Russia Continues Pressing Sovereignty Claims in the Yukos Award Saga
January 25, 2024
Yukos Oil Company (“Yukos”) shareholders’ attempts to enforce their $50 billion arbitral award against the Russian Federation are moving forward in the U.S. District Court for the District of Columbia.
On November 17, 2023, Judge Beryl Howell denied Russia’s motion to dismiss the case for lack of subject matter jurisdiction under the Foreign Sovereign Immunities Act and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). In the process, this latest decision in Hulley Enterprises Ltd. v. Russian Federation offers observers a reminder of both the details of the Yukos saga and the central role that sovereignty plays in Russia’s efforts to defeat the shareholders’ claims.
Background of the Dispute
The roots of the Yukos dispute date back to the 1990s, when the relatively new Russian Federation auctioned off a group of state-owned corporations, including Yukos, in a “loans for shares” scheme. Then, starting in 2003, the Russian government took various actions against the company—tax reassessments and fines, forced sale of a subsidiary at a discounted rate, and even harassment and intimidation of company officials via criminal investigations and arrests, inter alia—“in order to bankrupt Yukos and appropriate its assets while, at the same time, removing [the company’s CEO] from the political arena.” While Russia has contended that these actions were justified, various courts and tribunals have concluded they were effectively pretext to seize the company. As Judge Howell observed in her November 17 memorandum opinion, Russia’s arguments “have achieved little success on the merits” over the years.
Russia’s most significant loss was embodied in the 2014 arbitral award issued by an arbitral tribunal seated in the Hague. A group of Yukos shareholders initiated these proceedings nine years earlier under the Energy Charter Treaty (“ECT”), which Russia signed but never ratified and from which Russia subsequently withdrew. In addition, the ECT includes protections for foreign investment and provides, in Article 26, for arbitration of disputes between contracting States and foreign investors. Crucially for this case, the ECT also provides in Article 45 that each signatory will “apply this Treaty provisionally pending its entry into force for such signatory . . . , to the extent that such provisional application is not inconsistent with its constitution, laws or regulations.”
The arbitral tribunal was thus first faced with the threshold question of the ECT’s provisional application and whether, in particular, Article 26 should be applied to a State that had signed but not ratified the treaty. In other words: Had Russia agreed to arbitrate? The answer, as it turned out, was yes. Russia submitted a letter to the tribunal, accepting that the tribunal had the authority to determine its own jurisdiction. Relying on such authority, the tribunal found the ECT applied in full to Russia, and proceeded to consider the merits of the shareholders’ claims.
The tribunal ultimately found that Russia had violated its investment-related obligations under the ECT by abusing its taxation system to force Yukos out of business, and it produced an historically large award for the Yukos shareholders.
The shareholders filed an action to confirm the massive award in the District Court for the District of Columbia, and shortly thereafter, Russia challenged the award at the seat of the arbitration. This process ushered in a long stay of proceedings in D.C. while Dutch courts wrestled with the award; the Hague trial court quashed it, the appeals court reinstated it, and finally the Supreme Court of the Netherlands threw out the appeals court’s reinstatement of the award and referred the case to a different appeals court for further consideration. As the second Dutch appeals court was considering the case, Judge Howell in April 2022 refused to extend the D.C. district court stay any further, citing “the protracted nature of this litigation, recent D.C. Circuit precedent directing prompt resolution of sovereign immunity claims in the arbitral context, and concerns about asset liquidation in the wake of the Russian Federation’s war against Ukraine . . . .”
Judge Howell’s November 17 Decision
With no stay in place, Judge Howell turned to Russia’s motion to dismiss the shareholders’ enforcement action for lack of subject-matter jurisdiction under the Foreign Sovereign Immunities Act (“FSIA”). Russia contested the shareholders’ assertion that the FSIA’s arbitration exception applies, raising five principal objections to jurisdiction. First, provisional application of the ECT’s Article 26 was inappropriate. Second, the shareholders and their predecessor investors in Yukos had engaged in fraudulent behavior, which invalidated any agreement to arbitrate under the ECT. Third, the shareholders were Russian nationals, not foreign investors, meaning Article 26 did not apply to them. Fourth, the shareholders and arbitral tribunal failed to follow proper procedures under the ECT for referring tax disputes to national tax authorities before proceeding to arbitration over them. Finally, the New York Convention applies only to awards that “aris[e] out of a legal relationship . . . which is considered as commercial,” and the underlying relationship between Russia and Yukos was public, not commercial, in nature.
Judge Howell rejected each of these arguments, while also rejecting Russia’s assertion that she should engage in de novo review regarding whether an arbitration agreement existed. Deeming de novo review both unnecessary and improper, Judge Howell concluded that the D.C. District Court was bound—at least at this jurisdictional stage—by the arbitral tribunal’s determinations with respect to provisional application, alleged fraud, investors’ nationality, and any referral precondition to arbitration. She also disagreed with Russia’s characterization of its relationship with the shareholders as public, finding instead that the relationship, which originated with the loans for shares arrangement, was commercial. Accordingly, she held that the New York Convention applied and gave the court a “basis upon which [it] may enforce a foreign arbitral award,” satisfying the requirements of the FSIA’s arbitration exception.
Sovereignty as Litigation Strategy
Throughout the two decades of litigation in this case—from the arbitral tribunal in the Hague to domestic courts around the world—Russia has advanced a consistent set of arguments that turn, in significant part, on its status as a sovereign nation.
Among Russia’s sovereignty-based arguments are the following: First, not only was there a more run-of-the-mill lack of party consent to arbitrate, but the lack of sovereign consent here must be understood through the interaction of international and domestic law relating to the provisional application of the ECT’s arbitration clause. Second and relatedly, Russia is entitled to sovereign immunity in domestic courts where the Yukos shareholders are seeking to enforce the arbitral award. And third, Russia’s relationship with the Yukos shareholders was public or sovereign, not commercial, in nature, so it is not properly subject to the scrutiny that it has been receiving.
As I argue in my forthcoming article, Procedural Sovereign Distinction, the very fact of applying unique rules to sovereign defendants, including with respect to immunity, is worth examining not least because of the additional delay such rules can bring about. This is not to say that U.S. courts shouldn’t treat sovereign litigants differently—indeed, there are a number of good reasons to do so. But we should be aware of the possible effects of doing so, and ideally align the unique rules that apply to sovereigns with the reasons for treating them as unique.
If the Yukos shareholders’ award were against a foreign private party, subject-matter jurisdiction would be a relatively simple matter under the Federal Arbitration Act. To be sure, this hypothetical private party might later raise many of the objections Russia has raised here—absence of a valid arbitration agreement, award creditor’s “unclean hands,” and so on—to resist enforcement of the award. But considering the question of Russia’s immunity under the FSIA’s arbitration exception has given Russia another opportunity to make these arguments, adding another issue to brief and offer expert testimony over, another decision to be appealed, and so on, onto a long stretch of related litigation. Judge Howell seemed to express frustration with such prolongation of the dispute at various points throughout the order, including when noting that it “has now consumed judicial resources in the District of Columbia for almost a decade, and related proceedings have likewise demanded judicial attention in multiple jurisdictions abroad, including the Netherlands, Belgium, France, Germany, India, and the United Kingdom.” Moreover, Russia is in the unique position as a sovereign to argue that its relationship with the shareholders was public, rather than commercial, meaning the New York Convention and in turn the FSIA’s arbitration exception would not apply. The Hulley v. Russian Federation litigation is thus a paradigmatic case of a sovereign litigant deploying the particular rules that apply to sovereigns in a way that frustrates timely judicial resolution.
In finding that the FSIA’s arbitration exception applied, Judge Howell effectively rebuffed each of Russia’s sovereignty-based arguments. She even emphasized Russia’s acceptance of the tribunal’s authority to determine its own jurisdiction, suggesting the award might in some sense be understood as an expression of Russia’s own authority to bind itself. Yet Judge Howell, as well as the shareholders and their counsel, was required to consider and respond to each of these unsuccessful arguments in turn—arguments that would not have been available to a private party at this stage—and rightly so as a legal matter, given foreign States’ presumptive entitlement to immunity in U.S. courts.
Despite their loss at the motion to dismiss stage, we surely haven’t seen the end of Russia’s arguments, including those grounded in sovereignty. Having presented these arguments at virtually every stage of the dispute, we can expect Russia to continue making them as the case carries on. Judge Howell even signaled in her recent opinion that some of these arguments—especially Article 26’s consistency with Russian law and the applicability of that clause in light of the shareholders’ nationality—would be better suited to a later stage of litigation when the court is considering whether to enforce the award.
Procedurally, Russia filed an appeal of Judge Howell’s decision to the D.C. Circuit on December 18. In the meantime, interest on the award continues to accrue, with the total amount due now nearing an eye-watering $60 billion.