Interesting press release and analysis by the law firm (Shearman & Sterling) that won the arbitration case for the Yukos shareholders. Some relevance to Crystallex's case: i.e., Russia used a bogus pretext (in that case tax evasion) to effectively steal assets without compensation.

See detailed paper available at: http://www.shearman.com/en/newsinsights/news/2014/07/award-for-yukos-majority-shareholders

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Shearman's press release:

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. 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. This is by far the largest award ever rendered by an arbitral tribunal.

“This award is a major victory for us. After intense scrutiny, the Tribunal confirmed what the Claimants have been saying all along, namely that Yukos was destroyed, and its assets expropriated, for political reasons”, said Tim Osborne, director of GML, the holding company that indirectly owned the majority of Yukos’ shares.

According to Emmanuel Gaillard, Head of Shearman & Sterling’s International Arbitration Group, “This is a great day for the rule of law: a superpower like the Russian Federation is held accountable for its violations of international law by an independent arbitral tribunal of the highest possible calibre”.

“The award is final and binding, and is now enforceable in 150 States under the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards,” said Yas Banifatemi, International Arbitration partner in charge of the Shearman & Sterling’s Public International Law practice.

The Tribunal was chaired by Yves Fortier, formerly Canada’s Representative on the UN Security Council and President of the Council. The Russian Federation appointed Judge Stephen Schwebel, former President of the International Court of Justice, and the Claimants appointed Dr. Charles Poncet, partner at CMS von Erlach Poncet Ltd. in Geneva.

The proceedings were, in the Tribunal’s words, “mammoth arbitrations.” They involved a ten-day hearing on jurisdiction and admissibility in 2008 and a 21-day Hearing on the Merits in 2012, attended by over 50 party representatives as well as fact witnesses and experts. The parties’ written submissions exceeded 6,500 pages and the transcript of the hearings is over 3,300 pages long. Over 11,000 exhibits were filed with the Tribunal.

The dispute attracted massive media attention, as it involved the Russian Federation’s attack on Yukos, which led to the destruction of the company and the expropriation of its assets. In the words of the Tribunal, “Yukos was the object of a series of politically-motivated attacks by the Russian authorities that eventually led to its destruction,” the Russian Federation’s aim being “to bankrupt Yukos, assign its assets to a State-controlled company, and incarcerate [Mikhail Khodorkovsky] who gave signs of becoming a political competitor.”

It should be recalled that, in 2003, Yukos was the largest oil company in Russia in terms of daily crude oil production. It had around 100,000 employees, six main refineries and a market capitalization of about USD 33 billion.

The expropriation of our clients’ investment in Yukos was achieved through a series of steps, which included paralyzing the Company (notably through the arrest, imprisonment and harassment of its management and employees), manufacturing a pretext for the taking of the Company’s assets (namely, the fabrication of over USD 24 billion in tax debt), using that pretext to take Yukos’ assets piece by piece (beginning with Yuganskneftegaz, Yukos’ crown-jewel asset), and later transferring all of the Company’s assets to Russian State-owned companies Rosneft and Gazprom. This in turn allowed Rosneft to become the nation’s largest oil producer whose current market capitalization is at USD 67 billion. The Russian Federation’s actions culminated in the liquidation of Yukos in November 2007, and the complete and total deprivation of our clients’ investments.

We notified the Russian Federation of the claims in October 2004 and the arbitration started in February 2005. On November 30, 2009, the Arbitral Tribunal issued a decision on jurisdiction, holding that the Russian Federation was bound by the ECT by virtue of its provisional application, despite the fact that the Treaty had not been ratified by the Russian Duma, and that our clients were protected investors under the ECT.

In its July 18, 2014 Final Award, the Tribunal held that the Russian Federation’s actions amounted to an “unlawful expropriation,” that the Russian Federation had breached its obligations under Article 13(1) of the ECT, and that our clients were entitled to “reparation for the injury they suffered as a result of those of [Russian Federation’s] measures that the Tribunal has found to be internationally wrongful.”

The Tribunal also held that our clients will be entitled to post-award interest if the Russian Federation fails to pay the amounts due by January 15, 2015.

Yukos’ majority shareholders were represented in the arbitration proceedings by partners Emmanuel Gaillard, Head of Shearman & Sterling’s International Arbitration Group, and Yas Banifatemi, International Arbitration partner in charge of the Firm’s Public International Law practice, as well as Counsel Jennifer Younan (Paris-International Arbitration). A team comprising a total of over 20 international arbitration lawyers worked on the matter over the years, including partners Coralie Darrigade (Paris-International Arbitration) and Mark McNeill (London-International Arbitration) and associates Ilija Mitrev Penusliski, Lara Kroop, Elise Edson, Ketevan Betaneli, Dimitrios Katsikis and Benjamin Siino (Paris-International Arbitration), Ximena Herrera-Bernal (London-International Arbitration), and Emmanuel Jacomy (Singapore-International Arbitration).

We need to keep in mind that PDVSA's oil will not necessarily be considered a VZ state asset for ICSID enforcement purposes (the shares of PDVSA, by contrast, clearly are, however they are obviously safely held in VZ!). Recent cases concerning enforcement of ICSID awards against states have, unfortunately, held that assets of state owned entities cannot be "attached" by the claimant. Although VZ has, for the time being, enough net cash flow to pay ICSID awards from oil revenues it will, like Argentina, need to have a strong reason to pay up. This might mean that its financial position will first need to worsen to the point of needing, for example, support from the IMF. It is unlikely that enough (non diplomatic and non military) VZ state assets can be found outside VZ to cover all of the multi-billion dollar awards that are expected to mount, especially now that the country's gold reserves have been physically repatriated. Time will tell...

See the recent Reuters article below.

Argentina appears to be taking steps to settle various ICSID claims by issuing "settlement bonds" which can be traded by the claimant (albeit, presumably, at a discount). This is being done, it would seem, in order to unlock $1.8 billion in much needed funds from the World Bank/IMF and enable Argentina to access the international capital markets (which have been effectively closed to it for some time).

The reference in the article to the U.S. Generalized System of Preferences program is interesting. Given the level of oil sales by VZ to the US, this system might give the U.S. government some leverage in trying to support the enforcement of ICSID awards in favour of ConocoPhillips (and, hopefully, ExxonMobil). If VZ pays those awards, it's hard to imagine that it would not "clear its name" at the World Bank (which runs ICSID) and pay all successful claimants. In this way, it would maintain its ability to borrow from the World Bank, IMF and other international lenders of last resort. Given the current state of the VZ economy, it is only a matter of time before the country will need such access.

The concept of settlement bonds is interesting. In our case, issuance of such bonds might allow VZ to save face to some extent. In effect, VZ would be borrowing (from claimants) to pay their claims, but KRY and other claimants could realise cash by selling the bonds on. The only trick for KRY and others would be to work out the expected value of the bonds in the market. Not an ideal scenario, but perhaps better than chasing oil tankers around the world for the next 10 years...

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Argentina to pay $500 mln to end disputes at World Bank -report

BUENOS AIRES, Oct 10 (Reuters) - Argentina will offer about $500 million to resolve disputes with corporations at a World Bank arbitration panel, a financial daily newspaper reported on Thursday.

Ambito Financiero reported on its website, without citing sources, that the payment would be made in sovereign bonds to five companies that have filed complaints over a range of grievances at the World Bank's International Centre for Settlement of Investment Disputes.

Representatives at Argentina's economics ministry could not immediately be reached for comment on the report.

The decision coincides with a sensitive time in the South American country's battle in U.S. courts with hedge funds that refused to take part in two debt restructurings following Argentina's 2002 default.

Argentina hopes the Obama administration will ask the U.S. Solicitor General to present arguments to the U.S. Supreme Court on whether the case merits the court's attention, after a lower court ruled in favor of bondholders who will not accept reduced payments under a restructuring agreement.

The International Monetary Fund and some U.S. officials have said they were concerned that if Argentina were to be forced to pay the non-participating investors, it would become more difficult for cash-strapped countries to restructure their debts in the future.

The Ambito Financiero newspaper said the companies to be paid include France's Vivendi SA, British electric and gas utility National Grid PLC and Continental Casualty Company, a unit of Chicago-based CNA Financial Corp.

U.S.- based water company Azurix and Blue Ridge Investments, a subsidiary of Bank of America Corp, will also receive compensation, the report said.

Economy Minister Hernan Lorenzino, in Washington this week for World Bank and International Monetary Fund meetings, aims to unlock up to $1.8 billion credit lines from those institutions, the newspaper said.

Argentina's sovereign default in 2002 effectively ended the country's ability to tap global bond markets. Falling levels of foreign direct investment and a huge bill for gasoline imports have led to dwindling foreign reserves, making additional credit lines crucial to finance government spending and supply individuals and businesses with foreign currency.

In May 2012, the United States suspended Argentina from the U.S. Generalized System of Preferences program, which waives import duties on certain goods from developing countries, after the South American nation failed to pay about $300 million in compensation awards in disputes involving Azurix and Blue Ridge Investments. It was the first time a country had been suspended from the program for failing to pay an arbitration award.

The United States imported $477 million worth of goods from Argentina under the program in 2011, which was about 11 percent of total U.S. imports from the country that year.

I agree that the ConocoPhillips case is much more complex, especially on the question of quantum of damages. There were changes to the VZ tax/royalty regime (which the panel ruled cannot be factored into damages) and there was a formula in the investment agreement for determining (and capping) CP's damages upon nationalisation (which may or may not be relevant). Hopefully, the issue of quantum will be addressed in the main GRZ and KRY rulings but, in the absence of agreement between the litigants, it is actually the tribunal that decides whether the quantum determination should be split out. Fingers crossed...

In recent complex petroleum arbitration before ICSID, the "old-style" 2 stage process (decision on jurisdiction/final award) is increasingly being abandoned in favour of a 3 stage process (decision on jurisdiction/decision on liability/final quantum award). The panel's decision in this case is, unfortunately, consistent with this trend. (Another example of this is Burlington v. Ecuador (decision on liability made 2012), in which ConocoPhilips is again involved (having acquired Burlington).) The introduction of an additional phase obviously results in a more protracted process, which is frustrating for claimants. From the perspective of arbitration panelists and lawyers making money from the process, it is a wholly positive development!

The Minister will indeed get another hearing at ICSID, but not to debate jurisdiction or merits. Those issues have now been finally settled, and there is no further right of appeal. The panel has already decided that there will need to be a further hearing on quantum. I suspect the politicians are simply trying to dress this next hearing up as an "appeal", which is understandable given that this result is potentially very embarrassing.

As far as consent to arbitration is concerned, the panel agreed with VZ that the Investment Protection Law did not itself constitute consent. But it concluded that the relevant Bilateral Investment Treaty did. In KRY's case, there is (was) a very strong BIT in place between Canada/VZ on which KRY can very clearly rely. VZ's scope for arguing lack of consent in KRY's case has virtually evaporated.