Corporate Sovereignty Tribunal Makes $50 Billion Award Against Russia

from the arbitrary-arbitrals dept

Techdirt has been writing about the dangers faced by nations that sign up to treaties containing corporate sovereignty clauses for some time now. These chapters are typically included in so-called trade agreements like TAFTA/TTIP and TPP — although they actually go far beyond regulating trade — but are also found elsewhere. For example the Energy Charter Treaty (ECT) includes one, as Germany found to its cost when the Swedish company Vattenfall used the investor-state dispute settlement (ISDS) mechanism to claim €3.7 billion after the Germany state decided to phase out nuclear power stations — thus reducing Vattenfall’s future profits. Now the ECT’s corporate sovereignty chapter has struck again on an even more staggering scale:

In an historic arbitral award rendered on July 18, 2014, an Arbitral Tribunal sitting in The Hague under the auspices of the Permanent Court of Arbitration (PCA) held unanimously that the Russian Federation breached its international obligations under the Energy Charter Treaty (ECT) by destroying Yukos Oil Company and appropriating its assets. The Tribunal ordered the Russian Federation to pay damages in excess of USD 50 billion to our clients who were the majority shareholders of Yukos Oil Company.

That comes from a press release issued by the lawyers acting for the Yukos shareholders, who are also doing quite nicely:

The Tribunal also ordered the Russian Federation to reimburse to our clients USD 60 million in legal fees, which represents 75% of the fees incurred in these proceedings, and EUR 4.2 million in arbitration costs.

Even for an oil- and gas-rich country like Russia, this is obviously a massive amount of money. A detailed and insightful post by Kavaljit Singh puts it in context:

In relative terms, the compensation award is equivalent to around 11 per cent of Russia’s foreign exchange reserves, 10 per cent of annual national budget and 2.5 per cent of country?s GDP. Given the magnitude of compensation, the Award could be more damaging to the Russian economy than all the economic sanctions imposed by the West against Russia for its actions in Ukraine.

He goes on to point out one of the most worrying aspects of these awards by tribunals:

What is most astonishing is that the arbitral tribunal has not provided any standard or credible rationale behind awarding $50 bn in compensation to claimants. The calculations of total damages put forward by claimants are based on assumptions and hard evidence is lacking. The tribunal found that the claimants contributed to 25 per cent “to the pejudice they suffered at the hands of the Russian Federation.” Hence, the amount of damages to be paid by Russia is reduced by 25 per cent to $50 bn from $67 bn. In its lengthy 615-page verdict, no explanation has been given by the tribunal on how did it arrive at 25 per cent of claimants’ contributory fault? Why not 30 or 40 or 50 per cent?

The arbitrary nature of these awards, and the fact there seems to be literally no limit to the amount that might be awarded, are just some of the many problems afflicting investor-state dispute settlements. Singh notes another disturbing aspect of the current verdict:

It needs to be emphasized here that Russia only accepted the provisional application of the ECT (pending ratification) in 1994 meaning that the country will only apply the Treaty “to the extent that such provisional application is not inconsistent with its constitution, law or regulations.” Same was the approach adopted by Belarus, Iceland, Norway and Australia.

Russia never ratified the ECT and announced its decision to not become a Contracting Party to it on August 20, 2009. As per the procedures laid down in the Treaty, Russia officially withdrew from the ECT with effect from October 19, 2009.

Nevertheless, Russia is bound by its commitments under the ECT till October 19, 2029 because of Article 45 (3) (b) states that “In the event that a signatory terminates provisional application?any Investments made in its Area during such provisional application by Investors of other signatories shall nevertheless remain in effect with respect to those Investments for twenty years following the effective date of termination.”

That is, although Russia signed the treaty, it never ratified it. And yet under its terms, it can still be sued, as here — another good reason never to sign up to these kind of agreements. Whether it will pay up is quite a different matter, of course. As Singh points out:

Shareholders will soon find it extremely difficult to enforce the Award as Russia has already decided to challenge it. The shareholders could seek to seize commercial assets of Russia (owned by country’s state-owned corporations and sovereign wealth funds) in 149 countries which are signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Award (popularly known the New York Convention).

In any case, it is going to be a time-consuming and uphill process to enforce the tribunal Award in 149 contracting parties of New York Convention.

As he writes, the enormous award against the Russian government should stand as the starkest warning yet about the dangers of entering into these kinds of agreements:

Even though this Award is related to ECT, it provides important policy lessons to other countries which have already signed or currently negotiating bilateral investment treaties (that allow investor-to-state arbitration — ISA) without any consideration of consequences and potential costs.

Here’s why:

The existing investment protection agreements have failed to address the balance of rights and responsibilities of foreign investors as it offers numerous legal rights for investors without requiring corresponding responsibilities for them.

That’s a hugely important point that all those countries taking part in the negotiations for TAFTA/TTIP, TPP and CETA would do well to consider carefully — or they may find themselves on the wrong end of $50 billion award, as Russia now does.

Follow me @glynmoody on Twitter or identi.ca, and +glynmoody on Google+

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Comments on “Corporate Sovereignty Tribunal Makes $50 Billion Award Against Russia”

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46 Comments
David says:

Re: Re:

Given that Russia did not even ratify the treaty, I’d be surprised if anything but “f… that” came of it: any consequential sanctions are not likely to add up to the “fine”.

I am surprised that they get hit for a treaty they have not even ratified.

That would seem to imply that if the European Commission (which is not democratically controlled and basically a bunch of lobbyists) goes on a treaty rampage without the parliament actually ratifying any of that, the bills for that will still end up at the tax payers.

That One Guy (profile) says:

50 billion… yeah, first of all, as noted in the article, good luck collecting that, and forcing the issue if Russia refuses to pay out.

Second, the idea that even when they hadn’t fully signed in to the ‘agreement’, and in fact turned it down, they still fell under it’s rules seems just a titch out there. If other corporate sovereignty agreements have clauses like that, the various countries who’ve signed up with them are pretty much screwed, since even if they drop the ‘agreements’ now they’d still be beholden to them.

Hopefully this will serve as a good warning to others to flat out reject and refuse to sign any treaty or agreement that comes packaged with any corporate sovereignty clauses in the future.

Anonymous Coward says:

Re: Re:

The offence happened in 2003 when Russia dissolved the company for “unpaid taxes” after arresting the owner. It has been ruled by almost all other parties to be a political and illegitimate maneuver. The beneficiaries of the dissolution or “unlawful expropriation” are the state-owned: Rosneft and Gazprom. Hinky business it is.

So the case is pretty clear in terms of responsibility and guilt has been concluded pretty well before too.

The problem here is that the arbitration seems arbitrary. Corporate sovereignty is crap, but when you risk these kinds of nationalisations if you invest in a business in a certain country, the interest in investing there will be low.

Shaun Wilson (profile) says:

Re: Re: Re:

I’d say my thoughts are pretty similar – at first glance it seemed almost obvious that the basic ruling was correct given the major corruption in the Russian government. The only question seemed to be whether the size of the award was appropriate and who should pay it – ideally Putin personally and whomever of his cronies received the stolen company assets.
The story seems more complicated however as it appears that the shareholders themselves acquired the company – initially from the Russian government – through corruption so it seems a bit hypocritical of them to complain about the Russian government’s corruption in stealing it back.

Anonymous Coward says:

Re: Re: Re: Re:

Yeah Russia in the 1990’s was extremely corrupt and the mass cowboy liberalisations without a functioning process were very problematic. But it is not necessarily the initial investors getting hit when they chopped it up and sold it to cronies.

I guess there is a certain level of politics in it: Do you punish all investors at the time of the breakup or do you let the corrupt ones get away with it because of clean ones coming in?

Eldakka (profile) says:

Re: Re: Re:2 Re:

FIFY

“Yeah Russia since the dissolution of the Soviet Union was extremely corrupt..”

err 2nd try:

“Yeah Russia since the dissolution the Tsarist regime was extremely corrupt..”

3rd try:

“Yeah Russia in the later years of Tsarist regime was extremely corrupt…”

Bah:

“Yeah Russia has always been extremely corrupt…”

Donglebert The Needlessly Unready says:

I don't think this is quite the same sort of dispute

I think all of us agree that a state should be allowed to make policy decisions without the threat of being sued for future potential earnings of companies.

But this case doesn’t look to be that sort of case. Russia was being charged with “stealing” the Yukos through various methods. That the head of the company was known to be anti-Putin lends their claims a certain credibility.

If that is the case, then this might be the sort of thing that actually should be covered by a treaty. Much in the same way that eminent domain, compulsory purchase, etc requires reasonable compensation.

But that then would lead to the question of how the company was valued at $50 billion. An even bigger question is how on earth do you spend $60 million on legal fees.

Anonymous Coward says:

Re: I don't think this is quite the same sort of dispute

An even bigger question is how on earth do you spend $60 million on legal fees.

Based on my sample of one, lawyer fees are often a percentage of the value at issue. So the 60 million is nothing more than a fixed percentage of whatever they won in this case.

Eldakka (profile) says:

Re: I don't think this is quite the same sort of dispute

What it comes down to: Investors do their research before investing.

This includes taking into account things like: weather patterns, governmental impacts on your investment, government corruption, government stability, crime, phase of the moon if it’s relevant to the investment, rate of return and so on.

The riskier the investment, the bigger the return IF it pays off.

There is NEVER a guarantee of an investment breaking even, let alone paying off. Even government bonds are not 100% (tho generally speaking pretty close to it, ask those people who invested in Argentinian government bonds in the 90’s how safe that was …) secure.

If you invest in a region of high instability or corruption, that should be taken into account in the investment. Whats the chance of losing it all? Whats the potential return? Does the potential return warrant the risk of losing it all? Can I afford to lose what I’ve invested in that country if it does go down the tubes?

Unless you have answers to all those questions, you shouldn’t be investing. If the Risk vs Reward equation is not in your favour, don’t invest. If you can’t afford the downside (losing it all) don’t invest.

You don’t need corporate sovereignty rules. Either you trust the courts in the country to not be corrupt, or you do. And that should be taken into account:

“Yes I trust the courts, I trust the government, so it’s a safe investment, so I only expect 5%p.a. return”; or

“No, the courts are corrupt, the government is corrupt, so I won’t invest what I can’t afford to lose, and since I have a good chance of losing it, if it pays off I expect a 60%p.a. return.”

Anonymous Coward says:

and what is going to happen if Russia just says ‘go swivel’? is it going to lead to an atomic war? will all other countries stop dealing with Russia? will Russia suddenly not be able to sustain itself? i think the former will happen and no one will be able to do a damn thing! in my opinion, that would be exactly right! these ISDS clauses are ridiculous and are eventually gonna come back and haunt the originator of the idea! who was that, by the way? not the good old USA again, was it? trying to do it’s usual thing anf fucking everyone else while holding the door open ready for it to make it’s usual exit with ‘now it’s against us, we dont want ISDS included!!’

Whatever (profile) says:

The issue here is a pretty common one in many banana republics and communist hold overs: Forced nationalization or forced transfers of companies and assets to those more friendly with the regime.

The owners of the assets in the end are Putin’s best buddies. The gas and oil industries are pretty much what keeps Russia afloat these days, and getting his friends to control the taps is key to Russia being able to bully countries in Eastern Europe and such.

50 billion ain’t nothing compared to what shareholders lost.

That One Guy (profile) says:

Re: Re:

50 billion ain’t nothing compared to what shareholders lost.

Maybe, maybe not, the issue is that they seem to have pulled that ’50 billion’ number out of thin air, with no backing evidence to support it. Had they done that, provided documented evidence to support the claimed ‘losses’, and given what Russia had apparently done in this case, a lot less people would have a problem with this I’m guessing.

amoshias (profile) says:

If there is ever a just case for this kind of decision...

If there was ever a just case for this kind of treaty, this is it. It’s a great intellectual exercise, because if you can’t accept its existence here it should never exist.

I mean, this is a situation where – to enrich his own coffers, and bolster his power, Putin jailed the owner of the company for a decade, and broke up and seized the country. The charges are pretty much universally agreed to be trumped up. And there’s no redress, because Russia is pretty much under Putin’s thumb.

So… what’s the plan? Because while the idea of “corporate sovereignty” makes me want to throw up, it makes sense to me to have SOME kind of recourse when a dictator simply steals your company.

While there’s no question that if this kind of treaty IS the solution, there need to be much better checks and balances, written standards, etc., I think it’s a much tougher question than Glyn makes it out to be.

John Fenderson (profile) says:

Re: If there is ever a just case for this kind of decision...

“it makes sense to me to have SOME kind of recourse when a dictator simply steals your company.”

If you’re doing business in a country where you have no such recourse, then you’re a fool. Don’t do business there.

And THAT is the pressure that will cause nations to develop their own laws to prevent such theft. If they don’t they get no outside investment.

Things like ISDS are 100% unnecessary and harmful.

Anonymous Coward says:

Re: Re: If there is ever a just case for this kind of decision...

What a stupid comment. So you want a world in which Russia can steal a multi-billion dollar company, put its founders into siberian prison for 10+yrs and murder its counsel and opposition journalists who dared denounce the farce, and the sum total you’re willing to do is carp, “buyer beware” (or something stupid like that)?

In that case, then hopefully USA will NUKE Russia – since you don’t seem to think Russia should follow the Rule of Law.

Cerberus (profile) says:

Re: If there is ever a just case for this kind of decision...

First, this is not really a foreign company, but a Russian company. So “foreign investors” is a bit of a leap: partly foreign shareholders?

Secondly, Yukos was mostly bought by Chodorovsky for 310 million, even though it was probably worth far more. Putin is of course horrible, but, in a way, Chodorovski and the shareholders stole this money from the Russian people through corrupt officials, and they do not deserve the 50 billion either:

“[O]wnership of some of Russia’s most valuable resources was auctioned off by oligarch-owned banks… Although they were supposedly acting on behalf of the state, the bank auctioneers rigged the process-and in almost every case ended up as the successful bidders. This was how Khodorkovsky got a 78 percent share of ownership in Yukos, worth about $5 billion, for a mere $310 million…”
http://en.wikipedia.org/wiki/Yukos_Oil#Privatization_.281995.29

Third, if this had been a Western company wronged by the Russian government, the more desirable situation would be for its country to stick up for it, not enabling a few very rich people to get an arbitrary amount of money from a country through an arbitrary tribunal. As in the WTO, it should be country v. country, if anything.

Lastly, in general, I think nationalisation and otherwise depriving foreign companies of assets or profits is not always so bad per se, especially if the company’s interests legitimately conflict with those of the country. And companies are free not to invest in a country that might do this. So do we need any mechanism at all to fight this?

Case says:

Re: Re: Pacta sunt servanda

Ratification comes after signing. And the “provisional application” of a treaty which has not yet entered into force is fully supported by the Convention on the Law of Treaties, which Russia accessed on 29 Apr 1986

A state government is not some poor granny who got scammed by a doorstep seller due to obfuscatory fine print. If a state signs a treaty, they are expected to have had a horde of lawyers double-check every comma before.

Anonymous Coward says:

What about the minority shareholders?

“pay damages in excess of USD 50 billion to our clients who were the majority shareholders of Yukos Oil Company.”

So, screw the little guy shareholders who didn’t have enough stock to be declared a ‘majority’ shareholder?

Never have I seen a more blatant admission that these measures are met to protect the rich, not the middle class or poor who also happened to have some investments at stake in a foreign country. But hey, it’s consistent with how collection agencies never pay up the money owed to the little guys.

Anonymous Coward says:

Re: What about the minority shareholders?

There is a question of who paid for the arbitration. If this was a real case in front of a real civil court, the minority shareholders would be able to sue later and get their money or settle with the guilty part out of court.

In arbitration, I am not sure how that kind of thing works. If it is only to protect majority shareholders and companies against legislation, the problems of this kind of arrangement should be obvious since “due process” and/or “equality to the law” is basically non-existance in that kind of environment…

DannyB (profile) says:

Finally! At last!

Now maybe the RIAA / MPAA can get some action out of the Special 301 Report.

https://en.wikipedia.org/wiki/Special_301_Report

But they won’t be messing with paltry sums like $50 Billion. After all, the RIAA says that copyright infringement alone is worth $75 TRILLION. (Just google for ‘RIAA 75 trillion’. But do it quick before someone uses the ‘right to be forgotten / censored’.)

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