April 2005), Dr. Charles Poncet (appointed as a replacement arbitrator by Claimants on 24 September 2007) and The Hon. L. Yves Fortier PC CC OQ QC (appointed as Chairman on 21 July 2005 by the agreed appointing authority, the Secretary-General of the Permanent Court of Arbitration (“PCA”)).
14. On 15 October 2005, Respondent submitted its Statements of Defence, in which it objected to the Tribunal’s jurisdiction and denied Claimants’ allegations of expropriation and unfair and inequitable treatment.
15. On 31 October 2005, a preliminary procedural hearing was held in The Hague, at which the Parties and members of the Tribunal signed Terms of Appointment confirming, inter alia, that: (a) the members of the Tribunal had been validly appointed in accordance with the ECT and the UNCITRAL Rules; (b) the proceedings would be conducted in accordance with the UNCITRAL Rules; (c) the International Bureau of the PCA would act as registry; (d) the dispute would be decided in accordance with the ECT and applicable rules and principles of international law; (e) the language of the arbitration would be English; and (f) all pleadings, documents, testimonial evidence, deliberations and actions taken by the Tribunal would remain confidential in perpetuity, unless the Parties were to release the arbitrators from this obligation. The Tribunal also set a procedural calendar and determined that it would rule on Respondent’s plea concerning jurisdiction and the admissibility of the claim as a preliminary question. The calendar was confirmed in Procedural Order No. 1 on 8 November 2005.
C. Preliminary Phase on Jurisdiction and Admissibility
16. Respondent filed its First Memorials on Jurisdiction and Admissibility on 28 February 2006 and Claimants filed their Counter-Memorials on Jurisdiction and Admissibility on 30 June 2006.
17. On 8 September 2006, the Tribunal issued Procedural Order No. 2 dealing with document production. The Tribunal invited the Parties to agree on whether requests relating to the Parties’ respective “unclean hands” contentions and Respondent’s contention that the corporate personality of Claimants “must be disregarded” because they are “an instrumentality of a criminal enterprise” should be considered during the jurisdiction and admissibility phase or deferred to the merits phase.
18. On 31 October 2006, the Tribunal issued Procedural Order No. 3, in which it deferred consideration of the Parties’ contentions concerning “unclean hands” and Respondent’s “criminal enterprise” contention to the merits phase. On 3 November 2006, Claimants submitted a stipulation of facts, and on 8 November 2006, Respondent submitted its observations on the stipulation.
19. Between November 2006 and November 2008, the Tribunal issued six further procedural orders relating to the conduct of the jurisdiction and admissibility phase of the arbitrations. During this period the Parties exchanged two rounds of written submissions on jurisdiction and admissibility, as well as Skeleton Arguments for the hearing. As noted in the Interim Awards, the written record in the jurisdictional phase contained detailed and extensive filings of hundreds of pages, accompanied by over a thousand exhibits and dozens of witness statements.
20. The hearing on jurisdiction and admissibility was conducted at the Peace Palace in The Hague, from 17 to 21 November, 26 to 29 November and 1 December 2008.
21. On 30 November 2009, the Tribunal rendered the Interim Awards, stating in operative part:
For the reasons set forth above, the Tribunal:
(a) DISMISSES the objections to jurisdiction and/or admissibility based on Article 1(6) and 1(7), Article 17, Article 26(3)(b)(i) and Article 45 of the ECT;
(b) DEFERS its decision on the objection to jurisdiction and/or admissibility based on Article 21 of the ECT to the merits phase of the arbitration, consistent with [paragraph numbers], above;
(c) CONFIRMS that its decision on the objections to jurisdiction and/or admissibility involving the Parties’ contentions concerning “unclean hands” and Respondent’s contention that “Claimant’s personality must be disregarded because it is an instrumentality of a criminal enterprise” is deferred to the merits phase of the arbitration, consistent with Procedural Order No. 3;
(d) HOLDS that, subject to the preceding two sub-paragraphs, the present dispute is admissible and within its jurisdiction, and that the Tribunal has jurisdiction over the Russian Federation in connection with the merits of the present dispute;
(e) RESERVES all questions concerning costs, fees and expenses, including the Parties’ costs of legal representation, for subsequent determination; and
(f) INVITES the Parties to confer regarding the procedural calendar for the merits phase of the arbitration, and to report to the Tribunal in this respect within 60 days of receipt of this Interim Award.
D. Bifurcation and other Scheduling Matters
23. On 24 February 2010, the Parties informed the Tribunal that they disagreed as to whether or not to bifurcate the proceedings between a liability and a damages phase, and as to the sequence and timing of document production. Following an exchange of submissions on these issues, a hearing was held at the International Dispute Resolution Centre in London on 7 May 2010.
24. The Tribunal issued Procedural Order No. 10 on 13 May 2010, in which it: (a) decided that documentary discovery would take place in a single phase, after the Parties’ first round of written pleadings on the merits; (b) deferred the decision on bifurcation of the proceedings between a liability and a quantum phase and on the issue of referral arising under Article 21 of the ECT until after the Parties’ first round of written pleadings on the merits; and (c) fixed a procedural calendar. The Tribunal specified that the Parties’ first round of written pleadings on the merits was to address all issues, including the deferred preliminary questions, liability, quantum and the issue of referral under Article 21 of the ECT. With respect to documentary discovery, the Tribunal confirmed that some of its earlier rulings on requests relating to “unclean hands” and “criminal enterprise” in the jurisdiction and admissibility phase had been without prejudice to the Parties’ ability to restate one or more of these requests in the merits phase. The Parties also agreed for each filing that they would submit one brief and one set of exhibits for all three cases.
25. In accordance with Procedural Order No. 10 (as amended by the Tribunal on 23 June 2010), Claimants filed their Memorial on the Merits (“Memorial”) on 16 September 2010. It spanned 424 pages and was accompanied by 1045 exhibits, nine witness statements and two expert reports (with annexures). On 17 November 2010, further to a request by Respondent, Claimants provided an electronic copy of the appendices to the report of Claimants’ damages expert.
26. On 4 November 2010, Respondent informed the Tribunal that Baker Botts LLP was joining Cleary Gottlieb Steen & Hamilton LLP as Respondent’s counsel in these arbitrations.
27. Respondent filed its Counter-Memorial on the Merits (“Counter-Memorial”) on 4 April 2011 and submitted a corrected version on 29 July 2011. The Counter-Memorial spanned 787 pages and was accompanied by 2868 exhibits and eight expert reports (some with annexures).
28. On 29 April 2011, the Parties filed their respective submissions on the bifurcation of the proceedings and the issue of referral arising under Article 21 of the ECT. A hearing on these matters was held at the Church House Conference Centre in London on 9 May 2011.
29. On 31 May 2011, the Tribunal issued Procedural Order No. 11, in which it: (a) denied Respondent’s request that the proceedings be bifurcated between a liability and a damages phase; (b) reserved its decision on referral under Article 21(5)(b)(i) of the ECT to a later stage of the proceedings, when the evidentiary record would be completed; and (c) ordered the Parties to proceed in accordance with the amended procedural calendar.
E. Document Production and Confidentiality
30. The Parties exchanged requests for documents on 17 June 2011 and the following month exchanged objections and comments on objections to the document requests. Respondent also requested an oral hearing on disclosure issues and repeated a request for more time to file its Rejoinder.
31. On 11 August 2011, the Tribunal ruled on certain procedural aspects of document production and the timing of submissions, and informed the Parties that it “considered then, as it does today, that the Amended Procedural Calendar is in compliance with the requirement of due process and equality between the parties taking into account all the circumstances.”
32. On 16 September 2011, the Tribunal issued Procedural Order No. 12, in which it ruled on the Parties’ document requests (with some rulings being “without prejudice” to a further decision after the reply rounds of written submissions).
33. By letter of 23 September 2011, Respondent informed the Tribunal that the European Court of Human Rights (“ECtHR”) had, on 20 September 2011, issued a judgment in OAO Neftyanaya Kompaniya Yukos v. Russia (“ECtHR Yukos Judgment”),4 which addressed the “same circumstances” on which Claimants’ claims in these arbitrations are based.
34. On 16 December 2011, Claimants produced documents pursuant to Procedural Order No. 12. Respondent did not produce documents, but wrote to the Tribunal, expressing concern that Claimants had provided no assurance that documents collected for disclosure would be kept confidential and used only for the purposes of these arbitrations. Respondent requested the Tribunal to issue a directive “requiring the Parties to protect the confidentiality of all documents disclosed by the other, using them solely for purposes of these arbitrations.” Claimants objected to Respondent’s “eleventh hour” request for a confidentiality order.
35. On 19 December 2011, the Tribunal ordered Respondent to provide by the end of that day documents to Claimants that had been ordered to be produced in Procedural Order No. 12, requested written submissions on confidentiality and directed that until it decided the confidentiality issue, the documents produced by both Parties were to remain confidential and be used solely for purposes of these arbitrations. Pursuant to the Tribunal’s directive, Respondent produced documents on 19 December 2011.
36. On 18 January and 2 February 2012, the Parties exchanged submissions on the scope of confidentiality of the documents produced. From January to May 2012, the Parties exchanged extensive correspondence concerning compliance with Procedural Order No.12.
37. On 27 February 2012, the Tribunal issued Procedural Order No. 13, in which it: (a) ordered that all documents produced by a Party to the other Party and the Tribunal following an order of the Tribunal “be and remain confidential in perpetuity” and “be used solely for the purpose of the pursuit or defense of these arbitrations and not for any other purpose;” (b) listed the persons involved in these arbitrations to whom these documents could be disclosed; and (c) invited the Parties to refrain from discussing these arbitrations in public in order not to exacerbate their dispute or otherwise compromise the integrity of these arbitration proceedings.
38. Claimants filed their Reply on the Merits (“Reply”) on 15 March 2012. It spanned 474 pages and was accompanied by a further 629 exhibits and two expert reports (with annexures).
39. On 30 April 2012, the Tribunal issued Procedural Order No. 14, granting some of Respondent’s document production requests which had earlier been denied “without prejudice” in Procedural Order No. 12. Claimants produced documents pursuant to Procedural Order No. 14 on 29 May 2012. On 29 June 2012, Respondent produced additional documents “in accordance with the parties’ continuing obligation to disclose requested documents as they are discovered” under Procedural Order No. 12. Throughout June and July 2012, the Parties exchanged extensive correspondence as to whether that was in violation of Procedural Order No. 12.
F. Hearing on the Merits
41. On 28 August 2012, a pre-hearing telephone conference took place during which the Parties agreed on a number of issues, but disagreed on others. For example, Respondent requested that the Tribunal set a deadline for the exchange between the Parties of witness “impeachment” evidence prior to the Hearing on the Merits, while Claimants raised several “due process” issues and requested permission to file written submissions in support of their requests. The Parties then exchanged written comments on these issues.
42. By exchange of letters dated 10 September 2012, Claimants provided the names and order of three Respondent witnesses they wished to cross-examine and Respondent advised the names and order of ten of Claimants’ witnesses whom it wished to cross-examine.
43. On 12 September 2012, the Tribunal issued Procedural Order No. 15 dealing with logistical and procedural issues for the Hearing on the Merits.
44. On 14 September 2012, the Tribunal issued Procedural Order No. 16, in which it determined the outstanding procedural issues for the Hearing on the Merits, inter alia (a) denying Respondent’s requests relating to the exchange of “impeachment” evidence (noting that “in international arbitration practice, documents used at an evidentiary hearing should generally be submitted with the Parties’ written pleadings, in accordance with the established procedural calendar”); and (b) granting Claimants permission to file certain documents that would “complete the record” in relation to selected exhibits that Respondent had included in its Rejoinder.
45. Claimants filed additional exhibits on 20 September 2012. On 25 September 2012, Respondent objected to certain of these exhibits on the grounds that they exceeded the scope of Procedural Orders No. 15 and 16. Following an exchange of views by the Parties, the Tribunal ruled on Respondent’s objection in Procedural Order No. 17 dated 2 October 2012.
46. On 1 October 2012, the Parties submitted their respective Skeleton Arguments in aid of the oral arguments to be presented at the Hearing on the Merits.
47. On 4 October 2012, Respondent advised that it no longer intended to cross-examine one of Claimants’ tax law experts, Mr. Philip Baker QC. The same day Claimants withdrew the witness statement of former Russian Prime Minister, Mr. Mikhail Kasyanov, which had been submitted with the Memorial, on the ground that Mr. Kasyanov had informed Claimants’ counsel that “he will not appear at the hearing in these arbitrations.”
48. On 8 October 2012, Claimants advised that they no longer intended to cross-examine one of Respondent’s tax law experts, Professor Rosenbloom.
49. The Hearing on the Merits took place at the Peace Palace, The Hague from 10 October to 9 November 2012. Over the course of the Hearing, the following were in attendance:
The Hon. L. Yves Fortier PC CC OQ QC
Dr. Charles Poncet
Judge Stephen M. Schwebel
Professor Emmanuel Gaillard
Dr. Yas Banifatemi
Mr. Philippe Pinsolle
Ms. Jennifer Younan
Dr. Paschalis Paschalidis
Mr. Ilija Mitrev Penusliski
Ms. Kamalia Mehtiyeva
Mr. Gueorgui Babitchev
Mr. Emmanuel Jacomy
Mr. Scott Vesel
Ms. Ximena Herrera-Bernal
Ms. Elise Edson
Ms. Ketevan Betaneli
Ms. Coralie Darrigade
Mr. Thomas Voisin
Mr. Dimitrios Katsikis
Mr. Benjamin Siino
Mr. Jean-Marc Elsholz
Ms. Gracia Angulo Duncan
Mr. Benoit Arnauld
Ms. Nanou Leleu-Knobil
Mr. Tim Osborne
Mr. Christopher Cook
Mr. Rodney Hodges
Mr. Vladimir Dubov
Dr. Andrei Illarionov
Mr. Jacques Kosciusko-Morizet
Mr. Bruce Misamore
Mr. Leonid Nevzlin
Mr. Frank Rieger
Mr. Steven Theede
Mr. Brent Kaczmarek
Assistant to the Tribunal
Mr. Martin Valasek
Permanent Court of Arbitration
Mr. Brooks W. Daly, Secretary to the Tribunal
Ms. Judith Levine, Assistant Secretary to the Tribunal
Ms. Olga Boltenko
Ms. Evgeniya Goriatcheva
Ms. Hinda Rabkin
Ms. Elsa Sardinha
Mr. Yuri Somov
Mr. Ilya Feliciano
Mr. Trevor McGowan
Dr. Claudia Annacker
Mr. Lawrence Friedman
Mr. David Sabel
Mr. Matthew Slater
Mr. William McGurn
Mr. Jay Alexander
Mr. Samuel Cooper
Mr. Michael Goldberg
Mr. Cameron Murphy
Ms. Laurie Achtouk-Spivak
Ms. Marina Akchurina
Mr. Yury Babichev
Mr. Nowell Bamberger
Mr. Adam Bryan
Ms. Chiara Capalti
Ms. Ania Farren
Ms. Giulia Gosi
Mr. Michael Jacobsohn
Mr. Magnus Jones
Mr. Lorenzo Melchionda
Mr. Milo Molfa
Ms. Sara Nadeau-Seguin
Ms. Daria Pavelieva
Mr. Jacopo Roberti di Sarsina
Ms. Teale Toweill
Ms. Marina Weiss
Mr. Larry Work-Dembowski
Mr. Konstantin Vyshkovskiy
Ms. Maria Maslyakova
Professor James Dow
Mr. Oleg Y. Konnov
50. On behalf of Claimants, oral arguments were presented by Dr. Yas Banifatemi, Professor Emmanuel Gaillard, Mr. Philippe Pinsolle and Ms. Jennifer Younan. On behalf of Respondent, oral arguments were presented by Dr. Claudia Annacker, Mr. Lawrence Friedman, Mr. David Sabel and Mr. Matthew Slater.
51. During the Hearing, on 14 October 2012, the Parties filed brief written submissions on a document production request made by Respondent in follow up to Procedural Order No. 14. On 15 October 2012, the Tribunal ruled that the time for document production requests had passed, and noted that Respondent was free to ask the Tribunal to draw adverse inferences from any alleged non-compliance by Claimants with the Tribunal’s document production orders.
G. Post-Hearing Procedures
52. At the close of the Hearing on 9 November 2012, the Tribunal directed the Parties to submit Post-Hearing Briefs of no more than 100 pages by 21 December 2012. On 13 November 2012, the Tribunal confirmed that the Post-Hearing Briefs were to be prepared on the basis of a closed evidentiary record as at 9 November 2012.
53. During November 2012, the Parties provided electronic copies of all additional materials relied upon during the Hearing, demonstrative exhibits and slides from arguments. They also submitted agreed and contested corrections to the transcript to the court reporter, who in turn circulated amended transcripts on 11 December 2012.
55. On 1 August 2013, the Tribunal invited the Parties to comment on a judgment issued on 25 July 2013 by the ECtHR.5
57. On 26 September 2013, Respondent drew the Tribunal’s attention to developments in two other international arbitrations against the Russian Federation connected with Yukos. Claimants submitted comments in response on 8 October 2013.
58. On 10 January 2014, the Tribunal sent a letter to the Parties noting that Mr. Mikhail Khodorkovsky, former CEO of Yukos, had been pardoned and released from prison, and inviting the Parties to submit their observations on the impact, if any, of these developments on the present arbitral proceedings. The Parties submitted their comments in response on 24 January 2014, and further observations in reply on 4 February 2014.
59. The Parties filed their costs claims on 17 April 2014, and submitted comments on the opposing side’s costs claims on 6 May 2014.
61. On 9 June 2014, Respondent informed the Tribunal that it was prepared to agree that the Final Awards may be publicly disclosed under certain conditions. Respondent also requested that the Tribunal modify its Procedural Order No. 13 to lift confidentiality restrictions with respect to documents disclosed in the course of these proceedings, to allow them to be used in “related proceedings” recently commenced against the Russian Federation. Claimants submitted comments in response on 16 June 2014, and Respondent further commented on 20 June 2014.
62. On 27 June 2014, the Tribunal issued Procedural Order No. 18 in which it: (a) ordered that these Final Awards remain confidential for a period of ten calendar days following electronic dispatch to the Parties, after which period the PCA would post the Final Awards to its website and so notify the Parties and the Tribunal, whereupon all confidentiality obligations in respect of the Final Awards shall terminate; and (b) modified Procedural Order No. 13 to provide for limited disclosure of documents in related proceedings.
II. Factual Background
63. The disputes between the Parties to the present proceedings involve various measures taken by Respondent against Yukos and associated companies primarily in the period between July 2003 and November 2007, when Yukos had emerged after the dissolution of the Soviet Union to become the largest oil company in the Russian Federation. The measures complained of include criminal prosecutions, harassment of Yukos, its employees and related persons and entities; massive tax reassessments, VAT charges, fines, asset freezes and other measures against Yukos to enforce the tax reassessments; the forced sale of Yukos’ core oil production asset; and other measures culminating in the bankruptcy of Yukos in August 2006, the subsequent sale of its remaining assets, and Yukos being struck off the register of companies in November 2007. Claimants contend, and Respondent denies, that Respondent failed to treat Claimants’ investments in Yukos in a fair and equitable manner and on a non-discriminatory basis, in breach of Article 10(1) of the ECT, and that Respondent expropriated Claimants’ investments in breach of Article 13(1) of the ECT. Claimants seek full reparation in excess of USD 114 billion.
64. The factual matrix of this case is complex. A detailed exposition of the relevant facts, including specific references to the record, is set out for each part of the narrative in Part VIII (broken down into eight chapters, starting with Yukos’ tax optimization scheme and the Russian Federation’s tax assessments against Yukos and ending with the bankruptcy of Yukos and the withdrawal of audit opinions by PricewaterhouseCoopers (“PwC”)). It is also in Part VIII that the Tribunal makes determinations in respect of the many highly contested issues of fact and observations on the significance of various facts and findings. By contrast, the purpose of the introductory overview of the facts contained in this Part II of the Award is only to provide sufficient background for what follows.
A. The Parties to these Proceedings
1. Claimants and Related Entities
65. The three Claimants in these related cases are all part of the Yukos group of companies, which had at its center Yukos, headed by Chief Executive Officer Mr. Mikhail Khodorkovsky.
66. Claimant in PCA Case No. AA 226, Hulley, was incorporated in the Republic of Cyprus on 17 September 1997 and was a 100 percent owned subsidiary of YUL.
67. Claimant in PCA Case No. AA 227, YUL, was incorporated on 24 September 1997 in the Isle of Man (a Dependency of the United Kingdom).
68. Claimant in PCA Case No. AA 228, VPL, was incorporated in the Republic of Cyprus on 7 February 2001.
B. OAO Yukos Oil Company
71. After the dissolution of the Soviet Union, Yukos was incorporated as a joint stock company in 1993 by Presidential Decree. Fully privatized in 1995–1996, it was a vertically integrated group engaging in exploration, production, refining, marketing and distribution of crude oil, natural gas and petroleum products. Its three main production subsidiaries were Yuganskneftegaz (“YNG”), Samaraneftegaz and, from 1997, Tomskneft.
72. In May 2002, Yukos became the first Russian company to be ranked among the top ten largest oil and gas companies by market capitalization worldwide. In the fourth quarter of 2002, Claimants submit that Yukos became the largest oil company in Russia in terms of daily crude oil production.
73. At its peak in 2003, it had around 100,000 employees, six main refineries and a market capitalization estimated at over USD 33 billion. According to Claimants, after its projected 2003 merger with then Russia’s fifth largest oil company Sibneft (“Sibneft”), YukosSibneft would have become the fourth largest private oil producer worldwide, behind BP, Exxon and Shell. At the time of Respondent’s alleged adverse actions in the summer of 2003, Yukos was engaged in negotiations with ExxonMobil and ChevronTexaco for a merger or other form of business combination. Claimants contend that this level of success was the result of efforts to modernize Yukos’ operations and implement Western business practices. According to Claimants, Yukos’ success and the increasing social and economic influence gained by its management—including financial support given by Mr. Khodorkovsky to opposition parties—were perceived as a political threat by the Russian authorities and accordingly Yukos would fall from grace and be targeted for destruction. Respondent, however, contends that Yukos was a “criminal enterprise”, engaged in a variety of tax evasion schemes and other fraudulent activities.
C. The Russian Low-Tax Region Program
74. The low-tax region program was established in the 1990s to foster economic development in impoverished areas of the Russian Federation. The Russian low-tax regions were permitted to exempt taxpayers from federal corporate profit tax for the purpose of fostering taxpayers’ investments in the low-tax regions, provided the taxpayer complied with certain requirements.
75. The Russian low-tax regions that are relevant to Yukos’ “tax optimization” scheme include:
• Closed Administrative Territorial Units (known as “ZATOs”): Lesnoy and Trekhgorniy; and
• Other low-tax regions: Mordovia, Kalmykia and Evenkia.
76. With respect to the tax benefits available in the ZATOs (Lesnoy and Trekhgorniy), in 1999, the ZATOs were permitted to exempt taxpayers fully from federal corporate profit tax. In 2000, most ZATOs were permitted to exempt taxpayers from the portion of the federal corporate profit tax that was payable to their budget (e.g., up to 19 percent). In 2001, all ZATOs were permitted to exempt taxpayers from the portion of the federal corporate profit tax that was payable to their budget (e.g., also up to 19 percent). In 2002, however, these exemptions were revoked.
77. With respect to the tax benefits available in other low-tax regions, in 2000 and 2001, Mordovia, Kalmykia and Evenkia were permitted to exempt taxpayers fully from the portion of the federal corporate profit tax that was payable to their budget (e.g., from up to 19 percent to zero percent). From 1 July 2002 until 31 December 2003, low-tax regions were permitted to exempt taxpayers from the portion of the federal corporate profit tax payable to their budget, but only up to four percent. An exception existed for ‘grandfathered’ tax investment agreements entered into prior to 1 July 2001, such that these taxpayers could still receive a zero percent profit tax rate if they fulfilled certain other conditions. As of 1 January 2004, the existing tax investment agreements were terminated, but the Tax Code of the Russian Federation (the “Russian Tax Code”) still allowed low-tax regions to reduce the federal corporate profit tax payable to their budget up to four percent.
78. Respondent contends that Yukos’ restructuring of its trading operations from high-tax jurisdictions, such as Moscow and Nefteyugansk, to trading companies incorporated in the lowtax jurisdictions of Lesnoy, Trekhgorny, Mordovia, Kalmykia and Evenkia was aimed at evading taxes, rather than to achieve any genuine economic result. Respondent alleges that Yukos interposed between Yukos and its customer its “sham” trading shells registered in Russian low-tax regions. Yukos’ oil producing subsidiaries sold the extracted oil to the trading companies at a fraction of the market price. The trading companies then sold the oil either abroad at a market price or to Yukos’ refineries, and subsequently re-bought it at a reduced price and re-sold it at the market price. Respondent asserts that prices increased step by step from sham shell to sham shell, generating artificially inflated profits through non-armslength transactions. Those profits were then taxed at reduced rates in the low-tax regions, where the sham trading shells were registered. Respondent contends that the tax authorities identified abuses by the Lesnoy trading shells, which resulted in further investigations and, ultimately, in the tax assessments against Yukos and related proceedings.
79. Claimants contend that Yukos, like other Russian companies at that time, was merely taking advantage of the legislation in place in the low-tax regions. Claimants assert that any findings of “abuse” by the Russian tax authorities was a function of the arbitrary and unpredictable interpretations of the law in Russia.
D. Criminal Proceedings
81. Starting in July 2003, a series of criminal investigations were initiated by the Russian Federation against Yukos management and activities. According to Claimants, these actions included the “targeting” of Yukos’ employees, auditor PwC, in-house counsel, lawyers involved in various Yukos-related cases, as well as searches and seizures, threats to revoke its oil licenses, and mutual legal assistance requests and extradition proceedings against Yukos management. Claimants characterize these actions as harassment, motivated by Mr. Khodorkovsky’s participation in Russian opposition politics, that were intended—together with tax reassessments—to lead to the expropriation of Yukos’ assets. Respondent contends that its actions were in response to illegal acts committed by Yukos and its officers and shareholders.
82. Between July and October 2003, three key Yukos officers were arrested. In July 2003, Mr. Platon Lebedev, Director of Hulley and YUL, was arrested on charges of embezzlement and fraud; he was sentenced to nine years in prison in May 2005. In October 2003, Mr. Vasily Shakhovsky, President of Yukos-Moscow, was charged with and later convicted of tax evasion. In October 2003, Mr. Khodorkovsky himself was arrested and charged with crimes including forgery, fraud and tax evasion; he was also sentenced to a nine-year prison term in May 2005. As a result of these arrests, a number of high-ranking Yukos executives fled Russia, such as Mr. Leonid Nevzlin, Deputy Chairman of the Yukos Board of Directors until 2003. On 2 February 2007, new charges of embezzlement and money laundering were brought against Messrs. Khodorkovsky and Lebedev, leading to further convictions in December 2010. Messrs. Khodorkovsky and Lebedev were each imprisoned for over a decade.
83. Claimants contend that by April 2006, no fewer than 35 top managers and employees of Yukos had been interrogated, arrested or sentenced, and that lawyers acting for Yukos had been obstructed in their work. During the same period, Russian authorities conducted searches, seizures and interrogations of Yukos property and personnel. Claimants contend that all of these actions amounted to harassment and intimidation, that they deprived Yukos’ management of the ability to manage and control Yukos as a business, and that the underlying motive was to expropriate Yukos’ assets.
84. Respondent contends that in addition to participation in tax fraud schemes, Yukos participated in a massive transfer pricing scheme by which hundreds of millions of dollars from the sales of oil and other products were illegally siphoned off to offshore entities for the benefit of Khodorkovsky/Lebedev and other controlling Russian “Oligarchs”.6
85. Respondent also contends that Yukos officials have been engaged in violent crimes, such as the murder, attempted murder and assault of persons seeking to enforce Russian tax laws or otherwise perceived to threaten Yukos interests. Claimants deny Respondent’s allegations of criminal acts as well as acts of tax evasion.
86. Respondent denies that Yukos and its officers were targeted in a discriminatory way, contending that Russian taxation measures have also applied to other offenders and that the searches and seizures were taken as part of legitimate taxation measures and conducted in accordance with normal Russian practice and the appropriate procedural protections available under Russian law.
E. Additional Measures
88. In the period between October 2003 and December 2004, Yukos and its subsidiaries faced a series of major setbacks, including the alleged frustration of its merger with Sibneft, hefty tax reassessments, fines, VAT exactions, the freezing of shares and assets, the threatened revocation of licenses, and the forced sale of Yukos’ main oil production subsidiary, YNG. These measures were followed by the bankruptcy of Yukos in August 2006.
1. Alleged Frustration of Merger Between Yukos and Sibneft
89. In October 2003, a merger was about to be completed between Yukos and Sibneft, Russia’s fifth largest oil company. According to Claimants, the resulting entity, YukosSibneft, would have become the world’s fourth largest oil company. In November 2003, however, after Yukos had already acquired 92 percent of Sibneft’s shares as part of the merger and after the arrest of Mr. Khodorkovsky, Sibneft’s controlling shareholder, Mr. Roman Abramovich, called off the merger process and the transactions were then unwound by a series of court decisions. Further details are included in Chapter VIII.D of this Award.
2. Tax Reassessments for Years 2000–2004
90. On 28 April 2003, the Tax Ministry issued a Field Tax Audit Report for the years 2000 and 2001 that raised no questions concerning Yukos’ tax optimization structure. On 1 September, 1 October and 1 November 2003, the Tax Ministry issued certificates confirming that Yukos had no outstanding debts.
91. On 8 December 2003, the Tax Ministry ordered a tax re-audit of Yukos for the year 2000. On 29 December 2003, the tax authorities of the Russian Federation issued the first of five tax assessments against Yukos that were based on the alleged abuse by Yukos of its tax optimization scheme.
92. The Tax Ministry demanded payment from Yukos for approximately USD 3.5 billion for 2000, which was largely upheld by the Moscow Arbitrazh Court. Similarly large tax reassessments were issued in the period between 2004 and 2006 for subsequent tax years. 2001 taxes were re-assessed in the amount of approximately USD 4.1 billion, 2002 taxes in the amount of approximately USD 6.8 billion, 2003 taxes in the amount of approximately USD 6.1 billion, and 2004 taxes in the amount of approximately USD 3.7 billion. By the time the Tax Ministry issued the last of these demands, Yukos faced a tax bill of more than USD 24 billion, of which approximately USD 10.6 billion constituted allegedly evaded revenue-based taxes (including interest and fines), and the remainder (approximately USD 13.6 billion) comprised of VAT and related, interest and fines.
93. Respondent contends that the reassessments were a consequence of Yukos’ activities relating to the tax fraud scheme. Claimants submit, however, that the reassessments were so excessive that the Russian authorities’ strategy of destroying Yukos became plain.
94. At the same time that tax reassessments were being filed against Yukos and its subsidiaries, Russian authorities began freezing shares and other assets belonging to Yukos and related entities. In October 2003, Russian prosecutors froze shares held by YUL and Hulley in Yukos. Orders issued by the Moscow Arbitrazh Court in April and June 2004 prevented Yukos from disposing of its assets. An application by Yukos in July 2004 to have sufficient assets released to meet its tax liabilities was ignored and a surcharge of approximately USD 240 million was applied for late payment of taxes. Claimants also maintain that Yukos’ numerous proposals throughout this period to settle the tax claims were ignored or rejected by the Russian authorities, despite the fact that the government settled with taxpayers in several other cases.
95. In July 2004, Russian authorities began seizing Yukos’ shares in YNG, Samaraneftegaz and Tomskneft. YNG bank accounts were also frozen. The Russian authorities also used mutual legal assistance treaties to affect Yukos’ interests abroad.
96. Respondent does not dispute the freezing of Yukos’ assets but contends that freezing assets of a debtor, including shares owned by it, is a standard enforcement measure for tax levies and judgments. Respondent maintains that its freezing orders did not cover all of the assets of Yukos in Russia and that Yukos remained in possession of large assets abroad.
3. Auction of YNG
98. In July 2004, the Russian Federation indicated that it intended to appraise and sell YNG to pay off Yukos’ back taxes. A valuation carried out by investment bank ZAO Dresdner Bank (“Dresdner”) at the request of the Russian Federation valued YNG at between USD 15.7 billion and USD 18.3 billion. A valuation carried out by JP Morgan, at the request of Yukos, valued YNG at between USD 16 billion and USD 22 billion. The Russian Ministry of Justice announced that YNG was worth USD 10.4 billion.
99. After Yukos’ attempts to enjoin the sale of YNG by legal recourse in the United States failed, YNG was sold at auction on 19 December 2004 for USD 9.37 billion to sole bidder and newly incorporated entity, Baikal Finance Group (“Baikal”), which was quickly bought by Russian State-owned Rosneft (“Rosneft”).
4. Bankruptcy Proceedings
101. Claimants allege that the Russian Federation first reported in March 2005 that it intended to “push Yukos into bankruptcy in order to redistribute its remaining assets.” On 6 March 2006, a syndicate of foreign bank creditors of Yukos filed a bankruptcy petition before the Moscow Arbitrazh Court, pursuant to a Confidential Sale Agreement with Rosneft (the “Confidential Sale Agreement”). YNG—then owned by Rosneft—filed a separate bankruptcy petition against Yukos, which was subsequently joined to that of the bank syndicate. On 28 March 2006, bankruptcy proceedings were commenced against Yukos, placing it under external supervision, and on 4 August 2006, Yukos was declared bankrupt.
102. Yukos’ remaining assets were nearly all acquired by State-owned Gazprom and Rosneft, with the bankruptcy auctions raising a total of USD 31.5 billion. In November 2007, Yukos was liquidated and struck off the register of legal entities.
III. Parties’ Written Submissions
106. As indicated in the Procedural History above, the Parties submitted two rounds of memorials on the merits. Each side took full advantage of the written phase of these proceedings, filing detailed and extensive written submissions. Claimants’ Memorial runs to 424 pages and was accompanied by 1045 exhibits and 12 witness statements. Respondent’s Counter-Memorial is 787 pages long, and was accompanied by 2868 exhibits and 8 witness statements. Claimants’ Reply runs to 474 pages, and was accompanied by over 600 further exhibits. Finally, Respondent’s Rejoinder runs to 819 pages, and was submitted with over 1700 further exhibits and seven witness statements. The Parties filed Post-Hearing Briefs of over 100 pages. Throughout the arbitration the Parties filed extensive written submissions on various procedural issues.
107. The Tribunal studied these submissions carefully. The Parties’ principal arguments are re-stated in the Tribunal’s analysis of the issues in Parts VIII to XIII below. For the purposes of introduction, the Tribunal reproduces below verbatim the written “skeleton arguments” that the Parties submitted prior to the Hearing on the Merits at the Tribunal’s request.
A. Claimants’ Skeleton Arguments
108. The text of the paragraphs below is produced directly from paragraphs 1 to 82 of Claimants’ Skeleton Argument submitted on 1 October 2012 (“Claimants’ Skeleton”)( footnotes omitted).
1. The dispute between the Parties arises from the various actions taken by the Russian Federation against Yukos Oil Company (“Yukos” or the “Company”) and related persons and entities, which culminated in the expropriation of the Company for the exclusive benefit of the Russian State and State-owned entities, thereby destroying the Claimants’ investments in Yukos. As the Claimants have demonstrated, by (i) failing to treat the Claimants’ investments in Yukos in a fair and equitable manner and on a non-discriminatory basis, and (ii) expropriating the Claimants’ investments therein, the Russian Federation breached its obligations under Articles 10(1) and 13(1) of the Energy Charter Treaty (“ECT”), respectively, for which the Claimants are entitled to full reparation.
2. The Claimants’ positions on the merits are described in detail in their written submissions. This skeleton argument summarizes, for the benefit of the Tribunal, the Claimants’ principal arguments, with reference to key supporting materials. It does not replace or supplement those submissions, nor is it a substitute for oral argument.
II. Factual Background
3. The various actions taken by the Russian Federation against Yukos, and related persons and entities, were aimed at the destruction and expropriation of the Company. The expropriation of Yukos was achieved in 3 overlapping steps: first, the paralysis of the Company (A); second, the manufacturing of a pretext for the taking of the Company’s assets, namely, the fabrication of debt (B); finally, the use of that pretext to take Yukos’ assets piece by piece, including its most valuable asset, Yuganskneftegaz, and transfer them to the State-owned companies Rosneft and Gazprom (C). Each of these steps was accompanied by serious due process violations. The result was the liquidation of Yukos in November 2007, and the complete and total deprivation of the Claimants’ investments therein.
A. Paralysis of Yukos
4. Prior to the Russian Federation’s attack, Yukos was a flourishing oil company. In May 2002, it was the only Russian company to be ranked among the top 10 largest oil and gas companies by market capitalization worldwide. In the fourth quarter of 2002, it became the largest oil company in Russia in terms of daily crude oil production. In October 2003, it completed its merger with Sibneft, another of Russia’s leading oil companies, creating the world’s fourth largest private oil producer, behind BP, ExxonMobil and Shell. Yukos was also engaged in advanced discussions with American oil majors, ExxonMobil and ChevronTexaco, in relation to a merger or other form of business combination. This success was the result of concerted efforts to modernize the Company and implement Western business practices.
5. Starting in the summer of 2003, the Russian Federation took a series of actions aimed at undermining the ability of the Company’s management to run the business. These included: (i) the arrests of Messrs. Lebedev and Khodorkovsky, Yukos’ CEO; (ii) the targeting, intimidation and/or prosecution of other highranking Yukos managers, employees and related persons; (iii) the harassment, prosecution and/or arrest of Yukos’ in-house counsel and lawyers involved in various Yukos-related cases; (iv) the conduct of widespread and aggressive searches and seizures; (v) the seizure of the Claimants’ shares in Yukos; (vi) the threats to revoke Yukos’ oil licenses; (vii) the numerous mutual legal assistance requests and extradition proceedings to affect Yukos and entities/persons associated with the Company abroad; and (viii) the targeting and harassment of Yukos’ auditor, PwC. These actions were taken in violation of the most basic standards of due process and fair treatment.
6. Contrary to the Respondent’s allegations, the actions described above deprived Yukos’ management of the ability to manage and control the Company, thereby facilitating its dismantling and ultimate destruction. One early casualty of the Russian Federation’s attack on Yukos was the YukosSibneft merger.
B. Manufacturing a Pretext — The Fabrication of Debt
1. The fabrication of massive tax claims against Yukos for the years 2000–2004
7. In December 2003, the Russian Federation’s campaign against Yukos entered into a new phase with the fabrication of massive tax claims against the Company.
8. On December 8, 2003, 6 weeks after Mr. Khodorkovsky’s arrest, the Tax Ministry ordered a tax re-audit of Yukos for the year 2000. Only 3 weeks later, it issued a Field Tax Audit Report exceeding 100 pages in length and proposing to collect from Yukos US$ 3.4 billion in alleged tax arrears, interest and fines on the purported basis that the use of regional tax incentives by Yukos trading companies constituted unlawful tax evasion by Yukos itself.
9. The December 2003 re-audit of Yukos was extraordinary in many respects. Less than 8 months earlier, on April 28, 2003, the Tax Ministry had issued a Field Tax Audit Report for the years 2000 and 2001 that raised no questions concerning Yukos’ tax optimization structure. That audit had taken 5 months to conduct, followed by 2 months for drafting the report. On several occasions after this audit, including on September 1, October 1 and November 1, 2003, the Tax Ministry confirmed that Yukos had no outstanding tax debts. Prior tax audits of the Mordovian trading companies likewise raised no major concerns and specifically found their use of regional tax incentives to be lawful.
10. The Respondent alleges that the Russian authorities lacked knowledge of Yukos’ tax optimization structure and only “discovered” its allegedly abusive features in the course of the 3-week audit carried out in December 2003. This allegation is not credible. As the record demonstrates, the Russian authorities had long been aware of Yukos’ practices, and the Respondent has failed to identify a single piece of material information relevant to the alleged tax claims that it lacked prior to the December 2003 repeat audit. In particular:
∎ Yukos was one of Russia’s largest taxpayers and was therefore under constant scrutiny by the Russian tax authorities, who had never found any significant problems prior to the attack on Yukos.
∎ The use of trading companies incorporated in low-tax regions was a common practice among Russia’s vertically integrated oil companies, a fact that was well known to Russian authorities.
∎ Several trading companies’ affiliations with Yukos were reflected in their names, for instance, Yukos-M and Yu-Mordovia.
∎ Prior to using trading companies in Mordovia—the source of the overwhelming majority of the purported tax claims—Yukos discussed the issue with federal and regional officials, who approved Yukos’ plan. Mordovia’s Government then signed investment agreements with these trading companies specifying the amounts of monthly payments. Audits of the Mordovian trading companies confirm the tax authorities’ knowledge of the factual circumstances later alleged to constitute “abuse”.
∎ As the Respondent concedes, Yukos’ financial statements disclosed that companies within Yukos’ consolidation perimeter enjoyed tax benefits under the low-tax region program and the overall amounts of such benefits.
∎ VAT refund submissions documented the entire chain of transactions prior to export, including, in particular, the trading companies’ transactions with Yukos’ production companies, refineries, and the holding company.
∎ Yukos’ monthly submissions to obtain access to export pipelines confirmed that the trading companies’ tax payments were in relation to the trading of oil produced by Yukos’ production subsidiaries and exported under Yukos’ export quotas.
11. The Tax Ministry went on to fabricate similar tax claims against Yukos covering the years 2001–2004. As discussed below, the timing of these claims was instrumental in carrying out the Russian Federation’s expropriation plan. By the time the Tax Ministry issued the last of these demands, Yukos faced a tax bill of more than US$ 24 billion, of which only US$ 5.2 billion constituted allegedly evaded revenuebased taxes, the remainder being comprised of VAT, interest, and fines. These payment demands dwarfed the Company’s consolidated net income for the relevant periods.
2. The purported tax claims were unprecedented, arbitrary and manifestly expropriatory
12. Purported bases for revoking regional profit tax incentives. Yukos’ tax optimization structure fully complied with the legislation in force and current practices. Indeed, the Respondent does not allege that Yukos or the trading companies failed to comply with the federal or regional legislation. Nor does it allege that the trading companies failed to fulfill the terms of the investment agreements signed with the regional governments. Rather, it claims that the trading companies failed to satisfy additional, unwritten requirements beyond the statutory eligibility criteria, including, in particular, an alleged “proportionality of investments” requirement that directly contradicted both the legislation and the investment agreements signed by the regional governments. This justification is not credible.
13. Re-attribution. The primary weapon in the expropriation of Yukos’ assets was the reattribution of the alleged tax liabilities of the trading companies to Yukos. Russian law did not allow such re-attribution, and the Respondent cannot point to a single example of such a re-attribution other than the Yukos case. Had the Russian authorities genuinely believed that the tax benefits had been improperly granted to the trading companies, which was not the case, the proper course under Russian law would have been to pursue those companies for the allegedly underpaid taxes. Alternatively, had they genuinely believed that sales had occurred at below market prices, Russian tax law contained a specific statutory mechanism for such transferpricing situations. However, the Russian authorities ignored these statutory provisions. Re-attribution served 2 purposes: first, shifting liability to Yukos itself paved the way for the expropriation of the Company’s assets; second, re-attribution provided the basis for massive VAT claims.
14. VAT. Simultaneously invoking and contradicting their own re-attribution theory, the tax authorities re-attributed to Yukos all the revenues from the trading companies’ transactions, but refused to re-attribute to Yukos the trading companies’ entitlements to VAT refunds for export transactions. The purported basis for denying refunds was that the paperwork, although proper and timely, had been submitted by the trading companies rather than Yukos. This enabled the tax authorities to claim an additional US$ 13.59 billion—56.20% of the total claims against Yukos—despite the uncontested fact that no VAT was owed on these transactions. Such a step was clearly confiscatory in nature. Further, the fact that, even when Yukos attempted to submit the updated VAT returns in its own name, its submissions were rejected as improper and untimely, confirms that the purported VAT claims had nothing to do with taxation. The Respondent has been unable to offer any defense whatsoever for the fundamentally contradictory way in which its re-attribution theory was deployed.
15. Fines. The tax authorities further inflated their claims through the unjustified imposition of fines, including by imposing fines after the statute of limitations had expired; by doubling fines for “willfulness” despite the fact that Yukos did not—and could not possibly—“know” of the alleged illegality; and by doubling fines again for “repeat offenses” despite the fact that at the time of the alleged “repeat” offenses Yukos had never been previously held liable for a similar offense. Overall, these inflated fines amounted to US$ 8.5 billion, i.e., 35.13% of the total alleged tax liabilities, with the “repeat” offender fines alone amounting to US$ 3.92 billion.
16. The common thread unifying the Russian Federation’s approach was an overarching desire to manufacture and inflate claims against Yukos, with a view to expropriating the Company. As Yukos’ tax lawyer noted after reviewing the December 2003 audit report, “[e]ven if we assume political pressure on the court the extent of the violations committed by the Ministry for Taxes and Levies will make it impossible even for the most biased judge to support the clearly unlawful inspection act”. The Russian courts proved Yukos’ tax lawyer wrong, rubber-stamping the fabricated tax debts.
3. Due process violations in the administrative and judicial proceedings
17. The administrative and judicial proceedings with respect to the alleged tax debts were conducted in blatant disregard of Yukos’ basic due process rights. This involved, inter alia, pressure on the courts to ensure that only Government-friendly judges would preside over Yukos’ challenges—and subsequently rewarding those judges for their efforts; overly speedy proceedings, denying Yukos adequate time and facilities to prepare its defense; and arbitrary denials of Yukos’ motions to join to the proceedings the trading companies and the Mordovian Government. Coupled with the harassment of Yukos’ lawyers noted above, the Russian Federation ensured the hasty conclusion of these proceedings, bringing it one step closer to its objective, namely the taking of Yukos’ assets.
C. Appropriation of Yukos’ Assets — Seizing Yukos’ Assets and transferring them to State-owned companies
1. Yukos was prevented from settling its alleged tax debts or discharging them in full
18. The swift and manifestly disproportionate enforcement of the 2000 tax reassessment. On April 14, 2004, the tax authorities issued their payment demands for the year 2000. Yukos was given until April 16, 2004, i.e., less than 48 hours, to pay in full US$ 3.48 billion in alleged tax arrears, interest and fines.
19. Even this symbolic “voluntary” payment period was illusory. On April 15, 2004, the very next day after the demand for payment was issued, the tax authorities obtained from the Moscow Arbitrazh Court an ex parte injunctive order freezing, as a purported security measure, all of Yukos’ non-cash Russian assets, with the exception of oil and oil products.
20. On June 30, 2004, following Yukos’ unsuccessful appeal, an enforcement writ was issued giving the Tax Ministry 3 years to collect the 2000 tax debt. Rather than engage in discussions with the Company about the discharge of this debt within that period, the bailiffs initiated enforcement proceedings that very same day. The Company was given 5 days to pay voluntarily US$ 3.42 billion in alleged tax arrears, interest and fines for the year 2000 and threatened with a 7% enforcement fee if it failed to do so.
21. At the same time, the bailiffs ordered the seizure of (i) monies deposited in Yukos’ accounts with 16 Russian banks, and (ii) the Company’s Russian non-cash assets (which had previously been the subject of a freeze). On July 1, 2004, a wave of seizures on Yukos’ non-monetary assets began, culminating in the seizure on July 14, 2004 of Yukos’ shares in its 3 main production subsidiaries—Yuganskneftegaz, Samaraneftegaz and Tomskneft.
22. It should be recalled that all these seizures were conducted within the framework of the enforcement proceeding initiated on June 30, 2004 to recover from Yukos US$ 3.42 billion in alleged tax liabilities for 2000. These seizures covered virtually all of Yukos’ assets, whose value was staggeringly higher.
23. Further, within days, on July 20, 2004, the Ministry of Justice announced its intention to appraise and sell Yuganskneftegaz to satisfy the 2000 alleged tax debt.
24. The decision to seize and sell Yuganskneftegaz, which accounted for approximately 12% of Russia’s oil output and whose value on any estimation dramatically exceeded that of the alleged tax debt, can only be reconciled with a desire to destroy the Company and appropriate its core assets. This reality is confirmed by the fact that the decision was taken less than 3 weeks after the writ of execution had been issued and when all of Yukos’ domestic assets remained seized and available to satisfy the 2000 tax debt.
25. The failure to consider Yukos’ proposals of alternative means of paying the alleged debt. Further confirmation of the Russian Federation’s expropriatory intent is the systematic rejection of Yukos’ numerous offers to the bailiffs, courts and other Russian authorities and officials to settle or discharge its tax debts. These included: (i) the offers of Yukos’ Russian non-core assets and its stake in Sibneft, initially 34.5% and subsequently reduced to 20% minus 1 share following the seizure of the 14.5% stake in Sibneft on July 9, 2004, in the context of the Chukotka Arbitrazh Court proceedings; (ii) Yukos’ petition to pay its alleged tax debt for the year 2000 in installments; (iii) Yukos’ amicable proposal to the Ministry of Finance to defer the payment of the federal share of its alleged debt for 6 months or to pay it in tranches; (iv) the proposals by Mr. Jean Chrétien, former Canadian Prime Minister, to Prime Minister Fradkov and President Putin of a global settlement of the disputes, which envisaged the payment to the Russian Federation of approximately US$ 8 billion over the course of 2 years; (v) Yukos’ October 2004 full settlement proposal in the range of US$ 21 billion, which included non-core assets and Sibneft shares, as well as a concession to re-elect a new board of directors that would include people selected by the Government.
26. Each of these offers, as well as numerous others, was either denied or, in most cases, simply ignored. The Respondent’s attempts to provide post-hoc rationalizations for its conduct by qualifying each of Yukos’ offers as unacceptable or inadequate are unfounded. In any event, the Russian authorities’ failure to work with—or even respond to—the multiple offers by Yukos, one of the largest private taxpayers in Russia, or to consider other options for enforcement, confirms that the Russian Federation was not interested in collecting taxes. This is even more so in light of the fact that the Russian authorities had no difficulty entering into settlement discussions and negotiating repayment plans with other Russian oil companies, including, inter alia, Rosneft and Sibneft.
2. The forced sale of Yukos’ shares in Yuganskneftegaz
27. Fabrication of further debt to maintain the pretext. Despite the effect of the seizures described above, by the time of the Yuganskneftegaz auction, Yukos had paid off the 2000 tax reassessment in its entirety, eliminating the raison d’être of the decision to sell Yuganskneftegaz. Recognizing this difficulty as well as the gross disparity between the alleged tax debts and the value of Yuganskneftegaz, the Tax Ministry set about fabricating new claims.
∎ On September 2, 2004, the Tax Ministry served Yukos with a tax reassessment for 2001 in the amount of US$ 4.1 billion. Yukos was given only 2 days to pay voluntarily this amount, with the bailiffs initiating enforcement proceedings on September 9, 2004.
∎ On November 16, 2004, the Tax Ministry served Yukos with a tax reassessment for 2002 in the amount of US$ 6.76 billion, the largest among the 5 tax reassessments for the years 2000–2004. Yukos was given only 1 day to pay voluntarily this amount, with the bailiffs initiating enforcement proceedings on November 18, 2004.
∎ On December 6, 2004, the Tax Ministry served Yukos with a tax reassessment for 2003 in the amount of US$ 6.1 billion, giving the Company 1 day to pay in full. On December 9, 2004, the bailiffs initiated enforcement proceedings.
28. In each case, the bailiffs allowed Yukos at most 5 days for voluntary payment and charged the 7% enforcement fee for failure to comply with these unreasonably short time limits.
29. Thus, in the 4 months from September 2004 up until the auction of Yuganskneftegaz on December 19, 2004, the Russian Federation managed to increase Yukos’ alleged tax liability by approximately US$ 17 billion.
30. Efforts to depress the auction price of Yuganskneftegaz. At the same time, with a view to facilitating the Russian Federation’s acquisition of Yuganskneftegaz at a bargain price, the Russian Tax Ministry also fabricated claims against Yuganskneftegaz. These claims were premised on the application of statutory provisions on transfer pricing, which the tax authorities systematically refused to apply in relation to Yukos itself. Significantly, these claims concerned the same oil trading revenues that had already been re-attributed to Yukos, thus resulting in double taxation.
31. Thus, on October 29, 2004, the tax authorities simultaneously: (i) issued a Repeat Field Tax Audit Report for 2001 requesting Yuganskneftegaz to pay US$ 2.35 billion in alleged tax arrears, interest and fines;93 and (ii) rendered a Decision holding Yuganskneftegaz liable for an alleged tax offense for the year 2002 and requiring payment of US$ 1.03 billion in alleged tax arrears, interest and fines.
32. On December 3, 2004, a Field Tax Audit Report was issued for the year 2003, imposing on Yuganskneftegaz an additional US$ 1.22 billion in alleged tax arrears, interest and fines.
33. In addition to fabricating these US$ 4.6 billion in additional alleged liability, the Russian authorities also began to sow doubts about the security of Yuganskneftegaz’s oil licenses to depress further the Company’s value.
34. That all these payments demands, imposed simultaneously on Yukos and its main production subsidiary, were issued in the run-up to the auction of Yuganskneftegaz is no coincidence. Nor is it a coincidence that, after Yuganskneftegaz was acquired by Rosneft, the tax claims along with the oil license concerns promptly disappeared. Together with the generous payment terms accorded to Rosneft’s new subsidiary but systematically denied to Yukos, these facts confirm both the discriminatory nature of the Russian Federation’s treatment of Yukos, and the true purpose of the purported tax reassessments against Yuganskneftegaz, namely, to facilitate the expropriation of the Company and not to collect taxes.
35. Sham auction of Yuganskneftegaz. As noted above, the Ministry of Justice publicly announced its plan to sell Yuganskneftegaz on July 20, 2004, purportedly in order to satisfy the 2000 alleged tax debt.
36. On August 12, 2004, the bailiffs appointed ZAO Dresdner Bank (“Dresdner”) to carry out the valuation of Yuganskneftegaz in preparation for its sale. On October 6, 2004, Dresdner issued a confidential report valuing Yuganskneftegaz on a standalone basis at US$ 18.6 billion – 21.1 billion.
37. On November 18, 2004, the bailiffs announced that Yuganskneftegaz would be auctioned to satisfy Yukos’ outstanding tax debt, with the Russian Federal Property Fund issuing the formal auction notice the following day. The opening price for 100% of the ordinary shares, or 76.79% of Yuganskneftegaz’s total share capital, was set at US$ 8.65 billion, a price well below its true value. The auction date was set for December 19, 2004, which was the earliest possible date to hold the auction and only 1 month away.
38. In an attempt to prevent the auction of its core asset, Yukos filed an application with the Moscow Arbitrazh Court to declare unlawful the Bailiff’s Resolution of November 18, 2004 and sought interim measures. These efforts failed.
39. Confronted, yet again, with the futility of its efforts to obtain justice before the Russian courts, on December 14, 2004, Yukos filed for Chapter 11 bankruptcy protection before the U.S. Bankruptcy Court for the Southern District of Texas. By that date, only 3 companies, Gazpromneft (the new wholly-owned subsidiary of State-owned Gazprom), First Venture and Intercom, had sought antimonopoly clearance required in anticipation of the auction. On December 16, 2004, the U.S. Court issued a Temporary Restraining Order (“TRO”) enjoining Gazpromneft, its potential lenders, First Venture and Intercom from participating in the auction of Yuganskneftegaz.
40. Nonetheless, on December 19, 2004, which was a Sunday, the Russian authorities proceeded with the auction of Yuganskneftegaz. Gazpromneft and OOO Baikalfinancegroup (“Baikal”) were registered as participants. Baikal was a previously unknown company established at the address of a local bar in the provincial town of Tver on December 6, 2004. With only US$ 359 in capital, it mysteriously managed to pay a cash deposit in the amount of US$ 1.77 billion to register for the auction on December 16, 2004.
41. At the auction, Baikal opened the bidding at US$ 9.35 billion. Gazpromneft’s representative asked for a recess and left the room to make a telephone call. Upon his return, he did not make a single bid and Baikal was pronounced the winner of the auction with its opening bid of US$ 9.35 billion. The whole bidding process lasted approximately 10 minutes.
42. The Respondent’s allegation that the low price for Yuganskneftegaz reflected attempts by Yukos to “sabotage” the auction is unconvincing. Neither “litigation risk” nor the TRO had a material effect on the participants or the outcome of the auction. The reality is that, ignoring the advice of its own appraisal firm, the Russian authorities systematically acted in ways that negatively affected the ability and willingness of potential bidders to participate, as well as the price they would be willing to pay. Market participants also understood that political support was required to participate in auctions for Yukos assets.
43. The use of Baikal as a conduit for the eventual transfer of Yuganskneftegaz to a State-owned company was confirmed when, only a few days later, on December 23, 2004, Rosneft issued a statement announcing its acquisition of Baikal. Meeting journalists that day, President Putin confirmed his knowledge of the acquisition, stating that: “Today, the state, resorting to absolutely legal market mechanisms, is looking after its own interests. I consider this to be quite logical”. Rosneft then enabled Baikal to repay the principal and interest on its debt by granting it, on December 30, 2004, a 1-year interest-free loan.
44. Rosneft benefited significantly from this acquisition, with Rosneft’s estimated value increasing dramatically from US$ 7 billion in December 2004 to US$ 80 billion for its IPO in mid-2006. Based on the valuation disclosed by Rosneft at the time, Yuganskneftegaz was worth US$ 55.78 billion. Further, as noted above, the tax bills raised against Yuganskneftegaz as a Yukos subsidiary were almost entirely set aside by the Russian courts following its acquisition by Rosneft.
45. Looked at from any angle, the Russian Federation’s approach to enforcement of the alleged tax debts, culminating in the transfer of Yuganskneftegaz to Rosneft in a sham auction, confirms that the Russian Federation’s real goal was to expropriate the Company, and not to collect taxes.
46. Even after the sham auction of Yuganskneftegaz, there was no legitimate reason to put Yukos into bankruptcy. There were no substantial creditors apart from the Russian Federation, and the seizure of Yukos’ assets remained in place, so there was no risk of assets being dissipated and no need to resolve conflicting creditors’ claims. Yukos still possessed 2 substantial production subsidiaries— Samaraneftegaz and Tomskneft—as well as refining and marketing assets, and several non-core assets that it could readily have disposed of to pay off its outstanding debts and remain a going concern. However, the Russian authorities’ priority was not recouping taxes; nor did they have any intention of allowing Yukos to survive as a going concern. The initiation of the bankruptcy proceedings provided a convenient way to sideline Yukos’ management and to facilitate the taking of the Company’s remaining assets.
47. Forcing Yukos into bankruptcy. As a result of the Russian Federation’s attack, Yukos defaulted on a US$ 1 billion loan granted by a syndicate of Western banks. On December 13, 2005, Rosneft entered into a confidential agreement with the syndicate under which Rosneft agreed to pay the outstanding amount owed by Yukos in exchange for the assignment to Rosneft of the syndicate’s rights of claim against Yukos. Crucially, the payment of Yukos’ debt by Rosneft was conditioned upon the initiation of Yukos’ bankruptcy by the syndicate. Pursuant to that agreement, on March 6, 2006, the syndicate filed a petition with the Moscow Arbitrazh Court to declare Yukos bankrupt, and on March 14, 2006, Rosneft paid off the loan.
48. On March 28, 2006, the Moscow Arbitrazh Court ordered the commencement of bankruptcy proceedings, placed Yukos under supervision, appointed Mr. Rebgun as interim administrator, and formally substituted Rosneft for the syndicate as creditor.
49. The Respondent argues that “sound commercial interests” explain both the syndicate’s sale of the loan and Rosneft’s reasons for acquiring the same. However, even if that were the case, the Respondent still fails to answer the basic question: why not simply have the syndicate of banks assign their claim to Rosneft, and let Rosneft put Yukos into bankruptcy? The only plausible explanation for this elaborate stratagem was to conceal the Russian Federation’s role in initiating the bankruptcy of Yukos.
50. Ensuring the Russian State’s control over the bankruptcy proceedings. After Rosneft initiated the bankruptcy through the syndicate, the Russian courts ensured that the Russian State, either directly or through Rosneft, would become Yukos’ main creditor.
51. First, the Russian courts bent over backwards to ensure that the tax authorities’ purported claims would be admitted, by: (i) delaying a scheduled hearing in order to give “the State more time to prove new tax claims”, namely, the US$ 3.9 billion in tax payment demands for 2004, which the tax authorities rushed to issue on March 17, 2006, 11 days after the bankruptcy petition was filed; (ii) merging Yukos’ challenge to that payment demand into the bankruptcy proceedings; and (iii) approving all the tax authorities’ purported claims against Yukos for the years 2000–2004 following a wholly perfunctory review of the voluminous case files. Consequently, the Federal Taxation Service was by far Yukos’ largest creditor with 60.50% of all registered bankruptcy claims.
52. Second, in the period leading up to the first meeting of Yukos’ registered creditors on July 20, 2006, some 29 purported claims were admitted on behalf of Yuganskneftegaz, now Rosneft’s subsidiary, totaling approximately US$ 4.42 billion. Subsequently, Rosneft secured admission of an even larger claim of US$ 5.55 billion premised on an allegation that Yuganskneftegaz had suffered “lost profits” in this amount during the period 2000-2003. These purported claims of US$ 9.97 billion enabled Rosneft to more than recoup the US$ 9.35 billion paid for Yuganskneftegaz and thereby acquire the Company for free. With the admission of these and various smaller claims, Rosneft became Yukos’ second largest creditor with 37.17% of all registered bankruptcy claims.
53. Third, while the Russian court hearing Yukos’ bankruptcy showed great flexibility in admitting any and all claims to benefit the Russian State, it was intransigent and formalistic in finding pretexts not to recognize substantial claims of creditors related to Yukos or to Yukos’ shareholders.
54. These combined efforts resulted in the complete monopolization of Yukos’ bankruptcy proceedings by the Russian State, which held 97.67% of all bankruptcy claims, guaranteeing its control over the bankruptcy process.
55. Rejection of Yukos’ Rehabilitation Plan. The Financial Rehabilitation Plan proposed by Yukos’ management (“the Rehabilitation Plan”) set out a series of concrete measures that would enable Yukos to pay off its alleged liabilities fully within 2 years, while remaining a viable going concern. This would be achieved by, among other things, creating a “cash pool” from the sale of ancillary assets, cash flows generated by Yukos’ remaining core assets, and more than US$ 1.5 billion from the sale of Yukos’ 53.7% stake in the Lithuanian oil company Mazeikiu Nafta and Yukos’ 49% stake in Slovakian oil transport major Transpetrol.
56. By contrast, according to Mr. Rebgun, the potential proceeds from the sale of Yukos’ remaining assets, which he significantly undervalued at US$ 17.75 billion (after deducting the 24% profit tax payable on auction proceeds), were not sufficient to cover the US$ 18.3 billion of registered bankruptcy claims. Accordingly, he did not even bother to propose any measure for the Company’s financial restoration but simply recommended liquidation. In the event, despite the fact that the bankruptcy auction prices represented significant markdowns from market value, the bankruptcy estate netted approximately US$ 35.55 billion—twice the amount Mr. Rebgun had put forward to argue in favor of liquidation.
57. Ultimately, the Federal Taxation Service and Rosneft held 93.87% of votes at the meeting of Yukos’ creditors of July 25, 2006. It therefore came as no surprise that they rejected the Rehabilitation Plan and voted to liquidate Yukos’ assets, despite the fact that Yukos’ assets exceeded its alleged liabilities, and the Company was clearly solvent.
58. The bankruptcy auctions. Yukos’ remaining assets were transferred to the Russian State at well below their fair market value through a series of 17 auctions held between March 2006 and August 2007. Rosneft thereby directly or indirectly acquired Yukos’ key remaining assets, including Samaraneftegaz (Lot No. 11) and Tomskneft (Lot No. 10), which were sold at a gross discount of approximately 37% and 33%, respectively, of their fair market value. For its part, Gazprom acquired through Eni/Enel the 20% minus 1 share stake in Sibneft that the Russian Federation had persistently refused to let Yukos sell to pay off alleged tax debts. As with the sham auction of Yuganskneftegaz, there was no genuine competition in the bankruptcy auctions and, in many instances, including those for Samaraneftegaz and Tomskneft, the only participants were Rosneft and a previously unknown entity whose sole role was to satisfy the formal requirement that there be a minimum of 2 bidders.
59. Finally, when, by the end of July 2007, it became clear that despite the low auction prices, the bankruptcy might still generate some surplus, further claims were admitted in the bankruptcy proceedings on behalf of the Russian State, through the Federal Taxation Service and Rosneft. This ensured the completeness of Yukos’ destruction and the transfer of its value and assets to the Russian State. Thus, the Russian Federation received, either directly or through State-owned Rosneft or Gazprom, approximately 99.71% of the bankruptcy proceeds and over 95% of Yukos’ remaining assets, including all of Yukos’ main production assets.
60. On November 12, 2007, the Moscow Arbitrazh Court formally endorsed all the activities of Yukos’ receiver Mr. Rebgun, closed the Company’s receivership and ordered that Yukos be struck off the register of legal entities. The latter happened on November 21, 2007: Yukos was removed from the register of companies, its shares were legally extinguished and so, too, were the Claimants’ investments.
61. Seen together, the Russian Federation’s actions can only be reasonably understood as a deliberate and sustained effort to destroy Yukos, gain control over its assets and eliminate Mr. Khodorkovsky as a potential political opponent. Indeed, viewed any other way, they make no sense and the Respondent has been unable to provide a plausible alternative explanation for its actions.
A. The Russian Federation is in breach of its obligations under Art. 10(1) ECT
62. Under Article 10(1) ECT, the Russian Federation undertook to “encourage and create stable, equitable, favorable and transparent conditions for Investors”, to accord at all times “fair and equitable treatment” to investments made in its territory and not to “in any way impair by unreasonable or discriminatory measures [the] management, maintenance, use, enjoyment or disposal” of such investments, which “shall also enjoy the most constant protection and security”.
63. The Russian Federation violated the above mentioned undertakings in the most egregious manner. In particular, it violated its obligation under Article 10(1) ECT to provide to the Claimants’ investments fair and equitable treatment, by failing to meet basic requirements of procedural propriety and due process, engaging in conduct that was unreasonable, arbitrary, disproportionate and abusive, and failing to ensure a stable and transparent legal and business framework. The Russian Federation’s actions also constituted a denial of justice in breach of the fair and equitable treatment standard of Article 10(1) ECT, as demonstrated by, inter alia, the removal of judges refusing to rule in the Russian State’s favor and the lack of independence and impartiality of judges hearing Yukos’ cases.
64. The Russian Federation also breached Article 10(1) ECT by discriminating against the Claimants’ investments. In particular, it (i) singled out Yukos and treated it in a markedly different manner from other similar oil companies in Russia, (ii) treated Yuganskneftegaz differently before and after its acquisition by State-owned Rosneft, in the hands of which the former Yukos subsidiary’s alleged tax liabilities all but disappeared, and (iii) ensured a differential treatment in the bankruptcy proceedings between creditors related to Yukos, on the one hand, and State-related creditors, on the other.
65. The Respondent’s primary defense is to invoke Article 21 ECT to argue that the Claimants’ claims should be dismissed on the ground that they are “based exclusively on measures ‘with respect to Taxation Measures.’” As discussed below, not only is the Respondent’s interpretation of Article 21 ECT untenable, but the Russian Federation’s conduct had nothing to do with the genuine exercise of its taxation power and is thus not covered by Article 21 ECT.
B. The Russian Federation is in breach of its obligations under Art. 13(1) ECT
68. As of October 2003, Yukos was one of the largest oil companies in the world. It held 92% of Sibneft, 3 core production subsidiaries (Yuganskneftegaz, Samaraneftegaz and Tomskneft), as well as refining and marketing subsidiaries. As of November 21, 2007, it ceased to exist as a company, owing to a series of actions by which the Russian Federation seized its assets and transferred their title to Stateowned Rosneft and Gazprom. The only plausible explanation for the Russian Federation’s actions is the twin desire of dismantling the Company and transferring its assets to the State and the removal of Mr. Khodorkovsky as a potential political opponent. The result of those actions was a complete and total deprivation of the Claimants’ investments therein.
69. The Russian Federation moreover failed to satisfy any of the 4 conditions set out in Article 13(1) ECT. The expropriation of the Claimants’ investments was manifestly: (i) not in the public interest; (ii) discriminatory; (iii) carried out without due process of law; and (iv) not accompanied by the payment of any compensation, let alone prompt, adequate and effective compensation.
70. Unable to deny the total deprivation of the Claimants’ investments and the transfer of title of Yukos’ assets to State-owned Rosneft and Gazprom, the Respondent disaggregates its actions and argues that, when taken in isolation, each of them was, under Russian law, a proper response to Yukos’ alleged conduct. While, in fact, many of those actions amounted to a gross distortion or abuse of Russian law, lawfulness under domestic law is not, in any event, the proper inquiry under Article 13(1) ECT. Under the applicable international law standards, the actions of the Russian Federation, in their totality, constitute an expropriation of the Claimants’ investments in breach of Article 13(1) ECT for which compensation is due.
71. The Russian Federation is under an obligation to make full reparation to the Claimants for the financial consequences of its breaches of Articles 10(1) and 13(1) ECT. This standard of reparation is not challenged by the Respondent.
72. The magnitude of these financial consequences cannot be underestimated. As a result of the Respondent’s actions, the Claimants have lost the entire value of their investments in YukosSibneft, as well as the benefits they should have received from those investments. The Claimants’ valuation expert, Navigant, has quantified the Claimants’ damages for the loss of their investments in YukosSibneft at US$ 114.174 billion.
73. Navigant has also quantified the Claimants’ damages for the loss of their investments in YukosSibneft in 3 alternative scenarios, assuming that: (i) the Respondent does not bear responsibility for the demerger between Yukos and Sibneft, which it does; (ii) further, all tax reassessments were legitimate, which they were not; and (iii) in addition, the sale of Yuganskneftegaz was legitimate, which it was not, and assessing the Claimants’ damages at US$ 107.966 billion, US$ 69.583 billion, and US$ 33.317 billion, respectively.
74. In its Counter-Memorial, the Respondent chose not to challenge Navigant’s valuation of the Claimants’ expropriated investments underlying their principal claims for damages, instead seeking to divert the Tribunal’s attention through a series of flawed objections. When the Respondent did make an effort to address the subject, in its Rejoinder, its arguments were inaccurate and entirely divorced from historical data and contemporaneous valuations of YukosSibneft’s assets.
V. The Respondent’s Objections Should be Rejected
76. The Respondent’s rehashed ‘fork-in-the-road’ objection is both res judicata and groundless. The Respondent contends that the Tribunal lacks jurisdiction over the Claimants’ claims because the Claimants are allegedly pursuing identical claims before the ECtHR. This very same objection was first raised in the jurisdiction and admissibility phase of these arbitrations and unequivocally dismissed by the Tribunal. It is entirely inappropriate for the Respondent to reopen this issue, which is res judicata, on the basis that it was allegedly poorly decided. Further, the Respondent’s allegations that the Interim Awards were based on an “incorrect assumption” or that there are “special circumstances” justifying a new examination of the issue are unfounded. The Respondent’s objection based on Article 26(3)(b)(i) ECT is manifestly without merit and must fail.
77. The Respondent’s attempt to rely on Article 21 ECT is misguided. The issues arising in relation to Article 21 ECT have already been briefed at length in the jurisdiction and admissibility phase of these arbitrations. In deferring the Respondent’s objection based on Article 21 ECT to the merits phase, the Tribunal indicated that it did not wish to rule in a vacuum on the issue of the background to, and motivation behind, the Russian Federation’s actions. In light of the Parties’ pleadings on the merits, it is clear that those actions had nothing whatsoever to do with the genuine exercise of the Russian Federation’s taxation powers, but were rather solely intended to destroy Yukos and gain control of its assets. Article 21 ECT clearly was not meant to shield a Contracting Party from such egregious conduct.
78. Even assuming, however, that the Russian Federation’s actions were a genuine exercise of its taxation powers, which they were not, those actions would nonetheless fall outside the scope of Article 21 ECT, which is limited to the enactment of tax provisions. Further, even if Article 21 ECT were applicable, which it is not, Article 21(5) ECT ensures that Article 13(1) ECT’s substantive protection from expropriation remains fully intact. Finally, under any interpretation of Article 21 ECT, many of the Russian Federation’s actions had nothing to do with taxation and thus fall outside the ambit of Article 21 ECT altogether.
79. Conversely, under the Respondent’s interpretation of Article 21 ECT, save for expropriatory “charges or payments, to the exclusion of enforcement and collection measures, including interest and fines”, investors would stand unprotected from any and all State actions, so long as the respondent State in an arbitration labels its actions as “taxation”—regardless of whether such actions had anything to do with taxation, or were being pursued with the sole aim of expropriating or otherwise harming an investor’s investment. Such an interpretation, which would turn Article 21 ECT into a gaping hole in one of the key multilateral treaties on investment protection, is clearly untenable and should be rejected.
80. The Respondent’s so-called “unclean hands” theory is without merit. The Respondent argues that over a period of approximately 12 years, an array of actors engaged in a variety of allegedly “illegal and bad faith misconduct” that somehow deprive the Claimants’ investments of ECT protection. The Respondent’s position is fundamentally unfounded for several reasons. First, the so-called “unclean hands” theory finds no support in the text of the ECT, customary international law, or investment treaty jurisprudence. Second, even assuming the existence of such a general principle of international law, which the Claimants deny, its scope would be dramatically more limited than the Respondent contends, such that the Respondent has not alleged any facts that could establish its applicability in the present case. As demonstrated by the Claimants, the Respondent’s theory is premised almost exclusively on allegations of collateral illegalities, unrelated either to the making of the Claimants’ investments, or to the Claimants’ claims in these arbitrations, and all but one of which assert misconduct by third parties. Third, and in any event, the Respondent has failed utterly to substantiate any of its allegations. Finally, the principles of estoppel and proportionality prevent the Respondent from invoking such alleged illegalities in an attempt to escape liability for its violations of the ECT.
81. In its Rejoinder, while recounting its laundry list of alleged misconduct, the Respondent devotes attention solely to its allegation concerning the application of the 1998 Russia-Cyprus Double Taxation Agreement (“DTA”). Apart from the fact that: (i) this allegation has no bearing on the merits of these arbitrations; and (ii) these arbitrations are not the appropriate forum to hear and decide an alleged dispute on the application of the DTA, the Claimants have, in any event, demonstrated that this allegation is baseless. The Respondent’s so-called “unclean hands” objection is thus without merit and must fail.
B. Respondent’s Skeleton Arguments
109. The text of the paragraphs below is produced directly from paragraphs 1 to 104 of Respondent’s Skeleton Argument submitted on 1 October 2012 (“Respondent’s Skeleton”) (annexes omitted).
I. The Russian Federation Properly Assessed Taxes And Fines Against Yukos
1. Yukos fraudulently evaded billions of dollars of Russian corporate profit tax from 1999 to 2004, abusing the program authorized by the Russian Government in the early 1990s to foster economic development in designated economically underdeveloped areas. Under this program, corporate profits in the low-tax regions were taxed at substantially reduced rates if the taxpayer complied with the applicable legal rules, including Russia’s anti-tax abuse principles.
2. In order to properly avail itself of the benefits available in a low-tax region, Yukos was required to comply with three legal regimes: (a) the federal statute authorizing the low-tax region program and the region’s own statutes; (b) Yukos’ agreements with the regional authorities; and (c) Russia’s federal anti-tax abuse “bad faith taxpayer” doctrine.
3. The federal bad faith taxpayer doctrine is rooted in Russia’s federal Constitution, and has been applied by Russian tax authorities and courts in thousands of cases since the mid-1990s to condemn abusive transactions that, in substance, constitute unlawful tax evasion. As described by Yukos’ own tax lawyers in commentaries they published before the assessments at issue in these arbitrations, this doctrine condemns as tax evasion transactions in which “the taxpayer’s actions were aimed solely to reduce the amount of its tax payments rather than to achieve an economic result, [as] this would demonstrate that the relevant transaction was inconsistent with law because the motive underlying such transaction was to avoid tax […]. A person’s actions aimed solely at tax evasion may not be regarded as actions made in good faith.”
4. Yukos abused the low-tax region program, and evaded Russian corporate profit tax in violation of the bad faith taxpayer doctrine, by implementing what Yukos referred to internally as its “tax optimization” scheme. Pursuant to this scheme, Yukos established dozens of sham “trading companies” in low-tax regions that had no business purpose, and then shifted its own profits to the sham trading companies. These sham trading shells had no genuine economic substance and served no purpose other than to reduce Yukos’ tax liabilities, an arrangement described by Yukos’ own lawyers as constituting unlawful tax evasion.
5. The European Court of Human Rights (“ECtHR”) unanimously rejected Yukos’ challenge of the tax assessments that are at issue here, on the basis of the same core principles that underlie these arbitrations. The ECtHR found that Yukos’ “tax optimization” scheme consisted of “switching the tax burden from [Yukos] and its production and service units to letter-box companies in domestic tax havens in Russia,” and that these “letter box companies” had “no assets, employees or operations of their own [and] were nominally owned and managed by third parties, although in reality they were set up and run by [Yukos] itself.”
6. According to the ECtHR, the “letter-box companies” (a) purchased oil and oil products from Yukos’ production companies at a fraction of their true market prices, (b) “acting in cascade, then sold the oil either abroad, this time at market price or to [Yukos’] refineries and subsequently re-bought it at a reduced price and re-sold it at the market price,” (c) thereby accumulated most of Yukos’ profits in the low-tax regions, resulting in Yukos paying substantially lower taxes on those profits, and (d) then unilaterally transferred to Yukos, as a gift or in purported repayment of sham loans, the profits that had been improperly taxed at reduced rates in the low-tax regions. The ECtHR unanimously concluded that this scheme “was obviously aimed at evading the general requirements of the Tax Code […].”
7. The Russian tax authorities concluded that Yukos’ “tax optimization” scheme constituted unlawful tax evasion under the bad faith taxpayer doctrine. In particular, the Russian tax authorities found, and the Russian courts later agreed, that Yukos had abused the low-tax region program because its trading shells (a) did not engage in any genuine business activities in the low-tax regions, but were instead controlled by Yukos from Moscow, (b) purchased oil and oil products at below-market prices solely to artificially concentrate Yukos’ profits in low-tax regions, and (c) made only paltry investments in the low-tax regions that were dwarfed by the tax benefits they claimed, thereby failing to fulfill the purpose of the low-tax region program.
8. Yukos did not then — or later — offer any rationale for selling Yukos’ oil through its network of low tax region trading companies other than reducing Yukos’ own tax liabilities, nor have Claimants done so in these arbitrations.
9. Yukos was aware of the bad faith taxpayer doctrine and the risk that its scheme would result in substantial tax assessments if the Russian authorities were ever to learn of it. Among other things, (a) Yukos knew that the authorities had previously denied the low-tax region benefits claimed by several sham trading shells in the Lesnoy region and Sibirskaya based on the same Russian anti-abuse rules that were later applied to Yukos (the Russian authorities only later learned that Yukos exercised de facto control over and management of Sibirskaya and the Lesnoy trading shells, and that Yukos surreptitiously liquidated the latter in order to prevent the collection of their overdue taxes), (b) Yukos managers had expressly warned the company’s senior executives in internal memoranda that public disclosure of the scheme “will result in substantial tax claims against the Company,” (c) as Yukos’ former deputy general counsel later conceded, none of the company’s external lawyers was willing to render an opinion endorsing its scheme (to the contrary, in refusing to render a “clean” opinion, one cited the need to comply with the same bad faith taxpayer doctrine that later led the Russian tax authorities and courts to find that Yukos was guilty of tax evasion), and (d) Yukos had access to the numerous court decisions applying the bad faith taxpayer doctrine to abusive tax schemes — including those finding Lukoil, one of Yukos’ major competitors, liable for substantial additional amounts for having abused the low-tax region program — and to the published legal commentaries discussing the bad faith taxpayer doctrine and its requirements, including those written by its own tax lawyers.
10. Yukos’ knowledge that its “tax optimization” scheme was unlawful is further confirmed by Yukos’ repeated lies to the tax authorities, the Russian courts, the ECtHR, and Yukos’ own external auditors, including Yukos’ knowingly false assertion that it was not affiliated with (and did not control) the sham trading shells, a point now conceded even by Claimants. Yukos’ repeated false denial of its affiliation with the sham trading shells can only be explained by the company’s awareness of the illegality of its scheme.
11. Yukos’ tax evasion was not victimless. The billions of dollars in tax benefits it wrongfully claimed caused commensurate damage to the regional budget of Moscow, where Yukos, as the real party in interest, should have paid profit tax at the full rate.
12. Claimants’ claims that the Russian authorities’ measures were expropriatory and unfair are meritless. First, Claimants’ contention that the legal principles applied by the Russian courts were “novel” or “vague” is, as the ECtHR unanimously found, refuted by the numerous Russian court decisions that applied these principles and similar ones to hold taxpayers liable for tax evasion since the mid-1990s, including their abuse of the low-tax region program. Moreover, the published legal commentaries, including the guidance published by Yukos’ own tax counsel, describe those principles in the same terms as they were applied to Yukos. The relevant Russian judicial precedents include those compiled for the Tribunal by Russian tax law expert Oleg Konnov, whose description of the history and content of the bad faith taxpayer doctrine Claimants have not sought to rebut with any expert testimony.
13. Mr. Konnov shows that the fines assessed against Yukos were also proper because, among other reasons, no taxpayer — in Russia or elsewhere — could legitimately claim to be surprised that it may not invoke a limitations period that has expired only because of its own obstruction of tax audits.
14. Claimants also ignore the extensive international precedents demonstrating that the principles applied by the Russian authorities and the actions they took against Yukos’ tax evasion were consistent with those of ECT signatories and other nations worldwide.
15. Second, Claimants’ attack on Yukos’ VAT assessments — holding Yukos liable for the VAT due on revenues nominally realized by the sham trading shells but properly attributable to Yukos itself — is also meritless. As the ECtHR unanimously held, the Russian authorities acted properly in disregarding Yukos’ sham trading shells for profit tax purposes and denying Yukos the benefit of the shells’ 0% VAT filings. Claimants also ignore Yukos’ still unexplained failure to submit proper 0% VAT returns in its own name after it received its December 29, 2003 tax audit report. It is not disputed that Yukos could have filed proper VAT returns — nothing prevented it from doing so — or that had it done so, it would have avoided more than half of its challenged tax liabilities.
16. Third, Claimants’ assertion that the tax assessments were discriminatory is contradicted by the facts. The ECtHR unanimously rejected this charge. Several large Russian companies, including a number of Yukos’ principal competitors, were also held liable for tax evasion and assessed substantial amounts of tax on grounds similar to those relied on by the Russian authorities and courts in dealing with Yukos. But unlike Yukos, these other companies promptly paid their taxes and, in the case of Lukoil, publicly abandoned its own “tax optimization” scheme.
17. There were also numerous material differences between Yukos’ conduct and that of many other Russian oil companies: (a) no other Russian oil company committed abuses that were as egregious as those of Yukos, (b) none did so for as long as Yukos, (c) none attempted to conceal its abuses as did Yukos (to the extent of lying about them to the tax authorities, the courts, and even its own auditors), (d) none obstructed their tax audits as did Yukos, including by sending documents and employees to distant locations before they could be reviewed and interviewed, (e) none made investments in the low-tax regions that were so miniscule in comparison to the tax benefits they claimed, (f) none diverted billions of dollars offshore to prevent the collection of overdue taxes, and (g) none refused to pay their assessed taxes when ultimately required to do so.
18. Fourth, Claimants’ contention that the Russian authorities knew and approved of Yukos’ scheme is completely unsupported by any credible evidence, as the ECtHR again unanimously found. Claimants’ contention cannot be reconciled with Yukos’ unflagging efforts to conceal its scheme from the Russian authorities. Yukos would obviously have had no reason to hide its scheme if it believed the authorities were already aware of it, let alone had approved it, or if it thought its scheme was lawful and its disclosure would not lead to substantial tax claims. Yukos’ efforts to conceal its scheme are reflected in (a) the company’s convoluted offshore structures, serving no purpose other than to mask Yukos’ affiliation with its sham trading shells, (b) Yukos’ seriatim restructuring of its Lesnoy trading shells after their abuse of that region’s low tax program was discovered, (c) Yukos’ management’s internal warnings that disclosure of its scheme “will result in substantial tax claims against the Company,” (d) Yukos’ failure to disclose its scheme in its purportedly “transparent” financial statements, and (e) Yukos’ repeated lies about its scheme to the tax authorities, the courts, the ECtHR, and its own auditors.
19. In any event, as a matter of Russian law and as Claimants concede, even if the tax authorities had known of Yukos’ scheme — and there is no evidence they did — they would not have been estopped from later challenging it.
20. Fifth, Claimants’ contention that the assessments against Yukos were fabricated as part of a politically motivated campaign to dismantle Yukos — an allegation on which Claimants have unambiguously staked their claims, contending that the assessments “cannot be explained in any other way” — is, as the ECtHR again unanimously found, unsupported by any credible evidence. If the assessments were, as Claimants insist, the product of a massive political conspiracy spanning several years and involving numerous government agencies, engineered and implemented by hundreds if not thousands of officials, including no fewer than 60 judges at four different levels of courts, along with a large cast of third parties around the globe, then surely after nearly a decade of challenges — by Yukos, its minority shareholders, and now Claimants — at least one internal government memorandum, instruction or minute of a meeting evidencing or referring to the grand conspiracy alleged by Claimants would have surfaced, or one disgruntled former Government official would have reported having participated in a meeting or telephone call where the alleged conspiracy was discussed. Instead, Claimants rely solely on double and triple hearsay renditions of purported conversations by vocal opponents of the Russian Government, inaccurate and uninformed reports by political commentators, and sheer innuendo, none of which, even as proffered, competently supports Claimants’ conspiracy allegations.
21. Claimants’ failure to prove the supposed vast conspiracy confirms that it is merely one more sham perpetrated by the Oligarchs who controlled Yukos and were ultimately responsible for its demise.
22. Yukos’ dealings with PricewaterhouseCoopers (“PwC”) provide yet another example of Yukos’ blaming the Russian Federation for the consequences of its own misconduct.
23. PwC withdrew all of its Yukos audit opinions in June 2007 (after refusing to continue to audit the company’s U.S. GAAP financial statements in 2003, itself an extraordinary event for a supposedly “transparent” company), following confirmation that Yukos’ senior managers had repeatedly lied to PwC about, among other things, Yukos’ de facto control over the management of its sham trading shells — an essential element in the company’s “tax optimization” scheme.
24. Claimants’ attempt to blame the Russian Federation for PwC’s withdrawal of the firm’s audit opinions finds no support in the record. To the contrary, both PwC’s senior Russian representative at the time (in a contemporaneous private conversation with U.S. Embassy officials in Moscow) and PwC’s senior Yukos auditor (in sworn U.S. deposition testimony) confirm that PwC, in withdrawing its audit opinions, acted in accordance with applicable auditing standards, a conclusion supported by Mr. John Ellison, a former KPMG LLP partner, in his unchallenged expert report. The U.S. deposition testimony of Mr. Douglas Miller, the PwC partner in charge of auditing Yukos, is especially relevant, because (a) it was sought by counsel for Messrs. Khodorkovsky and Lebedev on the grounds that it would provide the best opportunity to obtain a truthful account of the reasons for PwC’s actions, and (b) Mr. Miller repeatedly rejected Claimants’ “harassment” theory.
II. The Russian Federation Is Not Responsible For And Did Not Cause The Unwinding Of The Sibneft Merger
26. The Russian Federation is not responsible for the unwinding of Yukos’ proposed merger with Sibneft because Claimants do not allege — let alone establish — that Sibneft was then exercising governmental authority or acting under the instructions of Russian State organs. Nor was the Russian Federation the cause of the unwinding of the merger. To the contrary, the Russian Federation repeatedly supported the proposed merger, and Claimants themselves acknowledge that the Russian Federation provided all of the approvals necessary for the merger, including approvals granted long after the Russian Federation’s supposed attack on Yukos.
27. The merger in fact collapsed because Yukos refused to accommodate Sibneft’s request that Mr. Khodorkovsky, following his resignation from Yukos’ management, be replaced by a Sibneft nominee as head of the to-be merged company. Sibneft’s proposal would have left Yukos representatives in all of the surviving company’s other senior management positions.
28. Documents that Claimants were ordered to produce in these proceedings (over their objection) show that Claimants and Sibneft’s principal shareholders agreed to unwind the merger without the payment of additional compensation by either side, an agreement fatal to Claimants’ request for damages relating to the proposed merger. The same documents also reveal that Yukos’ management proposed its own plan to unwind the merger without the payment of additional compensation, and that this plan contemplated the initiation of a “sham” lawsuit challenging the previously-completed exchange of Yukos and Sibneft shares. The contemplated lawsuit bears a striking resemblance to the actual lawsuit (challenged by Yukos in these arbitrations) that was brought by two of Yukos’ shareholders and ultimately led to the legal unwinding of the merger without the payment of additional compensation.
29. Claimants’ assertion that the US$ 2 billion giga-dividend was required by the Sibneft merger is patently untrue. The record shows that the giga-dividend was approved on November 28, 2003 (and not on September 25, 2003, as Claimants falsely asserted in their Reply), one day after Yukos was informed that the Sibneft merger would not proceed. At the Extraordinary General Meeting of Yukos’ shareholders held on November 28, Claimants voted against all the other shareholder proposals linked to the completion of the Sibneft merger, but supported payment of the giga-dividend “for Yukos” (that is, for Claimants to the extent of 70% of the dividend).
III Yukos Bears Sole Responsibility For The Consequences Of The Assessments Properly Made Against It, Because It Could Have Avoided Those Consequences — And Reduced Its Liability By Well More Than Half — By Paying The Amounts Due During The First Quarter Of 2004, While Continuing To Challenge The Assessments In Full
30. During the first quarter of 2004, Yukos could have avoided well more than half of its ultimate tax exposure by paying its corporate profit taxes and the interest then due and by filing proper amended VAT returns in its own name. Had Yukos taken these few simple steps — abiding by its own tax counsel’s published advice as to how a taxpayer should mitigate its tax liabilities — it would also have avoided all of the subsequent enforcement measures about which Claimants complain, and still preserved its right to seek a refund of all the taxes it paid.
31. If Yukos had mitigated its liabilities in this way, its total exposure under the Russian court rulings that Claimants challenge in these arbitrations would have been capped at less than US$ 9.8 billion, rather than the US$ 25.8 billion that was ultimately assessed.
32. Yukos had more than ample resources in the first quarter of 2004 to cap its tax exposure at less than US$ 9.8 billion and to satisfy that liability, even after paying its unprecedented US$ 2 billion giga-dividend, but it elected not to do so.
33. Instead, Yukos pursued an irrational and ultimately self-destructive course of action, for which only the managers of Yukos, installed and controlled by Claimants, are to blame. This course of action included (a) Yukos’ continuing denial of any liability for its assessed taxes, (b) Yukos’ now acknowledged false denial that it controlled the sham trading shells, (c) Yukos’ repeated obstruction of the actions taken by the Russian authorities to enforce and collect the company’s overdue taxes, (d) Yukos’ dissipation of its own assets and those of the companies it controlled, to frustrate the collection of the taxes it owed, and (e) Yukos’ attempt to put pressure on the Russian Government by mounting an aggressive international lobbying and disinformation campaign that sought to politicize what, for the Russian authorities, was always a matter of tax evasion and collection.
34. All of the subsequent enforcement proceedings and other measures about which Claimants now complain were thus the result of Yukos’ own adamant refusal to acknowledge or mitigate its tax liabilities, and its repeated attempts to dissipate and conceal its assets and to frustrate the enforcement and collection of its overdue taxes. Had Yukos not persisted in this self-destructive course of action, there would have been no April injunction (discussed below), and YNG would not have been sold.
35. Permitting Claimants to benefit from Yukos’ self-inflicted wounds would contravene basic legal principles, and provide Claimants with a windfall — beyond the billions of dollars they have already extracted from Yukos, including by way of dividends, share sales, and stichting assets — to which they are not entitled.
IV. The Russian Federation Acted Properly In Enforcing The Tax Assessments Against Yukos, Including By Auctioning YNG
36. The tax assessments were enforced against Yukos in compliance with Russian law and after ample notice to Yukos. As the ECtHR unanimously concluded, there is “no reason to doubt that throughout the proceedings the actions of various authorities had a lawful basis and that the legal provisions in question were sufficiently precise and clear.” The enforcement actions were also measured and appropriate in the circumstances and entirely consistent with international practice.
37. Claimants’ and Yukos’ contention that Yukos was “surprised” by the timing of the assessment for 2000 and the need to make prompt payment is false and indicative of Yukos’ lack of good faith. Promptly upon receipt of the December 29, 2003 audit report, Yukos’ internal and external counsel advised Yukos that, under established Russian law and practice, it should expect to receive a final tax assessment within about a month, and that this assessment would require Yukos to make full payment promptly, most likely within one day. In the event, the tax assessment for 2000 was issued on April 14, 2004, more than two months later than Yukos’ advisors had expected, and required payment in two days, not one.
38. Although Yukos had ample notice of when and how much it would be required to pay, it made no effort to marshal the necessary assets, instead claiming that it was not able to pay, even though Claimants now acknowledge that Yukos had sufficient resources to pay all of its 2000 taxes.
39. By the time of Yukos’ April 2004 assessment, the tax authorities had learned that Yukos controlled the Lesnoy shell companies and had sought to prevent the payment of their overdue taxes by dissolving them. The tax authorities thus understandably applied to the Moscow Arbitrazh Court in April 2004 for enforcement of Yukos’ 2000 tax liability and for an injunction prohibiting Yukos from selling or encumbering the company’s shareholdings in its Russian subsidiaries.
40. As the ECtHR held, the authorities’ actions were neither arbitrary nor unfair:
“[T]he Ministry’s action was lodged under the rule which made it unnecessary to wait until the end of the grace period if there was evidence that the dispute was insoluble and, regard being had to the circumstances of the case, [the Court] finds no indication of arbitrariness or unfairness […] in this connection.” [emphases added]
41. The April injunction did not affect Yukos’ use of its substantial on- and off-shore cash resources, and did not affect Yukos’ offshore assets at all. Yukos nonetheless falsely claimed that the injunction prevented Yukos from paying its taxes, again evidencing its lack of good faith and credibility.
42. No further enforcement efforts were taken for more than two months. During this period, Yukos continued to generate close to US$ 2 billion each month in gross receipts that Yukos partly transferred off-shore and partly used to voluntarily pay its loan to GML’s Moravel shell subsidiary — but not to pay its tax liabilities.
43. Yukos also began a pattern of diminishing the value of its assets, often to the benefit of Claimants and the Oligarchs whose interests they represented. For example, Yukos forced its production subsidiaries to guarantee Yukos’ already outstanding US$ 1.6 billion loan from Moravel, corroborating the concerns that had led the authorities to obtain the April injunction.
44. Following Yukos’ failure to make (or even to promise to make) any tax payments, as well as its dissipation of substantial assets, Russia’s bailiffs finally attached a number of Yukos’ on-shore bank accounts at the end of June 2004 — ten weeks after the April tax assessment and 26 weeks after Yukos’ legal advisors advised that it needed to be prepared to pay promptly. It was only then that Yukos began to pay some, but not all, of its taxes.
45. The authorities also sought to seize Yukos’ shares in its production subsidiaries to prevent Yukos from encumbering them. True to form, Yukos attempted to frustrate the bailiffs’ efforts by terminating the share registry company contract for its production subsidiaries and concealing their registries, directing that they be sent from central Moscow to remote locations around the country.
46. Yukos also took steps to reduce the value of its largest production subsidiary, YNG. First, Yukos caused YNG to stop paying its mineral extraction taxes, imperiling its production licenses. Second, Yukos and its trading shells stopped paying YNG for its crude oil, leaving YNG with more than US$ 4 billion in unpaid invoices. And third, Yukos continued to divert funds to GML, its majority shareholder, arranging for the payment of more than US$ 700 million to Moravel, even after the cash freeze orders were in place.
47. Yukos also made a series of bad faith offers to “settle” a portion of its tax liabilities, repeatedly offering Sibneft shares as a partial payment or as security for proposed future payment, even though Russian law did not allow payment in kind, Yukos’ title to the proffered shares had been challenged by a third-party, and an injunction had been issued (at the request of the third-party) prohibiting their sale or encumbrance.
48. During this entire period, nothing prevented Yukos from selling its assets subject to the bailiffs’ approval and using the proceeds to pay its tax obligations.
49. Thus, the authorities found themselves confronted by a company that was fiercely resisting the payment of its overdue taxes, that had previously obstructed its tax audit, lied to the tax authorities and courts, and attempted to make itself and its subsidiaries judgment proof, and that was now burdening the tax authorities’ principal security — YNG — with new liabilities. In these circumstances, the bailiffs understandably decided to sell a majority of YNG’s shares — the only realistic way to timely collect Yukos’ unpaid taxes. Despite criticizing the bailiffs for not adequately documenting their decision-making process, the ECtHR concluded that the bailiffs’ actions were not unreasonable. It is commonplace in other countries too for tax collection authorities to sell first the assets that best ensure payment.
50. The sale of the YNG shares was carried out in accordance with Russian law and consistent with international practice. The authorities could have sold the shares to a designated purchaser in a directly negotiated transaction, but instead granted Yukos’ request that the shares be auctioned. A formal and careful appraisal was conducted by DKW, and the starting price for the auction was set at a level consistent with DKW’s appraisal, taking account of the fact that only 76.79% of the company’s shares were sold and that YNG had its own outstanding tax liabilities. All bidders, foreign or domestic, were welcome to participate.
51. Claimants and Yukos did all they could to prevent the auction from succeeding, threatening a “lifetime of litigation” against anyone who participated in or facilitated the sale. Yukos also initiated sham bankruptcy proceedings in Houston, obtaining a temporary restraining order (“TRO”) that prevented all the previously announced bidders and all of their banks from participating in the auction. If the price achieved was lower than it might otherwise have been, the fault lies solely with Claimants and Yukos.
52. The YNG auction achieved a price of approximately US$ 9.4 billion, US$ 500 million more than the starting price. This result was consistent with the shares’ appraised value and contemporaneous fair market value estimates.
53. The evidence does not support Claimants’ contention that the winning bidder, Baikal Finance, conspired with Rosneft. Rather, Baikal Finance found itself unable to finance its winning bid because of the Houston court’s TRO, and thus at risk of losing its US$ 1.7 billion deposit unless a substitute purchaser, not dependent on immediate bank financing, could be found on very short notice. Rosneft simply seized a commercial opportunity that presented itself as a result of Claimants’ misconduct.
54. The net proceeds of the YNG sale were not sufficient to meet all of Yukos’ tax obligations. The Russian authorities nonetheless gave Yukos ample time to pay the remaining balance, but it declined to do so, making clear that its priority was to place assets behind the shield of the Dutch stichtings.
V. The Russian Federation Acted Properly In Connection With Yukos’ Bankruptcy, Which Was Precipitated By Yukos’ Failure To Pay Its Debts To The SocGen Syndicate, And Is Not Attributable To The Russian Federation
55. Claimants’ bankruptcy-related claims fail because critical conduct essential to these claims was taken by actors for which the Russian Federation is not responsible, including the SocGen syndicate, YNG, Rosneft, the Federal Tax Service acting as creditor, the meeting and committee of Yukos’ creditors, Yukos’ interim manager and bankruptcy receiver, the participants in Yukos’ bankruptcy auctions, and the purchasers of the auctioned assets sold. In taking the actions complained of by Claimants, none of these actors was exercising sovereign authority or acting pursuant to the direction or control of sovereign authority. Claimants have provided no evidence on which the Tribunal could make a contrary finding.
56. Yukos’ dilatory and obstructionist treatment of its commercial creditors paralleled closely its treatment of the tax authorities. In both instances, Yukos (a) falsely claimed it was unable to meet its obligations, (b) forced its creditors to pursue their claims in multiple court proceedings where Yukos presented unsubstantiated defenses, (c) offered to negotiate with its creditors only when they were close to collecting their claims, (d) made unrealistic settlement proposals that were subsequently withdrawn, and (e) together with its controlling shareholders, strenuously resisted all collection efforts, prompting more aggressive action on the part of its creditors.
57. Both sides agree that Yukos’ bankruptcy was initiated by the SocGen syndicate, based upon Yukos’ failure to pay an outstanding English court judgment after it was recognized in Russia.
58. The SocGen syndicate simultaneously also sought payment of the same debt from Rosneft pursuant to the 2004 loan guarantee that Yukos had foisted on YNG, which Rosneft then owned. Although Rosneft disputed the validity of the guarantee, Rosneft required forbearance from the same banks on covenant breaches arising from the YNG acquisition, and Rosneft needed the banks’ cooperation for its planned IPO. The convergence of the syndicate’s and Rosneft’s commercial interests resulted in their agreeing that Rosneft would pay the syndicate in full, but only after the syndicate had pursued all legal avenues to obtain payment from Yukos, the primary obligor. If Rosneft instead paid, the syndicate’s rights under the loan agreement were to be assigned to Rosneft.
59. Claimants acknowledge that this agreement was commercially-motivated and on commercial terms, but contend that its confidentiality clause evidences a conspiracy on the part of the SocGen syndicate to act secretly on behalf of Rosneft, which Claimants improperly equate with Respondent. The confidentiality clause, however, was itself a standard commercial term necessary to preserve the possibility that Yukos would pay the SocGen syndicate before Rosneft became unconditionally obligated to do so, and remained in effect only for so long as Yukos’ payment would have discharged Rosneft’s own obligation to pay the syndicate.
60. Yukos satisfied the criteria for bankruptcy under Russian law due to its persistent failure to pay its commercial creditors, and was insolvent long before the proceedings were commenced. This is also undisputed.
61. The proceedings were conducted in compliance with Russian law and international practice. The courts properly allowed the Federal Tax Service’s, Rosneft’s and YNG’s claims, and substantial amounts of YNG’s claims were never disputed by Yukos. Belying Claimants’ discrimination charge, the courts also allowed some Yukos related-party claims, but properly rejected other abusive claims, such as the Moravel loan, a barely disguised attempt to turn equity into debt.
62. Yukos’ management, actively supported by Claimants, had the opportunity to present a rehabilitation plan to the meeting of creditors. The rough outline management submitted was, however, legally defective and did not provide any basis for creditors to prefer rehabilitation to liquidation. It was not properly presented to or approved by Yukos’ shareholders, did not meet the legal requirement that the company’s tax claims be satisfied within six months, and did not ensure full, let alone timely, payment of Yukos’ creditors’ claims.
63. Once Yukos’ liquidation was properly approved, the company’s assets were sold at auction in accordance with Russian law and international practice. Yukos’ receiver obtained appraisals for the fair value of the assets, and used those appraisals to set minimum bids in the auctions, all of which were exceeded, some by very large margins. The auctions were open to domestic and foreign bidders, adequately noticed and advertised, and competitive. To the extent that any bidders may have been discouraged from participating, this was again the result of Claimants and Yukos having threatened potential bidders with legal action. While the aggregate results exceeded Yukos’ own (and other) contemporaneous fair market value estimates, more than US$ 9 billion in creditor claims nonetheless remained unsatisfied.
VI. Claimants Have Failed To Establish Sine Qua Non Elements Of Their Article 13 And 10(1) ECT Claims
A. Article 21 ECT
64. First, as an initial matter, Claimants’ claims must be based on measures outside the taxation carve-out of Article 21(1) ECT or, alternatively, within Article 21(1) ECT, but subject to one of the claw-backs of Article 21(2) to (5) ECT.
65. Taxation carve-outs such as this one fulfill plainly legitimate functions. They (a) preserve the Contracting Parties’ sovereign power in the field of taxation, which is of critical importance to the very existence of a State, (b) delineate the extensive network of investment treaties from the even broader network of taxation treaties, (c) pay due regard to the complexity of tax matters, and, in many cases, preserve the coordination role of the competent tax authorities under double taxation treaties.
66. To fulfill these functions, taxation carve-outs are typically broad, covering all aspects of tax regimes, including tax enforcement measures.
67. Article 21(1) ECT, under its plain meaning, covers the whole range of measures taken by all branches of government in the field of taxation. Tax legislation and enforcement measures are inextricably linked, and it is not possible to meaningfully dissociate them in the context of Article 21(1) ECT.
68. The core allegations on which Claimants base their claims are squarely within the scope of Article 21(1) ECT: tax audits, tax assessments, interest and fines provoked by Yukos’ failure to pay its assessed taxes, measures to ensure the effective collection of its taxes, and the sale of Yukos’ assets to satisfy its tax liabilities.
69. Claimants seek to avoid Article 21 ECT on two grounds, that Article 21(7)(a) ECT limits the scope of the taxation carve-out to tax legislation and tax treaties and does not apply to mala fide taxation measures. These arguments are baseless.
70. Article 21(7)(a) ECT contains an illustrative list of taxation measures that does not replace the term “measures” with the term “provisions,” but underscores that the term “Taxation Measures” covers all aspects of the tax regime, including international and domestic measures.
71. Claimants’ position that Article 21(1) ECT is inapplicable to the taxation measures they complain about fails as a matter of fact and law. The record shows that the taxation measures at issue were a justified response to Yukos’ massive tax fraud and its willful strategy to obstruct efforts to collect the taxes due. As a matter of law, Claimants mix two issues, the concept and definition of “Taxation Measures,” on the one hand, and their legality, on the other. Legality is determined under Part III of the ECT, but only to the extent of the claw-backs pursuant to Article 21(2) to (5) ECT.
72. Article 21 ECT contains no claw-back for Article 10(1) ECT, and the Tribunal therefore lacks jurisdiction over core allegations of Claimants’ Article 10(1) ECT claims.
73. Article 21(5) ECT contains a claw-back for Article 13 ECT claims, but is applicable only to “taxes,” and is combined with a mandatory referral to the competent tax authorities, a procedure invoked by Respondent in these proceedings. The expropriation claw-back, in its ordinary meaning, supported by the travaux préparatoires, applies to charges imposed by the State for public purposes, excluding tax enforcement and collection measures. When compared to the varying practices with respect to clawbacks in taxation carve-outs, the deliberate choice of the ECT negotiating States to reinstate expropriatory “taxes” represents a middle ground, which must be respected.
B. Article 13(1) ECT
74. In order to establish their claim for a breach of Article 13(1) ECT, Claimants must show that, in addition to being outside the scope of the taxation carveout of Article 21(1) ECT — or within Article 21(1) ECT, but reinstated by Article 21(5) ECT — the measures complained of must be “measures having effect equivalent to nationalization or expropriation.”
75. First, Claimants have failed to establish that conduct not carved-out by Article 21 ECT that is (a) attributable to Respondent, and (b) an exercise of its sovereign power caused a total or near total deprivation of Claimants’ investment. Critically, the core allegations of Claimants’ claims are outside the scope of Article 13(1) ECT by virtue of Article 21 ECT. Moreover, Yukos itself engaged in conduct — by refusing to pay the assessments against it when due, while preserving its right to challenge them — that directly resulted in the company’s demise and the ensuing loss of Claimants’ investments. Finally, conduct that was essential to Yukos’ liquidation, including in particular the filing of the bankruptcy petition by the SocGen syndicate, and the creditors’ meeting decision to liquidate Yukos, is not expropriatory because it is not attributable to Respondent under the rules of State responsibility, or does not involve an exercise of sovereign power.
76. Second, Claimants have failed to establish that the measures complained of frustrated distinct, reasonable, investment-backed expectations, an important element in assessing whether regulatory measures amount to “measures having effect equivalent to nationalization or expropriation.” Claimants had no right or legitimate expectation to operate Yukos in violation of Russian law, and no right or legitimate expectation that Respondent would exempt Yukos from the tax enforcement and collection measures about which Claimants complain if Yukos failed to pay its taxes and obstructed the collection of taxes due.
77. In particular, Claimants have failed to establish that Respondent at any time made a representation, based upon complete disclosure, that it would allow Yukos to operate its fraudulent tax evasion scheme or refrain from enforcing and collecting the taxes Yukos owed. Yukos’ tax evasion scheme was illegal under Russian law when Claimants made their investments, and the tax enforcement and collection measures taken against Yukos were all provided for by Russian law at that time. The bad faith taxpayer anti-abuse doctrine that Respondent’s tax authorities and courts applied to counter Yukos’ tax evasion dates back to the mid 1990s, well before Claimants acquired their Yukos shares.
78. Third, putting aside the other elements required to establish “measures having effect equivalent to nationalization or expropriation,” the executive and judicial measures at issue, in any event, constitute a legitimate exercise of Respondent’s regulatory power.
79. The measures alleged to be expropriatory are well within the range of what is generally accepted as a legitimate exercise of States’ police powers. First, Respondent has established that the measures complained of accord in all material respects with international and comparative standards.
80. Second, the measures challenged by Claimants conform with Russian law, which in turn accords with international standards, and have been reviewed and upheld by multiple levels of Respondent’s judiciary, including the Russian Supreme Court.
81. Third, the European Court of Human Rights has found that the very same measures Claimants allege to be expropriatory were a legitimate exercise of Respondent’s regulatory power.
82. Fourth, the measures complained of must be assessed in their proper context — Yukos’ massive tax evasion, compounded by its illegal and deliberate strategy to frustrate any effort by the authorities to collect the company’s overdue taxes.
83. Contrary to Claimants’ perception, respect for the rule of law is not a oneway-street. Foreign investors have a duty to abide by the law, pay taxes, provide required disclosures of their activities in the host State, and cooperate with the authorities.
84. Measures taken to combat illegal conduct may legitimately result in the loss of an investment. Yukos’ tax evasion scheme violated Russian law, and the assessment of the evaded taxes was a legitimate measure to combat Yukos’ fraud. The resulting tax enforcement and collection measures were completely justified in light of Yukos’ failure to pay the assessed taxes and its willful obstruction of Respondent’s collection efforts. Indeed, none of the subsequent enforcement measures, including the auction of YNG, would have occurred, and Yukos would not have been liquidated, had Yukos acted as a responsible taxpayer should have done.
C. Article 10(1) ECT
85. Claimants’ Article 10(1) ECT claims fail for many of the same reasons as their expropriation claim. At the threshold, the core allegations on which Claimants base their Article 10(1) ECT claims are within the taxation carve-out of Article 21(1) ECT. The Tribunal therefore lacks jurisdiction over these claims and Article 10(1) ECT is inapplicable.
86. Again, at the threshold, critical conduct alleged to be unlawful under Article 10(1) ECT is not attributable to Respondent or not an exercise of sovereign authority. The harm attributed to Respondent’s alleged breaches of Article 10(1) ECT, the loss of Claimants’ Yukos shares, was caused by Yukos’ own misconduct and conduct of third parties not attributable to Respondent. Claimants have failed to show that any of the irregularities they allege in the administrative and judicial proceedings at issue affected the outcome of the case, the liquidation of Yukos, and the ensuing loss of Claimants’ shares.
87. In any event, Claimants have failed to establish that the challenged measures interfered with their legitimate expectations at the time they made their investment or were not taken in the proper exercise of the authorities’ statutory duties. The contested measures (a) accord with international and comparative standards, (b) were reviewed and upheld by the Russian courts, and (c) have been assessed by the ECtHR to be a legitimate exercise of Respondent’s taxation power.
88. Finally, but no less important, the host State’s conduct under Article 10(1) ECT cannot be assessed in isolation from that of the investor or its investment. Yukos’ massive tax fraud and illegal obstruction of the efforts to collect the taxes it owed provoked the measures complained of, which were justified responses to combat Yukos’ illegal conduct and enforce overdue taxes. None of the measures at issue can therefore be said to be arbitrary, unfair, or inequitable for purposes of Article 10(1) ECT.
89. Nor are such measures discriminatory within the meaning of Article 10(1) ECT. Article 10(1) ECT does not establish a right of impunity based on the host State’s authorities’ alleged failure to enforce mandatory legal requirements, and Claimants have in any event failed to show nationality-based discrimination, or unjustified differential treatment of similar cases.
VII. The Tribunal Lacks Jurisdiction Over Claimants’ Claims Concerning The Alleged Mistreatment Of Messrs. Khodorkovsky And Lebedev And Other Yukos Officials, And In Any Event, These Claims, And Claims Concerning Searches Of Yukos Records, Are Unsupported
90. The Tribunal should reject Claimants’ attempt to distract its attention from the only matter that is genuinely at issue in these arbitrations — Claimants’ investments in Yukos, and the consequences for those investments of Yukos’ tax evasion scheme — with extensive allegations concerning the arrests and prosecution of Yukos officials and searches and seizures of the company’s records.
91. First, the Tribunal cannot assert jurisdiction under Article 26 ECT to address alleged violations of the rights of Yukos officials, because Claimants have not proven that any such violations directly impaired Claimants’ management or control of their investments. To the contrary, Yukos expressly confirmed after Mr. Khodorkovsky’s arrest and subsequent resignation that they had “no impact whatsoever on [its] operations,” and Mr. Lebedev did not even hold a position with Yukos at that time. The prosecutions of Messrs. Khodorkovsky and Lebedev likewise did not impair Yukos’ performance, which the company informed its investors in 2005 “was extremely healthy.”
92. Claimants have also failed to establish that the prosecutions of any Yukos officials reflect a systemic failure of the Russian judicial system or, at a minimum, were fundamentally unjustified or groundless. To the contrary, all were reviewed by the Russian courts at multiple levels, and by the ECtHR (with respect to the initiation of Mr. Khodorkovsky’s prosecution), and were found to be in accord with Russian law and international standards. Tellingly, Claimants have never disputed that Mr. Khodorkovsky, Mr. Lebedev, or any of the other Yukos officials who were convicted of crimes related to their management of Yukos, actually committed those crimes, relying instead on conclusory complaints about various procedural matters, based on mischaracterizations of the pertinent facts.
93. Finally, Claimants have not established that the searches of certain of Yukos’ offices and the seizure of certain of its records pursuant to the official investigations of its misconduct were expropriatory, evidence a systemic judicial failure, or were otherwise fundamentally unjustified or groundless. This allegation is at best ironic, in light of Yukos’ unrelenting obstruction of those investigations. It is also unsustainable. All of these procedures conformed to Russian law, and Yukos’ own contemporaneous public statements and internal documents confirm that Yukos itself did not believe they had any significant impact on the company.
VIII. The Tribunal Lacks Jurisdiction Over Claimants’ Claims, Or Must Dismiss Them, Because They Are Based On Illegal Conduct By Claimants And The Yukos Managers They Installed And Controlled
94. The Oligarchs who controlled Claimants acquired and consolidated their investments in Yukos through illegal acts and bad faith conduct, and thereafter perpetrated — either directly or through the Yukos managers they installed and controlled — a long series of illegal acts, including the tax evasion that is at the heart of these arbitrations.
95. Claimants contend that these illegalities are “collateral” or “unrelated to” their investments, even though they relate to the acquisition or enhancement of the value of Yukos, or to Claimants’ own unlawful abuse of the Russia-Cyprus Tax Treaty. Through that abuse, Claimants themselves fraudulently evaded — in violation of both Russian and Cypriot criminal laws — more than US$ 230 million in Russian withholding taxes, and more than triple that amount in Russian profit taxes.
96. This history of repeated illegal conduct by Claimants — culminating in the diversion of assets worth billions of dollars to the illegally-created Dutch stichtings, placing those assets beyond the reach of the Russian tax authorities — deprives the Tribunal of jurisdiction over Claimants’ claims, because ECT protection does not extend to illegal investments, or requires that the Tribunal dismiss those claims under the principle of unclean hands. The Tribunal should reject Claimants’ attack on the existence of the principle of unclean hands in international law, as well as their baseless charge that Respondent is estopped from raising Claimants’ illegalities.
IX. Claimants Have Failed To Establish Any Entitlement To Damages
97. Claimants are not entitled to any compensation, in light of (a) their own illegal conduct, including their and the Oligarchs’ illegal acquisition and consolidation of their ownership and control of Yukos, their abuse of the Russia-Cyprus Tax Treaty, and their implementation of Yukos’ tax evasion scheme, and (b) Yukos’ failure to mitigate its tax liability, and Yukos’ and Claimants’ actions to prevent the collection of Yukos’ overdue taxes.
98. Claimants are not entitled to any compensation for acts of the Russian Federation that are within the carve-out of Article 21(1) ECT and not within the clawback of Article 21(5) ECT.
99. Claimants also are not entitled to any compensation based on Yukos’ claimed value at any given point in time, because they have failed to demonstrate any causal link between any diminution in Yukos’ then-supposed value and specific violations of the ECT. Claimants’ “all-or-nothing” approach does not provide a means by which the Tribunal can (a) assess whether the Russian Federation’s actions constituted an “expropriation,” or (b) quantify the damages, if any, arising in the event some, but not all, of the measures Claimants complain about are found to violate the ECT. This is the inevitable result of Claimants’ failure to present a damages measure, but instead a static valuation, devoid of any causation analysis.
100. Claimants’ valuations also fail on their own terms, because they are entirely dependent on Claimants’ unsustainable valuation date of November 21, 2007.
101. Claimants and their expert concede that the valuations presented in their opening submissions are infected by numerous material errors. These errors fatally undermine Claimants’ core assertions and render Claimants’ evidence unreliable for any purpose. The revised valuations submitted in Claimants’ Reply are likewise riddled with errors and are manifestly result-driven, leaving Claimants with no competent evidence of damages at all. This is true, too, of their “method of collection” scenarios, which are unsupportable and fail of their own terms.
102. Once Yukos chose not to mitigate its tax liability during the first quarter of 2004 — by paying no more than US$ 9.8 billion, capping its tax exposure at that amount and avoiding all of the subsequent enforcement measures — there was no realistic means by which Yukos could have paid all of its liabilities, let alone continued in business as a going concern. Claimants’ failure to mitigate is a further reason why their damages model, based on the claimed value of Yukos as of a given date, does not provide a meaningful measure of damages. Thus, even if the Tribunal were to conclude that an award of damages is warranted, it must be capped at Claimants’ proportionate interest in the amount, if any, of Yukos’ unavoidable liabilities — not more than US$ 9.8 billion — that the Tribunal concludes were improperly assessed.
103. Claimants’ damages claim represents a 58% compound annual rate of return on their investment in Yukos. Claimants’ requested rate of return fails to take account of Claimants’, the Oligarchs’, and Yukos’ unlawful misconduct and is well beyond that which any legitimate investor would have earned.
IV. Parties’ Requests for Relief
A. Relief Requested by Claimants
110. Claimants request that the Tribunal render an Award:
(1) Declaring that the Respondent has breached its obligations under Article 10(1) of the Energy Charter Treaty;
(2) Declaring that the Respondent has breached its obligations under Article 13(1) of the Energy Charter Treaty;
(3) Ordering the Respondent to pay to the Claimants, in full reparation of their damages, an amount to be determined by the Arbitral Tribunal, estimated by the Claimants at no less than US$ 114.174 billion, to be shared between the Claimants in the following proportions:
∎ Hulley Enterprises Limited US$ 93.229 billion
∎ Yukos Universal Limited US$ 4.666 billion
∎ Veteran Petroleum Limited US$ 16.279 billion
(4) Ordering the Respondent to pay post-award interest on the above sums to the Claimants at the rate of Libor + 4% compounded annually from the date of the Award until the date of full payment;
(5) Ordering the Respondent to pay to the Claimants the full costs of these arbitrations, including, without limitation, arbitrators’ fees, administrative costs of the PCA, counsel fees, expert fees and all other costs associated with these proceedings;
(6) Dismissing all of the Respondent’s defenses;
(7) Ordering any such further relief as it may deem appropriate.7
B. Relief Requested by Respondent
111. Respondent requests that the Tribunal render an Award:
(a) Dismissing Claimants’ claims on the ground that the Tribunal lacks jurisdiction to entertain them;
(b) In the alternative, dismissing Claimants’ claims on the ground that they are inadmissible;
(c) In the alternative, dismissing Claimants’ claims on the merits in their entirety;
(d) In the alternative, declaring that Claimants are not entitled to the damages they seek, or to any damages;
(e) Ordering Claimants to pay the Russian Federation’s costs, expenses, and attorney’s fees;
(f) Granting such further relief against the Claimants as the Tribunal deems fit and proper.8
V. Applicable Law
A. Procedural Law
112. The procedural law to be applied by the Tribunal consists of the procedural provisions of the ECT (particularly Article 26), the UNCITRAL Rules of 1976, and, because The Hague is the place of arbitration, any mandatory provisions of Dutch arbitration law. The Final Awards are made pursuant to Article 1049 of the Netherlands Arbitration Act 1986.
B. Substantive Law
113. The substantive law to be applied by the Tribunal consists of the substantive provisions of the ECT, the Vienna Convention on the Law of Treaties (“VCLT”),9 and applicable rules and principles of international law, including those authoritatively set out in the Articles on Responsibility of States for Internationally Wrongful Acts of the International Law Commission of the United Nations (“ILC Articles on State Responsibility”).10 In addition to the foregoing sources, the national law of the Russian Federation is relevant with regard to certain issues.
1. Energy Charter Treaty
114. Throughout this Award, the Tribunal refers to and analyzes specific provisions of the ECT. For ease of reference, the key relevant provisions are also collected and reproduced below, in the order in which they appear in the Treaty:
Article 10 Promotion, Protection and Treatment of Investments
(1) Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area. Such conditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment. Such Investments shall also enjoy the most constant protection and security and no Contracting Party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal. In no case shall such Investments be accorded treatment less favourable than that required by international law, including treaty obligations.
Article 13 Expropriation
(1) Investments of Investors of a Contracting Party in the Area of any other Contracting Party shall not be nationalized, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation (hereinafter referred to as “Expropriation”) except where such Expropriation is:
(a) for a purpose which is in the public interest;
(b) not discriminatory;
(c) carried out under due process of law; and
(d) accompanied by the payment of prompt, adequate and effective compensation.
Such compensation shall amount to the fair market value of the Investment expropriated at the time immediately before the Expropriation or impending Expropriation became known in such a way as to affect the value of the Investment (hereinafter referred to as the “Valuation Date”).
Such fair market value shall at the request of the Investor be expressed in a Freely Convertible Currency on the basis of the market rate of exchange existing for that currency on the Valuation Date. Compensation shall also include interest at a commercial rate established on a market basis from the date of Expropriation until the date of payment.
Article 21 Taxation
(1) Except 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.
(a) Article 13 shall apply to taxes.
(b) Whenever an issue arises under Article 13, to the extent it pertains to whether a tax constitutes an expropriation or whether a tax alleged to constitute an expropriation is discriminatory, the following provisions shall apply:
(i) The Investor or the Contracting Party alleging expropriation shall refer the issue of whether the tax is an expropriation or whether the tax is discriminatory to the relevant Competent Tax Authority. Failing such referral by the Investor or the Contracting Party, bodies called upon to settle disputes pursuant to Article 26(2)(c) or 27(2) shall make a referral to the relevant Competent Tax Authorities;
(ii) The Competent Tax Authorities shall, within a period of six months of such referral, strive to resolve the issues so referred. Where nondiscrimination issues are concerned, the Competent Tax Authorities shall apply the non-discrimination provisions of the relevant tax convention or, if there is no nondiscrimination provision in the relevant tax convention applicable to the tax or no such tax convention is in force between the Contracting Parties concerned, they shall apply the non-discrimination principles under the Model Tax Convention on Income and Capital of the Organisation for Economic Co-operation and Development;
(iii) Bodies called upon to settle disputes pursuant to Article 26(2)(c) or 27(2) may take into account any conclusions arrived at by the Competent Tax Authorities regarding whether the tax is an expropriation. Such bodies shall take into account any conclusions arrived at within the six-month period prescribed in subparagraph (b)(ii) by the Competent Tax Authorities regarding whether the tax is discriminatory. Such bodies may also take into account any conclusions arrived at by the Competent Tax Authorities after the expiry of the sixmonth period;
(iv) Under no circumstances shall involvement of the Competent Tax Authorities, beyond the end of the six-month period referred to in subparagraph (b)(ii), lead to a delay of proceedings under Articles 26 and 27.
(7) For the purposes of this Article:
(a) The term “Taxation Measure” includes:
(i) any provision relating to taxes of the domestic law of the Contracting Party or of a political subdivision thereof or a local authority therein; and
(ii) any provision relating to taxes of any convention for the avoidance of double taxation or of any other international agreement or arrangement by which the Contracting Party is bound.
(b) There shall be regarded as taxes on income or on capital all taxes imposed on total income, on total capital or on elements of income or of capital, including taxes on gains from the alienation of property, taxes on estates, inheritances and gifts, or substantially similar taxes, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation.
(c) A “Competent Tax Authority” means the competent authority pursuant to a double taxation agreement in force between the Contracting Parties or, when no such agreement is in force, the minister or ministry responsible for taxes or their authorized representatives.
(d) For the avoidance of doubt, the terms “tax provisions” and “taxes” do not include customs duties.
Article 26 Settlement of Disputes Between an Investor and a Contracting Party
(1) Disputes between a Contracting Party and an Investor of another Contracting Party relating to an Investment of the latter in the Area of the former, which concern an alleged breach of an obligation of the former under Part III shall, if possible, be settled amicably.
(2) If such disputes can not be settled according to the provisions of paragraph (1) within a period of three months from the date on which either party to the dispute requested amicable settlement, the Investor party to the dispute may choose to submit it for resolution:
(c) in accordance with the following paragraphs of this Article.
(a) Subject only to subparagraphs (b) and (c), each Contracting Party hereby gives its unconditional consent to the submission of a dispute to international arbitration or conciliation in accordance with the provisions of this Article.
(4) In the event that an Investor chooses to submit the dispute for resolution under subparagraph (2)(c), the Investor shall further provide its consent in writing for the dispute to be submitted to:
(b) a sole arbitrator or ad hoc arbitration tribunal established under the Arbitration Rules of the United Nations Commission on International Trade Law (hereinafter referred to as “UNCITRAL”);
(6) A tribunal established under paragraph (4) shall decide the issues in dispute in accordance with this Treaty and applicable rules and principles of international law.
(8) The awards of arbitration, which may include an award of interest, shall be final and binding upon the parties to the dispute. An award of arbitration concerning a measure of a sub-national government or authority of the disputing Contracting Party shall provide that the Contracting Party may pay monetary damages in lieu of any other remedy granted. Each Contracting Party shall carry out without delay any such award and shall make provision for the effective enforcement in its Area of such awards.
2. Vienna Convention on the Law of Treaties
115. Relevant provisions of the VCLT are as follows:
Article 31 General rule of interpretation
1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose
2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:
(a) any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty;
(b) any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.
3. There shall be taken into account, together with the context:
(a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions;
(b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;
(c) any relevant rules of international law applicable in the relations between the parties.
Article 32 Supplementary means of interpretation
1. Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31:
(a) leaves the meaning ambiguous or obscure; or
(b) leads to a result which is manifestly absurd or unreasonable.
Article 33 Interpretation of treaties authenticated in two or more langauges
1. When a treaty has been authenticated in two or more languages, the text is equally authoritative in each language, unless the treaty provides or the parties agree that, in case of divergence, a particular text shall prevail.
2. A version of the treaty in a language other than one of those in which the text was authenticated shall be considered an authentic text only if the treaty so provides or the parties so agree.
4. Except where a particular text prevails in accordance with paragraph 1, when a comparison of the authentic texts discloses a difference of meaning which the application of articles 31 and 32 does not remove, the meaning which best reconciles the texts, having regard to the object and purpose of the treaty, shall be adopted.
116. Where appropriate, provisions of the ILC Articles on State Responsibility and Russian law are set out in relevant parts of the Award. Additionally, where appropriate, the Tribunal cites to decisions of other international courts and tribunals and legal commentaries which the Parties have submitted as relevant sources to consider in deciding the arbitrations.
VI. Summary of Witness Testimony
117. In the merits phase of these proceedings, Claimants and Respondent each submitted statements or opinions from 11 witnesses.11 In all, the Tribunal has reviewed over 1,400 pages of written testimony, as well as thousands of exhibits to the witness statements and opinions.
118. The purpose of the present part of the Award is to provide an overview of the witnesses’ evidence. It is not meant to be exhaustive. Rather, it serves as a summary of the vast evidentiary foundation on which the Tribunal has reached its conclusions. Additional references to witness testimony, including specific extracts of their oral examinations, are set out in the relevant portions of the Tribunal’s analysis of the evidentiary record.12
119. The Tribunal has considered the evidence of those witnesses that were cross-examined, as well as those witnesses who submitted written statements but were not called to the Hearing. With respect to this latter category, the Tribunal has kept in mind that these witnesses were not subject to cross-examination.
A. Claimants’ Witnesses
120. At the Hearing on the Merits, Respondent called 8 of Claimants’ 11 witnesses for examination. They were, in the order in which they testified:
1) Mr. Jacques Kosciusko-Morizet;
2) Mr. Vladimir Dubov;
3) Mr. Frank Rieger;
4) Dr. Andrei Illarionov;
5) Mr. Leonid Nevzlin;
6) Mr. Bruce Misamore;
7) Mr. Steven Theede; and
8) Mr. Brent Kaczmarek CFA.
121. Claimants’ other witnesses, who did not appear for cross-examination, were:
9) Mr. Philip Baker QC;
10) Mr. Yuri Schmidt; and
11) Dr. Sergei Kovalev.
1. Mr. Jacques Kosciusko-Morizet
123. Mr. Jacques Kosciusko-Morizet13 was a Member of the Board of Directors of Yukos and the Chairman of the Board’s Audit Committee from June 2000 to December 2004. In his witness statement, Mr. Kosciusko-Morizet describes Mr. Khodorkovsky’s plans in the late 1990s “to modernize Yukos and to break the company’s ties with the Soviet traditions” through a Western board and consolidation of Yukos’ accounts. According to Mr. Kosciusko-Morizet, the reforms brought success: Yukos’ shares increased in value by 50 percent after it published U.S. Generally Accepted Account Principles (“U.S. GAAP”) consolidated financial statements in July 2000, and its leadership in transparency and corporate governance brought the verb “to Yukosize” into common parlance in Russian business circles.
124. Mr. Kosciusko-Morizet’s statement also deals with the relationship with PwC, which he describes as “cordial and close” while he was Chairman of the Audit Committee. Yukos was one of PwC’s major clients; PwC conducted Yukos’ external audits and assisted with training Yukos’ in-house accountants and with designing and implementing procedures. Thus, he testifies, “from 1997 to 2004, PwC was given access to the entire documentation of the whole of Yukos without restriction and had a very detailed and global view of the financial situation and the procedures of Yukos and its subsidiaries.”14
125. After the arrest of Mr. Platon Lebedev in July 2003, Mr. Kosciusko-Morizet chaired a temporary ad hoc committee set up to assess the situation through interviews with individual managers at Yukos and PwC. He states that Mr. Michael Kubena, a PwC partner, assured the committee that Yukos had always complied with Russian law, including in its tax optimization structure, and that “PwC did not consider that there was any possibility for the Russian authorities to attack Yukos on these issues.”15 Mr.Kosciusko-Morizet referred to this advice several times during his oral testimony. Thus, according to Mr. Kosciusko-Morizet, the “late and spectacular volte-face of PwC,” including the withdrawal of the certification of Yukos’ accounts that took place on 15 June 2007, was “in blatant contradiction” to his relationship with PwC, was “questionable and damaging to [PwC’s] reputation,” and can only be explained by Respondent’s pressure on PwC’s Moscow office from December 2006 onwards.
126. Mr. Kosciusko-Morizet appeared before the Tribunal on 15 October 2012. He was crossexamined about, inter alia: (a) his responsibilities as the Chairman of Yukos’ Audit Committee; (b) the relationship between Yukos and PwC including as to disclosures about Behles Petroleum S.A., Baltic Petroleum Trading Limited and South Petroleum Limited (known collectively as the “BBS Companies”); (c) the Yukos consolidation perimeter for purposes of U.S. GAAP; (d) the abandoned plans to list Yukos on the New York Stock Exchange (“NYSE”) due to the Yukos—Sibneft merger; and (e) his knowledge of Yukos’ tax optimization structures and the tax assessments against regional Yukos trading entities (in which context he remarked that “[t]rying to minimise tax is good management … within the legislation applicable.”)16
127. Mr. Kosciusko-Morizet was also given the opportunity to recount to the Tribunal a story that Mr. Khodorkovsky had conveyed to him in August 2003 about threats from the Russian authorities and their potential impact on Yukos.17
2. Mr. Vladimir Dubov
128. Mr. Vladimir Dubov18 held various senior positions in Bank Menatep and Yukos entities, including on the Yukos Board from 1998 to 1999. He was elected as a State Duma Deputy in December 1999 (representing a region encompassing Mordovia) and was Chairman of the Tax Sub-Committee of the State Duma from February 2000 to October 2003. From 1997 he was a shareholder, and then a beneficiary of trusts holding shares in GML Limited (“GML”) (the parent company of YUL). He first met Mr. Khodorkovsky in the late 1980s. In his witness statement, Mr. Dubov makes three key assertions: (a) Respondent was aware of, and approved Yukos’ trading structure and tax optimization scheme; (b) Yukos’ trading companies significantly contributed to the social and economic development of the regions in which they operated; and (c) Respondent’s tax claims were aimed at appropriating Yukos’ assets and removing Mr. Khodorkovsky as a “potential political threat”.
129. Mr. Dubov explains in his statement that, given that Yukos’ tax payments accounted for approximately four percent of the country’s 2003 budget, the company was under “constant supervision and control of the Russian tax authorities.”19 Before 2003 there was never “any suggestion that Yukos’ trading structure was other than in compliance with legal requirements and appropriate.”20 The authorities were extensively consulted and approved Yukos’ practice of operating through trading companies in low-tax regions like the Republic of Mordovia. Yukos’ trading companies significantly contributed to the local economy. Yukos’ trading companies’ VAT refunds were also closely monitored. According to Mr. Dubov, all four major Russian oil companies (Lukoil, Sibneft, TNK, Yukos) engaged in tax optimization. Their taxes were closely supervised. Access to pipelines was conditioned on payment of taxes. This involved liaising with officials and opening up records to inspection.21
130. Mr. Dubov describes how he and Mr. Khodorkovsky became increasingly involved in social and political activities to build a civil society based on “liberal, open and democratic values” and in 2001 co-founded Open Russia to manage and fund projects to foster a “social and liberal ethos.”22 Mr. Khodorkovsky’s funding of political parties openly and legally “put pressure on other political parties to be more transparent.” These efforts “sent shockwaves through the entire Russian political system.”23
131. Mr. Dubov expresses “no doubt that the alleged tax claims and the other trumped-up charges brought against Yukos, Khodorkovsky and his associates, were merely a pretext to remove Khodorkovsky as a potential political threat and to destroy Yukos with a view to taking its assets.”24 According to Mr. Dubov’s statement, as the 2004 presidential elections approached, the Administration shifted attention to seizing Yukos’ assets. At a meeting of the Russian Union of Industrialists and Entrepreneurs with President Putin at the Kremlin in February 2003, Mr. Khodorkovsky raised questions about official corruption. President Putin rebuked him and suggested that Yukos be scrutinized. At an April 2003 meeting, President Putin approved the Sibneft merger but warned that Mr. Khodorkovsky should restrict his political activities and not finance the Communist Party. In October 2003, Mr. Khodorkovsky was arrested just before a planned meeting with opposition parties.25
132. Mr. Dubov testifies that, on 27 October 2003, he learned his name had been removed as a Duma candidate. He was advised to leave Russia and was told by a Kremlin official that President Putin “had gone absolutely berserk over Khodorkovsky.”26 He left that night and has not returned since. In January 2004, the financial support of Messrs. Dubov and Nevzlin to an opposition presidential candidate was announced. The next day, international arrest warrants were issued against both men on “entirely unfounded and politically motivated” charges. They were both found guilty in absentia.27
133. Mr. Dubov appeared before the Tribunal for examination on 16 October 2012. He was crossexamined about his financial interest in the case, being the beneficiary of the Draco Trust, in which had made an initial investment of around USD 10,000 and which now has a seven percent interest in GML.28 He was also extensively cross-examined about the extent of disclosures he made to Russian government officials about Yukos’ tax scheme in Mordovia and his knowledge and understanding about the Yukos trading entities in the ZATOs and the tax assessments leveled against them.29
134. Mr. Dubov stated his belief, held since he heard about the tax assessments against Yukos in 2004 from media reports, that the tax claims were being used by Respondent as an instrument of confiscation.30 When asked by the Tribunal to elaborate on what information at the time led him to that conclusion, he testified:
I had a personal relationship with the Deputy Head of Staff of the President, Mr. Vladislav Surkov … . [O]n the first business day following Khodorkovsky’s arrest, Surkov asked me to come see him in the Kremlin … . He told me that he was asking for my forgiveness … . I had been struck from the list upon petition from the Prosecutor General by the council of the party without leveling any charges against me… . And I remember asking, “What will happen to Yukos?” And he said—and I am quoting him verbatim; I remember it very well—he said, “Yukos will be taken away from … you gentlemen.” … And I also had a longstanding good relationship with yet another Deputy Head of the Staff of the President who, in late November of that year, told us … there would be criminal claims against every single shareholder. He said that an instruction had been issued to commence criminal cases against us and to take Yukos from us.31
3. Mr. Frank Rieger
135. Mr. Frank Rieger32 is the former Acting CFO of Yukos, and held various positions with Yukos and its subsidiaries from 2000 until 2006. He resigned on 26 March 2006, due to the “deepening crisis surrounding the company and the persecution of its management.” In his witness statement, Mr. Rieger recounts that under Mr. Khodorkovsky’s leadership, Yukos acted as a “trail-blazer” in corporate governance in Russia. When Mr. Rieger joined Yukos in 2000 from Roland Berger Consulting, he was directed by Mr. Khodorkovsky to “apply the same benchmark of Western corporate accountability and responsibility.” Yukos modernized its production process, disclosed the company’s shareholding details, and implemented international accounting and reporting procedures. Mr. Rieger states that Yukos “set a new standard for corporate social responsibility in Russia” but its achievements provoked concern amongst competitors.
136. According to Mr. Rieger, the Russian authorities targeted and harassed Yukos’ auditor, PwC. Yukos engaged PwC as its external auditor and gave it “unrestricted access” to its “personnel, management, the Board of Directors, books and accounts.” Mr. Rieger’s “personal involvement with PwC was extensive.” After PwC employees began to be questioned by the Prosecutor General’s Office, PwC ceased to have further contact with Yukos. Mr. Rieger learned about PwC’s withdrawal of its Yukos audits from 1995 to 2004 from the media. The suggestion that PwC did not have full access to information or that Yukos deliberately withheld information “defies credibility”; PwC raised no such concerns until its June 2007 withdrawal letter (“PwC’s Withdrawal Letter”).
137. According to Mr. Rieger, Yukos made numerous attempts to settle the alleged tax claims against it, including through negotiations and significant payments. However, the Russian authorities did not respond to Yukos’ various proposals, and refused to provide written confirmation of the payments. It became clear to Mr. Rieger that “this was a political case, not a tax case, aimed at the destruction and expropriation of the company itself.”
138. Mr. Rieger claims that Respondent conducted a campaign of harassment against Yukos, including illegal raids by armed masked men, searches and seizures of up to 70 percent of the Accounting Department’s documents. In addition, numerous Yukos employees were questioned by the Prosecutor General’s Office. Mr. Rieger himself was detained and interrogated at Moscow’s airport in May 2006.
139. Mr. Rieger appeared before the Tribunal for examination on 17 October 2012. He was crossexamined about, inter alia: (a) his role at Yukos and understanding of its related entities; (b) Yukos’ accounting structure including the extent to which it was designed by PwC; (c) the timing and process of Yukos’ identification of assets for payment of taxes; (d) Yukos’ settlement offers, the responses from the Russian authorities and the legal limits within which the authorities were operating; (e) the repayment of the SocGen and Moravel Investments Limited (“Moravel”) loans, relevant to the bankruptcy; (f) dividend payments via the “Laurel” group of Yukos companies; and (g) his awareness and understanding of tax assessment of Yukos entities in the ZATOs.
140. Mr. Rieger was also given an opportunity to describe to the Tribunal how in 2006 he was asked a series of questions at the General Prosecutor Office for which the investigator had already prepared his answers, a situation he said he “couldn’t believe” had he not experienced it himself. He refused to sign the pre-prepared answers and gave his own version instead.33
4. Dr. Andrei Illarionov
141. Dr. Andrei Illarionov34 served as Chief Economic Advisor to President Putin from April 2000 until his resignation in December 2005. He was also President Putin’s personal representative (“sherpa”) to the G-8. He is currently a Senior Fellow at the Cato Institute’s Center for Global Liberty and Prosperity in Washington, D.C., as well as the President of the Institute of Economic Analysis in Moscow, which he founded. Dr. Ilarionov maintains a residence in Moscow and visits approximately five times a year.35 In his witness statement, Dr. Illarionov recounts the evolution of Yukos since its establishment by government decree in 1993 following the dissolution of the USSR and the restructuring of the oil industry. Yukos saw remarkable growth and improvements in performance after its privatization in 1995–96, as a result of substantial investment, the employment of foreign engineers and managers, and the use of Western technology. Some officials viewed such reforms negatively. Yukos’ public revelation, in 2002, of details of its shareholding, including the structure of GML, “had the effect of an earthquake on the Russian business community.” It contrasted with the traditionally secretive manner of doing business and was viewed as setting a “harmful” precedent. In Dr. Illarionov’s words, Yukos was “one of the most dangerous enemies for those who did not want to see Russia a free country.”36
142. According to Dr. Illarionov, the arrests of Messrs. Khodorkovsky and Lebedev and the dismantlement of Yukos were politically and economically motivated. Yukos’ intended merger with Western oil majors was seen as a national betrayal and a hurdle to expropriation. Dr. Illarionov describes the 19 February 2003 meeting at the Kremlin between President Putin and business leaders, at which Mr. Khodorkovsky made a presentation on corruption, to which President Putin responded that everyone knew how various assets, including Yukos, were acquired, and told Mr. Khodorkovsky: “I return the ball in your corner.” The tone of the meeting became “steely and menacing” as if something had gone “really wrong.” It signaled the “gloves [had come] off,” and that Mr. Khodorkovsky was no longer tolerated. From then on, according to Dr. Illarionov, “a case needed to be fabricated to launch the Government attack under the guise of ‘legitimate’ court proceedings” and a special unit was set up to fabricate evidence against Yukos. In October 2003, the “dramatic arrest” of Mr. Khodorkovsky at the airport signaled Yukos could be attacked. Few dared to voice support, and Prime Minister Mikhail Kasyanov, among others, was dismissed for doing so.37
143. Dr. Illarionov’s statement further recounts that the campaign against Yukos culminated in the confiscation of YNG. While it was independently valued at USD 14.7–17.3 billion, the Russian authorities sold YNG for USD 9.3 billion—“a price well below even the most conservative estimates prepared by experts”—on a Sunday, at a forced auction attended by two participants, to an unknown company (Baikal) which was registered at an address above a local bar and had a charter capital of USD 350. President Putin said he knew the individuals behind the company and they were “well-established in the oil business.” Four days later, Rosneft purchased Baikal with funds from State banks. According to Dr. Illarionov, the auction “sent shockwaves” and was internationally condemned. This “scam” was “one of the low points in Russia’s recent history.” The dismantling of Yukos was contrary to “basic principles of due process,” and led Dr. Illarionov to resign as sherpa in 2004 and as the President’s Chief Economic Advisor in December 2005.38
144. Dr. Illarionov appeared before the Tribunal for examination on 18 October 2012. Respondent sought to undermine his credibility by showing he is now a vocal critic of the Russian Government, and that he has taken extreme positions against climate change regulation.39 Respondent also challenged his assertion that Yukos’ financial statements had complied with U.S. GAAP, on the basis that Dr. Illarionov lacked an understanding of GAAP and had not read Yukos’ financial statements in full. Dr. Illarionov was cross-examined mostly about his claimed knowledge and understanding of the valuation of YNG and the auction process.40
145. The Tribunal asked Dr. Illarionov whether he had ever felt able to discuss with President Putin the arrest of Mr. Khodorkovsky and the measures of the Russian Government in respect of Yukos.41 He replied:
the most important conversation that I had with Mr. Putin was several days after Mr. Khodorkovsky had been arrested … . Mr. Putin has said that Mr. Khodorkovsky has made mistakes and behaved pretty badly … . And for a long time Mr. Putin himself was protecting Mr. Khodorkovsky from these attacks of his friends, of Mr. Putin’s friends, but unfortunately Mr. Khodorkovsky continued to behave badly, and not cooperatively… One thing, he said that Mr. Khodorkovsky lied to us because he was in negotiations with American oil company about possible merger. Another issue he has mentioned: that Mr. Khodorkovsky joined Communist Party in preparation to the parliamentary election of year 2003… That is not something that “mi dogovarivalis”—I will try, “we had an agreement on.” So he said …
So he said that after protecting Mr Khodorkovsky for some time—now it’s almost a quotation—“I decided and I stepped aside to allow Mr Khodorkovsky to solve his problems with the boys by himself.” … .“so Mr Khodorkovsky has chosen to fight. Okay,” said Mr Putin, “if he has chosen to fight, let him to fight and we’ll see what will happen.”42
146. The Tribunal also asked Dr. Illarionov about the 50-person special unit that, according to paragraph 35 of his statement, was set up at the Russian General Prosecutor’s office to work exclusively on “fabricating” evidence against Mr. Khodorkovsky and Yukos and, in particular, whether he could identify the sources on which he relied for that statement. He could not disclose the identity of his source—due to that individual still residing in Moscow and thus facing “serious risks” but his source was a “very high-placed official in the Russian administration at the time” and was very reliable.43 Dr. Illarionov testified that the official had told him that the targeting of Yukos was “a big mistake … but it is a mistake that would be impossible to stop … . This unit has been created to ‘zanyatsa’ Khodorkovsky, [meaning to] ‘take care of’ Khodorkovsky … which means one day … security services and officers did receive an order so-called to solve the problem.”44
147. Dr. Illarionov elaborated on his assertion, at paragraph 41 of his statement, that Russian Prime Minister Mikhail Kasyanov had “expressed his disapproval of Mr. Khodorkovsky’s arrest and the mounting attack on Yukos”, and explained that after Mr. Khodorkovsky’s arrest:
there was public outrage in mass media … . From the Government ranks, I cannot recall any person who would express disapproval of the arrest … with the exception of Mr. Kasyanov … . And after making such a statement, Mr. Putin publicly made a very rude statement that you can find recorded in video … that, “I would ask everybody in the Government to shut up on Mr. Khodorkovsky’s arrest.” And it was very clear that this comment was addressed to Mr. Kasyanov, and later Mr. Kasyanov … [was] removed from his position.’45
5. Mr. Leonid Nevzlin
148. Mr. Leonid Nevzlin46 is a long-standing friend and close business colleague of Mr. Khodorkovsky. They first met at a research centre in 1987. Mr. Nevzlin held various high level positions in Bank Menatep and Yukos, including as Vice-President of Yukos responsible for public relations, and as First Deputy Chairman of the Yukos Board of Directors. Mr Nevzlin helped found Open Russia in 2001. He also later served as a senator representing Mordovia until March 2003. He is a beneficiary of three of the trusts that hold ownership shares in GML. He now resides in Israel, working in philanthropy.
149. In his witness statement of 15 September 2010, Mr. Nevzlin testifies that his support for democratic causes led the Russian authorities to target him for persecution. For example, after he announced his financial support for an opposition presidential candidate in January 2004, the Prosecutor General’s Office brought “entirely unfounded and politically motivated” charges against him for tax evasion and embezzlement. “Ludicrous” murder charges were added in 2004 and 2005. Israel refused to extradite him to Russia but after a “show trial” in 2008, he was sentenced in absentia to life imprisonment.47
150. Mr. Nevzlin explains that Mr. Khodorkovsky was perceived by the Kremlin as a political threat and a potential presidential candidate. According to Mr. Nevzlin, the attacks on Yukos were motivated by the objectives “to remove Mr. Khodorkovsky as a potential political threat,” “to punish and make an example of” Yukos leaders, and to “expropriate Yukos without compensation.” Mr. Nevzlin received warnings of the attacks on Yukos, including at a meeting with the Media Minister in Spring 2003, who told him that Mr. Khodorkovsky risked losing everything, including his liberty, if he did not immediately stop criticism of President Putin. He was told that President Putin was “furious” about Mr. Khodorkovsky’s media coverage.48
151. With regard to the Yukos—Sibneft merger, Mr. Nevzlin testifies that he understood that “everything that happened with Sibneft was approved by President Putin.” At a meeting with Mr. Khodorkovsky, President Putin cautioned against a U.S. oil major acquiring more than 25 percent of YukosSibneft. The merger was completed in October 2003, but Mr. Abramovich “abruptly changed his mind and sought to unwind the merger” after it “became apparent that Khodorkovsky was being targeted by the Kremlin.” Mr. Nevzlin testifies that shortly after Mr. Khodorkovsky’s arrest in October 2003, Mr. Abramovich approached Mr. Nevzlin in Tel Aviv to convey that the Yukos—Sibneft merger could only be preserved if Sibneft was given management of the merged company. The companies were not integrated and eventually de-merged.49
152. Mr. Nevzlin appeared before the Tribunal for examination on 18 and 19 October 2012. Respondent highlighted his lack of banking experience when he rose to the top of Bank Menatep. Mr. Nevzlin pointed out that “there had not been any commercial banks in the Soviet Union, and not a single person in the Soviet Union worked in a commercial bank prior to 1988;” and further that “the position of bank president did not mean that [he] in fact was responsible for banking operations; it was a position that was established specifically for someone who engaged in public relations.” 50
153. Mr. Nevzlin was cross-examined on his interest in GML, his motives for testifying in these arbitrations, and a recent UK court case relating to individuals involved in the Yukos—Sibneft merger. He acknowledged that the trusts in which he has beneficial interests (the Pictor Trust, the Southern Cross Trust and the Palmus Trust) hold a total of approximately 67 percent of GML, and thus that he would benefit financially if the outcome of these arbitrations was favourable to Claimants.51 Mr. Nevzlin testified that he had not paid anything for his interests in the trusts and confirmed also that Messrs. Brudno, Lebedev and Shakhnovsky had not paid any consideration for their beneficial interests in the Palmus Trust. Amidst this line of questioning, Mr. Nevzlin pointed out:
everything I own, just like my partners used to own, was earned through extremely hard work, starting, as you will know from … in 1987 … . [V]irtually all the business revenue, except for what was paid to charity or used for personal needs, was reinvested in the business … . So all the money, all the shares that we owned we earned through our titanic—if you will—efforts that had spread over a long period of time.52
154. Mr. Nevzlin confirmed that he knew about the 2004 tax assessments soon after they were issued, but by that point he had “already realised that Putin will not stop, and will take away the company anyway. So I was not surprised by tax claims in this size and consequent actions by the Russian Federation.” He also confirmed his long-held belief that the tax assessments were improper, as were the Russian authorities’ enforcement actions, claiming:
Yukos was led into bankruptcy … They [the Russian authorities] did everything in order to prevent Yukos from paying off its debts. The company was in perfect shape, with a lot of cash, with the best rating in the country, with a good market capitalisation, but it took about two years for Putin and Sechin … to destroy this company completely.53
When asked whether he had hoped Yukos would prevail and defeat the assessments, he replied that “[t]hose proceedings took place in the Russian Federation, and the outcomes, the decisions were made in the Kremlin. The decisions were not made in the courtroom … . We are not talking about a democratic country; we are talking about a dictatorship.”54
155. Mr. Nevzlin was questioned about why he had waited until 2010, when providing his witness statement in these proceedings, to disclose that in 2003 Mr. Abramovich told him that Mr. Khodorkovsky “had been targeted because of his involvement in politics.”55 He was also asked why he had not included this evidence in his 6 August 2006 witness statement in the ECtHR proceedings, nor in any of the Russian criminal cases against Mr. Khodorkovsky. He explained:
if I had spread the information about Abramovich and Putin fairly broadly, and if it had become available to the public, then from the perspective of Khodorkovsky, who is in Russian prison, I would have damaged him.
… I would have caused him tremendous amounts of harm … in the other corner facing him were Putin, Sechin and others; but I also would have turned Abramovich into an enemy of Khodorkovsky’s by disclosing this information.
… [A]fter … things moved to a second absurd set of charges and a second trial, Khodorkovsky’s position changed radically. He was no longer wary of a political … confrontation with Putin’s regime because he realised that he was not going to be able to find truth in a Russian court if he tried to defend himself based on the laws.
… Russian courts have no interest in my position: it would be either ignored or rejected by them … .Because it’s not a judge who makes decision on Khodorkovsky and Lebedev; the judge just rubber-stamps decisions that are made by investigative committee and Prosecutor’s Office … .The fact that I trust this court and tell this court a lot more than I’ve ever said on the matter, this is a typical position for me, because … if we’re able to defend our interests, that would be either in courts in free countries or international courts.56
156. Mr. Nevzlin was cross-examined about his May 2011 witness statement to the High Court of Justice in England in a case brought by Mr. Berezovsky against Mr. Abramovich. Mr. Nevzlin was shown the English judge’s decision, in which the judge declined to attach significant weight to Mr. Nevzlin’s evidence, as she found him to be “tendentious,” that he “expressed opinions about matters in respect of which he had no knowledge,” and that she had “the impression that Mr. Nevzlin had crafted his evidence to suit Mr. Berezovsky’s case.” Mr. Nevzlin observed the judge was “entitled to her opinion” and he “only told her the truth.”57
6. Mr. Bruce Misamore
157. Mr. Bruce Misamore58 was Chief Financial Officer of Yukos and a Member of its Management Committee from April 2001 to December 2005. He was a Member of the Executive Committee of the Yukos Board commencing in 2005. He has 38 years experience in financial and executive roles in the oil industry. In his witness statement, Mr. Misamore explains that as CFO, he was to ensure that Yukos met international best practices in financial management. He describes how, by 2003, Yukos had become an industry leader in transparency, corporate governance and production and that, “[c]ontemplating significant expansion and growth” Yukos closed its merger with Sibneft on 3 October 2003 and was in talks with Western oil majors.59
158. Mr. Misamore testifies that PwC played an “integral role” in developing Yukos’ financial reporting system and was given full access to Yukos’ books, accounts, and employees, and was “very knowledgeable about and had full access to Yukos’ principal subsidiaries.” He considers PwC’s withdrawal of the Yukos audit reports as having been “motivated by the continuing attack … on Yukos and persons associated with the company” and that it was “highly questionable professionally.”60
159. According to Mr. Misamore, the campaign by the Russian authorities to dismantle Yukos began in earnest in the summer of 2003 with arrests, raids, searches, and seizures. In July 2003, Russian authorities raided Yukos’ Moscow offices “in an incredible scene full of armed, masked officers” and “trawled through [the company’s] computer records for approximately 17 hours.” Large volumes of documents and electronic files were seized, with no copies or record left.” In August 2006, “baseless, politically motivated” criminal investigations were announced against Mr. Misamore and others.61
160. According to Mr. Misamore, Russian authorities also interfered with the Yukos—Sibneft merger; Sibneft put the merger “on hold,” and refused to negotiate the demerger.62 Russian authorities then imposed a series of “huge fabricated tax reassessments” on Yukos “designed to financially cripple the company” and to “serve as a pretext under which the Government broke up the company and expropriated its assets.” Yukos made numerous efforts to negotiate and to pay its tax bills; these were rejected, “stifle[d],” or went unanswered.63 He described how on 19 December 2004, the Russian authorities held an auction for YNG. As one of only two bidders, Baikal won the auction, in ten minutes, for USD 9.35 billion. Baikal was immediately sold to State-owned Rosneft. In 2007, the court-appointed receiver in the bankruptcy proceedings, Mr. Eduard Rebgun, liquidated the remaining 40 percent of the company in auctions won by State-owned entities at prices well below market value.64
161. Mr. Misamore appeared for examination on 22 October 2012. He was cross-examined on a wide range of issues encompassing, inter alia: (a) the Yukos—Sibneft merger including the dividend payment and the unwinding of the merger; (b) PwC and its role in developing the concepts of golden shares and call options which allowed Yukos to consolidate the financial performance of companies that it did not own, but for which it had call options; (c) Mr. Misamore’s knowledge and understanding of Yukos’ domestic offshore trading entities and the tax assessments levied against some of them; (d) the responses to the tax assessments and use of proceeds from the sale of Yukos assets; and (e) the creation of two Dutch foundations, namely Stichting Administratiekantoor Yukos International (“Stichting 1”) and Stichting Administratiekantoor Small World Telecommunication Holdings B.V. (“Stichting 2,” together with Stichting 1, the “Stichtings”).
162. The Tribunal also asked Mr. Misamore whether he was aware of any written legal opinion that concluded that Yukos’ tax optimization scheme was lawful under Russian law. He replied that upon receiving the tax assessment in December 2003, Yukos requested opinions from Mr. Sergey Pepeliaev, a tax expert and regular advisor to Yukos, and PwC. Mr. Misamore stated that “[b]oth of those opinions basically said what Yukos was doing was completely legal,” but he could not recall if Yukos’ tax structure had received the blessing of a lawyer or an accounting firm in writing prior to December 2003. He added that he “was informed consistently, throughout the entire time [he] was at Yukos, that everything Yukos did with respect to these things was entirely in accordance with Russian law.”65
7. Mr. Steven Theede
163. Mr. Steven Theede66 joined Yukos as its Chief Operating Officer in August 2003, after a 30 year career with ConocoPhilips. From June 2004 until February 2005, he served as CEO of Yukos. Upon the advice of the U.S. State Department, in November 2004 he decided not to return to Russia. From May 2005 until resigning in August 2006, Mr. Theede was President of Yukos. In his witness statement, Mr. Theede testifies that within a few years he saw “one of the largest oil companies in the world … managed in accordance with the highest international standards” be “brought to its knees through the orchestrated attacks of the Russian authorities.”67
164. Mr. Theede states that he was involved in many attempts by Yukos to discharge or settle its alleged tax liabilities. While Yukos did not accept the validity of the tax claims, it nonetheless tried to discharge or settle them, only to be prevented from doing so by Respondent. For instance, in April 2004, Yukos was told to pay USD 3.4 billion within two days, but the next day was prohibited by the Moscow Arbitrazh Court from alienating assets. This “impossible situation” of demanding that Yukos pay but depriving it of any means to pay, became a pattern that led to “a state of paralysis.”68
165. According to Mr. Theede’s statement, Yukos made about 80 proposals and communications to various Russian authorities but “all our efforts were in vain.” For example, he states that in July 2004, an offer by Yukos to relinquish its stake in Sibneft to satisfy the alleged debt was ignored. Yukos retained former Canadian Prime Minister Jean Chrétien to seek a global settlement, but his proposals went unanswered. Meanwhile, the tax bill kept increasing and Yukos paid taxes nearly equal to its total revenue. In October 2004, Mr. Theede testifies that Yukos submitted a “full settlement proposal” in the range of USD 21 billion, but negotiations “came to an abrupt end” when Yukos’ principal negotiator, Yukos Vice-President Alexander Temerko was advised to leave Russia to avoid arrest. In December 2004, YNG, Yukos’ core asset, was sold for a “grossly undervalued price” of USD 9.35 billion in a “sham auction” to an “unknown company.” After that, there were no more settlement discussions. Mr. Theede stated that the undervaluation of YNG became obvious when in 2006 Rosneft valued it at approximately USD 80 billion.69
166. According to Mr. Theede’s statement, in March 2006, a consortium of Western banks that had obtained a judgment in England against Yukos filed a bankruptcy petition with the Moscow Arbitrazh Court. Mr. Theede states that his urgent letter to the Chief Bailiff, requesting that assets be released to satisfy the debt, went unanswered. He further describes how, in a confidential agreement, Rosneft agreed to purchase Yukos’ debt to the consortium upon the initiation of bankruptcy proceedings, which began in March 2006. Respondent was thus the only creditor of significance. Mr. Theede testifies that in July 2006, Mr. Rebgun produced a report concluding that Yukos was insolvent, and at the 20 July 2006 creditors’ meeting, he recommended Yukos be declared bankrupt. By contrast, Yukos had submitted a rehabilitation plan in June 2006 (the “Rehabilitation Plan”), which valued the company at USD 31 billion, and would have seen Yukos pay its creditors in two years. The Rehabilitation Plan was not mentioned in Mr. Regbun’s report. Not wanting to lend credibility to a “charade”, Mr. Theede did not attend the 20 July 2006 creditors’ meeting and, feeling there was nothing more to do to protect the company’s assets, he resigned with effect from 1 August 2006.70
167. Mr. Theede appeared before the Tribunal for examination on 23 and 24 October 2012. Mr. Theede was cross-examined about, inter alia: (a) the 15 April 2004 injunction (“April 2004 Injunction”) and its effect on Yukos’ control over certain assets; (b) Yukos’ perception of the tax assessments as politically motivated; (c) the nature, adequacy and legitimacy of various settlement proposals offered by Yukos to pay off its tax debts; (d) the bankruptcy proceedings and proceeds from asset sales; and (e) the establishment of the Stichtings.
168. Upon cross-examination, Mr. Theede confirmed that, in light of Yukos’ strong performance in 2004, “[d]espite the ongoing external pressure,” Yukos’ Board approved approximately USD 50 million in bonuses. Mr. Theede himself received a USD 5 million bonus. The decision to issue bonuses was motivated by Yukos’ acute concerns about employee retention and “hiring others was going to be almost impossible, because … it was a scary place to be.”71 He recalled the exceptional hire of Mr. Aleksanyan as executive vice-president of Yukos because the bankruptcy administrator, Mr. Rebgun, wanted a Yukos executive in Moscow with whom he could work directly. Mr. Theede recounted that Mr. Aleksanyan “went and met with Mr. Rebgun and explained to him that we were in a difficult situation but we wanted to cooperate, and we really felt that we could find a way to survive.” Within three days, police stormed Mr. Aleksanyan’s house and he was held in jail without a hearing for three years and only released as a result of a ECtHR ruling.72 He died a year later from an illness contracted in jail.
169. In response to a Tribunal question, Mr. Theede testified that he met with PwC at least quarterly, but he did not recall that the trading companies ever came up in their discussions. He never asked PwC for a written opinion on the structure of the trading companies, and he “was told that PwC’s consulting arm was actually the architect of those structures.” He did not discuss any of the tax reassessments with either Messrs. Kubena or Miller of PwC.73
8. Mr. Brent Kaczmarek
170. Mr. Brent C. Kaczmarek CFA74 is Managing Director of Navigant Consulting, Inc. and has served as a financial, valuation and damages expert in more than 40 international investment arbitrations. Mr. Kaczmarek was retained by Claimants as a damages expert to calculate Claimants’ losses result from a “series of acts which resulted in the demerger of Yukos Sibneft, the piece-by-piece sale of Yukos’ assets, and eventually the destruction of Yukos,” which he defines as “the Actions.”
171. Mr. Kaczmarek’s two expert reports and oral testimony are summarized in Part XII of the Award. In essence he concludes that, assuming the underlying tax assessments and all subsequent Actions were violations of the ECT, Claimants should be compensated for the value of their shareholding in a hypothetical Yukos entity (as merged with Sibneft and listed on the NYSE) as at the date of 21 November 2007, as well as any dividends that would have been paid to them up to that point in time, plus interest. The total amount of damages calculated on this basis would be USD 114.174 billion. Mr. Kaczmarek relies on a number of techniques in support of this figure, including valuations of Yukos’ assets, a Discounted Cash Flow (“DCF”) analysis, a comparable companies approach and a comparable transactions approach. Mr. Kaczmarek also offers valuations in scenarios where there is no merger with Sibneft and no listing on the NYSE. He additionally makes assessments of the damages which would be due to compensate Yukos were the Tribunal to find that the original tax assessments did not breach the ECT but that the subsequent enforcement of the tax claims did. His damages calculations for the latter scenario range between USD 33 billion and USD 67 billion.
172. Mr. Kaczmarek was cross-examined about (a) revisions he made between his first and second reports; (b) errors made with respect to the crude oil export tariff rate, the mineral extraction tax rate, inflation rates, the use of the U.S. Consumer Price Index, an erroneous conversion of tons to barrels, (c) assumptions about Yukos’ borrowing capacity, and (d) various reasonableness tests. The Tribunal also questioned him about the choice of valuation dates.75
9. Mr. Philip Baker QC
173. Mr. Philip Baker QC76 practices at Gray’s Inn Tax Chambers in London and is presently a senior research fellow at the University of London. Claimants presented him as an expert on international tax law to counter claims made by Respondent’s expert Professor Rosenbloom, regarding the benefits claimed by Hulley and VPL under the Agreement between Cyprus and the Russian Federation for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital, signed on 5 December 1998 (“Cyprus-Russia DTA”). For reasons explained in more detail in Chapter IX.B of this Award (on “Unclean Hands”), Mr. Baker disagrees with Professor Rosenbloom’s conclusion that the claims to benefit from the Cyprus-Russia DTA were not appropriate, were vitiated by tax treaty abuse and were not justified by the provisions of the DTA.
174. In essence, Mr. Baker firstly maintains that the benefits that Hulley and VPL received under the Cyprus-Russia DTA are consistent with its purpose. Secondly, Mr. Baker opines that the abuse of law doctrine is found in the domestic law of certain countries, but is not universal and, where it applies, it is for that domestic jurisdiction to resolve whether the doctrine applies to international obligations such as double taxation conventions. Thirdly, Mr. Baker maintains that Hulley and VPL were the beneficial owners of the dividends received from Yukos in the sense of Article 10 of the Cyprus-Russia DTA. Hulley and VPL were acknowledged investment companies holding shares in Russian companies and did not have a permanent establishment in Russia under Article 10(4).
10. Mr. Yuri Schmidt
175. Mr. Yuri Schmidt77 was Mr. Khodorkovsky’s defense lawyer in his 2004 and 2007 criminal trials, prior to which Mr. Schmidt had no previous dealings with Mr. Khodorkovsky or with Yukos. In his witness statement, Mr. Schmidt recounts that Russian authorities systematically intimidated and harassed Yukos’ lawyers and personnel. Illegal and aggressive raids and seizures were “meticulously calculated to correspond to the critical stages in the dismantlement of Yukos.” Russian authorities also engaged in physical attacks and other provocation, including long and abusive interrogations and beatings. In February 2007, defense lawyers were illegally and invasively searched at the airport while en route to visit Mr. Khodorkovsky in Siberia. Russian authorities also (unsuccessfully) brought libel proceedings against and attempted to disbar Mr. Schmidt. Respondent chose not to call him for cross-examination.
176. Mr. Schmidt testifies that in the criminal cases against Messrs. Khodorkovsky and Lebedev, Russian authorities violated basic standards of due process and fair trial. In 50 years of legal practice in Russia, Mr. Schmidt had “never seen breaches of due process so flagrant and so egregious,” nor had he ever, even in the “darkest hours of the Soviet regime,” “seen the Russian State undertake such coordinated, systematic and intense efforts, and deploy such huge resources, against a person accused of an alleged economic offense.” The raids resulted in the “massive confiscation” of documents that were not returned. In December 2006, the defendants were transferred to a “pre-trial detention isolator” in Chita and Siberia. Mr. Schmidt recounts that during the trials, seized documents were presented out of context; the defendants sat in metal and glass cages that were equipped with hidden microphones; criminal charges were brought against defense witnesses; and prosecution motions were systematically granted, while defense motions were refused.
177. According to Mr. Schmidt, the goal of destroying Yukos and confiscating its assets was carried out by the coordinated actions of all branches of the Russian State. The judiciary blocked Mr. Khodorkovsky’s registration of candidacy for the 2005 parliamentary elections by accelerating his appeal. The administration transferred Messrs. Khodorkovsky and Lebedev to the “most inaccessible penal colonies in Russia,” “in blatant violation of Russian law.” The legislature amended legislation to permit the transfer and amended the law on NGOs to force the closure of Open Russia.
11. Dr. Sergei Kovalev
178. Dr. Sergei Kovalev78 is a Russian human rights activist, former politician, Soviet dissident and political prisoner. From 1993 to 2003 he served as an elected State Duma Deputy. He has been nominated for the Nobel Peace Prize. Dr. Kovalev’s expert opinion is on the independence of the Russian judiciary in cases with a political element or representing a particular interest to Russian authorities. Dr. Kovalev concludes that the Russian judicial system was not, and is still not, independent. According to Dr. Kovalev, where cases implicate the interests of the State, trials are political and decisions dictated by extralegal motives. There exists “absolute submission of the Russian judiciary to the executive power.” Respondent did not call him for cross-examination.
179. Dr. Kovalev opines that the normative regulation of the Russian judiciary ensures its dependence, including through the role of the executive branch of government in the appointment of judges. Court Presidents have “excessive powers,” courts are under-funded, judges earn bonuses for “exemplary behavior” (as defined by the regime), and disciplinary action is taken against disobedient judges.
180. Dr. Kovalev’s answer to the question of whether the Russian judiciary was independent of the executive branch in the Yukos and Khodorkovsky/Lebedev cases, is “unequivocal and definitely negative,” because of the “clearly political nature” of the cases. The political motive was “to dispose of Mikhail Khodorkovsky,” whom the Putin administration saw as an “unmistakable political opponent.” According to Dr. Kovalev, the attacks on Yukos also had economic motives, as evidenced by President Putin’s vouching for the unknown last minute purchasers of YNG. Pressure (including the imprisonment of Yukos lawyer Vasiliy Aleksanyan) was exerted on other Yukos associates to obtain testimony. Dr. Kovalev lists “egregious due process violations” against Messrs. Khodorkovsky and Lebedev, including: (a) a pretrial investigation that was conducted without the defendants’ participation; (b) the dismissal by the Court of every defense petition; and (c) the refusal by the Court to allow the defense attorneys to question Prosecution expert witnesses.
B. Respondent’s Witnesses
181. Respondent submitted no testimony from fact witnesses. Respondent submitted 11 expert opinions. At the Hearing on the Merits, Claimants chose to cross-examine only:79
1) Professor James Dow PhD; and
2) Mr. Oleg Y. Konnov
182. Respondent’s other witnesses, who did not appear for cross-examination, were:
3) Professor Reinier Kraakman;
4) Professor H. David Rosenbloom;
5) Professor Thomas Z. Lys PhD;
6) Ms. Felicity Cullen QC;
7) Mr. Dale Hart;
8) Mr. Polyvios G. Polyviou;
9) Mr. John Ellison FCA;
10) Mr. Raymond Gross CPA; and
11) Professor Dr. Albert Jan van den Berg
183. The following summary first addresses the testimony of Respondent’s two witnesses who appeared before the Tribunal, in order of appearance. It then reviews the evidence from Respondent’s nine witnesses whom Claimants chose not to cross-examine as well as the evidence provided by Professor Stef van Weeghel during the jurisdictional phase of this case.
1. Professor James Dow
184. Professor James Dow80 is Professor of Finance at London Business School, where he has taught valuation since 1989. He has a PhD from Princeton University and economics degrees from Cambridge University. Professor Dow was retained by Respondent as a damages expert to respond to the reports of Claimants’ expert, Mr. Kaczmarek.
185. Professor Dow’s two expert reports and oral testimony are summarized in Part XII of the Award. Professor Dow acknowledges focusing on “explaining why the Kaczmarek Report is not useful for calculating damages in this matter.” His reports contain no alternative valuation of his own. He basically describes a series of flaws in the analysis of Mr. Kaczmarek, highlighting his choice of a valuation date which, he says, is arbitrary and unjustifiably inflates damages. He also criticizes Mr. Kaczmarek for ignoring causation and the extent to which Yukos’ own actions might have contributed to the loss. Professor Dow identifies a number of errors in Claimants’ DCF analysis and questions the way in which Mr. Kaczmarek sought to correct them without impacting the ultimate valuation. He also articulates problems with Claimants’ comparable companies method and the assumptions underlying the “alternative collection scenarios” whereby Claimants would have been given an opportunity to make arrangements to pay off legitimate tax assessments. He identifies some “obvious and significant errors” relating to the application of the inflation rate, the export duty rate and the mineral extract tax rate. He also criticizes any valuation based on an American Depository Receipt (“ADR”) listing on the NYSE as too speculative. Professor Dow was cross-examined about these issues.
186. At the Hearing, Professor Dow testified that he would be prepared to put some weight on Mr. Kaczmarek’s analysis for YNG with corrections (USD 17.1 billion for the comparable companies approach and USD 17.2 billion for the comparable transactions approach); which represented a “reasonable stab”.81 Professor Dow was asked if his corrected figures for Yukos and YukosSibneft valuations resulting from the comparable companies analysis (of USD 67.8 billion and US 93.7 billion respectively) could provide “a valid result in terms of valuation in the same manner as for YNG,” to which he answered that: “They are not presented in that context, but I think I’d have to agree that they could be a useful valuation, yes.” 82 He qualified this answer by noting he had not done enough analysis, for example by accounting for changes in oil prices. Claimants’ counsel also challenged Professor Dow on his criticisms of Claimants’ comparable companies approach. With respect to the proper valuation date, from an economic standpoint, he considered that the end of 2004 was the appropriate valuation date, since that is when the loss of value in Yukos had taken place and the market thought, based on the share price, that the company’s fortunes had no chance of being reversed. Professor Dow opined that “it’s indisputable that there was no value by the end of 2004.83 By the end of 2004, Yukos’ share price had plummeted, it was a penny stock, and in the three years that followed there was no recovery in the share price.”84
2. Mr. Oleg Y. Konnov
187. Mr. Oleg Y. Konnov85 is a partner at Herbert Smith LLP and head of its Russian tax group based in Moscow. He has practiced tax law for 17 years and taught at the Law Faculty of Moscow State University. Respondent retained him as an expert on Russian tax law. Mr. Konnov was the only Russian tax lawyer who appeared as a witness before the Tribunal. Extensive extracts from his testimony are set out in the Analysis portion of the Award, especially the chapters dealing with Yukos’ tax optimization scheme and the tax assessments. Accordingly, his testimony is not reproduced here in any detail.
188. His first expert report describes the tax optimization scheme adopted by Yukos using domestic offshore companies and sets out some basic principles of the Russian federal tax legislation at the relevant times. He then addresses seven specific questions.
189. The first question is whether the tax authorities acted in accordance with applicable law and practice when assessing profit tax on Yukos with respect to sales by the domestic offshore companies. Mr. Konnov answers affirmatively and opines that the actions of the Russian tax authorities against Yukos were consistent with pronouncements by Russian courts on the “anti-abuse doctrine”, which according to Mr. Konnov, was “accepted and consistently applied” by Russian courts before and after the Yukos tax cases.86
190. The second question is whether Yukos was automatically entitled to a zero percent VAT rate in connection with exports declared by domestic offshore companies. Mr. Konnov answers no, because the application of a zero percent VAT rate was “strictly conditioned” on the taxpayer’s filing of a “special” zero percent monthly VAT return. According to Mr. Konnov, Yukos should have complied with the specific procedures because the courts and the tax authorities established that Yukos was “the actual owner and exporter of goods.”87
191. The third question is whether Yukos had disclosed to the Russian tax authorities prior to the commencement of the 2003 tax audit its tax minimization practices involving the use of domestic offshore companies registered in domestic low-tax jurisdictions. Mr. Konnov saw nothing in the record indicating that Yukos “made any significant disclosure of its tax scheme,” but even so, illegal tax practices may not be legitimized through a tax offender’s disclosure.88
192. The fourth question is whether the Russian Tax Ministry complied with applicable law in appointing and conducting a tax audit of Yukos in December 2003. Mr. Konnov answers affirmatively.89
193. The fifth question is whether the Russian tax authorities and courts complied with applicable law in imposing fines on Yukos. Mr. Konnov explains that the base fine under Russian tax law is 20 percent, which can be increased to 40 percent if non-payment results from the willful acts of a taxpayer, which in turn may be doubled for repeat offenders. Mr. Konnov concludes that the imposition of fines on Yukos was justified and accorded with prevailing court practice.90
194. The sixth question concerns actions that Yukos could have taken after receiving the 2000 Tax Audit Report in December 2003 to reduce its tax liability. Mr. Konnov explains that Yukos could have: (a) voluntarily paid all tax arrears and accrued interest and reserved cash for fines; (b) filed amended tax returns, and paid tax and interest due for 2001–2003; (c) complied with the legal requirements for claiming the zero percent VAT rate; and (d) discontinued as of 1 January 2004 the use of domestic offshore companies.91
195. The seventh question is whether the tax treatment of YNG changed after its sale to Rosneft. Mr. Konnov concludes that the treatment of YNG before and after its sale to Rosneft “was consistent with then current practice of the Russian tax authorities and courts, and does not suggest any irregularity.”92
196. Mr. Konnov’s second report responds to alleged misstatements of Russian tax law found in the Reply, including with respect to the “anti-abuse doctrine” under Russian tax law,93 “re-attribution,” and the “bad-faith taxpayer” doctrine.94 Mr. Konnov also addresses Claimants’ arguments about proportionality between tax benefits claimed and investments made in the low-tax regions, Yukos’ awareness that its tax optimization scheme was not fully compliant with the law, the application of the Law of the Russian Federation governing Value Added Tax (“VAT Law”), and fines on Yukos.95
197. Mr. Konnov appeared before the Tribunal for examination on 29, 30 and 31 October 2012. He was cross-examined on a range of documents from the record, legal authorities and their application to Yukos and its domestic offshore companies. Issues canvassed in the crossexamination included, inter alia: (a) the factual record underlying his views expressed about alleged improprieties in Yukos’ domestic offshore companies; (b) whether oil products must be physically stored or moved from the premises of trading companies; (c) the re-attribution theory applied to Yukos and the existence of legal precedents for the theory at the relevant time; (d) provisions in the regional tax legislation in Mordovia and elsewhere; (e) the investment agreements concluded between the domestic offshore trading companies and Mordovian authorities; (f) the existence of the anti-abuse doctrine at relevant times; (g) fines and penalties; (h) prior audits conducted by local and regional authorities on Yukos’ domestic offshore trading companies and the extent to which they demonstrate familiarity with and tolerance of the tax optimization scheme; (i) audit inspection practices; (j) the meaning of “interrelatedness” in the context of Russian tax legislation; (k) the consequences of the reattribution theory on entitlement to VAT refunds and the formalities required to enjoy VAT exemption; (l) the evolution of the ZATO tax laws and certain internal memoranda within ZATO tax inspectorates; and (m) timing for enforcement of tax assessments.96
198. Mr. Konnov also answered questions from the Tribunal, including about the principle of resolving doubts in favor of the taxpayer.97 He was asked why, in the interests of justice the Russian courts did not treat the filings for VAT by the trading companies as filings by Yukos.98 When he emphasized the formalities required for filing for VAT, he was further asked whether the trustee in bankruptcy (Mr Rebgun), who was charged with maximizing the resources available for creditors, himself could have filed the monthly forms for VAT return. Mr. Konnov answered that he could have done so, subject to the three-year limitation period, i.e., he could have re-filed for the three years preceding his appointment as trustee.99 The Tribunal also asked Mr. Konnov how the tax authorities determine the motivation of a taxpayer in making use of a low-tax region and about his experience in advising clients with respect to tax minimization.100
199. Mr. Konnov was asked about a comment made by him as an expert witness in the RosInvestCo UK Ltd. v. The Russian Federation arbitration (“RosInvestCo”), to the effect that “sometimes Russian courts [do not] have an excellent reputation.” Mr. Konnov responded that he had not come across corruption or irregularities in tax cases.101 He was invited to share his views on the tax evasion aspects of the convictions of Messrs. Khodorkovsky and Lebedev. The parts of the judgment dealing with tax elements of the ZATOs and issues of personal income tax avoidance seemed to him to make sense, but he could not comment on other parts of the judgment.102
3. Professor Reinier Kraakman
200. Professor Reinier Kraakman103 is a Harvard law professor specializing in comparative corporate law and governance. Claimants chose not to call him for cross-examination. His expert report concerns the activities of Bank Menatep, Mikhail Khodorkovsky and his “tight-knit group of confederates” (the “Khodorkovsky Group”), Yukos Oil Company, and Yukos’ subsidiaries from the period 1995–1999. He addresses provisions of the Russian Civil Law, Joint Stock Company Law (“JSC Law”) and privatization law.
201. Professor Kraakman maintains that Mr. Khodorkovsky, his Group, and Bank Menatep acted in bad faith and “probably illegally” in violation of the spirit and letter of Presidential Decree No. 889, which was the legal foundation of the Loans-For-Shares (“LFS”) Program. At stake in the initial auction of Yukos shares in December 1996 were (i) the right to lend funds to the Russian Federation secured by a pledge of 45 percent of Yukos stock, and (ii) the right to purchase a block of 33 percent of Yukos Stock in a so-called “Investment Tender”. Bank Menatep held shares pledged by the State and sold those shares to their close affiliates, a “tactic” that “allowed the Khodorkovsky Group to gain title to the pledged shares while avoiding Bank Menatep’s agency duty to maximize their value,” thus violating “the intent of Decree 889, while making a gesture toward formal compliance.”
202. According to Professor Kraakman, secondary sources, and some primary documentation, support “a reasonable inference” that, prior to the Russian Federation’s sovereign debt crisis in late 1998, the Khodorkovsky Group systematically skimmed revenue from Yukos’ partially-held operating subsidiaries—YNG, Samarneftegaz, and Tomskneft—in bad faith and in violation of the JSC Law’s regulations on self-dealing transactions. Circumstantial evidence indicates that the Khodorkovsky Group skimmed revenue directly from Yukos from mid-1996 until 1999, and transferred it to offshore companies around the world that were controlled or beneficially owned by members of the Khodorkovsky Group.
203. He testifies that following the Russian sovereign debt crisis, Yukos and the Khodorkovsky Group largely succeeded in squeezing out minority shareholders from Yukos’ operating subsidiaries. Yukos managed this by committing serious violations of the provisions in the JSC Law intended to protect minority shareholders. Yukos exhibited egregious bad faith by blocking minority shareholders from participating in extraordinary shareholders meetings called in March 1999. He claims: “As a professor of corporate law with a particular interest in the JSC Law, I have never read—or read about—anything more chilling in a professional sense than the documents and manipulative behavior surrounding the March 1999 EGMs [Extraordinary General Meetings] held for YNG, Samareneftegaz, and Tomskneft.” In Professor Kraakman’s opinion, Yukos and the Khodorkovsky Group opportunistically devalued Yukos shares, which Bank Menatep—the Group’s financial arm—had previously pledged to Western banks in order to finance Yukos’ efforts to gain control of Tomskneft.
4. Professor H. David Rosenbloom
204. Professor H. David Rosenbloom104 is a practicing attorney, a consultant and NYU law professor specializing in international taxation. He has worked for the U.S. Government on international tax matters. Respondent retained him as an international tax law expert. He opines on the appropriateness of the actions from 2000–2003 by four Cypriot entities—Hulley, VPL, Dunsley Limited, and Nassaubridge Management Limited—in claiming a reduced Russian Federation tax on dividends paid by Yukos and affiliates, under the Cyprus-Russia DTA.
205. Professor Rosenbloom concludes that each of the four entities is a “paper entity”, with “total control” and “ultimate ownership” exercised by Russian individuals operating solely within Russia and enjoying all economic benefits. According to Professor Rosenbloom, the invocation of the Cyprus-Russia DTA under these circumstances was a “blatant example of tax treaty abuse.” Professor Rosenbloom refers to pervasive recognition of the international “abuse of law” doctrine, to the OECD Commentaries (the DTA follows the OECD Model), and to the VCLT to assert that: (a) taxpayers must act in good faith to benefit from an income tax treaty; and (b) the employment of entities in one State party to a tax treaty exclusively to reduce taxes otherwise applicable under the laws of the other State party constitutes tax treaty abuse.
206. For reasons described in more detail in Chapter IX.B (on “Unclean Hands”), Professor Rosenbloom concludes that the benefits claimed were not justified by Article 10 of the Cyprus-Russia DTA, which limits the tax charged by one State on dividends paid from a company in that State to beneficial owners of the stock resident in the other State, provided they do not operate through a “permanent establishment” in the first State, to which the dividends are attributable. Firstly, he opines, the Cypriot entities were not beneficial owners of the dividends received on Yukos shares, and the beneficial owners were not residents of Cyprus. Secondly, in his view, the entities were not eligible for the claimed benefits because they operated through permanent establishments in the Russian Federation, to which the dividends were attributable. In sum, according to Professor Rosenbloom, the claims under the Cyprus-Russia DTA on behalf of the Cypriot entities were unjustified. They were not only abusive, but without merit.
207. In his second expert report, Professor Rosenbloom replies to the opinion of Claimants’ tax law expert, Mr. Baker, which he describes as “long on law and history” but “short, very short, on the facts.” The facts here, according to Professor Rosenbloom, involve Russian nationals and residents earning Russian source income and claiming a treaty-based reduction of normal Russian tax by reason of a “wafer-thin Cypriot corporate veneer managed from Russian soil.” Neither the DTA nor any other income tax treaty would condone such a structure and no rational country would endorse it as sound policy. Professor Rosenbloom then sets out in further detail facts pertaining to several Yukos-related entities which inappropriately claimed benefits under the Cyprus-Russia DTA.
208. Professor Rosenbloom opines that the primary purpose of a tax treaty is to eliminate or at least mitigate international double taxation and none of the authorities in Mr. Baker’s report deal with a country using treaties to reduce tax on its own residents but rather discuss third-country investors. Interpreting the Cyprus-Russia DTA as an instrument to attract foreign direct investment into Russia without regard to tax revenue loss exceeds the limited scope of OECDbased treaties and undermines the purpose of tax avoidance and evasion. Professor Rosenbloom also accuses Mr. Baker of failing to differentiate between treaty shopping and “round tripping”. Russia’s inaction to insist on strict limitation on benefit or its failure to terminate the Cyprus-Russia DTA does not establish Russia’s endorsement of round tripping.
209. Finally, Professor Rosenbloom refers to documents provided after the filing of his first report, which he says confirm that neither Hulley nor VPL beneficially owned dividends received from Yukos. Even if Hulley and VPL were considered beneficial owners of the Yukos dividends on the transferred shares, the related-party “repos” or stock-lending agreements, which had no purpose other than to enable claims of treaty benefits, are an improper use of the DTA.
210. According to Professor Rosenbloom, even if the Yukos structure and transactions with the Cypriot entities were not abusive, dividend distributions by Yukos and its affiliates to Hulley, VPL and the other Cypriot entities did not qualify under the DTA for reduced tax in Russia since they should have been taxed as “business profits” under Article 10(4) of the DTA. The facts also confirm that all the Laurel subsidiaries had permanent establishments in Russia to which the dividends received from their Russian subsidiaries were attributable. According to Professor Rosenbloom, it is not necessary to adopt a complicated “economic substance” or “substance-over-form” analysis to see that the Yukos structure cannot be defended as within the scope of the Cyprus-Russia DTA or legitimate tax planning. Had Mr. Baker and Claimants “focused on the facts presented” they could not reasonably have come to any other conclusion.
5. Professor Thomas Z. Lys
211. Professor Thomas Lys105 is a professor of accounting at Kellogg School of Management, Northwestern University in Chicago. He has a PhD in accounting and finance from the University of Rochester and an economics degree from the University of Berne, Switzerland. He has served as a consultant to several companies. He was retained by Respondent to expound in detail various financial transactions and operations of Yukos. Claimants chose not to call him for cross-examination. The appendices attached to Professor Lys’ Reports were used at various times throughout the Hearing to help illustrate Yukos’ structure and activities.
212. Professor Lys recounts Yukos’ incorporation in 1993, privatization in 1995 and public sale of shares in 1996. He describes Yukos’ structure and activities and the role of the various producing subsidiaries, trading entities and off-shore entities, and the structure and flow of funds originating in the trading companies into “offshore and Yukos entities.”
213. Professor Lys explains that starting in 1999, the majority of Yukos shares were owned by subsidiaries of GML, an entity whose major interest was held by Mr. Khodorkovsky, the CEO and Chairman of the Executive Committee of the Board of Directors of Yukos. Other shareholders of GML also had senior management positions in Yukos. In several instances, shares of Yukos stock were transferred between various entities under the control of GML. Many such transactions placed the Yukos shares temporarily, sometimes for less than a week, under nominal ownership of Cypriot entities on dates that established record ownership for purposes of Yukos dividend distributions, apparently in an effort to reduce Russian taxes on these dividends. YUL was a wholly-owned subsidiary of GML. Hulley was a wholly-owned subsidiary of YUL. Although VPL did not fall under the ownership structure of GML, it was a subsidiary of the Veteran Petroleum Trust (a Jersey trust), of which YUL controlled at least three quarters of the voting rights.