Veteran Petroleum v. Russia

Tribunal
Maître L. Yves Fortier, CC, QC
Mr. Daniel Price
Judge Stephen M. Schwebel

Claimants

Counsel
Professor Emmanuel Gaillard
Dr. Yas Banifatemi
Mr. Philippe Pinsolle

Respondent

Counsel
Mr. Robert T. Greig
Dr. Claudia Annacker
Mr. Grégoire Bertrou
Mr. Charles Olson

Party Representatives
Mr. Tim Osborne
Mr. Kevin Bromley
Mr. Christopher Cook
Mr. Rodney Hodges

Permanent Court of Arbitration
Mr. Brooks Daly
Ms. Evelien ter Meulen

Court Reporter
Mr. Trevor McGowan

Tribunal
Maître L. Yves Fortier, CC, QC
Dr. Charles Poncet
Judge Stephen M. Schwebel

Claimants

Counsel
Professor Emmanuel Gaillard
Dr. Yas Banifatemi
Mr. Philippe PinsoIle
Mr. Mark McNeill
Ms. Jennifer Younan
Ms. Anna Crevon
Mr. Jean-Baptiste Godon

Party Representatives
Mr. Tim Osborne
Mr. Christopher Cook
Mr. Rodney Hodges

Respondent

Counsel
Mr. Robert T. Greig
Mr. Matthew D. Slater
Dr. Claudia Annacker
Mr. J. Cameron Murphy
Dr. Maja Ménard

Assistant to the Tribunal
Mr. Martin Valasek

Permanent Court of Arbitration
Mr. Brooks Daly

Court Reporter
Mr. Trevor McGowan

Tribunal
Maître L. Yves Fortier, CC, QC

Claimants

Counsel
Professor Emmanuel Gaillard
Dr. Yas Banifatemi
Mr. Philippe PinsoIle
Mr. Mark McNeill
Ms. Jennifer Younan
Ms. Anna Crevon
Mr. Jean-Baptiste Godon
Ms. Tania Steenkamp
Mr. Gueorgui Babitchev

Party Representatives
Mr. Tim Osborne
Mr. Christopher Cook

Respondent

Counsel
Mr. Robert T. Greig
Mr. Matthew D. Slater
Dr. Claudia Annacker
Mr. J. Cameron Murphy
Dr. Maja Ménard
Mr. Guillaume de Rancourt

Assistant to the Tribunal
Mr. Martin Valasek

Permanent Court of Arbitration
Mr. Brooks Daly
Ms. Véronique Laughlin

Court Reporter
Mr. Trevor McGowan

Tribunal
Maître L. Yves Fortier, CC, QC
Dr. Charles Poncet
Judge Stephen M. Schwebel

Claimants

Counsel
Professor Emmanuel Gaillard
Dr. Yas Banifatemi
Mr. Philippe PinsoIle
Mr. Mark McNeill
Ms. Jennifer Younan
Ms. Coralie Darrigade
Ms. Ximena Herrera
Ms. Anna Crevon
Mr. Jean-Baptiste Godon
Mr. Gueorgui Babitchev
Ms. Jamia Sulayman

Party Representatives
Mr. Tim Osborne
Mr. Christopher Cook
Mr. Rodney Hodges

Witnesses
Mr. Vladimir Gladyshev
Mr. Brian Green, QC

Respondent

Counsel
Dr. Claudia Annacker
Mr. Matthew Slater
Mr. Jonathan Blackman
Mr. David Sabel
Mr. William McGurn
Mr. Cameron Murphy
Dr. Maja Ménard
Ms. Ksenia Khanseidova
Mr. Lorenzo Melchionda
Mr. Milo Molfa
Mr. Lee Berger
Mr. Guillaume De Rancourt
Mr. Matthew Bunda
Ms. Rachel Goldbrenner
Mr. Rashid Sharipov
Mr. Thomas Price
Mr. Stephane Sollogoub

Party Representatives
Mr. Vladislav Maslyannikov
Mr. Konstantin Gavrilov
Mr. Maxim Musikhin

Witnesses
Professor Suren Avakiyan
Mr. Sydney Fremantle
Mr. Anatoly Martynov
Mr. Martin Mann, QC
Professor Daniel Berman

Assistant to the Tribunal
Mr. Martin Valasek

Permanent Court of Arbitration
Mr. Brooks Daly
Ms. Judith Levine
Mr. Aloysius Llamzon
Mr. Erwann Nicot

Court Reporter
Mr. Trevor McGowan
Ms. Christina Yanni

Interpreters
Mr. Yuri Somov
Mr. Kirill Savinski

A. Claimants' Mandatory Opt-Out Declaration Argument is Without Merit

1. The Russian Federation is entitled to rely on the inconsistency clause in Article 45(1) of the ECT irrespective of whether the Russian Federation ever made an opt-out declaration under Article 45(2)(a).

2. Article 45(1) provides that the ECT is to be provisionally applied as to each signatory "to the extent that such provisional application is not inconsistent with its constitution, laws or regulations." Article 45(2)(a) separately provides that an ECT signatory "may" deliver to the Treaty Depository a declaration "that it is not able to accept provisional application." Contrary to Claimants' contention, Article 45(2)(a) is not a compulsory procedural mechanism, and a Treaty signatory need not have made an opt-out declaration in order to rely on the inconsistency clause in Article 45(1).

3. The plain language of Article 45, its context, the Treaty's travaux préparatoires, circumstances at the time of the Treaty's conclusion, and State practice in the application of the Treaty all support this conclusion.

4. By their terms, Article 45(1) is self-executing and does not require the delivery of an opt-out declaration, and Article 45(2)(a) operates in express derogation of Article 45(1) ("Notwithstanding paragraph (1)") and, in any event, is not obligatory (a signatory "may" deliver an opt-out declaration).

5. The inconsistency clause in Article 45(1) is based on standard inconsistency clauses included in other treaties, none of which provide for an opt-out mechanism. When originally proposed, Article 45(1) was drafted as a stand-alone clause without an opt-out mechanism. Article 45(2)(a) was added later only to accommodate those States that did not want to apply the Treaty provisionally at all, for political or other reasons.

6. At least six States separately stated that they considered themselves entitled to rely on the inconsistency clause in Article 45(1) without making an opt-out declaration. A Joint Statement of the EU Member States, the Council and the Commission of the European Union is to the same effect. The informal transparency declarations made by several States, relied on by Claimants, are unavailing. While some States did make transparency declarations, none of the transparency declarations was ever delivered to the Treaty Depository, as required by Article 45(2)(a), and several States which expressly relied on Article 45(1), including Germany, France, Spain, and Luxembourg, never made transparency declarations. Though not legally relevant, the Russian Federation's failure to make a transparency declaration is not surprising, given the extraordinarily rapid pace of legal and constitutional change in Russia in the period in question. Under the chaotic circumstances then prevailing, no detailed analysis of the Treaty's consistency with Russian law could fairly be expected.

B. Claimants' All-or-Nothing Approach to Article 45(1) of the Treaty is Without Merit

7. Pursuant to Article 45(1), each provision of the Treaty must be provisionally applied, but only to the extent performance of the obligation created by that provision is not inconsistent with Russia's Constitution, laws or regulations. Claimants' argument notwithstanding, Article 45(1) does not operate on an "all-or-nothing basis" so as to require, as a matter of principle, either that the entire Treaty be provisionally applied, or that no portion of the Treaty be provisionally applied.

8. The plain language of Article 45(1), its context, the Treaty's travaux préparatoires, the circumstances at the time of the Treaty's conclusion, and State practice in the application of the Treaty all support the conclusion that Article 45(1) is to be applied provision-by-provision, and not on an all-or-nothing basis.

9. In common usage, confirmed by standard dictionary definitions, "to the extent that" refers to the "scope" or "width of application." "To the extent that" is precisely the language used when drafters wish to make clear that a provision is to be applied only insofar as what follows is the case. If it had been intended that the Treaty would be provisionally applied in whole or not at all, Article 45(1) would have instead provided for the Treaty's provisional application "if" such provisional application is not inconsistent with a signatory's domestic laws. The drafters of the Treaty likewise could not plausibly have intended that a signatory's provisional application of the entire Treaty would in principle be inconsistent with a signatory's "regulations."

10. The travaux préparatoires confirm that the negotiating States expected that provisional application would differ from country to country based on different domestic inconsistencies; that even relatively minor regulations could result in the non-application pro tanto of an inconsistent Treaty provision; and that even a signatory which had no objection in principle to provisional application would only have to apply the Treaty's investment protection provisions to the extent not inconsistent with the signatory's own constitution, laws or regulations.

11. State practice is fully in accord. As reflected in the Joint Statement made by the EU Member States, the Council and the Commission of the European Union, Article 45(1), "defining the conditions and limits for the provisional application of the ECT by the Signatories[,...] does not create any commitment beyond what is compatible with the existing internal legal order of the Signatories." With specific reference to the Russian Federation, the Secretary of State for Foreign and Commonwealth Affairs of the United Kingdom stated as recently as February 7, 2006, that Article 45 of the Treaty "places some obligations on the Russian Federation, but only to the extent that such provisional application is not inconsistent with its constitution, laws or regulations" (emphasis supplied). Mr. Craig Bamberger, the Chairman of the ECT Legal Subgroup, and other scholars, agree with the views expressed in the Joint Statement and in the more recent statement of the UK Secretary of State.

12. The Tribunal must accordingly determine whether the dispute-settlement obligations imposed by Article 26 of the Treaty are consistent with Russia's Constitution, laws and regulations.

C. The Claims (and their Resolution by Arbitration) are Inconsistent with Russia's Laws and Constitution

13. For purposes of Article 45(1), a Treaty provision is inconsistent with a signatory's constitution, laws or regulations if, prior to ratification, the Treaty provision (a) imposes an obligation that conflicts with the signatory's domestic law, or (b) creates a new obligation that requires the taking of legal action that, under the signatory's constitution, may only be taken by the signatory's legislature (as distinguished from its executive branch). The travaux préparatoires reflect the importance of the latter type of inconsistency, a concern made explicit in Article 45(1) by the addition to that Article of language requiring the Treaty to be provisionally applied only to the extent the Treaty is consistent not just with a signatory's laws and regulations, but also its constitution.

14. Claimants' argument that Russian law is irrelevant in principle to the provisional application of the Treaty would render the Treaty's inconsistency clause a legal nullity and is based on a fundamental misunderstanding of the monist nature of the Russian legal system.

15. According to Claimants, Russian law is irrelevant here because the investors' claim is based on a treaty guarantee rather than domestic law, and thus any resulting investor-State arbitration is "autonomous and distinct from proceedings under the legal system of the host State." This argument is premised on an extreme dualist view, in which investment treaty protections operate on an entirely separate plane from domestic law. Claimants' argument is unavailing both because the argument would, as a matter of principle, deny any possible application to all domestic law exceptions, including the inconsistency clause in Article 45(1), and because Russia does not have a dualist legal system.

16. Following Claimants' tautological argument, there could never in principle be an inconsistency between a treaty provision and a signatory's domestic laws, each operating on its own separate plane. The Russian Federation submits, to the contrary, that the very purpose of a domestic-law exception to provisional application of a treaty is precisely to reconcile treaty-imposed obligations with conflicting domestic-law obligations.

17. Russia's legal system is, in any event, monist (not dualist) in nature. International treaties form an integral part of Russian law, and must be applied directly by Russia's courts. If ratified, the Russian Federation's treaties prevail over inconsistent legislation other than the Constitution. Contrary to Claimants' unstated and incorrect assumption, investment treaty protections are directly enforceable in Russian courts, and do not exist on some "autonomous and distinct" plane.

18. Under Russian law, disputes arising from sovereign acts or omissions, including claims for damages for expropriation, may not be submitted to arbitration absent a legal enactment in the form of a law or a ratified treaty so providing. Disputes involving the lawfulness of expropriation, taxation measures, bankruptcy, and other regulatory matters are within the exclusive jurisdiction of Russia's courts, and may not be submitted to arbitration. The Russian Federation's Civil Procedure Code, Arbitrazh Procedure Code and Tax Code confirm the exclusive jurisdiction of Russian courts over these issues, and prohibit their arbitration. Claimants' request for damages is based on allegedly illegal sovereign acts of various Russian authorities, none of which under Russian law may be submitted to arbitration, unless a specific law provides otherwise. The ECT, an unratified treaty, is not such a law.

19. In light of the exclusive jurisdiction granted to Russian courts by Russian law to resolve disputes of the type presented here, allowing Claimants' claims to be resolved by mandatory arbitration under Article 26 of the Treaty would be inconsistent with both Russia's laws and its Constitution. The Russian Constitution is based on the principle of separation of powers and the rule of law. Each branch of State power exercises its power independently, and no branch may usurp the power of another branch. The Russian Constitution specifically preserves the prerogatives of Russia's Federal Assembly (parliament) in the treaty-making process—law-making treaties must be ratified by the adoption of a federal law by both the Duma and the Federation Council—and prohibits the Government from legislating through the conclusion and implementation of international treaties that amend or complement federal laws. This ratification requirement is an emanation of the principle of separation of powers established in Article 10 of the Constitution, and is reflected in Article 15(1)(a) of the Federal Law on International Treaties. Under the latter Article, all treaties whose implementation requires "the amendment of existing or the adoption of new federal laws, and also those establishing rules that are different from those provided for by law," are subject to ratification.

20. The Treaty is also inconsistent with other provisions of Russian law, in addition to the non-arbitrability of disputes involving sovereign acts or omissions and the exclusive jurisdiction of Russian courts to resolve those disputes. Russian law requires privity between the parties to an arbitration agreement, unless a ratified treaty (for example, a ratified bilateral investment treaty) provides otherwise. Professor Kostin's expert opinion on this point has not been disputed. The standing offer to arbitrate investor-State disputes contained in Article 26 of the Treaty is thus inconsistent with Russian law.

21. Russian law also does not allow the shareholders of a Russian joint stock company, such as Claimants, to assert a claim based on injuries allegedly suffered by the company, its management or its subsidiaries. Professor Sukhanov's expert opinion on this point has not been disputed. Claimants' assertion of damages alleged to have been suffered in their capacity as shareholders, in reliance on Article 26, in conjunction with Articles 1(6) and (7), of the Treaty, is thus likewise inconsistent with Russian law.

22. Claimants' contention that Article 23(1) of the Federal Law on International Treaties provides blanket legislative approval for the Russian Government to provisionally apply all treaties, including the ECT, is equally unavailing. Article 23(1) is merely a restatement of Article 25(1) of the Vienna Convention on the Law of Treaties, which, uncontroversially, provides that a treaty may be provisionally applied pending its entry into force if, and under the conditions, agreed in the treaty.

23. Claimants' blanket-approval argument proves too much and is inconsistent with State practice. If Article 23 of the Federal Law on International Treaties constitutes blanket approval for the Treaty's provisional application, then (a) so does Article 25 of the Vienna Convention, and (b) no party to the Vienna Convention would have found provisional application of the Treaty problematic or have invoked the inconsistency clause in Article 45(1). Claimants' view notwithstanding, nine States party to the Vienna Convention deposited declarations under Article 45(2)(a) of the Treaty that they could not accept its provisional application, and four States party to the Vienna Convention stated at the signature conference that they could not apply the Treaty, relying on the inconsistency clause in Article 45(1).

24. Claimants also contend that Article 23 of the Law on International Treaties shows Russian law and treaty practice to be "perfectly familiar" with the concept of provisional application. The Russian Federation's familiarity with provisional application cannot, however, override the express inconsistency clause contained in Article 45(1).

25. Claimants mistakenly rely on general statements made by Russian politicians and officials as to the salutary effect of the Treaty, the Russian Federation's practice with respect to bilateral investment treaties, the Explanatory Note to the draft federal law providing for ratification of the Treaty, and a draft document of unknown origin and authorship.

26. General statements made by certain Russian politicians and officials as to the Treaty's benefits are manifestly not a formal or even informal expression of the Russian Federation's views with respect to the scope of the provisional application of the Treaty, and are directly at odds with the Russian Federation's continuing refusal to ratify the Treaty.

27. The Russian Federation's bilateral investment treaty practice not only does not support Claimants' position, it affirmatively undermines their argument. All of the bilateral investment treaties cited by Claimants were ratified by the Russian Federation, and none of them provides for provisional application prior to ratification. It is undisputed that Claimants have not invoked any of the Russian Federation's bilateral investment treaties. That these treaties, following ratification, provide for mandatory investor-State dispute settlement is irrelevant to the pre-ratification consistency-analysis required under Article 45(1).

28. Several explanatory notes prepared in connection with the ratification of Russian bilateral investment treaties state that these treaties are subject to ratification because they contain "provisions different from those provided by Russian legislation," singling out the investor-State arbitration provisions, among others. The Russian Federation's bilateral investment treaty practice thus confirms (a) that mandatory investor-State arbitration is not merely "additional" to Russian law, as Claimants contend, but is inconsistent with Russian law, and (b) that application of Article 26 prior to ratification would be inconsistent with Russia's Constitution and laws.

29. The Explanatory Note to the draft federal law on the ratification of the Treaty states that "provisional application of the ECT would be implemented to the extent that it would not be inconsistent with the constitution, laws and regulations of the country in question." The Note thus appropriately concludes, in reliance on the "to the extent" clause contained in Article 45(1), that "the provisions on provisional application were in conformity with Russian legal acts." As with most Russian explanatory notes, the ECT Explanatory Note does not contain a detailed or comprehensive analysis of the consistency of the Treaty's provisions with Russian law. The dispute settlement provisions are not mentioned at all, let alone analyzed.

30. The statement in the Explanatory Note that "The provisions of the ECT are consistent with Russian legislation," relied on by Claimants, is a correct statement of Russian law from the post-ratification perspective of the Note, and does not aid in the analysis of the pre-ratification consistency of the Treaty with domestic law, required under Article 45(1). That the Note analyzes the state of Russia's legal affairs following ratification is clear from other statements in the Note, including the need for GATT-related legislation to be enacted and Russia's customs laws to be amended, developments that would manifestly be "consistent" with Russia's domestic law only post-ratification. Although the Note does not address the Treaty's dispute settlement mechanism, the Note does state that the ECT is "consistent with the provisions of Russian bilateral investment treaties," and that inconsistencies between Treaty provisions and Russian domestic law would be resolved by ratification. It will be recalled that the Russian Federation's bilateral investment treaties, like the Treaty, provide for mandatory investor-State arbitration, and are likewise subject to ratification because their dispute settlement mechanism is inconsistent with domestic Russian law.

31. Claimants also rely heavily on a draft document of unknown origin and authorship, referred to by Claimants as the "Russian Note" even though there is no evidence that this document was prepared, let alone adopted, by the Russian authorities, and overwhelming evidence that the document was never distributed at the session of the Energy Charter Conference identified by Claimants. There is, in any event, nothing in the document at odds with the Russian Federation's position that the Treaty is to be provisionally applied only to the extent consistent with Russian domestic law, and that Article 26 is inconsistent with Russian law.

D. The Claims are Based on Taxation Measures Other than Taxes and are thus Barred under Article 21 of the Treaty

32. The Tribunal lacks jurisdiction or, alternatively, Claimants' claims are inadmissible, because (a) the Treaty does not create any rights or obligations with respect to Taxation Measures (with enumerated exceptions), (b) the claims in these proceedings are based on Taxation Measures, and (c) none of the enumerated exceptions is applicable to the claims asserted by Claimants in these proceedings.

33. Article 21(1) of the ECT provides that "nothing in this Treaty shall create rights or impose obligations with respect to Taxation Measures of the Contracting Parties," except as otherwise provided in the sub-sections to that Article. The same Article further provides, "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."

34. Taxation Measures include not only tax laws and regulations, as Claimants contend, but also measures relating to taxes, including the imposition, administration, collection and enforcement of taxes.

35. The plain meaning of Article 21 requires a broad and inclusive interpretation of Taxation Measures. Article 21(7)(a) states, "The term 'Taxation Measure' includes (i) any provision relating to taxes of the domestic law of the Contracting Party." The quoted text confirms that Taxation Measures was intended to have broad and inclusive scope, covering "any provision relating to taxes." Had the drafters intended to limit Taxation Measures solely to the (already broad) provisions referred to in Article 21(7), they would have instead provided that Taxation Measures "means" (rather than "includes") the referenced provisions.

36. Articles 21(3) and (6) make clear that Taxation Measures cover not only tax laws and regulations, but also a State's imposition and collection of taxes. Article 21(3) gives preferential treatment to "any Taxation Measure aimed at ensuring the effective collection of taxes." The "collection of taxes" is clearly a subset of the broader class of Taxation Measures. Article 21(6) confirms that Taxation Measures include not only the collection of taxes, but also their imposition. This Article provides, "For the avoidance of doubt, Article 14 [dealing with an Investor's right to transfer capital, returns and other payments] shall not limit the right of a Contracting Party to impose or collect a tax by withholding or other means."

37. The object and purpose of Article 21 supports the Russian Federation's interpretation. States are understandably concerned about possible limitations on their ability to raise revenue. A State's right to promulgate tax laws and regulations is meaningless unless the State also has the right to collect, administer and enforce its tax laws and regulations. The Russian Federation's interpretation is consistent with the purpose intended to be served by Article 21—to protect a State's right to promulgate and enforce its tax laws, and to avoid interference with tax treaties specifically intended to address these issues.

38. The Russian Federation's interpretation of Taxation Measures is supported by other tribunals, and by the testimony of Mr. Stephen Knipler, the executive officer of the International Tax Division of Australia's Tax Office during the ECT negotiations, and of Professor Daniel Berman, the Legislation Counsel to the U.S. Congress Joint Committee on Taxation, during the same period. Claimants have not offered any reason or basis for not crediting Mr. Knipler's testimony that Taxation Measures includes measures relating to taxes, and, in particular, the imposition, administration, collection or enforcement of taxes.

39. Claimants' reliance on the exception to Article 21(1) contained in Article 21(5) is misplaced. Article 21(5) states that Article 13, dealing with expropriation, "shall apply to taxes." It is an established rule of treaty interpretation that different treaty terms are intended to refer to different matters. Article 21(5) refers to "taxes," meaning a State's tax laws and regulations, and not to Taxation Measures, a broader term that "includes" not only "taxes" but also "any provision relating to taxes." Claimants' contrary argument, based on the French text of the Treaty—that "taxes" is either a broader term or interchangeable with "Taxation Measures"—is inconsistent with the text of the Treaty, and ignores both the fact that the Treaty's tax provisions were negotiated exclusively in English (not French) and the considerable authority that gives primacy to the original (here, English) text, even in cases where several texts are equally authentic.

40. Claimants' reliance on the exception to Article 21(1) contained in Article 21(3) is likewise unavailing. Article 21(3) provides that Articles 10(2) and (7) "shall apply to Taxation Measures," with two enumerated exceptions. Claimants, however, have never asserted a claim under either Article 10(2) or Article 10(7).

41. Claimants' procedural objections to this defense are not well founded. Respondent's Statement of Defense expressly objected to jurisdiction, as required by UNCITRAL Rule 21(3), and even though not so required, also put Claimants on notice of the Taxation Measures carve-out contained in Article 21(1). The cases cited on this issue by Claimants are clearly distinguishable.

E. The Tribunal Lacks Jurisdiction Ratione Personae and Materiae

42. The Tribunal lacks jurisdiction ratione personae and materiae (a) because Claimants are shell companies, (b) because Claimants are owned and controlled by Russian oligarchs, including Khodorkovsky, Lebedev and other Russian nationals, and (c) because Claimants are mere nominees who do not own or control the Yukos shares that are the subject of these proceedings.

43. The Russian oligarchs (Khodorkovsky and Lebedev, among others) have publicly conceded in newspaper interviews and in other legal proceedings that they effectively own and control Claimants' nominal investment in Yukos. In the case of Veteran Petroleum Limited ("VPL"), the Swiss Première Cour de Droit Public has found that Khodorkovsky, Lebedev, Golubovitch, Nevzlin, Doubov, Brudno and Chakhnovski are the beneficial owners of the totality of Yukos shares allegedly owned or controlled by VPL. VPL has also failed to establish that it was even a Yukos registered shareholder when VPL filed its request for arbitration.

44. The remaining Yukos shares at issue are also only nominally owned by Yukos Universal Limited and Hulley Enterprises Limited. Both Yukos Universal Limited and Hulley Enterprises Limited are totally dominated by the Russian oligarchs through multiple off-shore shells, for which no bona fide purpose is discernable. In large part because of Claimants' less than full compliance with the Tribunal's document production orders, the Tribunal does not now have before it a complete account of the relations between these intermediate legal entities. It is nonetheless clear that one of the principal purposes of the complex legal structure adopted at the Russian oligarchs' behest was to render opaque, but preserve, the oligarchs' continuing de facto ownership and control of the Yukos shares. In furtherance of this goal, the oligarchs interposed into the chain of nominal ownership and control legal entities and individuals who appeared to receive limited indicia of ownership and/or control, but who in fact acquired no genuine ownership interest in any of the relevant assets, nor any powers that would diminish the Russian oligarchs' continued effective control in fact over those assets.

45. Claimants have separately acknowledged that they have "no substantial business activity" in their countries of incorporation.

46. The object and purpose of the Treaty is to promote and protect foreign investments and foreign investors. The Treaty was never intended to protect Russian investors investing in Russia, and does not provide a remedy for host State nationals. Under "rules and principles of international law" applicable to this proceeding under Article 26(6) of the Treaty, a shell company dominated and controlled by host State nationals has no right to bring a claim against the host State. Like other fundamental principles of customary international law, the rule that nationals of a State may not assert an international claim against their own State cannot be dispensed with tacitly.

47. Granting shell companies protection under the Treaty would also be inconsistent with Russian law. As a result of its ratification, the EU-Russia Partnership and Cooperation Agreement is now an integral part of Russian law and of the framework for trade, business, and investment conducted by EU companies in Russia. Claimants, EU shell companies lacking the "real and continuous link with the economy" of an EU Member State required by Article 30(h) of the EU-Russia Partnership and Cooperation Agreement, are thus not entitled to protection as investors under Russian law. Insofar as matters covered by the EU-Russia Partnership and Cooperation Agreement are also covered by the Treaty, Article 105 of the EU-Russia Partnership and Cooperation Agreement provides that the Treaty's provisions shall apply, but not until the Treaty comes into force for the Russian Federation, which has not happened.

48. The Russian Federation's veil-piercing defenses lead to the same conclusion. In accordance with the Tribunal's Procedural Order No. 3 of October 31, 2006, these issues are not addressed here.

49. Under Article 1(6) of the Treaty, the Yukos shares that are the subject of these proceedings must be "owned or controlled" by Claimants. The Understanding with respect to Article 1(6) adopted upon signature of the Treaty is that "control of an Investment means control in fact." Claimants apparently concede that they do not meet this standard, and instead rely on their nominal ownership of the Yukos shares. Nominal ownership is insufficient to establish ownership of an "Investment" within the meaning of Article 1(6) of the Treaty or ius standi under "applicable rules and principles of international law."

F. The Claims are Inadmissible Because Part III of the Treaty Does Not Confer Rights on Claimants

50. Article 17 of the Treaty reserves the right to deny the Treaty's benefits to companies owned or controlled by nationals of a third State that do not have substantial business activity in their country of incorporation. Each of the Claimants is a shell company lacking substantial business activity in its country of incorporation.

51. Claimants' contention that host State parties are not third State nationals is unavailing. If Treaty benefits may be denied to third State nationals, a fortiori they may be denied to host State nationals. In any event, the term "third State," which is not defined in the Treaty, is used there in a manner that does not exclude the possibility that a third State may be a Contracting Party or a signatory, and a majority in interest of the "Russian" oligarchs are in fact nationals of Israel, a "third" State.

52. The Treaty's object and purpose also support the denial of benefits to host State nationals. Claimants' argument notwithstanding, no notification to Contracting Parties is required in order to invoke Article 17(1), and even if notification were required, the Russian Federation exercised its right to deny Treaty benefits to EU shell companies such as Claimants by ratifying and publishing the EU-Russian Partnership and Cooperation Agreement.

G. The Tribunal Lacks Jurisdiction Over Disputes Submitted to Russian Courts or to the European Court of Human Rights

53. Each of the Russian oligarchs who owns and controls Claimants, including in particular Khodorkovsky and Lebedev, has brought complaints before the European Court of Human Rights containing allegations that overlap with those raised by Claimants in these proceedings. Lawsuits have also been brought before Russian courts against the Ministry of Finance of the Russian Federation and other Russian State bodies based, inter alia, on alleged violations of "applicable principles and norms of international law", including the European Convention on Human Rights. The fork-in-the-road clause contained in Article 26(3)(b)(i) of the Treaty precludes these investors from re-litigating in these arbitrations disputes that have already been submitted to the European Court of Human Rights or to a Russian court. Claimants are in effect requesting the Tribunal to sit above the Russian Supreme Court and the Russian courts of appeal that have previously heard and issued final rulings in respect of the same allegations made by Claimants in these arbitrations.

III. The Russian Federation is Bound by the ECT—Article 45

13. The Russian Federation contends that it is not bound by the ECT. As a starting point, the Russian Federation argues that the provisional application of treaties does not give rise to legally enforceable rights and obligations. Its chief contention, however, is based on Article 45(1) of the ECT, which it alleges provides for the partial application of the Treaty provisions by virtue of the so-called "inconsistency clause". The Russian Federation claims that it is not bound by the ECT as regards the Claimants in these arbitrations because the application of every relevant provision of the ECT, including Article 45 itself, would be inconsistent with the Russian Federation's Constitution, laws or regulations. The Russian Federation's interpretation of Article 45 of the ECT, which sets out the regime of provisional application under the Treaty, is fundamentally flawed and should be rejected. In any event, the ECT is not inconsistent with the Russian Federation's Constitution, laws or regulations.

14. Provisional application of treaties creates legally enforceable rights and obligations under international law: Provisional application is a well-established treaty mechanism creating legally enforceable rights and obligations under international law. The Respondent is all the more familiar with these principles in that the Russian Federation and its predecessor, the USSR, have a long-standing practice of provisionally applying treaties so as to give rise to legally enforceable rights and obligations. Thirty-two international treaties entered into by the Russian Federation, including the ECT, are today provisionally applicable. The Russian Federation's suggestion that provisional application is some kind of legal anomaly, without legal effect, has no basis whatsoever and must fail.

15. The plain language of Article 45 of the ECT provides for automatic provisional application of the Treaty unless a specific signatory decides to opt out from such provisional application : Article 45(1) of the ECT establishes the principle of provisional application, while the remainder of Article 45 sets out its operation. In particular, under Article 45(2), any signatory that is not able to accept provisional application can decide to opt out from such provisional application at the time of signature by making a declaration to that effect. This interpretation is based on the plain language of Article 45 of the ECT, and is confirmed by its context and the travaux préparatoires of the Treaty. The Russian Federation's interpretation, which would dissociate Article 45(1) from Article 45(2) so as to create two separate regimes in which a signatory State may choose whether or not it is bound by provisional application depending on whether or not it is party to a dispute with an investor, is entirely unsubstantiated. The Russian Federation's interpretation further ignores the fundamental safeguard of reciprocity contained in Article 45(2)(b) of the ECT and, if given effect, would mean that a signatory State can invoke all rights under the Treaty while escaping any obligations by merely relying on the "inconsistency clause" in Article 45(1). Such a position is untenable and must be rejected.

16. Subsidiarily, the need for a declaration under Article 45(1): In any event, even assuming that the interpretation of Article 45 of the ECT as proposed by the Russian Federation were the correct interpretation, which the Claimants deny, a declaration is still needed in order for a signatory State to opt out of provisional application under Article 45(1). This is clear from the text of Article 45, and the circumstances of its negotiation and conclusion. It is further confirmed by the fact that all signatory States that expressed concerns regarding provisional application made a declaration with a view to avoiding the application of the Treaty, be it on the basis of Article 45(2) or Article 45(1). Therefore, even under the Respondent's own interpretation, a declaration is needed for a signatory State to opt out of provisional application on the basis of either paragraph (1) or paragraph (2) of Article 45 of the ECT. As the Russian Federation has not notified its counterparties of any inconsistency of the Treaty with its Constitution, laws or regulations, under either paragraph, it cannot claim that it is not bound by the Treaty.

17. In any event, the ECT is not inconsistent with the Constitution, laws or regulations of the Russian Federation: Even assuming that the interpretation of Article 45 of the ECT as proposed by the Russian Federation were the correct interpretation, which the Claimants deny, and that a declaration in relation to Article 45(1) is not required, contrary to the Claimants' submissions, the ECT is not inconsistent with the Russian Federation's Constitution, laws or regulations. Russian law fully recognizes the principle of provisional application, and there is no inconsistency between the substantive provisions of the Treaty and Russian law either. To the contrary, at all times—during the negotiation of the ECT, at the time of its proposed ratification by the Duma, and subsequently—the Russian Federation has maintained and represented that both the mechanism of provisional application and the provisions of the Treaty are consistent with its Constitution, laws and regulations.

18. It follows that, under Articles 45 of the ECT, the Russian Federation is bound by the Treaty.

IV. The Claimants Qualify as Protected Investors Under the ECT— Article 1(7)

19. The Russian Federation contends that the Claimants are not protected Investors under the ECT, relying on a host of allegations including that the Claimants are allegedly shell companies owned or controlled by Russian nationals. The Russian Federation's arguments are misplaced and must fail.

20. The definition of Investor under the ECT: Article 1(7)(a)(ii) of the ECT defines "Investor" as, with respect to a Contracting Party, "a company or other organization organized in accordance with the law applicable in that Contracting Party".

21. The Claimants are organized in accordance with the law applicable in Contracting States: The Claimants are companies organized in accordance with the law applicable in Cyprus, in the cases of Hulley and VPL, and the Isle of Man, in the case of YUL, and therefore meet the requirements of Article 1(7)(a)(ii) of the ECT.

22. Express treaty language cannot be overridden by alleged general principles of law: The Russian Federation does not dispute that the Claimants are companies organized in accordance with the law applicable in Contracting States. It claims, however, that the Claimants' nationality should be ignored based on vague and unsubstantiated principles of international law. There is no basis in international law for ignoring the corporate nationality of the Claimants. The language of Article 1(7)(a)(ii) of the ECT is clear and determinative in this regard and, contrary to the Respondent's submission, it is not for this Tribunal to ignore the express language of the Treaty itself. In any event, reference to the state of incorporation is the most common method of defining the nationality of corporate entities under modern BITs and international law.

23. It is clear from the foregoing that the Claimants are protected Investors under the ECT and the Respondent's attempts to suggest otherwise must fail.

V. The Claimants Have a Protected Investment under the ECT— Article 1(6)

24. The Russian Federation contends that the Claimants do not have protected Investments under the ECT alleging, amongst other things, that the Claimants did not inject any foreign capital into the Russian Federation in connection with their acquisition of Yukos shares. The Russian Federation's arguments are without merit and must fail.

25. The definition of an Investment under the ECT: "Investment" is defined in Article 1(6)(b) of the ECT as "every kind of asset, owned or controlled directly or indirectly by an Investor and includes [...] a company or business enterprise, or shares, stock, or other forms of equity participation in a company or business enterprise".

26. The Claimants own shares in Yukos: As shareholders of Yukos at all relevant times for the purposes of these arbitrations, the Claimants directly own protected Investments and therefore meet the requirements of Article 1(6)(b) of the ECT.

27. The Russian Federation's unpersuasive argument on the alleged lack of 'injection of foreign capital': It cannot be disputed that the Claimants have directly owned Yukos shares at all material times. This, in fact, is not disputed by the Respondent. The Claimants therefore hold protected Investments within the definition provided by Article 1(6)(b) of the ECT. The language of Article 1(6)(b) is clear and determinative in this regard and the Russian Federation's attempt to insert additional requirements regarding "origin of capital" or "injection of foreign capital" finds no support in the text of the definition of Investment, nor in the context in which the term is defined.

28. The Claimants undeniably hold protected Investments under the ECT, and the Russian Federation's numerous and unsubstantiated attempts to override the plain language of the Treaty must be rejected.

VI. The Conditions for a Denial of the Benefits of Part III of the ECT to Each of the Claimants are not Met

29. The Russian Federation argues that the Claimants should be denied the benefits of Part III of the ECT on the basis of Article 17, and that these arbitrations are nothing but a domestic dispute between Russian nationals and the Russian Federation. As shown below, the cumulative conditions for a denial of the benefits of Part III of the ECT are not met and each of the Claimants fully benefits from the protection of the Treaty.

30. Article 17 is a reservation of right which must be exercised: Article 17 provides that each Contracting Party "reserves the right" to deny the benefits of Part III. It follows from the plain meaning of these words that each Contracting Party has a right under Article 17(1) of the ECT to deny a covered investor the benefits of Part III; but as long as that right has not been exercised the investor benefits from the protection of Part III of the ECT. That the right to deny the benefits of Part III is an option that needs to be exercised by a Contracting Party is confirmed by the travaux préparatoires of the Treaty. Further, if a Contracting Party is to exercise its reserved right under Article 17(1) of the ECT, it must do so by a clear and unambiguous act. Contrary to the Respondent's contention, Article 17(1) of the ECT does not therefore operate automatically. As the Russian Federation did not exercise its reserved right to effectively deny the benefits of Part III of the ECT to each of the Claimants, Article 17(1) does not apply in these arbitrations.

31. Once exercised, the right of denial only operates prospectively: In any event, even assuming that the Russian Federation has effectively exercised its reserved right to deny the benefits of Part III of the ECT to each of the Claimants in its First Memorial of February 28, 2006, which the Claimants deny, the Russian Federation does not challenge that such exercise can only operate prospectively and cannot have a retroactive effect, i.e. it can only have effect on new wrongful acts occurring after the date on which the reserved right has been effectively exercised, as opposed to the mere continuation of previous wrongful acts.

32. The Claimants are not owned or controlled by citizens or nationals of a third State: In any event, even assuming that the Russian Federation has effectively exercised its reserved right to deny the benefits of Part III of the ECT to each of the Claimants, which the Claimants deny, Article 17(1) of the ECT still cannot apply because the cumulative conditions for the Russian Federation to exercise its right under Article 17 are not met, i.e. the Claimants are not owned or controlled by citizens or nationals of a third State. Hulley is a wholly-owned subsidiary of YUL, a company incorporated in the Isle of Man. YUL, in turn, is a wholly-owned subsidiary of GML Limited, a company incorporated in Gibraltar. GML Limited is owned by Palmus Trust Company Limited (Guernsey) (as trustee for the Palmus Trust) and Rysaffe Trustee Company (C.I.) Limited (as trustees for the remaining Guernsey Trusts). Likewise, VPL is owned by Chiltern Trust Company Limited (Jersey) (as trustee of the Veteran Petroleum Trust). The Claimants are therefore not owned by Russian nationals. Nor are they controlled by Russian nationals since control in each of the Trusts resides with the relevant trustees for the benefit of Russian nationals as regards the Guernsey Trusts and for the benefit of YUL and former Yukos employees as regards the Veteran Petroleum Trust. As a result, the Claimants are not "owned or controlled" by Russian nationals.

33. The Russian Federation is not a third State under the ECT: Even assuming that the Claimants are owned or controlled by Russian nationals, which the Claimants deny, the Russian Federation is not a "third State" under the ECT. It is plain that "third State" in Article 17(1) refers to a non-Contracting Party under the ECT and this is confirmed by the Vienna Convention on the Law of Treaties, as well as the travaux préparatoires of the ECT. By contrast, when contracting States intend to exclude the benefits of an investment protection regime to entities controlled by nationals of the host State, they so provide expressly. This was not done by the ECT drafters. The Russian Federation, which is bound by the ECT, cannot therefore claim to be a "third State" for the purposes of Article 17(1).

34. It results from the above that the cumulative conditions for the application of Article 17 of the ECT are not met and the Respondent's objection must fail.

VII. The Russian Federation's Other Unavailing Objections— Articles 26 and 21

A. The Claimants' Jus Standi

35. The Respondent alleges that the Claimants lack jus standi because they are supposedly enforcing a claim that properly belongs to Yukos.

36. This is plainly wrong as a matter of fact. The Claimants do not purport to enforce rights belonging to Yukos but are enforcing their own rights arising under the ECT as shareholders.

37. The Respondent's objection is also wrong as a matter of law. The distinction between the rights of a shareholder arising under an investment treaty and the rights that belong to the local company is well-established in international law. The Russian Federation's attempt to rely on the inconsistency clause in Article 45(1) of the ECT to argue that shareholders lack standing under Russian law to bring claims for injuries to companies in which they own shares is equally misplaced. As demonstrated above, the Russian Federation's "inconsistency clause" theory is without merit because both the principle of provisional application and the provisions of the Treaty are consistent with Russian law. Even assuming that Russian law is somehow relevant, which the Claimants deny, it is difficult to see how the alleged lack of a statutory right under Russian law could deprive the Claimants of standing under the ECT, except to demonstrate just how outlandish and all-encompassing the Respondent's theory of Article 45(1) is.

38. The Respondent's objection is ill-founded and must fail.

B. Fork-in-the-Road—Article 26

39. The Russian Federation contends that there exist a very large number of cases that have been brought by or on behalf of Yukos or by the "Russian oligarchs" themselves in the Russian courts and the ECHR in which the actions complained of in these arbitrations were subjected to judicial review. On that basis, the Russian Federation contends the Tribunal lacks jurisdiction to hear and decide the Claimants' claims pursuant to Article 26(3)(b)(i) of the ECT. The Respondent's contention is entirely groundless and must fail.

40. None of the proceedings relied on by the Russian Federation satisfy any of the cumulative conditions set out in Article 26(3)(b)(i) of the ECT, the so-called fork-in-the-road provision: (i) the Claimants in these arbitrations are not parties to any of the proceedings cited by the Russian Federation; (ii) none of the proceedings cited by the Russian Federation concern an alleged breach of Part III of the ECT; and (iii) the Claimants have not submitted these claims to any "previously agreed dispute settlement procedure" or to the Russian courts.

41. The Russian's Federation's objection based on Article 26(3)(b)(i) of the ECT is manifestly without merit and must fail.

C. Taxation Measures—Article 21

42. The Russian Federation contends that the Claimants' claims are premised on Taxation Measures and therefore fall within the exemption of Article 21(1) of the ECT. The Respondent's objection based on the taxation provision of the ECT, which it now appears to raise as an objection to jurisdiction, fails in a number of respects.

43. The Respondent's jurisdictional objection is time-barred: For the first time in its Reply, the Russian Federation sought to state a jurisdictional objection based on Article 21(1), contending that the Tribunal lacks jurisdiction because the phrase "nothing in this Treaty" in that provision allegedly excludes the Russian Federation's "offer to arbitrate [in] Article 26" of the ECT. To the extent that the Respondent's objection based on Article 21(1) of the ECT is stated as a jurisdictional objection, it is time-barred under Article 21(3) of the UNCITRAL Arbitration Rules which provides that an objection to jurisdiction is to be made no later than in the statement of defence.

44. Article 21 applies to the enactment of tax "provisions": Further, in any event, even assuming that the Russian Federation is entitled to base a preliminary objection on Article 21 of the ECT, which the Claimants deny, it does not apply here. It is clear that under Article 21 of the ECT a Taxation Measure, as this term is specifically defined in paragraph (7), is an actual "provision" relating to taxes, be it found in domestic law or in a tax treaty, nothing else. Article 21 therefore preserves the liberty of each Contracting State to enact legislation and regulations relating to taxes and the Respondent's numerous attempts to distort and expand the scope of this definition to enforcement actions find no support in the text of the Treaty itself. Because the Russian Federation's right to enact tax "provisions" is not at issue in these arbitrations, Article 21(1) of the ECT does not apply to the Claimants' claims.

45. Articles 13 and 10 expressly apply to Taxation Measures: Even assuming that Taxation Measures have the meaning given to them by the Respondent, which the Claimants deny, the Russian Federation conveniently ignores that the Treaty's substantive investment protections contained in Articles 13, 10(2) and 10(7) apply to Taxation Measures of the Contracting Parties by virtue of Articles 21(5) and 21(3), respectively, and that expropriatory or discriminatory actions are sanctioned under the Treaty even where they relate to Taxation Measures.

46. Conduct under the guise of taxation not covered: In any event, assuming that Taxation Measures have the meaning given to them by the Respondent, which the Claimants deny, the actions complained of by the Claimants do not fall within the scope of Article 21 because they are not genuine Taxation Measures. Indeed, the Russian Federation's actions were not a genuine exercise of the Russian State's prerogative to impose taxes, but merely a pretext for the Russian Federation's expropriation of Yukos' assets to the benefit of State-owned entities. Further, the Russian Federation feigns to ignore that a significant part of the acts complained of by the Claimants have no relation whatsoever to taxation.

47. The Russian Federation's objection based on Article 21 of the ECT is therefore ill-founded and must fail.

(a) determining that it lacks jurisdiction to entertain the claims brought by Claimant;

(b) in the alternative, determining that all claims brought by Claimant are inadmissible;

(c) in the alternative, determining that all claims relating to Taxation Measures other than those, if any, based solely on taxes are inadmissible;

(d) in the alternative, determining that all claims relating to taxes, if any, must be referred to the competent authorities pursuant to Article 21(5)(b)(i) of the Treaty;

(e) ordering Claimant to pay all of the Russian Federation's costs, expenses, and attorneys' fees; and

(f) granting any further relief against Claimant that the Tribunal deems fit and proper.

(a) to render an award determining that it has jurisdiction over the claims brought by Claimant and that such claims are admissible

(b) to order Respondent to pay all of Claimant's costs, including its legal fees and expenses; and

(c) To order any other relief that may be appropriate.

Article 1—Definitions

[...]

(6) Investment" means every kind of asset, owned or controlled directly or indirectly by an Investor and includes:

(a) tangible and intangible, and moveable and immovable, property, and any property rights such as leases, mortgages, liens, and pledges;

(b) a company or business enterprise, or shares, stock, or other forms of equity participation in a company or business enterprise, and bonds and other debt of a company or business enterprise;

(c) claims to money and claims to performance pursuant to contract having an economic value and associated with an Investment;

(d) Intellectual Property;

(e) Returns;

(f) any right conferred by law or contract or by virtue of any licences and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector.

[...]

(7) "Investor" means:

(a) with respect to a Contracting Party:

(i) a natural person having the citizenship or nationality of or who is permanently residing in that Contracting Party in accordance with its applicable law;

(ii) a company or other organization organized in accordance with the law applicable in that Contracting Party;

(b) with respect to a "third state," a natural person, company or other organization which fulfils, mutatis mutandis, the conditions specified in subparagraph (a) for a Contracting Party.

[...]

Article 17—Non-Application of Part III in Certain Circumstances

Each Contracting Party reserves the right to deny the advantages of this Part to:

(1) a legal entity if citizens or nationals of a third state own or control such entity and if that entity has no substantial business activities in the Area of the Contracting Party in which it is organized;

[...]

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.

(2) Article 7(3) shall apply to Taxation Measures other than those on income or on capital, except that such provision shall not apply to:

(a) an advantage accorded by a Contracting Party pursuant to the tax provisions of any convention, agreement or arrangement described in subparagraph (7)(a)(ii); or

(b) any Taxation Measure aimed at ensuring the effective collection of taxes, except where the measure of a Contracting Party arbitrarily discriminates against Energy Materials and Products originating in, or destined for the Area of another Contracting Party or arbitrarily restricts benefits accorded under Article 7(3).

(3) Article 10(2) and (7) shall apply to Taxation Measures of the Contracting Parties other than those on income or on capital, except that such provisions shall not apply to:

(a) impose most favoured nation obligations with respect to advantages accorded by a Contracting Party pursuant to the tax provisions of any convention, agreement or arrangement described in subparagraph (7)(a)(ii) or resulting from membership of any Regional Economic Integration Organization; or

(b) any Taxation Measure aimed at ensuring the effective collection of taxes, except where the measure arbitrarily discriminates against an Investor of another Contracting Party or arbitrarily restricts benefits accorded under the Investment provisions of this Treaty.

(4) Article 29(2) to (6) shall apply to Taxation Measures other than those on income or on capital.

(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 non-discrimination issues are concerned, the Competent Tax Authorities shall apply the non-discrimination provisions of the relevant tax convention or, if there is no non-discrimination 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.

(6) For the avoidance of doubt, Article 14 shall not limit the right of a Contracting Party to impose or collect a tax by withholding or other means.

(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.

[...]

Article 26—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 cannot 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:

(a) to the courts or administrative tribunals of the Contracting Party party to the dispute;

(b) in accordance with any applicable, previously agreed dispute settlement procedure; or

(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.

(b) (i) The Contracting Parties listed in Annex ID do not give such unconditional consent where the Investor has previously submitted the dispute under subparagraph (2)(a) or (b).

(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")

[...]

Article 45—Provisional Application

(1) Each signatory agrees to apply this Treaty provisionally pending its entry into force for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its constitution, laws or regulations.

(2) (a) Notwithstanding paragraph (1) any signatory may, when signing, deliver to the Depository a declaration that it is not able to accept provisional application. The obligation contained in paragraph (1) shall not apply to a signatory making such a declaration. Any such signatory may at any time withdraw that declaration by written notification to the Depository.

(b) Neither a signatory which makes a declaration in accordance with subparagraph (a) nor Investors of that signatory may claim the benefits of provisional application under paragraph (1).

(c) Notwithstanding subparagraph (a), any signatory making a declaration referred to in subparagraph (a) shall apply Part VII provisionally pending the entry into force of the Treaty for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its laws or regulations.

(3) (a) Any signatory may terminate its provisional application of this Treaty by written notification to the Depository of its intention not to become a Contracting Party to the Treaty. Termination of provisional application for any signatory shall take effect upon the expiration of 60 days from the date on which such signatory's written notification is received by the Depository.

(b) In the event that a signatory terminates provisional application under subparagraph (a), the obligation of the signatory under paragraph (1) to apply Parts III and V with respect to any Investments made in its Area during such provisional application by Investors of other signatories shall nevertheless remain in effect with respect to those Investments for twenty years following the effective date of termination, except as otherwise provided in subparagraph (c).

(c) Subparagraph (b) shall not apply to any signatory listed in Annex PA. A signatory shall be removed from the list in Annex PA effective upon delivery to the Depository of its request therefor.

1) Professor Suren Avakiyan

2) Mr. Sydney Fremantle

3) Mr. Anatoly Martynov

4) Mr. Martin Mann, QC

5) Professor Daniel Berman

6) Dr. Marat Baglay

7) Professor Martti Koskenniemi

8) Professor Alexey Kostin

9) Professor Yevgeny Sukhanov

10) Professor Gerhard Hafner

11) Professor Igor Lukashuk

12) Mr. S.V. Vasilyvev, on behalf of the Russian Ministry of Justice

13) Professor Georg Nolte

14) Professor Angelika Nussberger

15) Professor Alain Pellet

16) Mr. Stephen Knipler

17) Professor Myron Nordquist

18) Professor Andrey Lisitsyn-Svetlanov

19) Professor Stef van Weeghel

• to agree to apply the ECT provisionally under Article 45(1), relying on the limitations imposed in that sub-paragraph by the words "to the extent that such provisional application is not inconsistent with its constitution, laws or regulations"; or

• at the moment of signature of the ECT, to deliver a declaration under Article 45(2) of the ECT, that the State is unable to accept its provisional application.

• YUL and Yukos can jointly instruct the trustee to vote and/or retransfer the Yukos shares at their discretion and, similarly, can jointly instruct the trustee to retransfer the VPL Shares.

• Neither VPL nor the trustee is the beneficial owner of the Yukos shares.

Do the rights within any given trust give the trustee meaningful power through its holding of GML shares over the way in which GML's affairs including its daily business are conducted?

• The Protector is not a fiduciary and is not subject to the control of the court in exercising powers that, as in the case of these trusts, he can exercise in his own interests.

• As a result of the Call Option agreements, the trustees of the Auriga-type Trusts and the Southern Cross Trust can exercise the voting rights attached to the GML shares only in accordance with GML's directions.

• It is probable that a court would hold that a transfer of shares, bereft of all the rights normally attached to them, does not carry the beneficial interest.

• The trust purported to be established for the Mezzanine Amount is invalid as being in relation to a future interest, termed in English law an "expectancy," which, under English law, the Court will only enforce if the intended transfer is a transfer for value, which was not the case with the VP Trust.

• The rule in Saunders v. Vautier therefore applies in relation to the Yukos shares, because there are no others, besides YUL, with enforceable rights to the Yukos shares and the fruits of those shares.

• Mr. Green's "theories" regarding impediments to the exercise of the rule in Saunders v. Vautier are incorrect. In particular:

(a) there is no implied agreement not to terminate the VP Trust;

(b) the Canadian case of Buschau & National Trust Company v. Rogers Communications Inc.¹² is irrelevant and distinguishable from the facts in this case, and runs counter to the public policy considerations in Saunders v. Vautier ; and

(c) the trustee's indemnity rights do not preclude termination of the VP Trust.

• The Protector's powers, far from being entirely at his discretion, must be exercised in a fiduciary manner and for the benefit of the beneficiaries.

• The Anti-Bartlett provisions, exempting the trustee from a duty to perform certain actions, must be distinguished from provisions that would take away from the trustee the right to do so.

• The Call Option agreements proceed on the explicit basis that legal and beneficial ownership of the GML shares will remain in the trustees pending "Completion," and do not involve any transfer of property to the security holder (i.e., GML itself).

• The rule in Saunders v. Vautier has no application to the trust here, since the class of beneficiaries is open.

• The provisions of the trust instrument clearly show that the trustee is vested with ownership and control over the VPL shares.

• The fact that the trustee is required to act in accordance with the instructions of a Voting Committee in exercising any voting powers attaching to the Yukos shares does not interfere with the trustee's ownership and control over the VPL shares.

• The provisions requiring the trustee to sell the Yukos shares as directed by the Russian Service Provider ("RSP") do not equate with the RSP owning or controlling the Yukos shares.

• The trust appears as an arrangement referred to in the UK as an "unapproved profit sharing scheme."

• Successive interests are created in the Yukos shares, which are in the nature of fixed-interest trusts. The beneficiaries are YUL and the veteran employees of Yukos.

• The rule in Saunders v. Vautier is inapplicable to the Yukos shares; as for the VPL shares, there are several impediments to the exercise by YUL of any rights under the rule.

• As regards the rule in Saunders v. Vautier, even when the principle is potentially applicable, it does not justify the conclusion that the GML shares (or any other trust property) is owned or controlled by anyone other than the respective trustees unless and until the principle is effectively invoked.

• The security interest created by the Call Option agreements is at most in the nature of a charge and not a mortgage. A charge does not involve any transfer of property to the security holder, much less does it involve the chargee becoming the legal owner of such shares.

• In relation to Protector control, Mr. Green observes that the Protectors have no consent power as regards the exercise by the trustee of the voting rights over GML shares.

• Finally, Mr. Green maintains that Mr. Mann has failed to establish that the beneficial interest in the GML shares was retained by the settlor/first-named Protector.

• Reliance on the "expectancy" principle is erroneous, as the question here involves whether a party (YUL), being the present owner of present property (the Yukos shares), was able to assign such present (not expectant) property to a trustee, to hold the same on trust. The trust over the Mezzanine Amount is therefore valid and enforceable, and the beneficiaries are the veteran employees of Yukos.

• There remain significant impediments to the exercise by YUL of the rule in Saunders v. Vautier in relation to the VPL Shares, namely: (a) no unilateral right to terminate the trust; (b) inapplicability of the rule in relation to a pension trust fund (i.e., the Rogers Communications Inc. case); and (c) the trustee's indemnity rights take priority over YUL/Yukos' rights.

• Finally, even when the rule in Saunders v. Vautier is potentially available, that principle does not enable beneficiaries to control the trustee or to claim ownership of the trust property so long as the trust is ongoing.

• Explaining the inclusion of the International Red Cross in discretionary trusts, Mr. Green testified that it is the normal practice in properly-drafted trusts to ensure that the equitable interests under the trusts are completely disposed of, so that there is no beneficial vacuum at the end of the trust pursuant to which the property, no matter how remote, might be said to fall back into the estate of the settlor.

• Normally, a letter of wishes is designed to communicate to the trustees the settlor's aspirations at the time that the letter is written as to the way in which the beneficial enjoyment of the trust property might devolve over time. It is general in its terms and makes clear that it is only of precatory effect.

• In the Southern Cross Trust, any beneficiary can let the trustees know that he no longer wishes to be a beneficiary. Unlike English law, Guernsey law does not require that disposing of anything like an equitable interest should be in writing. Therefore, it is possible for the trustees to have removed Mr. Khodorkovsky without clear written instructions.

• The Call Option agreements gave each of the individual participants comfort as regards the other. They gave GML a mechanism to remove an individual participant if it decided in the future that a particular participant was no longer desirable. This is not uncommon in partnership or joint venture agreements of the present kind.

A. Does the provisional application of the ECT in the Russian Federation, as defined by Article 45, provide a basis for the Tribunal's jurisdiction over the merits of the claims in this arbitration?

1. Is a declaration required under Articles 45(2)?

2. Is a declaration required under Article 45(1)?

3. What effect should be given to the "to the extent" clause in Article 45(1) as it relates to the Russian Federation?

B. Is Claimant a protected Investor with an Investment under the ECT?

1. Does Claimant qualify as a protected "Investor" under Article 1(7)?

2. Does Claimant "own or control" a protected "Investment" under Article 1(6)?

C. Are the claims barred by the "denial-of-benefits" provision (Article 17) of the ECT?

1. Is there a notification requirement under Article 17 and, if so, did the Russian Federation satisfy such requirement?

2. Is Claimant a legal entity owned or controlled by nationals of a third State?

(a) Who owns and controls Claimant?

(b) Is the Russian Federation a "third State"?

(c) Can the Russian Federation invoke the ownership or control of Claimant by Israeli nationals to take advantage of Article 17(1)?

D. Are all or some of the claims barred by the "Taxation Measures" carve-out (Article 21) of the ECT?

1. What is the scope of the carve-out for "Taxation Measures"?

(a) What is the meaning of "Taxation Measures" as set out in Article 21(7)?

(b) Does the carve-out operate to deprive a tribunal of jurisdiction over the covered matters, or does it merely modulate the obligations that can be enforced in an arbitration, thus going to admissibility/merits?

(c) If the carve-out goes to jurisdiction, did Respondent timely raise the issue?

2. What is the scope of the claw-back for Article 13 (expropriation)?

3. How should the claims be characterized for purposes of Article 21?

E. Are all or some of the claims barred by the "fork-in-the-road" provision in Article 26(3)(b)(i) of the ECT?

(1) Each signatory agrees to apply this Treaty provisionally pending its entry into force for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its constitution, laws or regulations.

(2) (a) Notwithstanding paragraph (1) any signatory may, when signing, deliver to the Depository a declaration that it is not able to accept provisional application. The obligation contained in paragraph (1) shall not apply to a signatory making such a declaration. Any such signatory may at any time withdraw that declaration by written notification to the Depository.

(b) Neither a signatory which makes a declaration in accordance with subparagraph (a) nor Investors of that signatory may claim the benefits of provisional application under paragraph (1).

(c) Notwithstanding subparagraph (a), any signatory making a declaration referred to in subparagraph (a) shall apply Part VII provisionally pending the entry into force of the Treaty for such signatory in accordance with Article 44, to the extent that such provisional application is not inconsistent with its laws or regulations.

(3) (a) Any signatory may terminate its provisional application of this Treaty by written notification to the Depository of its intention not to become a Contracting Party to the Treaty. Termination of provisional application for any signatory shall take effect upon the expiration of 60 days from the date on which such signatory's written notification is received by the Depository.

(b) In the event that a signatory terminates provisional application under subparagraph (a), the obligation of the signatory under paragraph (1) to apply Parts III and V with respect to any Investments made in its Area during such provisional application by Investors of other signatories shall nevertheless remain in effect with respect to those Investments for twenty years following the effective date of termination, except as otherwise provided in subparagraph (c).

(c) Subparagraph (b) shall not apply to any signatory listed in Annex PA. A signatory shall be removed from the list in Annex PA effective upon delivery to the Depository of its request therefor.

a) Must the declaration referred to in Article 45(2) be made in order for a signatory to benefit from the Limitation Clause of Article 45(1)? In other words, in the language of Claimant's submission, is the declaration provided for in Article 45(2) the "mechanism" through which the Limitation Clause of Article 45(1) is implemented?

b) If the answer to issue (a) is no, is some form of prior declaration or notice to the other ECT signatories nevertheless required under Article 45(1) in order for a signatory to be able to invoke the Limitation Clause of Article 45(1)?

c) If the answer to (b) is no, what effect should be given to the Limitation Clause of Article 45(1)? In order to determine this question, the Tribunal must answer the preliminary issue of whether the Limitation Clause of Article 45(1) represents an "all-or-nothing" proposition, that is—whether it concerns the inconsistency of the principle of provisional application with the Constitution, laws or regulations of Respondent, or whether it requires a "piecemeal" approach which requires the analysis of the consistency of each provision of the ECT with the Constitution, laws and regulations of Respondent. Depending on its answer to this preliminary question, the Tribunal must determine either (i) whether the principle of provisional application per se is consistent with the Constitution, laws and regulations of Respondent, or (ii) whether particular inconsistencies between specific provisions of the ECT (those of Part V in particular) and the Constitution, laws and regulations of Respondent preclude the Tribunal's jurisdiction over the merits of the claim in this arbitration.

Neither a signatory which makes a declaration in accordance with subparagraph (a) nor Investors of that signatory may claim the benefits of provisional application under paragraph (1).

• Six States that expressly relied on Article 45(1) in their declarations did not make a declaration under Article 45(2), namely Austria, Luxembourg, Italy, Romania, Portugal and Turkey.

• Three other States made no declaration at all, but relied on the Limitation Clause in Article 45(1), namely Finland, France and Germany.

• European Union ("EU") authorities, through a joint "Statement by the Council, the Commission and the Member States on Article 45 of the European Energy Charter Treaty" approved in December 1994 ("1994 EU Joint Statement"), have relied on the Limitation Clause of Article 45(1) in concluding that there is no obligation to enter a declaration of non-application under Article 45(2).³⁸

• Article 45(1) is a standard inconsistency clause, similar to such clauses found in a number of other treaties; Respondent avers that treaties providing an exception to provisional application generally do not include a mechanism for a signatory to avail itself of the exception.

• The issue of reciprocity of rights and obligations in relation to Article 45(1) was raised and dismissed during the ECT negotiations as being both an impossible and an undesirable objective; furthermore, treaty practice demonstrates that reciprocity is rarely applied in the context of provisional application.

• The link drawn by Claimant between Article 6(2)(a) of the Trade Amendment and Article 45(2) is "absurd": Lithuania, like Russia, only made a declaration under Article 6 of the Trade Amendment and not under Article 45(2).

• Applicable rules of treaty interpretation, particularly Articles 31 and 32 of the VCLT, lead to the conclusion that Article 45(1) establishes the principle of provisional application while Article 45(2) provides the procedural mechanism for a State to opt out of such provisional application.

• Article 45(2)—and, specifically, paragraph (b) thereof—ensures reciprocity of the rights granted and the obligations undertaken by virtue of provisional application, an important safeguard, confirmed by the travaux préparatoires, that necessarily applies to any State's derogation from provisional application.

• The Russian Federation is not among the following States which have, in some way, refused provisional application of the ECT:

o the twelve States that availed themselves of the opting-out mechanism pursuant to a declaration under Article 45(2)(a);³⁹ or

o the six States that declared, in one way or another, that they would not apply the ECT provisionally in accordance with Article 45(1).⁴⁰

• As regards the three States—Finland, Germany and France—which, according to Respondent, purportedly relied on the inconsistency clause of Article 45(1) in not applying the ECT or provisions thereof without making any declaration, the travaux préparatoires do not establish that any one of these States ever took the view that it had an issue of "inconsistency" that would create an obstacle to provisional application of the ECT.

• The 1994 EU Joint Statement is similarly of no avail, as its purpose was to enable the Communities, on the basis of the proposed interpretation of Article 45, to apply the Treaty provisionally within the limits of their competence. This is confirmed by the Council decisions of 15 December 1994 on the provisional application of the Treaty by the European Community and the European Atomic Energy Community, respectively, providing that each Community would apply the Treaty "to the extent that the Community has competence for the matters governed by the Treaty" [emphasis added].⁴¹ The transparency requirement of Article 45 was thus satisfied, since this "declaration," made at the time of the signature of the Treaty by the Communities, allowed the provisional application of the Treaty by the Communities within the limits of their competence.

Article 31—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.

Article 32—Supplementary means of interpretation

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.