On 18 July 2014, the Claimants in three related arbitrations administered under the 1994 Energy Charter Treaty and the 1976 UNCITRAL Arbitration Rules prevailed against the Russian Federation.  The Claimants[1] were former shareholders of the OAO Yukos Oil Company (“Yukos”), which had emerged in the early 2000s as the largest private oil company in post-Soviet Russia.

Although the arbitrations were brought separately by each Claimant and not consolidated, the Parties appointed the same arbitrators to each Tribunal (collectively, the “Tribunals”) and the Tribunals proceeded to hear and decide the claims together in three substantially similar awards (the “Awards”).  The Tribunals found that the Russian Federation had unlawfully expropriated the assets of Yukos, in contravention of its obligations under international law, through a series of targeted measures taken between 2003 and 2007.  Put together, in monetary terms the arbitration Awards are by far the largest ever made public, as the Tribunals awarded total damages to the Claimants of more than US$ 50 billion. The Tribunals also ordered Russia to reimburse the Claimants for arbitration costs of € 4.2 million and costs of representation of more than US$ 60 million.

Of particular note in the Awards is the Tribunals’ consideration of the doctrine of “unclean hands” in international law, along with the application of the doctrine of contributory fault. The Tribunals’ decision to reduce to Claimants’ recovery by 25%, following the same approach adopted in the recent case of Occidental Petroleum and another v Ecuador, is likely to attract significant attention and may set a precedent for future investment treaty cases. However, the Tribunals’ extensive analysis of the Parties’ submissions concerning valuation, damages, and the awarding of interest will also add to the body of jurisprudence available to practitioners and arbitrators faced with similar questions.

The decision could prompt other Claimants (including some of the over 50,000 other minority shareholders in Yukos) to move forward with claims against the Russian Federation. For claimants from ECT signatory states, the Tribunals’ decision to uphold the continued application of the substantive protections of the ECT, at least for qualifying investments made before Russia withdrew from the ECT in August 2009, is likely to make the ECT an attractive option under which to bring such claims.


The factual background of these mega-arbitrations spans a number of years and involves numerous public figures and actors.  In essence, the Claimants alleged that the Russian Federation had engaged in a politically motivated, coordinated, and sustained effort to intimidate and harass – and ultimately to destroy – Yukos.

Yukos was incorporated as a joint stock company in 1993, having been formed by presidential decree in order to facilitate the development of the oil and gas industry in Russia following the collapse of the Soviet Union.  By 2003, Yukos had achieved an estimated market capitalisation of US$ 33 billion and become fully privatized under the leadership of CEO Mikhail Khodorkovsky.  The Awards underscored the relative size of Yukos at its peak in 2003: the company’s planned merger with another Russian oil company would have made the combined company the world’s fourth largest private oil producer behind BP, Exxon and Shell.[2]

The Claimants alleged that the financial success of Yukos in the early 2000s, coupled with Mr Khodorkovsky’s political activities, presented a threat to established political interests in the Russian Federation, including the administration of then-President Vladimir Putin.  The Tribunals ruled that from July 2003 until Yukos was ultimately struck off the Russian register of companies in November 2007, the Russian government instituted a broad range of measures calculated to paralyse Yukos.  The Tribunals concluded that the State measures ultimately led to the financial collapse and dismantling of Yukos, and the transfer of nearly all of its assets to the Russian Federation or its State-owned enterprises, principally including the State-owned oil major Rosneft.

Criminal prosecutions

In July 2003, Russian authorities arrested Mr Platon Lebedev, then the Director of two companies that held significant percentages of Yukos (which would later become two of the three Claimants). Mr Lebedev was charged and convicted of embezzlement and fraud.  Mr Khodorkovsky was arrested in October 2003, and was later charged and convicted of crimes including forgery, fraud and tax evasion.  Following their convictions, Messrs. Khodorkovsky and Lebedev each spent more than 10 years in prison, before being released, respectively, on 20 January 2013 and 25 January 2014.  A number of other key Yukos executives fled Russia, and some were tried in absentia and sentenced to long terms of imprisonment.  In parallel with the criminal proceedings against Yukos’ top managers, Russian authorities conducted extensive searches and seizures of Yukos’ property and personnel, including interrogations of Yukos’ lawyers and accountants.

Tax investigations and reassessments

At the same time, Russian tax authorities intensified investigations into Yukos’ tax optimization arrangements. The Tribunals determined that the legitimacy of Yukos’ tax optimization arrangements and the lawfulness of the State’s tax enforcement actions against Yukos were central issues in the case.  In short, Yukos had organized oil trading subsidiaries in certain regions of Russia that had tax incentive schemes, which enabled it to record profits from selling oil in comparatively low-tax jurisdictions.   The Russian Federation argued that these structures, among other tax optimization strategies (including the use of the Cyprus-Russia Double Taxation Treaty) were illegal, and that internal Yukos documents indicated that even insiders had questioned the legality of its tax planning strategies.  Beginning in December 2003, Russian authorities issued various reassessments of Yukos’ tax liabilities for the years 2000-2004, totaling US$ 24.18 billion in additional claims.[3]

The Tribunals concluded that “while Yukos was vulnerable on some aspects of its tax optimization scheme, and possibly even would have faced ‘substantial tax claims’ that might have resulted in ‘significant losses,’ principally because of the sham-like nature of some elements of its operations in at least some of the low-tax regions, the State apparatus decided to take advantage of that vulnerability by launching a full assault on Yukos and its beneficial owners in order to bankrupt Yukos and appropriate its assets while, at the same time, removing Mr. Khodorkovsky from the political arena.”[4]

Auction of Yukos’ core asset

Yukos’ most valuable asset in 2004 was its ownership of the oil production company Yuganskneftgaz (“YNG”).  In order to satisfy Yukos’ reassessed tax debt for the year 2000, on 20 July 2004 the Russian Ministry of Justice announced that YNG would be sold at auction.[5]   Whilst YNG was appraised in August 2004 at a price of up to US$ 21.1 billion, the winning bid price was just US$ 9.35 billion when it was sold on 19 December 2004.[6]  Only two bidders registered for the auction, which took place on a Sunday, and only one bid was registered.  The winning bidder, Baikal Finance Group (“Baikal”), had been incorporated just two weeks earlier, with a share capital of US$ 359.[7]  On 22 December 2004, just three days after the auction, Rosneft acquired Baikal, including its ownership of YNG.

The Tribunals concluded that the facts surrounding the auction of YNG provide “yet more compelling evidence that the Russian Federation was not engaged in a true, good faith tax collection exercise but rather was intent of confiscating the most valuable asset of Yukos and effectively transferring it to the Russian State.”[8]  In plain terms, “the auction of YNG was not driven by motives of tax collection but by the desire of the State to acquire Yukos’ most valuable asset and bankrupt Yukos. In short, it was in effect a devious and calculated expropriation by Respondent of YNG.”[9]

Bankruptcy and Liquidation

In August 2006, after Yukos’ attempts to structure a Rehabilitation Plan were rejected, Yukos was declared bankrupt and placed under receivership.[10]  In the bankruptcy proceedings, Russia held (directly through the Federal Taxation Service or indirectly through Rosneft) 97.67 per cent of all claims against Yukos, and received about 99.71 per cent of the bankruptcy proceeds.[11] In turn, Rosneft and Gazprom ultimately acquired Yukos’ most important remaining assets.  Yukos was formally struck off the register of companies on 21 November 2007.[12]


Remaining Jurisdictional Questions

At an earlier stage of the proceedings, the Russian Federation had challenged the Tribunals’ jurisdiction to hear the Claimants’ claims under the ECT.  Russia argued that because it had signed the ECT but not ratified it, its consent to arbitration could not be invoked.  Russia also contended that the ultimate beneficial interest holders were Russian nationals, and as such the Claimants could not invoke the benefits of the ECT.  The Tribunals rejected both arguments in preliminary decisions on jurisdiction on 30 November 2009.

Unclean hands

In the Merits phase, the Tribunals addressed Russia’s assertion that the Claimants came to the arbitration with “unclean hands“, with the consequence that the Tribunals lacked jurisdiction over the Claimants’ claims, that Claimants’ claims were inadmissible, or that the Claimants should be deprived of the protection of the ECT.  If the Tribunals did not consider the unclean hands argument to be dispositive as a preliminary objection, Russia argued in the alternative that any award of damages should be discounted due to Claimants’ alleged unclean hands.[13]

It was common ground that the ECT itself does not contain express provisions concerning “unclean hands” or illegality in the making of an investment.  The Tribunals nevertheless determined that “the principle that an investment ‘will not be protected if it has been created in violation of national or international principles of good faith’ or ‘of the host State’s law’ is a ‘general principle […] that exist[s] independently of specific language’ in an investment treaty.”  However, the Tribunals declined to extend the application of that principle in order to deny protection to investors “not only in the case of illegality in the making of the investment but also in its performance.”[14]

The Russian Federation took the position that, apart from the text of the ECT (which, as noted above, the Tribunals declined to read as imposing any legality requirement with respect to the performance of the investment), a claimant who has unclean hands in the performance of the investment is barred, on the basis of a general principle of law, from claiming protection from an international tribunal.  Noting that there is a high bar for the establishment of a general principle of international law, the Tribunals concluded that no such general principle of international law exists.

ECT Article 21

Article 21 of the ECT is a complex provision relating to “Taxation Measures” taken by Contracting Parties.  The Tribunals joined to the merits phase Russia’s preliminary claim that Article 21 of the ECT excluded jurisdiction over the Claimants’ claims, and ultimately concluded that they had jurisdiction for two independent reasons:

  • The Tribunals “would have ‘indirect’ jurisdiction over claims under Article 13 of the ECT because any measures excluded by the carve-out under Article 21(1) of the ECT would be brought back within the Tribunal’s jurisdiction by the claw-back of Article 21(5) of the ECT and any referral to the Competent Taxation Authorities within the meaning of this latter provision would clearly have been futile”; and
  • The Tribunals would have “direct” jurisdiction because, “[I]n any event, the carve-out of Article 21(1) can apply only to bona fide taxation actions, i.e., actions that are motivated by the purpose of raising general revenue for the State.  By contrast, actions that are taken only under the guise of taxation, but in reality aim to achieve an entirely unrelated purpose (such as the destruction of a company or the elimination of a political opponent) cannot qualify for exemption from the protection standards of the ECT under the taxation carve-out in Article 21(1).”


Whilst there was no disagreement that the acts of Russian State organs were attributable to Russia, Russia contended that the actions of the State-owned oil company Rosneft and of the appointed bankruptcy administrator were not attributable to the State.  After an extensive review of the factual record, the Tribunals concluded, however, that President Putin had made statements indicating that the State accepted responsibility for auction of YNG, Yukos’ primary asset, and Rosneft’s acquisition of it.  Further, for Rosneft’s other actions bearing on the destruction of Yukos, the Tribunals held that “the highest officers of Rosneft who at the same time served as officials of the Russian Federation in close association with President Putin acted in implementation of the policy of the Russian Federation.”[15]

Turning to the obligations of the Russian Federation under Article 13 of the ECT, the Tribunals found that the State had not “explicitly expropriated Yukos or the holdings of its shareholders, but the measure that [Russia] has taken in respect of Yukos…in the view of the Tribunal have had an effect ‘equivalent to nationalization or expropriation’.”[16]


a)     Contributory fault

Before turning to the quantification of damages, the Tribunals addressed Russia’s arguments that any damages should be reduced due to the contributory fault of the Claimants.  In order to analyse this aspect of the case, the Tribunals recounted the principles set out in the ILC Articles on the Responsibility of States for Internationally Wrongful Acts.  They ruled that they had the authority to adjust the award of damages if a sufficient causal link existed between any willful or negligent act or omission of the Claimants (or of Yukos) and the loss that the Claimants suffered.[17]  Further, not just any degree of contribution by the Claimants to their injury would be sufficient; mirroring the language used in Article 39 of the ILC Articles, the Tribunals reasoned that the contribution must be “material and significant” in order to warrant a reduction in the Claimant’s recovery.

The Tribunals concluded that most of the Russian Federation’s claims of bad faith or illegal conduct by or attributable to the Claimants did not satisfy this legal test.[18]  However, having concluded that some elements of Yukos’ aggressive tax avoidance strategies in Russia’s low-tax regions were abusive and unlawful, the Tribunals concluded that there was a sufficient causal link between those strategies and the ultimate demise of Yukos to warrant a finding of contributory fault.  On the basis of the evidence before it, the Tribunals concluded that the Claimants contributed “25 percent to the prejudice which they suffered as a result of Respondents’ destruction of Yukos“.[19]  Accordingly, the quantum awarded to Claimants would be reduced to 75 percent of the loss determined by the Tribunals.

b)     Interest

The Tribunals recalled the “well-established mantra that tribunals enjoy a wide margin of discretion in awarding interest.”[20]  They discussed a variety of approaches taken by other tribunals, and in particular the express language in the ECT that contemplates the awarding of interest.  Notably, the Tribunals reasoned that because the ECT mandates interest at “a commercial rate established on a market basis” in the case of a lawful expropriation, the Claimants were “entitled” to interest as an element of compensation for the Russian Federation’s unlawful expropriation of Yukos.[21]

The Claimants had proposed three alternative rates of interest: LIBOR plus two or four percent; the yield on Russian sovereign bonds issued in US dollars, and the US Prime rate plus two percent.  The Tribunals rejected the yield on Russian sovereign bonds, as it would lead to what they considered to be excessive compensation for the Claimants.  As for LIBOR, although a number of investment treaty awards have used it as the basis for interest rate calculations in previous cases, the Tribunals rejected LIBOR as having been “discredited“.[22]  Whilst not explicitly stated in the Awards, the timing of the hearing in the case coincided with a notorious scandal surrounding investigations into LIBOR rate-fixing involving numerous international banks.  The Tribunals’ reasoning regarding LIBOR is notable, although it is unclear to what extent the uncertainty surrounding the reliability of LIBOR will affect its continued relevance as a benchmark in international arbitration.

The Tribunals also rejected the Claimants’ third proposed alternative (the US Prime rate plus two percent). They reasoned that that rate was a version of the “borrowing rate” approach to interest calculations, which was not appropriate in this case because there is no evidence that the Claimants had to borrow money from another source because they had not received compensation for the expropriation. Rather, quoting the ICSID awards in Siemens v Argentina[23] and Santa Elena v Costa Rica[24], the Tribunals determined that it would be appropriate to award interest on the basis of the rate the amount of compensation would have earned had it been paid after the expropriation.  In the exercise of their discretion, the Tribunals determined to set the interest rate at the average yield of 10-year US Treasury bonds between 1 January 2005 and 30 May 2014, being 3.389 percent.[25] They also decided that pre-award interest would apply only to the damages which represented the value of lost dividend streams to the Claimants, not including the value of their Yukos shares.

A notable feature of the Tribunals’ reasoning as regards interest is the conclusion that “the awarding of compound interest under international law now represents a form of ‘jurisprudence constante’ in investor-state expropriation cases”.[26]  Nevertheless, the Tribunals ruled that the Claimants would only receive simple pre-award interest, whilst post-award interest would be compounded annually at a rate to be determined by reference to the yield on 10-year US Treasury bonds as of specified dates.  In light of the “significant” award of damages, the Tribunals granted the Russian Federation a grace period of 180 days to pay before interest would begin to accrue.

c)     Quantum

The Claimants presented claims for “no less than US$ 114.174 billion”, based on analysis performed by an expert consulting firm.[27]  In addition to the lost value of their shares of Yukos, the Claimants alleged damages from lost cash flows from dividends and the loss of the opportunity to list Yukos shares on the New York Stock Exchange.

The Tribunals reasoned that the Claimants’ position on the appropriate valuation date (21 November 2007, when Yukos was struck off the Russian company register) could not be correct, because the expropriation had in fact happened earlier.  In a passage that may be frequently cited in future cases involving alleged “creeping” expropriation, the Tribunals observed that the key date is that “on which the incriminated actions first lead to a deprivation of the investor’s property that crossed the threshold and became tantamount to an expropriation.”[28]  On that basis, the Tribunals determined that a “substantial and irreversible deprivation of Claimants’ assets occurred on 19 December 2004, the date of the YNG auction.”[29]

However, the Tribunals also went on to conclude that investors must be entitled to the benefits of unanticipated events that increase the value of an expropriated asset up to the date of a decision awarding compensation. Similarly, investors do not bear the risk of unanticipated events that decrease the value of such an expropriated asset.  In order to be made whole, an investor whose assets have been unlawfully expropriated must enjoy the right to elect between compensation based on the date of the expropriation, or the date of the award.[30]  For convenience, the Tribunals decided that the date of the Awards would be, for valuation purposes, 30 June 2014.

Turning to the method used to establish the value of the Claimants’ shares of Yukos, the Tribunals concluded that little weight could be given to the Claimants’ scenarios based upon Discounted Cash Flow or comparable transactions.  In particular, the Tribunals noted that the Claimant’s expert “admitted at the Hearing that his DCF analysis had been influenced by his own pre-determined notions as to what would be an appropriate result,” and that the Parties agreed that there were, in fact, no such comparable transactions.[31]

The Tribunals did, though, express “a measure of confidence” in the comparable companies approach to valuation – by which the value of Yukos’ shares would be assessed by reference to the market value of other similar companies – which it adopted as the starting point for its quantum analysis.[32]  The evidence before the Tribunals provided the Claimants’ assessment of valuation on the basis of comparable companies as of 21 November 2007, however, not as of the date of the award or the date of the expropriation as determined by the Tribunals.  In order to calculate the figures for those other dates, the Tribunals adjusted the 2007 figure by reference to changes in the RTS Oil and Gas index (a measure of certain stocks trading on the Moscow Stock Exchange), which the Parties had agreed was a reliable indicator of changes in value of Russian oil and gas companies.[33]  On this basis, the value of the Claimants’ shares of Yukos as of 30 June 2014 was determined to be US$ 30.049 billion.[34]

For the calculation of the Claimants’ share of lost dividends, the Tribunals ultimately concluded that neither side’s submissions had accounted for the totality of the risks inherent with continuing to own Yukos as a going concern. The prospect of materially increased taxes was, to the Tribunals, among several relevant factors that warranted a further downward adjustment of estimated dividend payments for the 2004-2014 period.[35]  It concluded, “in the exercise of its discretion,” that the total would have been US$ 45 billion, down from the Claimants’ estimate of US$ 67.213 billion.[36]  Including pre-award interest, the Tribunals determined that the Claimants share of lost dividends was 36.645 billion.[37]

It appears from the Tribunals’ reasoning that the Russian Federation had argued that the quantum awarded to the Claimants should be reduced on the basis of the rate of return that the Claimants stood to receive on their original investment.  In summary terms, the Tribunals rejected the relevance of that argument, as they had concluded that the amount originally invested by Claimants was not relevant to the calculation of damages.[38]  While the Awards did not provide substantial reasoning on this issue, the Tribunals’ strong statement may be relevant in other investment treaty disputes, particularly as regards the legal requirements for the making of an “investment”.

Accordingly, the Tribunals determined that the total amount of damages, before deductions for the Claimants’ contributory fault, was US$ 66.694 billion. After deducting 25 percent, the Tribunals awarded the total sum of US$ 50,020,867,798.00.

Damages calculations

d)     Costs

The Parties’ submissions on costs were unusually large on both sides. The Claimants requested reimbursement of over US$ 80 million for the costs of legal representation, experts and witnesses, while Russia claimed over US$ 27 million for reimbursement of its own costs. The Tribunals determined that, as the prevailing Parties, the Claimants should be reimbursed in proportion of their shareholding for their portion of the costs of the arbitration (€4.2 million), plus US$ 60 million for the costs of legal representation (about 75% of the amount that the Claimants had claimed).[39]


These Awards have been of great public interest, not only because of the factual background to the Claimants’ case, but also for the sheer size of the Awards themselves. For investors and practitioners, these Awards are also notable for the application of the doctrine of contributory fault and corresponding reduction of damages and the lengthy and thorough analysis of valuation and interest.

Despite these being “Final” Awards, it seems unlikely that the Yukos cases are behind us. These three Awards were followed within days by the announcement of an unprecedented $1.5bn award of compensation to Yukos’ shareholders against the Russian Federation by the European Court of Human Rights.  Together, the Awards and the ECHR compensation total as much as that spent by the Russian government on the Sochi Winter games, and Foreign Minister Sergey Lavrov has indicated that Russian authorities “will use all possible legal means to defend their position.”

Russia will no doubt appeal against the ECHR ruling within the 3 month period allowed. However, the avenues for challenging the Awards are more limited.  These cases were heard under the UNCITRAL Rules in The Hague, and the threshold for setting aside arbitral awards in the Netherlands is high.  If any such challenge fails, the Claimants have indicated through counsel that, rather than monetizing the Awards by selling them on the secondary market, they will seek to enforce the Awards against assets of the Russian Federation around the world.  That process may be lengthy and complex, and observing the Claimants’ strategies and successes (or failures) may provide useful guidance for other holders of investment treaty awards seeking to enforce them against the worldwide assets of a respondent state.

For further information, please contact Matthew Weiniger QC, Partner, Timothy Hughes, Associate, or your usual Herbert Smith Freehills contact.

Matthew Weiniger QC
Matthew Weiniger QC
+44 20 7466 2364
Timothy Hughes
Timothy Hughes
+852 21014117




[1]           The Claimants in the three cases were:

Clts in the 3 cases

[2]       Awards, para. 73.

[3]       Awards, para. 517

[4]       Awards, para 515.

[5]       Awards, para 988.

[6]       Awards, paras 993.

[7]       Awards, para 999.

[8]       Awards, para 985.

[9]       Awards, para 1037.

[10]      Awards, para 1090.

[11]      Awards, para 1096.

[12]      Awards, para 1099.

[13]      Awards, para 1480.

[14]      Awards, para 1480.

[15]      Awards, para 1480.

[16]      Awards, para 1580.

[17]      Awards, para 1599.

[18]      Awards, para 1607.

[19]      Awards, para 1637

[20]      Awards, para 1658.

[21]      Awards, para 1677.

[22]      Awards, para 1679.

[23]      Siemens A.G. v The Argentine Republic, ICSID ARB/02/8, Award, 2 February 2007 ¶ 396.

[24]      Compañía del Desarollo de Santa Elena, SA v Republic of Costa Rica, ICSID ARB/96/1, Final Award, 17 February 2000 ¶ 76.  The Chairman of the Tribunals, Yves Fortier, was also the Chairman of the Santa Elena tribunal.

[25]      Awards, para. 1687.

[26]      Awards, para. 1689.

[27]      Awards, para. 1694.

[28]      Awards, para. 1761.

[29]      Awards, para. 1762.

[30]      Awards, paras. 1763, 1767-1768.

[31]      Awards, para. 1785.

[32]      Awards, para. 1787.

[33]      Awards, para. 1788.

[34]      Awards, para. 1822.

[35]      Awards, para. 1805.

[36]      Awards, para. 1811.

[37]      Awards, para. 1824.

[38]      Awards, para. 1829.

[39]      Awards, para. 1887.