Russia liable to compensate investors in nationalised company

In its award, seen by Out-Law.com, the arbitral tribunal held that Russia used "illegitimate" tax bills to bankrupt and nationalise the company. The shareholders had argued that they had been "unlawfully dispossessed" of their shares in the company "by means of a variety of abuses of executive and judicial power".

"[The Russian government] intentionally prevented Yukos from discharging its tax debt," the tribunal said in its ruling. "[T]his conclusion supports [the shareholders'] allegation that the Russian Federation's goal was to expropriate Yukos, and not legitimately collect taxes."

Although stressing that it was unable to rule on whether the Russia's actions itself had been unlawful, the tribunal said that it was "simply [ordering the Government] to pay for what it took, valued at the time of the taking". The Russian Federation "ended up with 935 of the Yukos Oil Company" as a result of its actions, it said.

Marney Cheek of Covington and Burling, the law firm that acted for the Spanish investors, said in a statement that the ruling "vindicated" the rights of Yukos' investors.

"This case stands for an important principle: if Russia violates its treaty obligations and harms investors, there will be consequences," she said. "The panel's decision holds Russia accountable and awards compensation to the former shareholders of Yukos."

Yukos was bankrupted as a result of a series of tax claims issued by the Russian government in 2003. On liquidation, state-owned companies Rosneft and Gazprom received the vast majority of its assets. The company was worth more than $60bn at the time it was nationalised, according to the arbitral tribunal.

International arbitration expert Björn Gehle of Pinsent Masons, the law firm behind Out-Law.com, said that the decision as to whether retail investors who had made their investment through an investment fund had standing to claim for damages under the relevant treaty between Spain and the Russian Federation had been settled in an earlier jurisdictional decision by the tribunal in 2009, then known as the Renta 4 case.

He said that what made this "test case" significant is that it provides a certain level of confidence to investors based in other jurisdictions that they may be successful with similar claims against Russia, but that this is subject to the particular wording of each applicable investment treaty in those cases. The decision also  gives an indication of the potential total liability of the Russian State to former Yukos shareholder, as both direct and indirect investors. he said.

"Based on the award made to the Spanish investors, the Russian government's total potential liability could be in excess of $60 billion," he said.

The tribunal valued the shareholders' combined claims at over $2bn, based on the company's value at the time it was nationalised. An investor from the UK was successful in similar proceedings against the Russian government in September 2010, as a result of a similar investment treaty between the UK and Russia.

Gehle said that the case was also significant as the investors' action had been funded by a "Good Samaritan" third party, rather than a commercial third party funder. The tribunal did not award the investors any of the $14 million in costs they had claimed, stating that the investors had not "expended money nor incurred obligations on account of the costs" of pursuing the case.

"Under normal circumstances a third party funder will get some sort of benefit as a result of a successful outcome, such as a share in any damages," Gehle explained. "This case is somewhat different in that you had a 'Good Samaritan' as a third party funder rather than a commercial entity. The tribunal confirmed that, had there been a legal duty on the part of the investors to at least compensate the third party of their costs the situation would have been different, therefore funders need to be sure that funding agreements reflect the risk they incur in funding legal action."