|LIST OF DEFINED TERMS|
|2000 Audit Report||Field Tax Audit Report No. 08-1/1, dated 29 December 2003, finding that Yukos operated a tax evasion scheme|
|2000 Decision||Decision No. 14-3-05/1609-1, dated 14 April 2004, holding Yukos liable for a tax offense and reassessing approximately USD 3.48 billion in taxes against Yukos for the year 2000|
|2001 Decision||Decision No. 30-3-15/3, dated 2 September 2004, holding Yukos liable for a tax offense and reassessing approximately USD 4.1 billion in taxes against Yukos for the year 2001|
|2002 Decision||Decision No. 52/896, dated 16 November 2004, holding Yukos liable for a tax offense and reassessing approximately USD 6.7 billion in taxes against Yukos for the year 2002|
|2003 Decision||Decision No. 52/985, dated 6 December 2004, holding Yukos liable for a tax offense and reassessing approximately USD 6 billion in taxes against Yukos for the year 2003|
|2003 Interim Dividend||Yukos' declaration of a USD 2 billion interim dividend in November 2003|
|2004 Decision||Decision No. 52/292, dated 17 March 2006, holding Yukos liable for a tax offense and reassessing approximately USD 3.9 billion in taxes against Yukos for the year 2004|
|ADR||American Depositary Receipt|
|A Loan||USD 1 billion loan entered into on 24 September 2003 by Yukos from the Western Banks and secured by certain of Yukos' oil export contracts and by YNG|
|April 2004 Injunction||Ruling by the Moscow Arbitrazh Court dated 15 April 2004 prohibiting Yukos from alienating and encumbering its assets|
|Baikal||Baikal Finance Group, the entity which purchased YNG at auction and which was bought by Rosneft|
|BBS Companies||Behles Petroleum S.A., Baltic Petroleum Trading Limited and South Petroleum Limited|
|B Loan||USD 1.6 billion loan entered into on 30 September 2003 by Yukos from Société Générale S.A. and fully collateralized in cash by GML|
|Chrétien letters||Letters from Jean Chrétien to Prime Minister Fradkov, dated 6 and 15 July 2004, and to President Putin, dated 30 July 2004, 10 September 2004 and 17 November 2004|
|Claimants||Hulley, VPL, and YUL|
|Claimants' Post-HearingBrief||Claimants' Post-Hearing Brief, dated 21 December 2012|
|Claimants' Skeleton||Claimants' Skeleton Argument, dated 1 October 2012|
|Confidential SaleAgreement||Confidential sale agreement between the Western Banks and Rosneft dated 13 December 2005|
|Counter-Memorial||Respondent's Counter-Memorial on the Merits, dated 4 April 2011, as corrected 29 July 2011|
|Cyprus-Russia DTA||Agreement Between the Government of the Republic of Cyprus and the Government of the Russian Federation for the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital, signed on 5 December 1998|
|DCF||Discounted Cash Flow|
|Dresdner||ZAO Dresdner Bank|
|Dresdner Summary Letter||Dresdner Summary Valuation Opinion Letter dated 6 October 2004|
|Dresdner Valuation Report||Dresdner Valuation Report of YNG dated 6 October 2004|
|EBITDA||Earnings before Interest, Taxes, Depreciation and Amortization|
|ECHR||European Convention on Human Rights|
|ECT (or Treaty)||Energy Charter Treaty, 2080 UNTS 95, signed on 17 December 1994|
|ECtHR||European Court of Human Rights|
|ECtHR Yukos Judgment||OAO Neftyanaya Kompaniya Yukos v. Russia, ECtHR, Appl. No. 14902/04, Judgment, 20 September 2011|
|EGM||Extraordinary General Meeting|
|English Judgment||BNP Paribas S.A. v. Yukos Oil Company, High Court of England and Wales, Case No. HC 05 C0 12 19,  EWHC 1321 (Ch), Judgment, 24 June 2005|
|GML||GML Limited (formerly named Group Menatep Limited), a company incorporated in Gibraltar and parent company of YUL|
|Final Awards||Final Awards in these three arbitrations (PCA Case Nos. AA226 (Hulley), AA227 (YUL) and AA228 (VPL)) (including the present Award)|
|Hearing on the Merits (or Hearing)||Hearing on the merits held at the Peace Palace in The Hague from 10 October to 9 November 2012|
|Hulley||Hulley Enterprises Limited, a company organized under the laws of Cyprus and Claimant in PCA Case No. AA226, owned by YUL|
|ICJ||International Court of Justice|
|ILC||International Law Commission of the United Nations|
|ILC Articles on State Responsibility||ILC Draft Articles on Responsibility of States for Internationally Wrongful Acts, 2001|
|Interim Awards||Interim Awards on Jurisdiction and Admissibility issued on 30 November 2009 in these three arbitrations (PCA Case Nos. AA226 (Hulley), AA227 (YUL) and AA228 (VPL))|
|Law 9-Z||Law of the Republic of Mordovia No. 9-Z, which is the framework by which Mordovia offered tax benefits to corporate entities operating in the region|
|Memorial||Claimants' Memorial on the Merits, dated 15 September 2010|
|Moravel||Moravel Investments Limited|
|Notices of Arbitration and Statements of Claim||Claimants' Notices of Arbitration and Statements of Claim by Hulley and YUL, dated 3 February 2005; and by VPL, dated 14 February 2005|
|NYSE||New York Stock Exchange|
|Oligarchs||Respondent's style of reference to the individuals who have or had a beneficial interest in the trusts behind Claimants, namely Messrs. Khodorkovsky, Lebedev, Nevzlin, Dubov, Brudno, Shakhnovsky, and Golubovitch|
|Parties||Claimants and Respondent|
|PCA||Permanent Court of Arbitration|
|PCIJ||Permanent Court of International Justice|
|PwC||PricewaterhouseCoopers, the former auditor of Yukos|
|PwC's Withdrawal Letter||Letter from PwC to the bankruptcy receiver, Mr. Eduard Rebgun, dated 15 June 2007, by which PwC withdrew its Yukos audits|
|Quasar||Quasar de Valores SICAV S.A. et al. v. The Russian Federation, SCC Arbitration, Award, 20 July 2012|
|Rehabilitation Plan||Rehabilitation plan the in context of bankruptcy proceedings proposed by Yukos' management and approved by a majority vote during an EGM on 1 June 2006|
|Rejoinder||Respondent's Rejoinder on the Merits, dated 16 August 2012|
|Reply||Claimants' Reply on the Merits, dated 15 March 2012|
|Resolution No. 53||Resolution of the Plenum of the Supreme Arbitrazh Court No. 53, dated 12 October 2006|
|Respondent||The Russian Federation or Russia|
|Respondent's Post-Hearing Brief||Respondent's Post-Hearing Brief, dated 21 December 2012|
|Respondent's Skeleton||Respondent's Skeleton Argument, dated 1 October 2012|
|RosInvestCo||RosInvestCo UK Ltd. v. The Russian Federation, SCC Arbitration V (079/2005), Final Award, 12 September 2010|
|Rosneft||Russian State-owned entity that bought Baikal|
|Russian Civil Code||Civil Code of the Russian Federation|
|Russian Constitution||Constitution of the Russian Federation|
|Russian Tax Code||Tax Code of the Russian Federation|
|Share Exchange Agreement||Agreement pursuant to which Yukos would acquire 72 percent (plus one share) of Sibneft shares from Sibneft's principal shareholders in exchange for 26.01 percent of the fully diluted share capital of Yukos|
|Share Purchase Agreement||Agreement pursuant to which Yukos would acquire 20 percent (minus one share) of Sibneft shares from Sibneft's principal shareholders for a cash consideration of USD 3 billion|
|Sibneft||Russia's fifth largest oil company in 2003 when it agreed to a merger with Yukos|
|Stichting 1||Stichting Administratiekantoor Yukos International|
|Stichting 2||Stichting Administratiekantoor Small World Telecommunication Holdings B.V.|
|Stichtings||Stichting 1 and Stichting 2|
|TRO||Temporary Restraining Order|
|UNCITRAL Rules||Arbitration Rules of the United Nations Commission on International Trade Law, 1976|
|U.S. GAAP||United States' Generally Accepted Accounting Principles|
|VAT Law||Law of the Russian Federation governing Value Added Tax|
|VCLT||Vienna Convention on the Law of Treaties, 1155 UNTS 331, signed on 23 May 1969|
|VPL||Veteran Petroleum Limited, a company organized under the laws of Cyprus and Claimant in PCA Case No. AA 228|
|Western Banks||Syndicate of Western banks led by Société Générale S.A. and including BNP Paribas S.A., Citibank N.A., Commerzbank Akziengesellschaft, Calyon S.A., Deutsche Bank A.G., Hillside Apex Fund Limited, ING Bank N.V., KBC Bank N.V., Stark Trading, Shepherd Investments International Limited, Thames River Traditional Funds PLC (High Income Fund), UFJ (Holland) N.V. and V.R. Global Partners L.P.|
|YNG||Yuganskneftegaz, Yukos' core production subsidiary|
|Yukos (or OAO Yukos Oil Company)||OAO Yukos Oil Company, a joint stock company incorporated in Russia in 1993|
|Yukos CIS||Yukos CIS Investment Limited|
|Yukos Finance||Yukos Finance B.V.|
|Yukos International||Yukos International U.K. B.V.|
|YUL||Yukos Universal Limited, a company organized under the laws of the Isle of Man and Claimant in PCA No. AA 227, shareholder of Yukos|
|ZATO||Zakrytoe Administrativno-Territorial'noe Obrazovaniye, or Closed Administrative Territorial Unit.|
For the reasons set forth above, the Tribunal:
(a) DISMISSES the objections to jurisdiction and/or admissibility based on Article 1(6) and 1(7), Article 17, Article 26(3)(b)(i) and Article 45 of the ECT;
(b) DEFERS its decision on the objection to jurisdiction and/or admissibility based on Article 21 of the ECT to the merits phase of the arbitration, consistent with [paragraph numbers], above;
(c) CONFIRMS that its decision on the objections to jurisdiction and/or admissibility involving the Parties' contentions concerning "unclean hands" and Respondent's contention that "Claimant's personality must be disregarded because it is an instrumentality of a criminal enterprise" is deferred to the merits phase of the arbitration, consistent with Procedural Order No. 3;
(d) HOLDS that, subject to the preceding two sub-paragraphs, the present dispute is admissible and within its jurisdiction, and that the Tribunal has jurisdiction over the Russian Federation in connection with the merits of the present dispute;
(e) RESERVES all questions concerning costs, fees and expenses, including the Parties' costs of legal representation, for subsequent determination; and
(f) INVITES the Parties to confer regarding the procedural calendar for the merits phase of the arbitration, and to report to the Tribunal in this respect within 60 days of receipt of this Interim Award.
The Hon. L. Yves Fortier PC CC OQ QC
Dr. Charles Poncet
Judge Stephen M. Schwebel
Professor Emmanuel Gaillard Dr. Claudia Annacker
Dr. Yas Banifatemi Mr. Lawrence Friedman
Mr. Philippe Pinsolle Mr. David Sabel
Ms. Jennifer Younan Mr. Matthew Slater
Dr. Paschalis Paschalidis Mr. William McGurn
Mr. Ilija Mitrev Penusliski Mr. Jay Alexander
Ms. Kamalia Mehtiyeva Mr. Samuel Cooper
Mr. Gueorgui Babitchev Mr. Michael Goldberg
Mr. Emmanuel Jacomy Mr. Cameron Murphy
Mr. Scott Vesel Ms. Laurie Achtouk-Spivak
Ms. Ximena Herrera-Bernal Ms. Marina Akchurina
Ms. Elise Edson Mr. Yury Babichev
Ms. Ketevan Betaneli Mr. Nowell Bamberger
Ms. Coralie Darrigade Mr. Adam Bryan
Mr. Thomas Voisin Ms. Chiara Capalti
Mr. Dimitrios Katsikis Ms. Ania Farren
Mr. Benjamin Siino Ms. Giulia Gosi
Mr. Jean-Marc Elsholz Mr. Michael Jacobsohn
Ms. Gracia Angulo Duncan Mr. Magnus Jones
Mr. Benoit Arnauld
Mr. Lorenzo Melchionda
Ms. Nanou Leleu-Knobil
Mr. Milo Molfa
Party Representatives Ms. Sara Nadeau-Seguin
Mr. Tim Osborne Ms. Daria Pavelieva
Mr. Christopher Cook Mr. Jacopo Roberti di Sarsina
Mr. Rodney Hodges Ms. Teale Toweill
Ms. Marina Weiss
Claimants' Witnesses Mr. Larry Work-Dembowski
Mr. Vladimir Dubov Party Representatives
Dr. Andrei Illarionov Mr. Konstantin Vyshkovskiy
Mr. Jacques Kosciusko-Morizet Ms. Maria Maslyakova
Mr. Bruce Misamore
Mr. Leonid Nevzlin Respondent's Witnesses
Mr. Frank Rieger Experts
Mr. Steven Theede Professor James Dow
Mr. Oleg Y. Konnov
Mr. Brent Kaczmarek
Assistant to the Tribunal
Mr. Martin Valasek
Permanent Court of Arbitration
Mr. Brooks W. Daly, Secretary to the Tribunal
Ms. Judith Levine, Assistant Secretary to the Tribunal
Ms. Olga Boltenko
Ms. Evgeniya Goriatcheva
Ms. Hinda Rabkin
Ms. Elsa Sardinha
Mr. Yuri Somov
Mr. Ilya Feliciano
Mr. Trevor McGowan
1. The dispute between the Parties arises from the various actions taken by the Russian Federation against Yukos Oil Company ("Yukos" or the "Company") and related persons and entities, which culminated in the expropriation of the Company for the exclusive benefit of the Russian State and State-owned entities, thereby destroying the Claimants' investments in Yukos. As the Claimants have demonstrated, by (i) failing to treat the Claimants' investments in Yukos in a fair and equitable manner and on a non-discriminatory basis, and (ii) expropriating the Claimants' investments therein, the Russian Federation breached its obligations under Articles 10(1) and 13(1) of the Energy Charter Treaty ("ECT"), respectively, for which the Claimants are entitled to full reparation.
2. The Claimants' positions on the merits are described in detail in their written submissions. This skeleton argument summarizes, for the benefit of the Tribunal, the Claimants' principal arguments, with reference to key supporting materials. It does not replace or supplement those submissions, nor is it a substitute for oral argument.
II. FACTUAL BACKGROUND
3. The various actions taken by the Russian Federation against Yukos, and related persons and entities, were aimed at the destruction and expropriation of the Company. The expropriation of Yukos was achieved in 3 overlapping steps: first, the paralysis of the Company (A); second, the manufacturing of a pretext for the taking of the Company's assets, namely, the fabrication of debt (B); finally, the use of that pretext to take Yukos' assets piece by piece, including its most valuable asset, Yuganskneftegaz, and transfer them to the State-owned companies Rosneft and Gazprom (C). Each of these steps was accompanied by serious due process violations. The result was the liquidation of Yukos in November 2007, and the complete and total deprivation of the Claimants' investments therein.
A. PARALYSIS OF YUKOS
4. Prior to the Russian Federation's attack, Yukos was a flourishing oil company. In May 2002, it was the only Russian company to be ranked among the top 10 largest oil and gas companies by market capitalization worldwide. In the fourth quarter of 2002, it became the largest oil company in Russia in terms of daily crude oil production. In October 2003, it completed its merger with Sibneft, another of Russia's leading oil companies, creating the world's fourth largest private oil producer, behind BP, ExxonMobil and Shell. Yukos was also engaged in advanced discussions with American oil majors, ExxonMobil and ChevronTexaco, in relation to a merger or other form of business combination. This success was the result of concerted efforts to modernize the Company and implement Western business practices.
5. Starting in the summer of 2003, the Russian Federation took a series of actions aimed at undermining the ability of the Company's management to run the business. These included: (i) the arrests of Messrs. Lebedev and Khodorkovsky, Yukos' CEO; (ii) the targeting, intimidation and/or prosecution of other high-ranking Yukos managers, employees and related persons; (iii) the harassment, prosecution and/or arrest of Yukos' in-house counsel and lawyers involved in various Yukos-related cases; (iv) the conduct of widespread and aggressive searches and seizures; (v) the seizure of the Claimants' shares in Yukos; (vi) the threats to revoke Yukos' oil licenses; (vii) the numerous mutual legal assistance requests and extradition proceedings to affect Yukos and entities/persons associated with the Company abroad; and (viii) the targeting and harassment of Yukos' auditor, PwC. These actions were taken in violation of the most basic standards of due process and fair treatment.
6. Contrary to the Respondent's allegations, the actions described above deprived Yukos' management of the ability to manage and control the Company, thereby facilitating its dismantling and ultimate destruction. One early casualty of the Russian Federation's attack on Yukos was the YukosSibneft merger.
B. MANUFACTURING A PRETEXT — THE FABRICATION OF DEBT
1. The fabrication of massive tax claims against Yukos for the years 2000-2004
7. In December 2003, the Russian Federation's campaign against Yukos entered into a new phase with the fabrication of massive tax claims against the Company.
8. On December 8, 2003, 6 weeks after Mr. Khodorkovsky's arrest, the Tax Ministry ordered a tax re-audit of Yukos for the year 2000. Only 3 weeks later, it issued a Field Tax Audit Report exceeding 100 pages in length and proposing to collect from Yukos US$ 3.4 billion in alleged tax arrears, interest and fines on the purported basis that the use of regional tax incentives by Yukos trading companies constituted unlawful tax evasion by Yukos itself.
9. The December 2003 re-audit of Yukos was extraordinary in many respects. Less than 8 months earlier, on April 28, 2003, the Tax Ministry had issued a Field Tax Audit Report for the years 2000 and 2001 that raised no questions concerning Yukos' tax optimization structure. That audit had taken 5 months to conduct, followed by 2 months for drafting the report. On several occasions after this audit, including on September 1, October 1 and November 1, 2003, the Tax Ministry confirmed that Yukos had no outstanding tax debts. Prior tax audits of the Mordovian trading companies likewise raised no major concerns and specifically found their use of regional tax incentives to be lawful.
10. The Respondent alleges that the Russian authorities lacked knowledge of Yukos' tax optimization structure and only "discovered" its allegedly abusive features in the course of the 3-week audit carried out in December 2003. This allegation is not credible. As the record demonstrates, the Russian authorities had long been aware of Yukos' practices, and the Respondent has failed to identify a single piece of material information relevant to the alleged tax claims that it lacked prior to the December 2003 repeat audit. In particular:
■ Yukos was one of Russia's largest taxpayers and was therefore under constant scrutiny by the Russian tax authorities, who had never found any significant problems prior to the attack on Yukos.
■ The use of trading companies incorporated in low-tax regions was a common practice among Russia's vertically integrated oil companies, a fact that was well known to Russian authorities.
■ Several trading companies' affiliations with Yukos were reflected in their names, for instance, Yukos-M and Yu-Mordovia.
■ Prior to using trading companies in Mordovia—the source of the overwhelming majority of the purported tax claims—Yukos discussed the issue with federal and regional officials, who approved Yukos' plan. Mordovia's Government then signed investment agreements with these trading companies specifying the amounts of monthly payments. Audits of the Mordovian trading companies confirm the tax authorities' knowledge of the factual circumstances later alleged to constitute "abuse".
■ As the Respondent concedes, Yukos' financial statements disclosed that companies within Yukos' consolidation perimeter enjoyed tax benefits under the low-tax region program and the overall amounts of such benefits.
■ VAT refund submissions documented the entire chain of transactions prior to export, including, in particular, the trading companies' transactions with Yukos' production companies, refineries, and the holding company.
■ Yukos' monthly submissions to obtain access to export pipelines confirmed that the trading companies' tax payments were in relation to the trading of oil produced by Yukos' production subsidiaries and exported under Yukos' export quotas.
11. The Tax Ministry went on to fabricate similar tax claims against Yukos covering the years 2001-2004. As discussed below, the timing of these claims was instrumental in carrying out the Russian Federation's expropriation plan. By the time the Tax Ministry issued the last of these demands, Yukos faced a tax bill of more than US$ 24 billion, of which only US$ 5.2 billion constituted allegedly evaded revenue-based taxes, the remainder being comprised of VAT, interest, and fines. These payment demands dwarfed the Company's consolidated net income for the relevant periods.
2. The purported tax claims were unprecedented, arbitrary and manifestly expropriatory
12. Purported bases for revoking regional profit tax incentives. Yukos' tax optimization structure fully complied with the legislation in force and current practices. Indeed, the Respondent does not allege that Yukos or the trading companies failed to comply with the federal or regional legislation. Nor does it allege that the trading companies failed to fulfill the terms of the investment agreements signed with the regional governments. Rather, it claims that the trading companies failed to satisfy additional, unwritten requirements beyond the statutory eligibility criteria, including, in particular, an alleged "proportionality of investments" requirement that directly contradicted both the legislation and the investment agreements signed by the regional governments. This justification is not credible.
13. Re-attribution. The primary weapon in the expropriation of Yukos' assets was the reattribution of the alleged tax liabilities of the trading companies to Yukos. Russian law did not allow such re-attribution, and the Respondent cannot point to a single example of such a re-attribution other than the Yukos case. Had the Russian authorities genuinely believed that the tax benefits had been improperly granted to the trading companies, which was not the case, the proper course under Russian law would have been to pursue those companies for the allegedly underpaid taxes. Alternatively, had they genuinely believed that sales had occurred at below market prices, Russian tax law contained a specific statutory mechanism for such transferpricing situations. However, the Russian authorities ignored these statutory provisions. Re-attribution served 2 purposes: first, shifting liability to Yukos itself paved the way for the expropriation of the Company's assets; second, re-attribution provided the basis for massive VAT claims.
14. VAT. Simultaneously invoking and contradicting their own re-attribution theory, the tax authorities re-attributed to Yukos all the revenues from the trading companies' transactions, but refused to re-attribute to Yukos the trading companies' entitlements to VAT refunds for export transactions. The purported basis for denying refunds was that the paperwork, although proper and timely, had been submitted by the trading companies rather than Yukos. This enabled the tax authorities to claim an additional US$ 13.59 billion—56.20% of the total claims against Yukos—despite the uncontested fact that no VAT was owed on these transactions. Such a step was clearly confiscatory in nature. Further, the fact that, even when Yukos attempted to submit the updated VAT returns in its own name, its submissions were rejected as improper and untimely, confirms that the purported VAT claims had nothing to do with taxation. The Respondent has been unable to offer any defense whatsoever for the fundamentally contradictory way in which its re-attribution theory was deployed.
15. Fines. The tax authorities further inflated their claims through the unjustified imposition of fines, including by imposing fines after the statute of limitations had expired; by doubling fines for "willfulness" despite the fact that Yukos did not—and could not possibly—"know" of the alleged illegality; and by doubling fines again for "repeat offenses" despite the fact that at the time of the alleged "repeat" offenses Yukos had never been previously held liable for a similar offense. Overall, these inflated fines amounted to US$ 8.5 billion, i.e., 35.13% of the total alleged tax liabilities, with the "repeat" offender fines alone amounting to US$ 3.92 billion.
16. The common thread unifying the Russian Federation's approach was an overarching desire to manufacture and inflate claims against Yukos, with a view to expropriating the Company. As Yukos' tax lawyer noted after reviewing the December 2003 audit report, "[e]ven if we assume political pressure on the court the extent of the violations committed by the Ministry for Taxes and Levies will make it impossible even for the most biased judge to support the clearly unlawful inspection act". The Russian courts proved Yukos' tax lawyer wrong, rubber-stamping the fabricated tax debts.
3. Due process violations in the administrative and judicial proceedings
17. The administrative and judicial proceedings with respect to the alleged tax debts were conducted in blatant disregard of Yukos' basic due process rights. This involved, inter alia, pressure on the courts to ensure that only Government-friendly judges would preside over Yukos' challenges—and subsequently rewarding those judges for their efforts; overly speedy proceedings, denying Yukos adequate time and facilities to prepare its defense; and arbitrary denials of Yukos' motions to join to the proceedings the trading companies and the Mordovian Government. Coupled with the harassment of Yukos' lawyers noted above, the Russian Federation ensured the hasty conclusion of these proceedings, bringing it one step closer to its objective, namely the taking of Yukos' assets.
C. Appropriation of Yukos' assets - Seizing Yukos' assets andTRANSFERRING THEM TO STATE-OWNED COMPANIES
1. Yukos was prevented from settling its alleged tax debts or discharging them in full
18. The swift and manifestly disproportionate enforcement of the 2000 tax reassessment. On April 14, 2004, the tax authorities issued their payment demands for the year 2000. Yukos was given until April 16, 2004, i.e., less than 48 hours, to pay in full US$ 3.48 billion in alleged tax arrears, interest and fines.
19. Even this symbolic "voluntary" payment period was illusory. On April 15, 2004, the very next day after the demand for payment was issued, the tax authorities obtained from the Moscow Arbitrazh Court an ex parte injunctive order freezing, as a purported security measure, all of Yukos' non-cash Russian assets, with the exception of oil and oil products.
20. On June 30, 2004, following Yukos' unsuccessful appeal, an enforcement writ was issued giving the Tax Ministry 3 years to collect the 2000 tax debt. Rather than engage in discussions with the Company about the discharge of this debt within that period, the bailiffs initiated enforcement proceedings that very same day. The Company was given 5 days to pay voluntarily US$ 3.42 billion in alleged tax arrears, interest and fines for the year 2000 and threatened with a 7% enforcement fee if it failed to do so.
21. At the same time, the bailiffs ordered the seizure of (i) monies deposited in Yukos' accounts with 16 Russian banks, and (ii) the Company's Russian non-cash assets (which had previously been the subject of a freeze). On July 1, 2004, a wave of seizures on Yukos' non-monetary assets began, culminating in the seizure on July 14, 2004 of Yukos' shares in its 3 main production subsidiaries—Yuganskneftegaz, Samaraneftegaz and Tomskneft.
22. It should be recalled that all these seizures were conducted within the framework of the enforcement proceeding initiated on June 30, 2004 to recover from Yukos US$ 3.42 billion in alleged tax liabilities for 2000. These seizures covered virtually all of Yukos' assets, whose value was staggeringly higher.
23. Further, within days, on July 20, 2004, the Ministry of Justice announced its intention to appraise and sell Yuganskneftegaz to satisfy the 2000 alleged tax debt.
24. The decision to seize and sell Yuganskneftegaz, which accounted for approximately 12% of Russia's oil output and whose value on any estimation dramatically exceeded that of the alleged tax debt, can only be reconciled with a desire to destroy the Company and appropriate its core assets. This reality is confirmed by the fact that the decision was taken less than 3 weeks after the writ of execution had been issued and when all of Yukos' domestic assets remained seized and available to satisfy the 2000 tax debt.
25. The failure to consider Yukos' proposals of alternative means of paying the alleged debt. Further confirmation of the Russian Federation's expropriatory intent is the systematic rejection of Yukos' numerous offers to the bailiffs, courts and other Russian authorities and officials to settle or discharge its tax debts. These included: (i) the offers of Yukos' Russian non-core assets and its stake in Sibneft, initially 34.5% and subsequently reduced to 20% minus 1 share following the seizure of the 14.5% stake in Sibneft on July 9, 2004, in the context of the Chukotka Arbitrazh Court proceedings; (ii) Yukos' petition to pay its alleged tax debt for the year 2000 in installments; (iii) Yukos' amicable proposal to the Ministry of Finance to defer the payment of the federal share of its alleged debt for 6 months or to pay it in tranches; (iv) the proposals by Mr. Jean Chrétien, former Canadian Prime Minister, to Prime Minister Fradkov and President Putin of a global settlement of the disputes, which envisaged the payment to the Russian Federation of approximately US$ 8 billion over the course of 2 years; (v) Yukos' October 2004 full settlement proposal in the range of US$ 21 billion, which included non-core assets and Sibneft shares, as well as a concession to re-elect a new board of directors that would include people selected by the Government.
26. Each of these offers, as well as numerous others, was either denied or, in most cases, simply ignored. The Respondent's attempts to provide post-hoc rationalizations for its conduct by qualifying each of Yukos' offers as unacceptable or inadequate are unfounded. In any event, the Russian authorities' failure to work with—or even respond to—the multiple offers by Yukos, one of the largest private taxpayers in Russia, or to consider other options for enforcement, confirms that the Russian Federation was not interested in collecting taxes. This is even more so in light of the fact that the Russian authorities had no difficulty entering into settlement discussions and negotiating repayment plans with other Russian oil companies, including, inter alia, Rosneft and Sibneft.
2. The forced sale of Yukos' shares in Yuganskneftegaz
27. Fabrication of further debt to maintain the pretext. Despite the effect of the seizures described above, by the time of the Yuganskneftegaz auction, Yukos had paid off the 2000 tax reassessment in its entirety, eliminating the raison d'être of the decision to sell Yuganskneftegaz. Recognizing this difficulty as well as the gross disparity between the alleged tax debts and the value of Yuganskneftegaz, the Tax Ministry set about fabricating new claims.
■ On September 2, 2004, the Tax Ministry served Yukos with a tax reassessment for 2001 in the amount of US$ 4.1 billion. Yukos was given only 2 days to pay voluntarily this amount, with the bailiffs initiating enforcement proceedings on September 9, 2004.
■ On November 16, 2004, the Tax Ministry served Yukos with a tax reassessment for 2002 in the amount of US$ 6.76 billion, the largest among the 5 tax reassessments for the years 2000-2004. Yukos was given only 1 day to pay voluntarily this amount, with the bailiffs initiating enforcement proceedings on November 18, 2004.
■ On December 6, 2004, the Tax Ministry served Yukos with a tax reassessment for 2003 in the amount of US$ 6.1 billion, giving the Company 1 day to pay in full. On December 9, 2004, the bailiffs initiated enforcement proceedings.
28. In each case, the bailiffs allowed Yukos at most 5 days for voluntary payment and charged the 7% enforcement fee for failure to comply with these unreasonably short time limits.
29. Thus, in the 4 months from September 2004 up until the auction of Yuganskneftegaz on December 19, 2004, the Russian Federation managed to increase Yukos' alleged tax liability by approximately US$ 17 billion.
30. Efforts to depress the auction price of Yuganskneftegaz. At the same time, with a view to facilitating the Russian Federation's acquisition of Yuganskneftegaz at a bargain price, the Russian Tax Ministry also fabricated claims against Yuganskneftegaz. These claims were premised on the application of statutory provisions on transfer pricing, which the tax authorities systematically refused to apply in relation to Yukos itself. Significantly, these claims concerned the same oil trading revenues that had already been re-attributed to Yukos, thus resulting in double taxation.
31. Thus, on October 29, 2004, the tax authorities simultaneously: (i) issued a Repeat Field Tax Audit Report for 2001 requesting Yuganskneftegaz to pay US$ 2.35 billion in alleged tax arrears, interest and fines;93 and (ii) rendered a Decision holding Yuganskneftegaz liable for an alleged tax offense for the year 2002 and requiring payment of US$ 1.03 billion in alleged tax arrears, interest and fines.
32. On December 3, 2004, a Field Tax Audit Report was issued for the year 2003, imposing on Yuganskneftegaz an additional US$ 1.22 billion in alleged tax arrears, interest and fines.
33. In addition to fabricating these US$ 4.6 billion in additional alleged liability, the Russian authorities also began to sow doubts about the security of Yuganskneftegaz's oil licenses to depress further the Company's value.
34. That all these payments demands, imposed simultaneously on Yukos and its main production subsidiary, were issued in the run-up to the auction of Yuganskneftegaz is no coincidence. Nor is it a coincidence that, after Yuganskneftegaz was acquired by Rosneft, the tax claims along with the oil license concerns promptly disappeared. Together with the generous payment terms accorded to Rosneft's new subsidiary but systematically denied to Yukos, these facts confirm both the discriminatory nature of the Russian Federation's treatment of Yukos, and the true purpose of the purported tax reassessments against Yuganskneftegaz, namely, to facilitate the expropriation of the Company and not to collect taxes.
35. Sham auction of Yuganskneftegaz. As noted above, the Ministry of Justice publicly announced its plan to sell Yuganskneftegaz on July 20, 2004, purportedly in order to satisfy the 2000 alleged tax debt.
36. On August 12, 2004, the bailiffs appointed ZAO Dresdner Bank ("Dresdner") to carry out the valuation of Yuganskneftegaz in preparation for its sale. On October 6, 2004, Dresdner issued a confidential report valuing Yuganskneftegaz on a standalone basis at US$ 18.6 billion - 21.1 billion.
37. On November 18, 2004, the bailiffs announced that Yuganskneftegaz would be auctioned to satisfy Yukos' outstanding tax debt, with the Russian Federal Property Fund issuing the formal auction notice the following day. The opening price for 100% of the ordinary shares, or 76.79% of Yuganskneftegaz's total share capital, was set at US$ 8.65 billion, a price well below its true value. The auction date was set for December 19, 2004, which was the earliest possible date to hold the auction and only 1 month away.
38. In an attempt to prevent the auction of its core asset, Yukos filed an application with the Moscow Arbitrazh Court to declare unlawful the Bailiff's Resolution of November 18, 2004 and sought interim measures. These efforts failed.
39. Confronted, yet again, with the futility of its efforts to obtain justice before the Russian courts, on December 14, 2004, Yukos filed for Chapter 11 bankruptcy protection before the U.S. Bankruptcy Court for the Southern District of Texas. By that date, only 3 companies, Gazpromneft (the new wholly-owned subsidiary of State-owned Gazprom), First Venture and Intercom, had sought antimonopoly clearance required in anticipation of the auction. On December 16, 2004, the U.S. Court issued a Temporary Restraining Order ("TRO") enjoining Gazpromneft, its potential lenders, First Venture and Intercom from participating in the auction of Yuganskneftegaz.
40. Nonetheless, on December 19, 2004, which was a Sunday, the Russian authorities proceeded with the auction of Yuganskneftegaz. Gazpromneft and OOO Baikalfinancegroup ("Baikal") were registered as participants. Baikal was a previously unknown company established at the address of a local bar in the provincial town of Tver on December 6, 2004. With only US$ 359 in capital, it mysteriously managed to pay a cash deposit in the amount of US$ 1.77 billion to register for the auction on December 16, 2004.
41. At the auction, Baikal opened the bidding at US$ 9.35 billion. Gazpromneft's representative asked for a recess and left the room to make a telephone call. Upon his return, he did not make a single bid and Baikal was pronounced the winner of the auction with its opening bid of US$ 9.35 billion. The whole bidding process lasted approximately 10 minutes.
42. The Respondent's allegation that the low price for Yuganskneftegaz reflected attempts by Yukos to "sabotage" the auction is unconvincing. Neither "litigation risk" nor the TRO had a material effect on the participants or the outcome of the auction. The reality is that, ignoring the advice of its own appraisal firm, the Russian authorities systematically acted in ways that negatively affected the ability and willingness of potential bidders to participate, as well as the price they would be willing to pay. Market participants also understood that political support was required to participate in auctions for Yukos assets.
43. The use of Baikal as a conduit for the eventual transfer of Yuganskneftegaz to a State-owned company was confirmed when, only a few days later, on December 23, 2004, Rosneft issued a statement announcing its acquisition of Baikal. Meeting journalists that day, President Putin confirmed his knowledge of the acquisition, stating that: "Today, the state, resorting to absolutely legal market mechanisms, is looking after its own interests. I consider this to be quite logical". Rosneft then enabled Baikal to repay the principal and interest on its debt by granting it, on December 30, 2004, a 1-year interest-free loan.
44. Rosneft benefited significantly from this acquisition, with Rosneft's estimated value increasing dramatically from US$ 7 billion in December 2004 to US$ 80 billion for its IPO in mid-2006. Based on the valuation disclosed by Rosneft at the time, Yuganskneftegaz was worth US$ 55.78 billion. Further, as noted above, the tax bills raised against Yuganskneftegaz as a Yukos subsidiary were almost entirely set aside by the Russian courts following its acquisition by Rosneft.
45. Looked at from any angle, the Russian Federation's approach to enforcement of the alleged tax debts, culminating in the transfer of Yuganskneftegaz to Rosneft in a sham auction, confirms that the Russian Federation's real goal was to expropriate the Company, and not to collect taxes.
46. Even after the sham auction of Yuganskneftegaz, there was no legitimate reason to put Yukos into bankruptcy. There were no substantial creditors apart from the Russian Federation, and the seizure of Yukos' assets remained in place, so there was no risk of assets being dissipated and no need to resolve conflicting creditors' claims. Yukos still possessed 2 substantial production subsidiaries— Samaraneftegaz and Tomskneft—as well as refining and marketing assets, and several non-core assets that it could readily have disposed of to pay off its outstanding debts and remain a going concern. However, the Russian authorities' priority was not recouping taxes; nor did they have any intention of allowing Yukos to survive as a going concern. The initiation of the bankruptcy proceedings provided a convenient way to sideline Yukos' management and to facilitate the taking of the Company's remaining assets.
47. Forcing Yukos into bankruptcy. As a result of the Russian Federation's attack, Yukos defaulted on a US$ 1 billion loan granted by a syndicate of Western banks. On December 13, 2005, Rosneft entered into a confidential agreement with the syndicate under which Rosneft agreed to pay the outstanding amount owed by Yukos in exchange for the assignment to Rosneft of the syndicate's rights of claim against Yukos. Crucially, the payment of Yukos' debt by Rosneft was conditioned upon the initiation of Yukos' bankruptcy by the syndicate. Pursuant to that agreement, on March 6, 2006, the syndicate filed a petition with the Moscow Arbitrazh Court to declare Yukos bankrupt, and on March 14, 2006, Rosneft paid off the loan.
48. On March 28, 2006, the Moscow Arbitrazh Court ordered the commencement of bankruptcy proceedings, placed Yukos under supervision, appointed Mr. Rebgun as interim administrator, and formally substituted Rosneft for the syndicate as creditor.
49. The Respondent argues that "sound commercial interests" explain both the syndicate's sale of the loan and Rosneft's reasons for acquiring the same. However, even if that were the case, the Respondent still fails to answer the basic question: why not simply have the syndicate of banks assign their claim to Rosneft, and let Rosneft put Yukos into bankruptcy? The only plausible explanation for this elaborate stratagem was to conceal the Russian Federation's role in initiating the bankruptcy of Yukos.
50. Ensuring the Russian State's control over the bankruptcy proceedings. After Rosneft initiated the bankruptcy through the syndicate, the Russian courts ensured that the Russian State, either directly or through Rosneft, would become Yukos' main creditor.
51. First, the Russian courts bent over backwards to ensure that the tax authorities' purported claims would be admitted, by: (i) delaying a scheduled hearing in order to give "the State more time to prove new tax claims", namely, the US$ 3.9 billion in tax payment demands for 2004, which the tax authorities rushed to issue on March 17, 2006, 11 days after the bankruptcy petition was filed; (ii) merging Yukos' challenge to that payment demand into the bankruptcy proceedings; and (iii) approving all the tax authorities' purported claims against Yukos for the years 2000-2004 following a wholly perfunctory review of the voluminous case files. Consequently, the Federal Taxation Service was by far Yukos' largest creditor with 60.50% of all registered bankruptcy claims.
52. Second, in the period leading up to the first meeting of Yukos' registered creditors on July 20, 2006, some 29 purported claims were admitted on behalf of Yuganskneftegaz, now Rosneft's subsidiary, totaling approximately US$ 4.42 billion. Subsequently, Rosneft secured admission of an even larger claim of US$ 5.55 billion premised on an allegation that Yuganskneftegaz had suffered "lost profits" in this amount during the period 2000-2003. These purported claims of US$ 9.97 billion enabled Rosneft to more than recoup the US$ 9.35 billion paid for Yuganskneftegaz and thereby acquire the Company for free. With the admission of these and various smaller claims, Rosneft became Yukos' second largest creditor with 37.17% of all registered bankruptcy claims.
53. Third, while the Russian court hearing Yukos' bankruptcy showed great flexibility in admitting any and all claims to benefit the Russian State, it was intransigent and formalistic in finding pretexts not to recognize substantial claims of creditors related to Yukos or to Yukos' shareholders.
54. These combined efforts resulted in the complete monopolization of Yukos' bankruptcy proceedings by the Russian State, which held 97.67% of all bankruptcy claims, guaranteeing its control over the bankruptcy process.
55. Rejection of Yukos' Rehabilitation Plan. The Financial Rehabilitation Plan proposed by Yukos' management ("the Rehabilitation Plan") set out a series of concrete measures that would enable Yukos to pay off its alleged liabilities fully within 2 years, while remaining a viable going concern. This would be achieved by, among other things, creating a "cash pool" from the sale of ancillary assets, cash flows generated by Yukos' remaining core assets, and more than US$ 1.5 billion from the sale of Yukos' 53.7% stake in the Lithuanian oil company Mazeikiu Nafta and Yukos' 49% stake in Slovakian oil transport major Transpetrol.
56. By contrast, according to Mr. Rebgun, the potential proceeds from the sale of Yukos' remaining assets, which he significantly undervalued at US$ 17.75 billion (after deducting the 24% profit tax payable on auction proceeds), were not sufficient to cover the US$ 18.3 billion of registered bankruptcy claims. Accordingly, he did not even bother to propose any measure for the Company's financial restoration but simply recommended liquidation. In the event, despite the fact that the bankruptcy auction prices represented significant markdowns from market value, the bankruptcy estate netted approximately US$ 35.55 billion—twice the amount Mr. Rebgun had put forward to argue in favor of liquidation.
57. Ultimately, the Federal Taxation Service and Rosneft held 93.87% of votes at the meeting of Yukos' creditors of July 25, 2006. It therefore came as no surprise that they rejected the Rehabilitation Plan and voted to liquidate Yukos' assets, despite the fact that Yukos' assets exceeded its alleged liabilities, and the Company was clearly solvent.
58. The bankruptcy auctions. Yukos' remaining assets were transferred to the Russian State at well below their fair market value through a series of 17 auctions held between March 2006 and August 2007. Rosneft thereby directly or indirectly acquired Yukos' key remaining assets, including Samaraneftegaz (Lot No. 11) and Tomskneft (Lot No. 10), which were sold at a gross discount of approximately 37% and 33%, respectively, of their fair market value. For its part, Gazprom acquired through Eni/Enel the 20% minus 1 share stake in Sibneft that the Russian Federation had persistently refused to let Yukos sell to pay off alleged tax debts. As with the sham auction of Yuganskneftegaz, there was no genuine competition in the bankruptcy auctions and, in many instances, including those for Samaraneftegaz and Tomskneft, the only participants were Rosneft and a previously unknown entity whose sole role was to satisfy the formal requirement that there be a minimum of 2 bidders.
59. Finally, when, by the end of July 2007, it became clear that despite the low auction prices, the bankruptcy might still generate some surplus, further claims were admitted in the bankruptcy proceedings on behalf of the Russian State, through the Federal Taxation Service and Rosneft. This ensured the completeness of Yukos' destruction and the transfer of its value and assets to the Russian State. Thus, the Russian Federation received, either directly or through State-owned Rosneft or Gazprom, approximately 99.71% of the bankruptcy proceeds and over 95% of Yukos' remaining assets, including all of Yukos' main production assets.
60. On November 12, 2007, the Moscow Arbitrazh Court formally endorsed all the activities of Yukos' receiver Mr. Rebgun, closed the Company's receivership and ordered that Yukos be struck off the register of legal entities. The latter happened on November 21, 2007: Yukos was removed from the register of companies, its shares were legally extinguished and so, too, were the Claimants' investments.
61. Seen together, the Russian Federation's actions can only be reasonably understood as a deliberate and sustained effort to destroy Yukos, gain control over its assets and eliminate Mr. Khodorkovsky as a potential political opponent. Indeed, viewed any other way, they make no sense and the Respondent has been unable to provide a plausible alternative explanation for its actions.
A. THE RUSSIAN FEDERATION IS IN BREACH OF ITS OBLIGATIONS UNDER ART. 10(1)ECT
62. Under Article 10(1) ECT, the Russian Federation undertook to "encourage and create stable, equitable, favorable and transparent conditions for Investors", to accord at all times "fair and equitable treatment" to investments made in its territory and not to "in any way impair by unreasonable or discriminatory measures [the] management, maintenance, use, enjoyment or disposal" of such investments, which "shall also enjoy the most constant protection and security".
63. The Russian Federation violated the above mentioned undertakings in the most egregious manner. In particular, it violated its obligation under Article 10(1) ECT to provide to the Claimants' investments fair and equitable treatment, by failing to meet basic requirements of procedural propriety and due process, engaging in conduct that was unreasonable, arbitrary, disproportionate and abusive, and failing to ensure a stable and transparent legal and business framework. The Russian Federation's actions also constituted a denial of justice in breach of the fair and equitable treatment standard of Article 10(1) ECT, as demonstrated by, inter alia, the removal of judges refusing to rule in the Russian State's favor and the lack of independence and impartiality of judges hearing Yukos' cases.
64. The Russian Federation also breached Article 10(1) ECT by discriminating against the Claimants' investments. In particular, it (i) singled out Yukos and treated it in a markedly different manner from other similar oil companies in Russia, (ii) treated Yuganskneftegaz differently before and after its acquisition by State-owned Rosneft, in the hands of which the former Yukos subsidiary's alleged tax liabilities all but disappeared, and (iii) ensured a differential treatment in the bankruptcy proceedings between creditors related to Yukos, on the one hand, and State-related creditors, on the other.
65. The Respondent's primary defense is to invoke Article 21 ECT to argue that the Claimants' claims should be dismissed on the ground that they are "based exclusively on measures 'with respect to Taxation Measures.'" As discussed below, not only is the Respondent's interpretation of Article 21 ECT untenable, but the Russian Federation's conduct had nothing to do with the genuine exercise of its taxation power and is thus not covered by Article 21 ECT.
66. The Respondent has moreover attempted to restrict the scope of its treaty obligations by misrepresenting the content of the fair and equitable treatment and discrimination standards in Article 10(1) ECT. Such attempts are groundless and should be rejected.
B. THE RussiAN FEDERATioN is iN BREACH oF iTs oBLiGATioNs uNDER ART. 13(1)ECT
67. The Russian Federation expropriated the Claimants' investments in breach of Article 13(1) ECT.
68. As of October 2003, Yukos was one of the largest oil companies in the world. It held 92% of Sibneft, 3 core production subsidiaries (Yuganskneftegaz, Samaraneftegaz and Tomskneft), as well as refining and marketing subsidiaries. As of November 21, 2007, it ceased to exist as a company, owing to a series of actions by which the Russian Federation seized its assets and transferred their title to State-owned Rosneft and Gazprom. The only plausible explanation for the Russian Federation's actions is the twin desire of dismantling the Company and transferring its assets to the State and the removal of Mr. Khodorkovsky as a potential political opponent. The result of those actions was a complete and total deprivation of the Claimants' investments therein.
69. The Russian Federation moreover failed to satisfy any of the 4 conditions set out in Article 13(1) ECT. The expropriation of the Claimants' investments was manifestly: (i) not in the public interest; (ii) discriminatory; (iii) carried out without due process of law; and (iv) not accompanied by the payment of any compensation, let alone prompt, adequate and effective compensation.
70. Unable to deny the total deprivation of the Claimants' investments and the transfer of title of Yukos' assets to State-owned Rosneft and Gazprom, the Respondent disaggregates its actions and argues that, when taken in isolation, each of them was, under Russian law, a proper response to Yukos' alleged conduct. While, in fact, many of those actions amounted to a gross distortion or abuse of Russian law, lawfulness under domestic law is not, in any event, the proper inquiry under Article 13(1) ECT. Under the applicable international law standards, the actions of the Russian Federation, in their totality, constitute an expropriation of the Claimants' investments in breach of Article 13(1) ECT for which compensation is due.
71. The Russian Federation is under an obligation to make full reparation to the Claimants for the financial consequences of its breaches of Articles 10(1) and 13(1) ECT. This standard of reparation is not challenged by the Respondent.
72. The magnitude of these financial consequences cannot be underestimated. As a result of the Respondent's actions, the Claimants have lost the entire value of their investments in YukosSibneft, as well as the benefits they should have received from those investments. The Claimants' valuation expert, Navigant, has quantified the Claimants' damages for the loss of their investments in YukosSibneft at US$ 114,174 billion.
73. Navigant has also quantified the Claimants' damages for the loss of their investments in YukosSibneft in 3 alternative scenarios, assuming that: (i) the Respondent does not bear responsibility for the demerger between Yukos and Sibneft, which it does; (ii) further, all tax reassessments were legitimate, which they were not; and (iii) in addition, the sale of Yuganskneftegaz was legitimate, which it was not, and assessing the Claimants' damages at US$ 107,966 billion, US$ 69,583 billion, and US$ 33,317 billion, respectively.
74. In its Counter-Memorial, the Respondent chose not to challenge Navigant's valuation of the Claimants' expropriated investments underlying their principal claims for damages, instead seeking to divert the Tribunal's attention through a series of flawed objections. When the Respondent did make an effort to address the subject, in its Rejoinder, its arguments were inaccurate and entirely divorced from historical data and contemporaneous valuations of YukosSibneft's assets.
75. Navigant has provided the only reliable and methodologically sound model for calculating the compensation due to the Claimants by the Russian Federation for the expropriation of their investments in breach of Articles 10(1) and 13(1) ECT.
V. THE RESPONDENT'S OBJECTIONS SHOULD BE REJECTED
76. The Respondent's rehashed 'fork-in-the-road' objection is both res judicata and groundless. The Respondent contends that the Tribunal lacks jurisdiction over the Claimants' claims because the Claimants are allegedly pursuing identical claims before the ECtHR. This very same objection was first raised in the jurisdiction and admissibility phase of these arbitrations and unequivocally dismissed by the Tribunal. It is entirely inappropriate for the Respondent to reopen this issue, which is res judicata, on the basis that it was allegedly poorly decided. Further, the Respondent's allegations that the Interim Awards were based on an "incorrect assumption" or that there are "special circumstances" justifying a new examination of the issue are unfounded. The Respondent's objection based on Article 26(3)(b)(i) ECT is manifestly without merit and must fail.
77. The Respondent's attempt to rely on Article 21 ECT is misguided. The issues arising in relation to Article 21 ECT have already been briefed at length in the jurisdiction and admissibility phase of these arbitrations. In deferring the Respondent's objection based on Article 21 ECT to the merits phase, the Tribunal indicated that it did not wish to rule in a vacuum on the issue of the background to, and motivation behind, the Russian Federation's actions. In light of the Parties' pleadings on the merits, it is clear that those actions had nothing whatsoever to do with the genuine exercise of the Russian Federation's taxation powers, but were rather solely intended to destroy Yukos and gain control of its assets. Article 21 ECT clearly was not meant to shield a Contracting Party from such egregious conduct.
78. Even assuming, however, that the Russian Federation's actions were a genuine exercise of its taxation powers, which they were not, those actions would nonetheless fall outside the scope of Article 21 ECT, which is limited to the enactment of tax provisions. Further, even if Article 21 ECT were applicable, which it is not, Article 21(5) ECT ensures that Article 13(1) ECT's substantive protection from expropriation remains fully intact. Finally, under any interpretation of Article 21 ECT, many of the Russian Federation's actions had nothing to do with taxation and thus fall outside the ambit of Article 21 ECT altogether.
79. Conversely, under the Respondent's interpretation of Article 21 ECT, save for expropriatory "charges or payments, to the exclusion of enforcement and collection measures, including interest and fines", investors would stand unprotected from any and all State actions, so long as the respondent State in an arbitration labels its actions as "taxation"—regardless of whether such actions had anything to do with taxation, or were being pursued with the sole aim of expropriating or otherwise harming an investor's investment. Such an interpretation, which would turn Article 21 ECT into a gaping hole in one of the key multilateral treaties on investment protection, is clearly untenable and should be rejected.
80. The Respondent's so-called "unclean hands" theory is without merit. The Respondent argues that over a period of approximately 12 years, an array of actors engaged in a variety of allegedly "illegal and bad faith misconduct" that somehow deprive the Claimants' investments of ECT protection. The Respondent's position is fundamentally unfounded for several reasons. First, the so-called "unclean hands" theory finds no support in the text of the ECT, customary international law, or investment treaty jurisprudence. Second, even assuming the existence of such a general principle of international law, which the Claimants deny, its scope would be dramatically more limited than the Respondent contends, such that the Respondent has not alleged any facts that could establish its applicability in the present case. As demonstrated by the Claimants, the Respondent's theory is premised almost exclusively on allegations of collateral illegalities, unrelated either to the making of the Claimants' investments, or to the Claimants' claims in these arbitrations, and all but one of which assert misconduct by third parties. Third, and in any event, the Respondent has failed utterly to substantiate any of its allegations. Finally, the principles of estoppel and proportionality prevent the Respondent from invoking such alleged illegalities in an attempt to escape liability for its violations of the ECT.
81. In its Rejoinder, while recounting its laundry list of alleged misconduct, the Respondent devotes attention solely to its allegation concerning the application of the 1998 Russia-Cyprus Double Taxation Agreement ("DTA"). Apart from the fact that: (i) this allegation has no bearing on the merits of these arbitrations; and (ii) these arbitrations are not the appropriate forum to hear and decide an alleged dispute on the application of the DTA, the Claimants have, in any event, demonstrated that this allegation is baseless. The Respondent's so-called "unclean hands" objection is thus without merit and must fail.
Vi. REQuEsT FoR RELiEF
82. For the reasons set out above, the Claimants respectfully request the Arbitral Tribunal to render an Award granting the relief set out in paragraph 1199 of the Claimants' Reply.
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
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.
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.
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.
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.
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.
(1) Declaring that the Respondent has breached its obligations under Article 10(1) of the Energy Charter Treaty;
(2) Declaring that the Respondent has breached its obligations under Article 13(1) of the Energy Charter Treaty;
(3) Ordering the Respondent to pay to the Claimants, in full reparation of their damages, an amount to be determined by the Arbitral Tribunal, estimated by the Claimants at no less than US$ 114,174 billion, to be shared between the Claimants in the following proportions:
■ Hulley Enterprises Limited US$ 93,229 billion
■ Yukos Universal Limited US$ 4,666 billion
■ Veteran Petroleum Limited US$ 16,279 billion
(4) Ordering the Respondent to pay post-award interest on the above sums to the Claimants at the rate of Libor + 4% compounded annually from the date of the Award until the date of full payment;
(5) Ordering the Respondent to pay to the Claimants the full costs of these arbitrations, including, without limitation, arbitrators' fees, administrative costs of the PCA, counsel fees, expert fees and all other costs associated with these proceedings;
(6) Dismissing all of the Respondent's defenses;
(7) Ordering any such further relief as it may deem appropriate.7
(a) Dismissing Claimants' claims on the ground that the Tribunal lacks jurisdiction to entertain them;
(b) In the alternative, dismissing Claimants' claims on the ground that they are inadmissible;
(c) In the alternative, dismissing Claimants' claims on the merits in their entirety;
(d) In the alternative, declaring that Claimants are not entitled to the damages they seek, or to any damages;
(e) Ordering Claimants to pay the Russian Federation's costs, expenses, and attorney's fees;
(f) Granting such further relief against the Claimants as the Tribunal deems fit and proper.8
PROMOTION, PROTECTION AND TREATMENT OF INVESTMENTS
(1) Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area. Such conditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment. Such Investments shall also enjoy the most constant protection and security and no Contracting Party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal. In no case shall such Investments be accorded treatment less favourable than that required by international law, including treaty obligations.
Article 13 EXPROPRIATION
(1) Investments of Investors of a Contracting Party in the Area of any other Contracting Party shall not be nationalized, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation (hereinafter referred to as "Expropriation") except where such Expropriation is:
(a) for a purpose which is in the public interest;
(b) not discriminatory;
(c) carried out under due process of law; and
(d) accompanied by the payment of prompt, adequate and effective compensation.
Such compensation shall amount to the fair market value of the Investment expropriated at the time immediately before the Expropriation or impending Expropriation became known in such a way as to affect the value of the Investment (hereinafter referred to as the "Valuation Date").
Such fair market value shall at the request of the Investor be expressed in a Freely Convertible Currency on the basis of the market rate of exchange existing for that currency on the Valuation Date. Compensation shall also include interest at a commercial rate established on a market basis from the date of Expropriation until the date of payment.
Article 21 TAXATION
(1) Except as otherwise provided in this Article, nothing in this Treaty shall create rights or impose obligations with respect to Taxation Measures of the Contracting Parties. In the event of any inconsistency between this Article and any other provision of the Treaty, this Article shall prevail to the extent of the inconsistency.
(5) (a) Article 13 shall apply to taxes.
(b) Whenever an issue arises under Article 13, to the extent it pertains to whether a tax constitutes an expropriation or whether a tax alleged to constitute an expropriation is discriminatory, the following provisions shall apply:
(i) The Investor or the Contracting Party alleging expropriation shall refer the issue of whether the tax is an expropriation or whether the tax is discriminatory to the relevant Competent Tax Authority. Failing such referral by the Investor or the Contracting Party, bodies called upon to settle disputes pursuant to Article 26(2)(c) or 27(2) shall make a referral to the relevant Competent Tax Authorities;
(ii) The Competent Tax Authorities shall, within a period of six months of such referral, strive to resolve the issues so referred. Where nondiscrimination issues are concerned, the Competent Tax Authorities shall apply the non-discrimination provisions of the relevant tax convention or, if there is no nondiscrimination provision in the relevant tax convention applicable to the tax or no such tax convention is in force between the Contracting Parties concerned, they shall apply the non-discrimination principles under the Model Tax Convention on Income and Capital of the Organisation for Economic Co-operation and Development;
(iii) Bodies called upon to settle disputes pursuant to Article 26(2)(c) or 27(2) may take into account any conclusions arrived at by the Competent Tax Authorities regarding whether the tax is an expropriation. Such bodies shall take into account any conclusions arrived at within the six-month period prescribed in subparagraph (b)(ii) by the Competent Tax Authorities regarding whether the tax is discriminatory. Such bodies may also take into account any conclusions arrived at by the Competent Tax Authorities after the expiry of the six-month period;
(iv) Under no circumstances shall involvement of the Competent Tax Authorities, beyond the end of the six-month period referred to in subparagraph (b)(ii), lead to a delay of proceedings under Articles 26 and 27.
(7) For the purposes of this Article:
(a) The term "Taxation Measure" includes:
(i) any provision relating to taxes of the domestic law of the Contracting Party or of a political subdivision thereof or a local authority therein; and
(ii) any provision relating to taxes of any convention for the avoidance of double taxation or of any other international agreement or arrangement by which the Contracting Party is bound.
(b) There shall be regarded as taxes on income or on capital all taxes imposed on total income, on total capital or on elements of income or of capital, including taxes on gains from the alienation of property, taxes on estates, inheritances and gifts, or substantially similar taxes, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation.
(c) A "Competent Tax Authority" means the competent authority pursuant to a double taxation agreement in force between the Contracting Parties or, when no such agreement is in force, the minister or ministry responsible for taxes or their authorized representatives.
(d) For the avoidance of doubt, the terms "tax provisions" and "taxes" do not include customs duties.
SETTLEMENT OF DISPUTES BETWEEN AN INVESTOR AND A CONTRACTING PARTY
(1) Disputes between a Contracting Party and an Investor of another Contracting Party relating to an Investment of the latter in the Area of the former, which concern an alleged breach of an obligation of the former under Part III shall, if possible, be settled amicably.
(2) If such disputes can not be settled according to the provisions of paragraph
(1) within a period of three months from the date on which either party to the dispute requested amicable settlement, the Investor party to the dispute may choose to submit it for resolution:
(c) in accordance with the following paragraphs of this Article.
(3) (a) Subject only to subparagraphs (b) and (c), each Contracting Party hereby gives its unconditional consent to the submission of a dispute to international arbitration or conciliation in accordance with the provisions of this Article.
(4) In the event that an Investor chooses to submit the dispute for resolution under subparagraph (2)(c), the Investor shall further provide its consent in writing for the dispute to be submitted to:
(b) a sole arbitrator or ad hoc arbitration tribunal established under the Arbitration Rules of the United Nations Commission on International Trade Law (hereinafter referred to as "UNCITRAL");
(6) A tribunal established under paragraph (4) shall decide the issues in dispute in accordance with this Treaty and applicable rules and principles of international law.
(8) The awards of arbitration, which may include an award of interest, shall be final and binding upon the parties to the dispute. An award of arbitration concerning a measure of a sub-national government or authority of the disputing Contracting Party shall provide that the Contracting Party may pay monetary damages in lieu of any other remedy granted. Each Contracting Party shall carry out without delay any such award and shall make provision for the effective enforcement in its Area of such awards.
General rule of interpretation
1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose
2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:
(a) any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty;
(b) any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.
3. There shall be taken into account, together with the context:
(a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions;
(b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;
(c) any relevant rules of international law applicable in the relations between the parties.
4. A special meaning shall be given to a term if it is established that the parties so intended.
Supplementary means of interpretation
1. Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31:
(a) leaves the meaning ambiguous or obscure; or
(b) leads to a result which is manifestly absurd or unreasonable.
Interpretation of treaties authenticated in two or more langauges
1. When a treaty has been authenticated in two or more languages, the text is equally authoritative in each language, unless the treaty provides or the parties agree that, in case of divergence, a particular text shall prevail.
2. A version of the treaty in a language other than one of those in which the text was authenticated shall be considered an authentic text only if the treaty so provides or the parties so agree.
3. The terms of the treaty are presumed to have the same meaning in each authentic text.
4. Except where a particular text prevails in accordance with paragraph 1, when a comparison of the authentic texts discloses a difference of meaning which the application of articles 31 and 32 does not remove, the meaning which best reconciles the texts, having regard to the object and purpose of the treaty, shall be adopted.
1) Mr. Jacques Kosciusko-Morizet;
2) Mr. Vladimir Dubov;
3) Mr. Frank Rieger;
4) Dr. Andrei Illarionov;
5) Mr. Leonid Nevzlin;
6) Mr. Bruce Misamore;
7) Mr. Steven Theede; and
8) Mr. Brent Kaczmarek CFA.
I had a personal relationship with the Deputy Head of Staff of the President, Mr. Vladislav Surkov.... [O]n the first business day following Khodorkovsky's arrest, Surkov asked me to come see him in the Kremlin.... He told me that he was asking for my forgiveness.... I had been struck from the list upon petition from the Prosecutor General by the council of the party without leveling any charges against me.... And I remember asking, "What will happen to Yukos?" And he said—and I am quoting him verbatim; I remember it very well—he said, "Yukos will be taken away from... you gentlemen."... And I also had a longstanding good relationship with yet another Deputy Head of the Staff of the President who, in late November of that year, told us... there would be criminal claims against every single shareholder. He said that an instruction had been issued to commence criminal cases against us and to take Yukos from us.31
the most important conversation that I had with Mr. Putin was several days after Mr. Khodorkovsky had been arrested.... Mr. Putin has said that Mr. Khodorkovsky has made mistakes and behaved pretty badly.... And for a long time Mr. Putin himself was protecting Mr. Khodorkovsky from these attacks of his friends, of Mr. Putin's friends, but unfortunately Mr. Khodorkovsky continued to behave badly, and not cooperatively... One thing, he said that Mr. Khodorkovsky lied to us because he was in negotiations with American oil company about possible merger. Another issue he has mentioned: that Mr. Khodorkovsky joined Communist Party in preparation to the parliamentary election of year 2003... That is not something that "mi dogovarivalis"—I will try, "we had an agreement on." So he said...
So he said that after protecting Mr Khodorkovsky for some time—now it's almost a quotation—"I decided and I stepped aside to allow Mr Khodorkovsky to solve his problems with the boys by himself."...."so Mr Khodorkovsky has chosen to fight. Okay," said Mr Putin, "if he has chosen to fight, let him to fight and we'll see what will happen."42
there was public outrage in mass media.... From the Government ranks, I cannot recall any person who would express disapproval of the arrest... with the exception of Mr. Kasyanov.... And after making such a statement, Mr. Putin publicly made a very rude statement that you can find recorded in video... that, "I would ask everybody in the Government to shut up on Mr. Khodorkovsky's arrest." And it was very clear that this comment was addressed to Mr. Kasyanov, and later Mr. Kasyanov... [was] removed from his position.'45
everything I own, just like my partners used to own, was earned through extremely hard work, starting, as you will know from... in 1987.... [V]irtually all the business revenue, except for what was paid to charity or used for personal needs, was reinvested in the business.... So all the money, all the shares that we owned we earned through our titanic—if you will—efforts that had spread over a long period of time.52
Yukos was led into bankruptcy... They [the Russian authorities] did everything in order to prevent Yukos from paying off its debts. The company was in perfect shape, with a lot of cash, with the best rating in the country, with a good market capitalisation, but it took about two years for Putin and Sechin... to destroy this company completely.53
When asked whether he had hoped Yukos would prevail and defeat the assessments, he replied that "[t]hose proceedings took place in the Russian Federation, and the outcomes, the decisions were made in the Kremlin. The decisions were not made in the courtroom.... We are not talking about a democratic country; we are talking about a dictatorship."54
if I had spread the information about Abramovich and Putin fairly broadly, and if it had become available to the public, then from the perspective of Khodorkovsky, who is in Russian prison, I would have damaged him.
... I would have caused him tremendous amounts of harm... in the other corner facing him were Putin, Sechin and others; but I also would have turned Abramovich into an enemy of Khodorkovsky's by disclosing this information.
... [A]fter... things moved to a second absurd set of charges and a second trial, Khodorkovsky's position changed radically. He was no longer wary of a political... confrontation with Putin's regime because he realised that he was not going to be able to find truth in a Russian court if he tried to defend himself based on the laws.
... Russian courts have no interest in my position: it would be either ignored or rejected by them....Because it's not a judge who makes decision on Khodorkovsky and Lebedev; the judge just rubber-stamps decisions that are made by investigative committee and Prosecutor's Office....The fact that I trust this court and tell this court a lot more than I've ever said on the matter, this is a typical position for me, because... if we're able to defend our interests, that would be either in courts in free countries or international courts.56
3) Professor Reinier Kraakman;
4) Professor H. David Rosenbloom;
5) Professor Thomas Z. Lys PhD;
6) Ms. Felicity Cullen QC;
7) Mr. Dale Hart;
8) Mr. Polyvios G. Polyviou;
9) Mr. John Ellison FCA;
10) Mr. Raymond Gross CPA; and
11) Professor Dr. Albert Jan van den Berg
• Aleksei Kudrin, First Deputy Minister of Finance, including in particular on the January 2000 meeting with Mr. Dubov at which the establishment of Yukos' trading companies in Mordovia was discussed;
• Vladimir Gusev, First Deputy Minister in charge of VAT, including in particular on the meeting with Mr. Dubov at which Yukos' VAT refunds in Mordovia were discussed;
• Alexander Pochinok, Tax Minister, including in particular on the December 1999 meeting with Mr. Dubov at which Yukos' plan to use trading companies in Mordovia was discussed;
• Alexander Smirnov, First Deputy Minister of Tax, including in particular on the December 1999 meeting with Mr. Dubov; and
• Nicolai Merkushkin, Head of the Republic of Mordovia, including in particular on the December 1999 meeting.120
• P. A. Puschin, Senior Tax Inspector of Russian Tax Ministry's Interregional Inspectorate for major Taxpayer No. 1; and
• A.V. Ivushkina, Senior Tax Inspector of Russian Tax Ministry's Interregional Inspectorate for major Taxpayer No. 1.121
• Douglas Miller, Director, ZAO PwC Audit, including in particular regarding the work conducted for the purposes of the certification of Yukos' accounts for years 1998-2003 and the circumstances of the withdrawal of the reports in 2007; and
• Michael Kubena, General Director, ZAO PwC Audit, including in particular regarding the establishment of Yukos' tax optimization structure and its legality.123
• Dmitry Gololobov, Yukos' former Deputy General Counsel;
• Irina Golub, Yukos' former Chief Accountant;
• Dmitry Maruev, former head of the Financial Engineering Section of Yukos Treasury Department (Deputy Chief Accountant);
• Alexey Smirnov, former head of Yukos' Tax Department;
• Vasily Shakhnovsky, GML shareholder/beneficiary and former President of Yukos-Moscow; and
• Mikhail Brudno, GML shareholder/beneficiary.124
• Pavel Malyi, former Deputy Head of Yukos' Corporate Finance Department; and
• Oleg Sheiko, former Vice President/Director of Yukos' Corporate Finance Department.126
A. Yukos' Tax Optimization Scheme
B. The Russian Federation's Tax Assessments
C. Harassment, Intimidation and Arrests
D. Unwinding of the Yukos-Sibneft Merger
E. Yukos' Attempts to Settle its Tax Liabilities
F. Auction of YNG
G. The Bankruptcy of Yukos
H. The Withdrawal of PwC's Audit Opinions
A. whether all or some of Claimants' claims are barred by the "fork-in-the-road" provision in Article 26(3)(b)(i) of the ECT (the Tribunal dismissed this objection in the Interim Awards, but Respondent has renewed the objection in this merits phase);
B. whether Claimants' conduct—their alleged "unclean hands"—deprives Claimants of protection under the ECT (in the Interim Awards, the Tribunal confirmed the deferral of its decision on this objection to the merits phase of this arbitration, consistent with Procedural Order No. 3); and/or
C. whether Article 21 of the ECT, which contains a "carve out" for "Taxation Measures", bars the Claimants' claims either as a matter of jurisdiction or admissibility (in the Interim Awards, the Tribunal decided to defer these issues to the merits phase, to avoid ruling on them in a vacuum).
[t]housands of companies took advantage of the low-tax regimes available in Russian tax havens zones, including businesses engaged in construction, services, the sale of oil products, investments, as well as holding companies and groups of companies involved in financing and taxation arrangements. This activity was well known to the Russian government, including the Federal Tax Ministry.132
|Region or ZATO||Company|
|Mordovia||Alta-Trade Fargoil Macro-Trade Mars-XII (Energotrage) Ratmir Yukos-M Yu-Mordovia|
|Evenkia||Evoil Interneft Petroleum-Trading Ratibor Yukos Vostok Trade|
|Kalmykia||Siberian Transportation Company|
|ZATO Lesnoy||Business-Oil Mitra Vald-Oil Forest Oil|
|ZATO Trekhgorny||Grace Muskron|