The text of the paragraphs below is produced directly from paragraphs 1 to 104 of Respondent's Skeleton Argument submitted on 1 October 2012 ("
Respondent's Skeleton") (annexes omitted).
I. The Russian Federation Properly Assessed Taxes And Fines Against Yukos
1. Yukos fraudulently evaded billions of dollars of Russian corporate profit tax from 1999 to 2004, abusing the program authorized by the Russian Government in the early 1990s to foster economic development in designated economically underdeveloped areas. Under this program, corporate profits in the low-tax regions were taxed at substantially reduced rates if the taxpayer complied with the applicable legal rules, including Russia's anti-tax abuse principles.
2. In order to properly avail itself of the benefits available in a low-tax region, Yukos was required to comply with three legal regimes: (a) the federal statute authorizing the low-tax region program and the region's own statutes; (b) Yukos' agreements with the regional authorities; and (c) Russia's federal anti-tax abuse "bad faith taxpayer" doctrine.
3. The federal bad faith taxpayer doctrine is rooted in Russia's federal Constitution, and has been applied by Russian tax authorities and courts in thousands of cases since the mid-1990s to condemn abusive transactions that, in substance, constitute unlawful tax evasion. As described by Yukos' own tax lawyers in commentaries they published before the assessments at issue in these arbitrations, this doctrine condemns as tax evasion transactions in which "the taxpayer's actions were aimed solely to reduce the amount of its tax payments rather than to achieve an economic result, [as] this would demonstrate that the relevant transaction was inconsistent with law because the motive underlying such transaction was to avoid tax [...]. A person's actions aimed solely at tax evasion may not be regarded as actions made in good faith."
4. Yukos abused the low-tax region program, and evaded Russian corporate profit tax in violation of the bad faith taxpayer doctrine, by implementing what Yukos referred to internally as its "tax optimization" scheme. Pursuant to this scheme, Yukos established dozens of sham "trading companies" in low-tax regions that had no business purpose, and then shifted its own profits to the sham trading companies. These sham trading shells had no genuine economic substance and served no purpose other than to reduce Yukos' tax liabilities, an arrangement described by Yukos' own lawyers as constituting unlawful tax evasion.
5. The European Court of Human Rights ("ECtHR") unanimously rejected Yukos' challenge of the tax assessments that are at issue here, on the basis of the same core principles that underlie these arbitrations. The ECtHR found that Yukos' "tax optimization" scheme consisted of "switching the tax burden from [Yukos] and its production and service units to letter-box companies in domestic tax havens in Russia," and that these "letter box companies" had "no assets, employees or operations of their own [and] were nominally owned and managed by third parties, although in reality they were set up and run by [Yukos] itself."
6. According to the ECtHR, the "letter-box companies" (a) purchased oil and oil products from Yukos' production companies at a fraction of their true market prices, (b) "acting in cascade, then sold the oil either abroad, this time at market price or to [Yukos'] refineries and subsequently re-bought it at a reduced price and re-sold it at the market price," (c) thereby accumulated most of Yukos' profits in the low-tax regions, resulting in Yukos paying substantially lower taxes on those profits, and (d) then unilaterally transferred to Yukos, as a gift or in purported repayment of sham loans, the profits that had been improperly taxed at reduced rates in the low-tax regions. The ECtHR unanimously concluded that this scheme "was obviously aimed at evading the general requirements of the Tax Code
7. The Russian tax authorities concluded that Yukos' "tax optimization" scheme constituted unlawful tax evasion under the bad faith taxpayer doctrine. In particular, the Russian tax authorities found, and the Russian courts later agreed, that Yukos had abused the low-tax region program because its trading shells (a) did not engage in any genuine business activities in the low-tax regions, but were instead controlled by Yukos from Moscow, (b) purchased oil and oil products at below-market prices solely to artificially concentrate Yukos' profits in low-tax regions, and (c) made only paltry investments in the low-tax regions that were dwarfed by the tax benefits they claimed, thereby failing to fulfill the purpose of the low-tax region program.
8. Yukos did not then -- or later -- offer any rationale for selling Yukos' oil through its network of low tax region trading companies other than reducing Yukos' own tax liabilities, nor have Claimants done so in these arbitrations.
9. Yukos was aware of the bad faith taxpayer doctrine and the risk that its scheme would result in substantial tax assessments if the Russian authorities were ever to learn of it. Among other things, (a) Yukos knew that the authorities had previously denied the low-tax region benefits claimed by several sham trading shells in the Lesnoy region and Sibirskaya based on the same Russian anti-abuse rules that were later applied to Yukos (the Russian authorities only later learned that Yukos exercised de facto control over and management of Sibirskaya and the Lesnoy trading shells, and that Yukos surreptitiously liquidated the latter in order to prevent the collection of their overdue taxes), (b) Yukos managers had expressly warned the company's senior executives in internal memoranda that public disclosure of the scheme "will result in substantial tax claims against the Company," (c) as Yukos' former deputy general counsel later conceded, none of the company's external lawyers was willing to render an opinion endorsing its scheme (to the contrary, in refusing to render a "clean" opinion, one cited the need to comply with the same bad faith taxpayer doctrine that later led the Russian tax authorities and courts to find that Yukos was guilty of tax evasion), and (d) Yukos had access to the numerous court decisions applying the bad faith taxpayer doctrine to abusive tax schemes -- including those finding Lukoil, one of Yukos' major competitors, liable for substantial additional amounts for having abused the low-tax region program -and to the published legal commentaries discussing the bad faith taxpayer doctrine and its requirements, including those written by its own tax lawyers.
10. Yukos' knowledge that its "tax optimization" scheme was unlawful is further confirmed by Yukos' repeated lies to the tax authorities, the Russian courts, the ECtHR, and Yukos' own external auditors, including Yukos' knowingly false assertion that it was not affiliated with (and did not control) the sham trading shells, a point now conceded even by Claimants. Yukos' repeated false denial of its affiliation with the sham trading shells can only be explained by the company's awareness of the illegality of its scheme.
11. Yukos' tax evasion was not victimless. The billions of dollars in tax benefits it wrongfully claimed caused commensurate damage to the regional budget of Moscow, where Yukos, as the real party in interest, should have paid profit tax at the full rate.
12. Claimants' claims that the Russian authorities' measures were expropriatory and unfair are meritless. First, Claimants' contention that the legal principles applied by the Russian courts were "novel" or "vague" is, as the ECtHR unanimously found, refuted by the numerous Russian court decisions that applied these principles and similar ones to hold taxpayers liable for tax evasion since the mid-1990s, including their abuse of the low-tax region program. Moreover, the published legal commentaries, including the guidance published by Yukos' own tax counsel, describe those principles in the same terms as they were applied to Yukos. The relevant Russian judicial precedents include those compiled for the Tribunal by Russian tax law expert Oleg Konnov, whose description of the history and content of the bad faith taxpayer doctrine Claimants have not sought to rebut with any expert testimony.
13. Mr. Konnov shows that the fines assessed against Yukos were also proper because, among other reasons, no taxpayer -- in Russia or elsewhere -- could legitimately claim to be surprised that it may not invoke a limitations period that has expired only because of its own obstruction of tax audits.
14. Claimants also ignore the extensive international precedents demonstrating that the principles applied by the Russian authorities and the actions they took against Yukos' tax evasion were consistent with those of ECT signatories and other nations worldwide.
15. Second, Claimants' attack on Yukos' VAT assessments -- holding Yukos liable for the VAT due on revenues nominally realized by the sham trading shells but properly attributable to Yukos itself -- is also meritless. As the ECtHR unanimously held, the Russian authorities acted properly in disregarding Yukos' sham trading shells for profit tax purposes and denying Yukos the benefit of the shells' 0% VAT filings. Claimants also ignore Yukos' still unexplained failure to submit proper 0% VAT returns in its own name after it received its December 29, 2003 tax audit report. It is not disputed that Yukos could have filed proper VAT returns -- nothing prevented it from doing so -- or that had it done so, it would have avoided more than half of its challenged tax liabilities.
16. Third, Claimants' assertion that the tax assessments were discriminatory is contradicted by the facts. The ECtHR unanimously rejected this charge. Several large Russian companies, including a number of Yukos' principal competitors, were also held liable for tax evasion and assessed substantial amounts of tax on grounds similar to those relied on by the Russian authorities and courts in dealing with Yukos. But unlike Yukos, these other companies promptly paid their taxes and, in the case of Lukoil, publicly abandoned its own "tax optimization" scheme.
17. There were also numerous material differences between Yukos' conduct and that of many other Russian oil companies: (a) no other Russian oil company committed abuses that were as egregious as those of Yukos, (b) none did so for as long as Yukos, (c) none attempted to conceal its abuses as did Yukos (to the extent of lying about them to the tax authorities, the courts, and even its own auditors), (d) none obstructed their tax audits as did Yukos, including by sending documents and employees to distant locations before they could be reviewed and interviewed, (e) none made investments in the low-tax regions that were so miniscule in comparison to the tax benefits they claimed, (f) none diverted billions of dollars offshore to prevent the collection of overdue taxes, and (g) none refused to pay their assessed taxes when ultimately required to do so.
18. Fourth, Claimants' contention that the Russian authorities knew and approved of Yukos' scheme is completely unsupported by any credible evidence, as the ECtHR again unanimously found. Claimants' contention cannot be reconciled with Yukos' unflagging efforts to conceal its scheme from the Russian authorities. Yukos would obviously have had no reason to hide its scheme if it believed the authorities were already aware of it, let alone had approved it, or if it thought its scheme was lawful and its disclosure would not lead to substantial tax claims. Yukos' efforts to conceal its scheme are reflected in (a) the company's convoluted offshore structures, serving no purpose other than to mask Yukos' affiliation with its sham trading shells, (b) Yukos' seriatim restructuring of its Lesnoy trading shells after their abuse of that region's low tax program was discovered, (c) Yukos' management's internal warnings that disclosure of its scheme "will result in substantial tax claims against the Company," (d) Yukos' failure to disclose its scheme in its purportedly "transparent" financial statements, and (e) Yukos' repeated lies about its scheme to the tax authorities, the courts, the ECtHR, and its own auditors.
19. In any event, as a matter of Russian law and as Claimants concede, even if the tax authorities had known of Yukos' scheme -- and there is no evidence they did -- they would not have been estopped from later challenging it.
20. Fifth, Claimants' contention that the assessments against Yukos were fabricated as part of a politically motivated campaign to dismantle Yukos - an allegation on which Claimants have unambiguously staked their claims, contending that the assessments "cannot be explained in any other way" -- is, as the ECtHR again unanimously found, unsupported by any credible evidence. If the assessments were, as Claimants insist, the product of a massive political conspiracy spanning several years and involving numerous government agencies, engineered and implemented by hundreds if not thousands of officials, including no fewer than 60 judges at four different levels of courts, along with a large cast of third parties around the globe, then surely after nearly a decade of challenges -- by Yukos, its minority shareholders, and now Claimants -- at least one internal government memorandum, instruction or minute of a meeting evidencing or referring to the grand conspiracy alleged by Claimants would have surfaced, or one disgruntled former Government official would have reported having participated in a meeting or telephone call where the alleged conspiracy was discussed. Instead, Claimants rely solely on double and triple hearsay renditions of purported conversations by vocal opponents of the Russian Government, inaccurate and uninformed reports by political commentators, and sheer innuendo, none of which, even as proffered, competently supports Claimants' conspiracy allegations.
21. Claimants' failure to prove the supposed vast conspiracy confirms that it is merely one more sham perpetrated by the Oligarchs who controlled Yukos and were ultimately responsible for its demise.
22. Yukos' dealings with PricewaterhouseCoopers ("PwC") provide yet another example of Yukos' blaming the Russian Federation for the consequences of its own misconduct.
23. PwC withdrew all of its Yukos audit opinions in June 2007 (after refusing to continue to audit the company's U.S. GAAP financial statements in 2003, itself an extraordinary event for a supposedly "transparent" company), following confirmation that Yukos' senior managers had repeatedly lied to PwC about, among other things, Yukos' de facto control over the management of its sham trading shells -- an essential element in the company's "tax optimization" scheme.
24. Claimants' attempt to blame the Russian Federation for PwC's withdrawal of the firm's audit opinions finds no support in the record. To the contrary, both PwC's senior Russian representative at the time (in a contemporaneous private conversation with U.S. Embassy officials in Moscow) and PwC's senior Yukos auditor (in sworn U.S. deposition testimony) confirm that PwC, in withdrawing its audit opinions, acted in accordance with applicable auditing standards, a conclusion supported by Mr. John Ellison, a former KPMG LLP partner, in his unchallenged expert report. The U.S. deposition testimony of Mr. Douglas Miller, the PwC partner in charge of auditing Yukos, is especially relevant, because (a) it was sought by counsel for Messrs. Khodorkovsky and Lebedev on the grounds that it would provide the best opportunity to obtain a truthful account of the reasons for PwC's actions, and (b) Mr. Miller repeatedly rejected Claimants' "harassment" theory.
25. On all of these points, the RosInvestCo and Rovime awards are inconsistent with the facts and Russian law, and ignore a wealth of uncontested international practice.
II. The Russian Federation Is Not Responsible For And Did Not Cause The Unwinding Of The Sibneft Merger
26. The Russian Federation is not responsible for the unwinding of Yukos' proposed merger with Sibneft because Claimants do not allege -- let alone establish -- that Sibneft was then exercising governmental authority or acting under the instructions of Russian State organs. Nor was the Russian Federation the cause of the unwinding of the merger. To the contrary, the Russian Federation repeatedly supported the proposed merger, and Claimants themselves acknowledge that the Russian Federation provided all of the approvals necessary for the merger, including approvals granted long after the Russian Federation's supposed attack on Yukos.
27. The merger in fact collapsed because Yukos refused to accommodate Sibneft's request that Mr. Khodorkovsky, following his resignation from Yukos' management, be replaced by a Sibneft nominee as head of the to-be merged company. Sibneft's proposal would have left Yukos representatives in all of the surviving company's other senior management positions.
28. Documents that Claimants were ordered to produce in these proceedings (over their objection) show that Claimants and Sibneft's principal shareholders agreed to unwind the merger without the payment of additional compensation by either side, an agreement fatal to Claimants' request for damages relating to the proposed merger. The same documents also reveal that Yukos' management proposed its own plan to unwind the merger without the payment of additional compensation, and that this plan contemplated the initiation of a "sham" lawsuit challenging the previously-completed exchange of Yukos and Sibneft shares. The contemplated lawsuit bears a striking resemblance to the actual lawsuit (challenged by Yukos in these arbitrations) that was brought by two of Yukos' shareholders and ultimately led to the legal unwinding of the merger without the payment of additional compensation.
29. Claimants' assertion that the US$ 2 billion giga-dividend was required by the Sibneft merger is patently untrue. The record shows that the giga-dividend was approved on November 28, 2003 (and not on September 25, 2003, as Claimants falsely asserted in their Reply), one day after Yukos was informed that the Sibneft merger would not proceed. At the Extraordinary General Meeting of Yukos' shareholders held on November 28, Claimants voted against all the other shareholder proposals linked to the completion of the Sibneft merger, but supported payment of the giga-dividend "for Yukos" (that is, for Claimants to the extent of 70% of the dividend).
III Yukos Bears Sole Responsibility For The Consequences Of The AssessmentsProperly Made Against It, Because It Could Have Avoided ThoseConsequences -- And Reduced Its Liability By Well More Than Half - By Paying The Amounts Due During The First Quarter Of 2004, While Continuing To Challenge The Assessments In Full
30. During the first quarter of 2004, Yukos could have avoided well more than half of its ultimate tax exposure by paying its corporate profit taxes and the interest then due and by filing proper amended VAT returns in its own name. Had Yukos taken these few simple steps -- abiding by its own tax counsel's published advice as to how a taxpayer should mitigate its tax liabilities -- it would also have avoided all of the subsequent enforcement measures about which Claimants complain, and still preserved its right to seek a refund of all the taxes it paid.
31. If Yukos had mitigated its liabilities in this way, its total exposure under the Russian court rulings that Claimants challenge in these arbitrations would have been capped at less than US$ 9.8 billion, rather than the US$ 25.8 billion that was ultimately assessed.
32. Yukos had more than ample resources in the first quarter of 2004 to cap its tax exposure at less than US$ 9.8 billion and to satisfy that liability, even after paying its unprecedented US$ 2 billion giga-dividend, but it elected not to do so.
33. Instead, Yukos pursued an irrational and ultimately self-destructive course of action, for which only the managers of Yukos, installed and controlled by Claimants, are to blame. This course of action included (a) Yukos' continuing denial of any liability for its assessed taxes, (b) Yukos' now acknowledged false denial that it controlled the sham trading shells, (c) Yukos' repeated obstruction of the actions taken by the Russian authorities to enforce and collect the company's overdue taxes, (d) Yukos' dissipation of its own assets and those of the companies it controlled, to frustrate the collection of the taxes it owed, and (e) Yukos' attempt to put pressure on the Russian Government by mounting an aggressive international lobbying and disinformation campaign that sought to politicize what, for the Russian authorities, was always a matter of tax evasion and collection.
34. All of the subsequent enforcement proceedings and other measures about which Claimants now complain were thus the result of Yukos' own adamant refusal to acknowledge or mitigate its tax liabilities, and its repeated attempts to dissipate and conceal its assets and to frustrate the enforcement and collection of its overdue taxes. Had Yukos not persisted in this self-destructive course of action, there would have been no April injunction (discussed below), and YNG would not have been sold.
35. Permitting Claimants to benefit from Yukos' self-inflicted wounds would contravene basic legal principles, and provide Claimants with a windfall -- beyond the billions of dollars they have already extracted from Yukos, including by way of dividends, share sales, and stichting assets -- to which they are not entitled.
IV. The Russian Federation Acted Properly In Enforcing The Tax Assessments Against Yukos, Including By Auctioning YNG
36. The tax assessments were enforced against Yukos in compliance with Russian law and after ample notice to Yukos. As the ECtHR unanimously concluded, there is "no reason to doubt that throughout the proceedings the actions of various authorities had a lawful basis and that the legal provisions in question were sufficiently precise and clear." The enforcement actions were also measured and appropriate in the circumstances and entirely consistent with international practice.
37. Claimants' and Yukos' contention that Yukos was "surprised" by the timing of the assessment for 2000 and the need to make prompt payment is false and indicative of Yukos' lack of good faith. Promptly upon receipt of the December 29, 2003 audit report, Yukos' internal and external counsel advised Yukos that, under established Russian law and practice, it should expect to receive a final tax assessment within about a month, and that this assessment would require Yukos to make full payment promptly, most likely within one day. In the event, the tax assessment for 2000 was issued on April 14, 2004, more than two months later than Yukos' advisors had expected, and required payment in two days, not one.
38. Although Yukos had ample notice of when and how much it would be required to pay, it made no effort to marshal the necessary assets, instead claiming that it was not able to pay, even though Claimants now acknowledge that Yukos had sufficient resources to pay all of its 2000 taxes.
39. By the time of Yukos' April 2004 assessment, the tax authorities had learned that Yukos controlled the Lesnoy shell companies and had sought to prevent the payment of their overdue taxes by dissolving them. The tax authorities thus understandably applied to the Moscow Arbitrazh Court in April 2004 for enforcement of Yukos' 2000 tax liability and for an injunction prohibiting Yukos from selling or encumbering the company's shareholdings in its Russian subsidiaries.
40. As the ECtHR held, the authorities' actions were neither arbitrary nor unfair:
"[T]he Ministry's action was lodged under the rule which made it unnecessary to wait until the end of the grace period if there was evidence that the dispute was insoluble and, regard being had to the circumstances of the case, [the Court] finds no indication of arbitrariness or unfairness [...] in this connection." [emphases added]
41. The April injunction did not affect Yukos' use of its substantial on- and off-shore cash resources, and did not affect Yukos' offshore assets at all. Yukos nonetheless falsely claimed that the injunction prevented Yukos from paying its taxes, again evidencing its lack of good faith and credibility.
42. No further enforcement efforts were taken for more than two months. During this period, Yukos continued to generate close to US$ 2 billion each month in gross receipts that Yukos partly transferred off-shore and partly used to voluntarily pay its loan to GML's Moravel shell subsidiary -- but not to pay its tax liabilities.
43. Yukos also began a pattern of diminishing the value of its assets, often to the benefit of Claimants and the Oligarchs whose interests they represented. For example, Yukos forced its production subsidiaries to guarantee Yukos' already outstanding US$ 1.6 billion loan from Moravel, corroborating the concerns that had led the authorities to obtain the April injunction.
44. Following Yukos' failure to make (or even to promise to make) any tax payments, as well as its dissipation of substantial assets, Russia's bailiffs finally attached a number of Yukos' on-shore bank accounts at the end of June 2004 -- ten weeks after the April tax assessment and 26 weeks after Yukos' legal advisors advised that it needed to be prepared to pay promptly. It was only then that Yukos began to pay some, but not all, of its taxes.
45. The authorities also sought to seize Yukos' shares in its production subsidiaries to prevent Yukos from encumbering them. True to form, Yukos attempted to frustrate the bailiffs' efforts by terminating the share registry company contract for its production subsidiaries and concealing their registries, directing that they be sent from central Moscow to remote locations around the country.
46. Yukos also took steps to reduce the value of its largest production subsidiary, YNG. First, Yukos caused YNG to stop paying its mineral extraction taxes, imperiling its production licenses. Second, Yukos and its trading shells stopped paying YNG for its crude oil, leaving YNG with more than US$ 4 billion in unpaid invoices. And third, Yukos continued to divert funds to GML, its majority shareholder, arranging for the payment of more than US$ 700 million to Moravel, even after the cash freeze orders were in place.
47. Yukos also made a series of bad faith offers to "settle" a portion of its tax liabilities, repeatedly offering Sibneft shares as a partial payment or as security for proposed future payment, even though Russian law did not allow payment in kind, Yukos' title to the proffered shares had been challenged by a third-party, and an injunction had been issued (at the request of the third-party) prohibiting their sale or encumbrance.
48. During this entire period, nothing prevented Yukos from selling its assets subject to the bailiffs' approval and using the proceeds to pay its tax obligations.
49. Thus, the authorities found themselves confronted by a company that was fiercely resisting the payment of its overdue taxes, that had previously obstructed its tax audit, lied to the tax authorities and courts, and attempted to make itself and its subsidiaries judgment proof, and that was now burdening the tax authorities' principal security -- YNG -- with new liabilities. In these circumstances, the bailiffs understandably decided to sell a majority of YNG's shares -- the only realistic way to timely collect Yukos' unpaid taxes. Despite criticizing the bailiffs for not adequately documenting their decision-making process, the ECtHR concluded that the bailiffs' actions were not unreasonable. It is commonplace in other countries too for tax collection authorities to sell first the assets that best ensure payment.
50. The sale of the YNG shares was carried out in accordance with Russian law and consistent with international practice. The authorities could have sold the shares to a designated purchaser in a directly negotiated transaction, but instead granted Yukos' request that the shares be auctioned. A formal and careful appraisal was conducted by DKW, and the starting price for the auction was set at a level consistent with DKW's appraisal, taking account of the fact that only 76.79% of the company's shares were sold and that YNG had its own outstanding tax liabilities. All bidders, foreign or domestic, were welcome to participate.
51. Claimants and Yukos did all they could to prevent the auction from succeeding, threatening a "lifetime of litigation" against anyone who participated in or facilitated the sale. Yukos also initiated sham bankruptcy proceedings in Houston, obtaining a temporary restraining order ("TRO") that prevented all the previously announced bidders and all of their banks from participating in the auction. If the price achieved was lower than it might otherwise have been, the fault lies solely with Claimants and Yukos.
52. The YNG auction achieved a price of approximately US$ 9.4 billion, US$ 500 million more than the starting price. This result was consistent with the shares' appraised value and contemporaneous fair market value estimates.
53. The evidence does not support Claimants' contention that the winning bidder, Baikal Finance, conspired with Rosneft. Rather, Baikal Finance found itself unable to finance its winning bid because of the Houston court's TRO, and thus at risk of losing its US$ 1.7 billion deposit unless a substitute purchaser, not dependent on immediate bank financing, could be found on very short notice. Rosneft simply seized a commercial opportunity that presented itself as a result of Claimants' misconduct.
54. The net proceeds of the YNG sale were not sufficient to meet all of Yukos' tax obligations. The Russian authorities nonetheless gave Yukos ample time to pay the remaining balance, but it declined to do so, making clear that its priority was to place assets behind the shield of the Dutch stichtings.
V. The Russian Federation Acted Properly In Connection With Yukos' Bankruptcy, Which Was Precipitated By Yukos' Failure To Pay Its Debts To The SocGen Syndicate, And Is Not Attributable To The Russian Federation
55. Claimants' bankruptcy-related claims fail because critical conduct essential to these claims was taken by actors for which the Russian Federation is not responsible, including the SocGen syndicate, YNG, Rosneft, the Federal Tax Service acting as creditor, the meeting and committee of Yukos' creditors, Yukos' interim manager and bankruptcy receiver, the participants in Yukos' bankruptcy auctions, and the purchasers of the auctioned assets sold. In taking the actions complained of by Claimants, none of these actors was exercising sovereign authority or acting pursuant to the direction or control of sovereign authority. Claimants have provided no evidence on which the Tribunal could make a contrary finding.
56. Yukos' dilatory and obstructionist treatment of its commercial creditors paralleled closely its treatment of the tax authorities. In both instances, Yukos (a) falsely claimed it was unable to meet its obligations, (b) forced its creditors to pursue their claims in multiple court proceedings where Yukos presented unsubstantiated defenses, (c) offered to negotiate with its creditors only when they were close to collecting their claims, (d) made unrealistic settlement proposals that were subsequently withdrawn, and (e) together with its controlling shareholders, strenuously resisted all collection efforts, prompting more aggressive action on the part of its creditors.
57. Both sides agree that Yukos' bankruptcy was initiated by the SocGen syndicate, based upon Yukos' failure to pay an outstanding English court judgment after it was recognized in Russia.
58. The SocGen syndicate simultaneously also sought payment of the same debt from Rosneft pursuant to the 2004 loan guarantee that Yukos had foisted on YNG, which Rosneft then owned. Although Rosneft disputed the validity of the guarantee, Rosneft required forbearance from the same banks on covenant breaches arising from the YNG acquisition, and Rosneft needed the banks' cooperation for its planned IPO. The convergence of the syndicate's and Rosneft's commercial interests resulted in their agreeing that Rosneft would pay the syndicate in full, but only after the syndicate had pursued all legal avenues to obtain payment from Yukos, the primary obligor. If Rosneft instead paid, the syndicate's rights under the loan agreement were to be assigned to Rosneft.
59. Claimants acknowledge that this agreement was commercially-motivated and on commercial terms, but contend that its confidentiality clause evidences a conspiracy on the part of the SocGen syndicate to act secretly on behalf of Rosneft, which Claimants improperly equate with Respondent. The confidentiality clause, however, was itself a standard commercial term necessary to preserve the possibility that Yukos would pay the SocGen syndicate before Rosneft became unconditionally obligated to do so, and remained in effect only for so long as Yukos' payment would have discharged Rosneft's own obligation to pay the syndicate.
60. Yukos satisfied the criteria for bankruptcy under Russian law due to its persistent failure to pay its commercial creditors, and was insolvent long before the proceedings were commenced. This is also undisputed.
61. The proceedings were conducted in compliance with Russian law and international practice. The courts properly allowed the Federal Tax Service's, Rosneft's and YNG's claims, and substantial amounts of YNG's claims were never disputed by Yukos. Belying Claimants' discrimination charge, the courts also allowed some Yukos related-party claims, but properly rejected other abusive claims, such as the Moravel loan, a barely disguised attempt to turn equity into debt.
62. Yukos' management, actively supported by Claimants, had the opportunity to present a rehabilitation plan to the meeting of creditors. The rough outline management submitted was, however, legally defective and did not provide any basis for creditors to prefer rehabilitation to liquidation. It was not properly presented to or approved by Yukos' shareholders, did not meet the legal requirement that the company's tax claims be satisfied within six months, and did not ensure full, let alone timely, payment of Yukos' creditors' claims.
63. Once Yukos' liquidation was properly approved, the company's assets were sold at auction in accordance with Russian law and international practice. Yukos' receiver obtained appraisals for the fair value of the assets, and used those appraisals to set minimum bids in the auctions, all of which were exceeded, some by very large margins. The auctions were open to domestic and foreign bidders, adequately noticed and advertised, and competitive. To the extent that any bidders may have been discouraged from participating, this was again the result of Claimants and Yukos having threatened potential bidders with legal action. While the aggregate results exceeded Yukos' own (and other) contemporaneous fair market value estimates, more than US$ 9 billion in creditor claims nonetheless remained unsatisfied.
VI. Claimants Have Failed To Establish Sine Qua Non Elements Of Their Article 13 And 10(1) ECT Claims
A. Article 21 ECT
64. First, as an initial matter, Claimants' claims must be based on measures outside the taxation carve-out of Article 21(1) ECT or, alternatively, within Article 21(1) ECT, but subject to one of the claw-backs of Article 21(2) to (5) ECT.
65. Taxation carve-outs such as this one fulfill plainly legitimate functions. They (a) preserve the Contracting Parties' sovereign power in the field of taxation, which is of critical importance to the very existence of a State, (b) delineate the extensive network of investment treaties from the even broader network of taxation treaties, (c) pay due regard to the complexity of tax matters, and, in many cases, preserve the coordination role of the competent tax authorities under double taxation treaties.
66. To fulfill these functions, taxation carve-outs are typically broad, covering all aspects of tax regimes, including tax enforcement measures.
67. Article 21(1) ECT, under its plain meaning, covers the whole range of measures taken by all branches of government in the field of taxation. Tax legislation and enforcement measures are inextricably linked, and it is not possible to meaningfully dissociate them in the context of Article 21(1) ECT.
68. The core allegations on which Claimants base their claims are squarely within the scope of Article 21(1) ECT: tax audits, tax assessments, interest and fines provoked by Yukos' failure to pay its assessed taxes, measures to ensure the effective collection of its taxes, and the sale of Yukos' assets to satisfy its tax liabilities.
69. Claimants seek to avoid Article 21 ECT on two grounds, that Article 21(7)(a) ECT limits the scope of the taxation carve-out to tax legislation and tax treaties and does not apply to mala fide taxation measures. These arguments are baseless.
70. Article 21(7)(a) ECT contains an illustrative list of taxation measures that does not replace the term "measures" with the term "provisions," but underscores that the term "Taxation Measures" covers all aspects of the tax regime, including international and domestic measures.
71. Claimants' position that Article 21(1) ECT is inapplicable to the taxation measures they complain about fails as a matter of fact and law. The record shows that the taxation measures at issue were a justified response to Yukos' massive tax fraud and its willful strategy to obstruct efforts to collect the taxes due. As a matter of law, Claimants mix two issues, the concept and definition of "Taxation Measures," on the one hand, and their legality, on the other. Legality is determined under Part III of the ECT, but only to the extent of the claw-backs pursuant to Article 21(2) to (5) ECT.
72. Article 21 ECT contains no claw-back for Article 10(1) ECT, and the Tribunal therefore lacks jurisdiction over core allegations of Claimants' Article 10(1) ECT claims.
73. Article 21(5) ECT contains a claw-back for Article 13 ECT claims, but is applicable only to "taxes," and is combined with a mandatory referral to the competent tax authorities, a procedure invoked by Respondent in these proceedings. The expropriation claw-back, in its ordinary meaning, supported by the travaux préparatoires, applies to charges imposed by the State for public purposes, excluding tax enforcement and collection measures. When compared to the varying practices with respect to clawbacks in taxation carve-outs, the deliberate choice of the ECT negotiating States to reinstate expropriatory "taxes" represents a middle ground, which must be respected.
B. Article 13(1) ECT
74. In order to establish their claim for a breach of Article 13(1) ECT, Claimants must show that, in addition to being outside the scope of the taxation carveout of Article 21(1) ECT -- or within Article 21(1) ECT, but reinstated by Article 21(5) ECT -the measures complained of must be "measures having effect equivalent to nationalization or expropriation."
75. First, Claimants have failed to establish that conduct not carved-out by Article 21 ECT that is (a) attributable to Respondent, and (b) an exercise of its sovereign power caused a total or near total deprivation of Claimants' investment. Critically, the core allegations of Claimants' claims are outside the scope of Article 13(1) ECT by virtue of Article 21 ECT. Moreover, Yukos itself engaged in conduct -- by refusing to pay the assessments against it when due, while preserving its right to challenge them - that directly resulted in the company's demise and the ensuing loss of Claimants' investments. Finally, conduct that was essential to Yukos' liquidation, including in particular the filing of the bankruptcy petition by the SocGen syndicate, and the creditors' meeting decision to liquidate Yukos, is not expropriatory because it is not attributable to Respondent under the rules of State responsibility, or does not involve an exercise of sovereign power.
76. Second, Claimants have failed to establish that the measures complained of frustrated distinct, reasonable, investment-backed expectations, an important element in assessing whether regulatory measures amount to "measures having effect equivalent to nationalization or expropriation." Claimants had no right or legitimate expectation to operate Yukos in violation of Russian law, and no right or legitimate expectation that Respondent would exempt Yukos from the tax enforcement and collection measures about which Claimants complain if Yukos failed to pay its taxes and obstructed the collection of taxes due.
77. In particular, Claimants have failed to establish that Respondent at any time made a representation, based upon complete disclosure, that it would allow Yukos to operate its fraudulent tax evasion scheme or refrain from enforcing and collecting the taxes Yukos owed. Yukos' tax evasion scheme was illegal under Russian law when Claimants made their investments, and the tax enforcement and collection measures taken against Yukos were all provided for by Russian law at that time. The bad faith taxpayer anti-abuse doctrine that Respondent's tax authorities and courts applied to counter Yukos' tax evasion dates back to the mid 1990s, well before Claimants acquired their Yukos shares.
78. Third, putting aside the other elements required to establish "measures having effect equivalent to nationalization or expropriation," the executive and judicial measures at issue, in any event, constitute a legitimate exercise of Respondent's regulatory power.
79. The measures alleged to be expropriatory are well within the range of what is generally accepted as a legitimate exercise of States' police powers. First, Respondent has established that the measures complained of accord in all material respects with international and comparative standards.
80. Second, the measures challenged by Claimants conform with Russian law, which in turn accords with international standards, and have been reviewed and upheld by multiple levels of Respondent's judiciary, including the Russian Supreme Court.
81. Third, the European Court of Human Rights has found that the very same measures Claimants allege to be expropriatory were a legitimate exercise of Respondent's regulatory power.
82. Fourth, the measures complained of must be assessed in their proper context -Yukos' massive tax evasion, compounded by its illegal and deliberate strategy to frustrate any effort by the authorities to collect the company's overdue taxes.
83. Contrary to Claimants' perception, respect for the rule of law is not a oneway-street. Foreign investors have a duty to abide by the law, pay taxes, provide required disclosures of their activities in the host State, and cooperate with the authorities.
84. Measures taken to combat illegal conduct may legitimately result in the loss of an investment. Yukos' tax evasion scheme violated Russian law, and the assessment of the evaded taxes was a legitimate measure to combat Yukos' fraud. The resulting tax enforcement and collection measures were completely justified in light of Yukos' failure to pay the assessed taxes and its willful obstruction of Respondent's collection efforts. Indeed, none of the subsequent enforcement measures, including the auction of YNG, would have occurred, and Yukos would not have been liquidated, had Yukos acted as a responsible taxpayer should have done.
C. Article 10(1) ECT
85. Claimants' Article 10(1) ECT claims fail for many of the same reasons as their expropriation claim. At the threshold, the core allegations on which Claimants base their Article 10(1) ECT claims are within the taxation carve-out of Article 21(1) ECT. The Tribunal therefore lacks jurisdiction over these claims and Article 10(1) ECT is inapplicable.
86. Again, at the threshold, critical conduct alleged to be unlawful under Article 10(1) ECT is not attributable to Respondent or not an exercise of sovereign authority. The harm attributed to Respondent's alleged breaches of Article 10(1) ECT, the loss of Claimants' Yukos shares, was caused by Yukos' own misconduct and conduct of third parties not attributable to Respondent. Claimants have failed to show that any of the irregularities they allege in the administrative and judicial proceedings at issue affected the outcome of the case, the liquidation of Yukos, and the ensuing loss of Claimants' shares.
87. In any event, Claimants have failed to establish that the challenged measures interfered with their legitimate expectations at the time they made their investment or were not taken in the proper exercise of the authorities' statutory duties. The contested measures (a) accord with international and comparative standards, (b) were reviewed and upheld by the Russian courts, and (c) have been assessed by the ECtHR to be a legitimate exercise of Respondent's taxation power.
88. Finally, but no less important, the host State's conduct under Article 10(1) ECT cannot be assessed in isolation from that of the investor or its investment. Yukos' massive tax fraud and illegal obstruction of the efforts to collect the taxes it owed provoked the measures complained of, which were justified responses to combat Yukos' illegal conduct and enforce overdue taxes. None of the measures at issue can therefore be said to be arbitrary, unfair, or inequitable for purposes of Article 10(1) ECT.
89. Nor are such measures discriminatory within the meaning of Article 10(1) ECT. Article 10(1) ECT does not establish a right of impunity based on the host State's authorities' alleged failure to enforce mandatory legal requirements, and Claimants have in any event failed to show nationality-based discrimination, or unjustified differential treatment of similar cases.
VII. The Tribunal Lacks Jurisdiction Over Claimants' Claims Concerning The Alleged Mistreatment Of Messrs. Khodorkovsky And Lebedev And Other Yukos Officials, And In Any Event, These Claims, And Claims Concerning Searches Of Yukos Records, Are Unsupported
90. The Tribunal should reject Claimants' attempt to distract its attention from the only matter that is genuinely at issue in these arbitrations -- Claimants' investments in Yukos, and the consequences for those investments of Yukos' tax evasion scheme -- with extensive allegations concerning the arrests and prosecution of Yukos officials and searches and seizures of the company's records.
91. First, the Tribunal cannot assert jurisdiction under Article 26 ECT to address alleged violations of the rights of Yukos officials, because Claimants have not proven that any such violations directly impaired Claimants' management or control of their investments. To the contrary, Yukos expressly confirmed after Mr. Khodorkovsky's arrest and subsequent resignation that they had "no impact whatsoever on [its] operations," and Mr. Lebedev did not even hold a position with Yukos at that time. The prosecutions of Messrs. Khodorkovsky and Lebedev likewise did not impair Yukos' performance, which the company informed its investors in 2005 "was extremely healthy."
92. Claimants have also failed to establish that the prosecutions of any Yukos officials reflect a systemic failure of the Russian judicial system or, at a minimum, were fundamentally unjustified or groundless. To the contrary, all were reviewed by the Russian courts at multiple levels, and by the ECtHR (with respect to the initiation of Mr. Khodorkovsky's prosecution), and were found to be in accord with Russian law and international standards. Tellingly, Claimants have never disputed that Mr. Khodorkovsky, Mr. Lebedev, or any of the other Yukos officials who were convicted of crimes related to their management of Yukos, actually committed those crimes, relying instead on conclusory complaints about various procedural matters, based on mischaracterizations of the pertinent facts.
93. Finally, Claimants have not established that the searches of certain of Yukos' offices and the seizure of certain of its records pursuant to the official investigations of its misconduct were expropriatory, evidence a systemic judicial failure, or were otherwise fundamentally unjustified or groundless. This allegation is at best ironic, in light of Yukos' unrelenting obstruction of those investigations. It is also unsustainable. All of these procedures conformed to Russian law, and Yukos' own contemporaneous public statements and internal documents confirm that Yukos itself did not believe they had any significant impact on the company.
VIII. The Tribunal Lacks Jurisdiction Over Claimants' Claims, Or Must Dismiss Them, Because They Are Based On Illegal Conduct By Claimants And The Yukos Managers They Installed And Controlled
94. The Oligarchs who controlled Claimants acquired and consolidated their investments in Yukos through illegal acts and bad faith conduct, and thereafter perpetrated -- either directly or through the Yukos managers they installed and controlled -- a long series of illegal acts, including the tax evasion that is at the heart of these arbitrations.
95. Claimants contend that these illegalities are "collateral" or "unrelated to" their investments, even though they relate to the acquisition or enhancement of the value of Yukos, or to Claimants' own unlawful abuse of the Russia-Cyprus Tax Treaty. Through that abuse, Claimants themselves fraudulently evaded -- in violation of both Russian and Cypriot criminal laws -- more than US$ 230 million in Russian withholding taxes, and more than triple that amount in Russian profit taxes.
96. This history of repeated illegal conduct by Claimants -- culminating in the diversion of assets worth billions of dollars to the illegally-created Dutch stichtings, placing those assets beyond the reach of the Russian tax authorities -- deprives the Tribunal of jurisdiction over Claimants' claims, because ECT protection does not extend to illegal investments, or requires that the Tribunal dismiss those claims under the principle of unclean hands. The Tribunal should reject Claimants' attack on the existence of the principle of unclean hands in international law, as well as their baseless charge that Respondent is estopped from raising Claimants' illegalities.
IX. Claimants Have Failed To Establish Any Entitlement To Damages
97. Claimants are not entitled to any compensation, in light of (a) their own illegal conduct, including their and the Oligarchs' illegal acquisition and consolidation of their ownership and control of Yukos, their abuse of the Russia-Cyprus Tax Treaty, and their implementation of Yukos' tax evasion scheme, and (b) Yukos' failure to mitigate its tax liability, and Yukos' and Claimants' actions to prevent the collection of Yukos' overdue taxes.
98. Claimants are not entitled to any compensation for acts of the Russian Federation that are within the carve-out of Article 21(1) ECT and not within the clawback of Article 21(5) ECT.
99. Claimants also are not entitled to any compensation based on Yukos' claimed value at any given point in time, because they have failed to demonstrate any causal link between any diminution in Yukos' then-supposed value and specific violations of the ECT. Claimants' "all-or-nothing" approach does not provide a means by which the Tribunal can (a) assess whether the Russian Federation's actions constituted an "expropriation," or (b) quantify the damages, if any, arising in the event some, but not all, of the measures Claimants complain about are found to violate the ECT. This is the inevitable result of Claimants' failure to present a damages measure, but instead a static valuation, devoid of any causation analysis.
100. Claimants' valuations also fail on their own terms, because they are entirely dependent on Claimants' unsustainable valuation date of November 21, 2007.
101. Claimants and their expert concede that the valuations presented in their opening submissions are infected by numerous material errors. These errors fatally undermine Claimants' core assertions and render Claimants' evidence unreliable for any purpose. The revised valuations submitted in Claimants' Reply are likewise riddled with errors and are manifestly result-driven, leaving Claimants with no competent evidence of damages at all. This is true, too, of their "method of collection" scenarios, which are unsupportable and fail of their own terms.
102. Once Yukos chose not to mitigate its tax liability during the first quarter of 2004 -- by paying no more than US$ 9.8 billion, capping its tax exposure at that amount and avoiding all of the subsequent enforcement measures -- there was no realistic means by which Yukos could have paid all of its liabilities, let alone continued in business as a going concern. Claimants' failure to mitigate is a further reason why their damages model, based on the claimed value of Yukos as of a given date, does not provide a meaningful measure of damages. Thus, even if the Tribunal were to conclude that an award of damages is warranted, it must be capped at Claimants' proportionate interest in the amount, if any, of Yukos' unavoidable liabilities -- not more than US$ 9.8 billion -- that the Tribunal concludes were improperly assessed.
103. Claimants' damages claim represents a 58% compound annual rate of return on their investment in Yukos. Claimants' requested rate of return fails to take account of Claimants', the Oligarchs', and Yukos' unlawful misconduct and is well beyond that which any legitimate investor would have earned.
104. Measured against a reasonable return on investment, and after taking account of the returns on their investment in Yukos that Claimants have already received (not to mention the fruits of their ill-gotten gains and assets secreted offshore), Claimants have not incurred any damages at all.
Stephen M. Schwebel