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The Hague's arbitration court ruled on Monday that Russia must pay a group of shareholders in oil giant Yukos $50.02 billion for expropriating its assets, a big hit for a country teetering on the brink of recession.
The arbitration panel in the Netherlands said it had awarded shareholders in the GML group just under half of their $114-billion claim, going some way to covering the money they lost when the Kremlin seized Yukos, once controlled by Mikhail Khodorkovsky, a decade ago.
"The award is a slam dunk. It is for $50 billion, and that cannot be disputed," said Tim Osborne, director of GML. "It's now a question of enforcing it.""
Russia's Finance Ministry called the ruling "flawed", "one-sided" and "politically biased" and said it would appeal the decision. It comes as Russia and the West are in their biggest stand-off since the Cold War over Moscow's actions in Ukraine.
Russia argued that the court ignored tax violations by Yukos and said it was senseless and speculative to value Yukos so long after the events. Lawyers, however, said there were only limited grounds on which to appeal.
The panel of judges, which has been reviewing the case since 2005, concluded that officials under President Vladimir Putin had manipulated the legal system to bankrupt Yukos.
"Yukos was the object of a series of politically motivated attacks by the Russian authorities that eventually led to its destruction," the court said. "The primary objective of the Russian Federation was not to collect taxes but rather to bankrupt Yukos and appropriate its valuable assets."
Economic impact
The ruling hits Russia at a time when it faces international sanctions about its role in Ukraine and anger over the downing of a Malaysian airliner over eastern Ukraine, where Moscow-backed rebels are fighting a separatist campaign. The country is also grappling with slowing economic growth.
"This decision affects the assessment of the long-term financial stability of Russia and could become the basis for arguments for revising Russia's ratings by international rating agencies," said Credit Suisse economist Aleksei Pogorelov.
The $50 billion represents about 2.5 per cent of Russia's total GDP worth, or 57 per cent of Russia's Reserve Fund, which is earmarked to cover budget holes.
The ruling hit Russian stocks. The RTS index of Russian shares was down 3.1 per cent by 1400 GMT.
The European Court of Human Rights (ECHR) in Strasbourg is expected on Thursday to announce a separate decision on Yukos's multi-billion-dollar claim against Russia, ruling on 'just satisfaction' or compensation, a Yukos spokeswoman said.
Yukos's application in the ECHR, which is on behalf of all Yukos shareholders, argued that Yukos was unlawfully deprived of its possessions by the imposition of bogus taxes and a sham auction of its main asset.
One lawyer who declined to be named said the timing of both rulings coming together was likely coincidence.
Reclaiming assets
GML may now face a battle to claim the money from Russia.
"The question is whether Russia will pay that award, which I very much doubt," said Jan Kleinheisterkamp, an Associate Professor of Law at the London School of Economics. "This means that ultimately the shareholders will start to chase Russian assets abroad, which is a very tedious and usually not very fruitful business."
Antonios Tzanakopoulos, a law professor at Oxford University, said if assets were to be seized, they would have to be purely commercial in nature to be expropriatable, meaning it would not be possible to get an order that an embassy building or a docked Russian warship should be handed over.
Russia must pay the compensation to subsidiaries of Gibraltar-based Group Menatep, a company through which Khodorkovsky, once Russia's richest man, controlled Yukos.
Group Menatep now exists as holding company GML, and Khodorkovsky is no longer a shareholder in GML or Yukos.
"We didn't go into this for a pyrrhic victory to make a point ... We still believe that we will ultimately collect on this award," said Osborne.
Former Russian presidential advisor Andrei Illarionov said if Russia avoided payment it could face asset arrests around the world.
LANDMARK RULING
* "Slam-dunk" ruling for shareholders, says Tim Osborne, director of GML
* Russian Foreign Minister Sergei Lavrov said Moscow would most likely appeal the decision
* Mikhail Khodorkovsky, who once controlled Yukos, will not seek benefit from outcome
* Ruling comes amid turmoil in Ukraine and East-West rift
* The European Court of Human Rights in Strasbourg is expected on Thursday to announce a separate decision on Yukos's multi-billion-dollar claim against Russia
* Russian RTS share index down over 2%
