Russia vows to challenge $50bn Yukos ruling

By bne IntelliNews July 29, 2014


The Russian finance ministry has reacted furiously to a court ruling delivered on July 28 that ordered it to pay $50bn damages to former shareholders of defunct oil firm Yukos, insisting Moscow will challenge the arbitration fine.

In a binding verdict, the court of arbitration in The Hague said Russian officials had manipulated the Russian legal system to bankrupt the company. After then-majority owner Mikhail Khodorkovsky was arrested in 2003, Yukos was dismembered, with the majority of the assets ending up in the hands of Rosneft. That built the state-controlled company into the world's largest publicly listed oil producer.

The Russian finance ministry called the ruling "flawed," "one-sided" and "politically biased" as it digested the world's largest ever compensation package, which the court said it should pay to GML. The plaintiff held 60% of Yukos, once Russia's biggest oil producer.

During his trial for fraud and tax evasion in 2005, Khodorkovsky – who built himself into a western cause celebre during his decade or so in prison despite his questionable methods used to build up Yukos – signed over his stake in the company to Leonid Nevzlin, who holds 70% in GML. Platon Lebedev, who was jailed alongside Khodorkovsky until the pair was released in January, is one of a handful of others that hold the rest of GML. The thousands of former minority shareholders in Yukos are not included in the award.

“This award is a major victory for us," said Tim Osborne, director of GML, in a statement released by lawyers Shearman & Sterling. "After intense scrutiny, the tribunal confirmed… that Yukos was destroyed, and its assets expropriated, for political reasons."

“The agencies which represent Russia in this process will no doubt use all available legal avenues to defend its position,” Sergei Lavrov, Russia’s foreign minister, said at a briefing prior to the announcement, according to the FT. After the verdict was announced, the finance ministry claimed the court "had no jurisdiction to consider the questions it was given," and insisted the finding was "politically motivated."

“The Russian Federation will contest the ruling of The Hague’s Arbitration Court in Dutch courts and expects to get a fair result,” the ministry added.

Should that challenge fail, and Moscow refuses to pay by January 15, GML will be free to pursue Russian assets around the globe. That "could set in motion a long-lasting stream of unwelcome headlines," suggest analysts at VTB Capital.

"Unfortunately it looks like nationalisation of Yukos went in favor of Putin’s state oligarchs who were primary beneficiaries of the whole process," write analysts at Midlincoln Research. "While now the taxpayers are supposed to pay the state debt associated with Yukos."

None of this will help calm the rising tensions between Russia and the West over the crisis in Ukraine. While not a formal part of it, the Yukos ruling sits well with the rising pressure being applied by the West on Russia since the shooting down of the Malaysian Airlines plane, almost certainly by the pro-Moscow separatists in Ukraine.

The US said on July 28 that it is preparing new sanctions against Moscow over its role in the crisis in Ukraine, while the EU has plans to announce a further expansion of sanctions on July 29 against members of President Vladimir Putin's inner circle as well as perhaps Russia’s major banking players like VTB.

Washington also claimed on July 28 that Russia had violated a key arms control treaty by testing a nuclear cruise missile. A senior US official provided few details on the alleged launch, which the White House says broke the Intermediate-Range Nuclear Forces Treaty signed in 1987, and described it as "very serious."

Notes Tim Ash at Standard Bank: "As if relations between the US and Russia were not bad enough already… All this is likely to further solidify support in the US Congress for further sanctions against Russia."

Meanwhile, Moscow is reported to be threatening to expand restrictions on food imports from EU countries.

All of this negative news flow hit Russian markets hard on July 28. The ruble lost 1%, while the RTS Index posted its second sharpest daily decline since mid-April.

"This is another extremely negative development indicating the possibility that sanctions will affect trade flows in addition to the financial sector," write analysts at Alfa Bank. "Regardless of whether they are immediately confirmed, both developments suggest that the ruble will remain under pressure for the near future and that the inflation outlook for the coming months will deteriorate. The [central bank's] response remains an open question: While previously we considered another rate hike as very unlikely this year, we now would not exclude this happening within the next two months."


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