LONDON (Reuters) - Russia will likely try to settle with former owners and managers at defunct oil firm YUKOS after latest court actions showed the Kremlin could face asset seizures in Europe and the U.S., an EU law specialist said.
Former YUKOS managers, creditors and shareholders took Russia to Europe’s top human rights court last month, accusing Moscow of destroying the firm through illegal, crippling tax demands. They are seeking a record $98 billion in damages.
Professor Alan Riley, an energy and competition law specialist at City University, London and an adviser to the EU, said Russia’s need for capital investment in the energy sector would lead it to reconsider its defense against YUKOS.
“It is likely that ultimately neither side will actually want the embarrassment or media frenzy of the execution of arrest warrants of Russian assets all over North America and Europe, and a private settlement will be arrived at,” Riley told Reuters in an interview late last week.
In November a tribunal of the Permanent Court of Arbitration in The Hague ruled that Russia was bound by the Energy Charter Treaty (ECT) by virtue of its 1994 signatory membership, despite never having ratified the document.
Once Russia’s largest oil firm, YUKOS was brought to its knees in 2006 after a multi-billion-dollar tax claim that its directors say was driven by then President Vladimir Putin, who was consolidating his power at the expense of tycoons.
Russia has denied charges of wrongdoing and its ambassador to the Council of Europe has accused the court of playing politics by agreeing to hear the YUKOS case.
In July last year Russia withdrew its consent to provisional application of the ECT, exiting in October. However, legacy provisions of the ECT mean its binding effect remains in force for 20 years from the withdrawal date.
The November ruling nevertheless cleared the way for former owners of YUKOS to go forward with their “life-long litigation” claim against the Russian state over the way it broke up in 2007 what was the country’s biggest oil company.
“(YUKOS) have the significant advantage, and the scale of assets outside Russia plus the prospect of a media frenzy would, I think, eventually induce a private settlement,” Riley said.
Riley said it would be several years before a hearing on the merits of the YUKOS case was brought to trial, but that the interim judgment had significantly strengthened the legal standing of foreign investments in Russia.
As oil and other commodity prices boomed in the last half of the previous decade, Russia’s state coffers expanded and Putin began acquiring state shareholdings in energy and commodity assets, in turn encouraging those companies to acquire overseas assets of their own.
Riley said state shareholdings in energy and commodity assets were, unlike military, diplomatic or cultural assets, vulnerable to litigation by aggrieved counterparties in court.
“They don’t attract sovereign immunity because they are not diplomatic missions, they are not used in an exercise of state power, all of that creates a degree of leverage for western companies,” Riley said by telephone.
“I don’t think that they thought through the consequences that actually creates hostage investments in Europe.”
In a commentary for a think tank, Center for European Policy Studies, Riley wrote: “By creating classes of assets outside Russia that are owned by state-owned Russian companies that are not able to benefit from sovereign immunity, the Kremlin has created attractive targets for seizure by Yukos shareholders,”
“Execution could be enforced against Russian assets in any court in Europe or North America with a significant chance of success.”
Editing by James Jukwey