Russia’s most successful energy company

Once it had been privatised in 1995-96, Yukos Oil Company confronted its Soviet legacy of chronic under-investment: oil production was falling by 15% and the company owed debts of around $3 billion. Workers had not been paid for months. The economic shocks of 1998, when the rouble and stock market collapsed, only made things harder.

But new management restructured Yukos from top to bottom, and invested heavily in new technology, boosting oil production and efficiency. The company adopted Western standards of governance, issued quarterly financial reports in line with US accounting rules, and published its entire ownership structure.

By 2003, Yukos was the country’s largest taxpayer, accounting for 5% of the federal budget, employing 100,000 people across 50 regions, and reaching a market value of more than $33 billion. Yukos joined the Financial Times top ten global companies for shareholder confidence.


The Russian state brutally expropriates Yukos

From the turn of the century, Yukos chief executive, Mikhail Khodorkovsky, played a growing role in Russian civil society, promoting liberal democracy and economic reform. In 2001 he launched the Open Russia Foundation to strengthen the country’s democratic culture. In the eyes of President Vladimir Putin, he posed a threat.

Shortly after a televised meeting with the Russian Union of Industrialists and Entrepreneurs in February 2003, where Khodorkovsky spoke about the need to curb corruption, state authorities began to harass and threaten Yukos staff; the company’s offices were searched and files confiscated.

In October 2003, Mikhail Khodorkovsky was seized at gunpoint. Even after the European Court of Human Rights condemned his trial – the charges were clearly fabricated and the trial violated every principle of the rule of law – he would spend more than a decade in jail.

More than 30 Yukos employees were interrogated or arrested. The European Court of Human Rights has condemned Russia on eight separate occasions for violating the basic rights of former Yukos executives. In 2014, the Court awarded former shareholders €1.9 billion in compensation.

For Yukos Executive Vice-President, Vasily Aleksanyan, these rulings came too late. He was diagnosed with lymphoma and AIDS shortly after his detention, but was repeatedly denied urgent medical attention even as his health deteriorated. A man of honour, Aleksanyan refused to give false testimony against his Yukos colleagues. He remained in pre-trial detention for almost three years in conditions described as “monstrous” by Russia’s Human Rights Council. In 2008, the European Court of Human Rights ordered Russia to release him. Aleksanyan never recovered, and died shortly after his release.

The Russian state’s brutal expropriation of Yukos revealed a growing contempt for the rule of law both at home and abroad.

In December 2003, without warning, Russian tax authorities demanded $3.5 billion from Yukos, only months after a regular tax audit had given the company a clean bill of health. Yukos was ordered to pay the full amount in two days.

Over the next two years, the authorities would demand a total of $24 billion, and refuse every offer of dialogue. Every act of the authorities raised a simple question: why would they harass and threaten Yukos if their true purpose was to collect taxes?

As it pursued its campaign of intimidation, the Russian state revealed its true goal: to destroy Yukos and steal its assets. In 2006, the state auctioned off Yukos’s core production facility, Yuganskneftegaz, in less than 10 minutes. The vast majority of Yukos’s assets were acquired well below their market value by Rosneft, the state-owned oil producer, and its affiliates. Yukos was forced into bankruptcy in 2006, and struck from the company register in 2007.


Former Yukos shareholders bring Russia to justice

In 2005, after it became clear that the Russian Federation intended to expropriate the company, former Yukos majority shareholders commenced independent arbitration proceedings, pursuant to the Energy Charter Treaty. For more than a decade, three renowned arbitrators examined more than 4,000 pages of evidence, and presided over 10 days of hearings on jurisdiction and then 23 days on the merits. More than 20 witnesses give evidence. While Russia participated fully in all proceedings, it put forward not a single factual witness, despite the tribunal suggesting this would be helpful.

In its Final Awards of July 2014, the tribunal concluded that:

  1. Russian courts bent to the will of Russian executive authorities to bankrupt Yukos, assign its assets to a State-controlled company, and incarcerate a man who gave signs of becoming a political competitor.
  2. The State’s campaign of intimidation and harassment not only disrupted the operations of Yukos but also contributed to its demise.
  3. The primary objective of the Russian Federation was not to collect taxes but rather to bankrupt Yukos and appropriate its valuable assets.
  4. The owners could not have been expected to anticipate that they risked the evisceration of their investments and the destruction of Yukos.

The Tribunal awarded compensation of more than $50 billion to GML’s wholly-owned subsidiaries, Yukos Universal Limited and Hulley Enterprises Limited, and to Veteran Petroleum Limited, a pension fund for the benefit of former Yukos employees.

To this day, in defiance of international law, Russia refuses to pay the compensation. Since 2014, it has disputed the arbitral awards in the courts of The Netherlands. Dutch courts have jurisdiction over these proceedings for the simple reason that the country’s capital, The Hague, had served as the seat of the arbitration.

In 2020, the Court of Appeal of The Hague confirmed the arbitral awards and declared them enforceable; it quashed a previous decision that had set the awards aside. The Court of Appeal ruled that Russia was bound by the Energy Charter Treaty, including its provisions on settling disputes, and thus confirmed the legal basis of the arbitral tribunal and the compensation it had awarded to former Yukos shareholders.

Russian filed a cassation appeal with the Supreme Court of The Netherlands – its final opportunity to set aside the arbitral awards. In December 2020, the Supreme Court dismissed Russia’s application to suspend enforcement of the Arbitral Awards, deciding that the former Yukos majority shareholders could continue to enforce them. Following a preliminary review of Russia’s appeal, the Supreme Court ruled that the likelihood of Russia’s arguments succeeding was not such as to warrant any suspension of enforcement.

In November 2021, the Supreme Court of The Netherlands rejected all the substantive grounds of Russia’s cassation appeal, and referred one final matter to the Court of Appeal of Amsterdam for further review. The former Yukos shareholders submitted their pleadings to the Court of Appeal in February 2022.