A spectre of litigation

Adverse court rulings are exhuming Russia’s most infamous expropriation

REMEMBER Yukos, Russia’s biggest oil firm, which was bankrupted by improbable tax claims and then dismembered in bogus auctions? The Russian government would rather that you did not. Although it has expunged Yukos from official registers, the firm’s ghost is haunting the Kremlin and its state oil company, Rosneft, which swallowed Yukos’s assets. In the past few weeks this ghost has been particularly active, making appearances in several European and American courts, demanding retribution and winning injunctions against Rosneft. Earlier this month an English court froze Rosneft’s local assets in a case brought by Yukos Capital, an offshore affiliate of Yukos. A week later a similar freezing order was imposed by a court in Ireland.

This is part of an effort by Yukos’s former managers to enforce an earlier Dutch court ruling that Rosneft should repay a loan of nearly $400m (plus interest and penalties), which it had acquired together with Yukos’s main production assets. The loan dates to 2004, when the Russian authorities simultaneously piled up billions of dollars worth of tax claims on Yukos and froze its assets and bank accounts, making it impossible for the oil company to make any tax payments.

To shore up Yuganskneftegaz, its main production unit, Yukos arranged for a loan from one of its offshore affiliates, Yukos Capital. However, the government soon seized Yuganskneftegaz and auctioned it off to a front company called BaikalFinanceGroup, which had been registered two weeks earlier at the address of a vodka bar in the provincial Russian town of Tver. A few days later Yuganskneftegaz ended up in Rosneft’s hands. But Rosneft refused to repay Yukos Capital.

Remarkably, a commercial arbitration court in Moscow ruled in Yukos’s favour, telling Rosneft to repay the loan. This decision was soon overturned but it gave Yukos Capital a chance to take its case to a Dutch court which also ordered Rosneft to pay up. When Rosneft refused, Yukos Capital asked the courts in Britain, Ireland and the state of New York to oblige it.

On March 17th the court in New York said that unless Rosneft had assets in the state, the case was outside its jurisdiction. (Yukos Capital was given 60 days to find such assets). But in England and in Ireland the freezing orders remain in place, at least for now. In a statement, Rosneft said the British court order was groundless and it was taking all necessary measures to protect its interests.

The injunctions, which stop Rosneft from making payments from its local accounts, have put its oil traders and its creditors into a spin. They put Rosneft into technical default on loans from foreign banks which are secured by sale contracts between Rosneft and its customers. As Russia’s largest oil company, it is certainly good for the money: the disputed sum represents just 10% of last year’s profit. But it is the first time that Rosneft has been materially affected by its controversial acquisition of Yukos’s assets.

The timing is particularly important given a $98 billion claim made in the European Court of Human Rights against Russia by Yukos before its destruction. Despite Russia’s protests that Yukos no longer exists, the court accepted the case; a judgment is pending. In its defence, Russia argued that “the integrity, professionalism and independence” of Russian courts has not been challenged. But the European Court, which regularly overturns Russian legal judgments, may have a different view. If it finds in Yukos’s favour, the shareholders could seek enforcement in any court in Europe.

Mikhail Khodorkovsky, Yukos’s former owner, already serving an eight-year sentence for tax evasion, is now on trial for stealing oil as well. According to a recent poll, 41% of Russians believe that the government is putting pressure on the courts to secure a guilty verdict, whereas only 20% think otherwise.

The Kremlin has tried to portray Mr Khodorkovsky as a blood-soaked gangster and Yukos’s destruction as a noble act on behalf of Russia’s defrauded taxpayers. In a recent phone-in session open to the public, Vladimir Putin, Russia’s prime minister, in effect accused Mr Khodorkovsky of murder, diverted responsibility for Yukos’s bankruptcy to foreign banks and took pride in returning to the Russian people the money he says was stolen from them.

But few Russians seem to subscribe to that version of events. According to the same poll, only 7% of respondents believe that the destruction of Yukos has benefited the people, whereas 63% believe it was orchestrated in the interests of a small group of bureaucrats and businessmen with close ties to the Kremlin. The thought that some foreign courts might share that view must truly haunt Russia’s rulers.