Seven years have passed since Russia began the campaign against OAO Yukos Oil Company that led to the renationalization of a business controlling more than 3 percent of world oil production, comparable in scale to Chevron Corporation. The dispossessed owners call it the biggest political expropriation in history. The fall of Yukos has generated history’s biggest arbitrations—and by far the biggest human rights claim ever—with stakes as high as $100 billion. The director of the majority shareholder group, Timothy Osborne, vowed a “lifetime of litigation” against those responsible, and he is well on his way.

So far, the litigation is going well for the Yukos side. The company’s former management or shareholders have prevailed in jurisdictional fights in four different cases—most recently, with a surprise victory late last year at the Permanent Court of Arbitration in The Hague. Now the real battle begins. In March, in a second case, the main parties finally engaged on the merits at oral hearing before the European Court of Human Rights in Strasbourg, France. That court is expected to render its judgment imminently. While the damages in Strasbourg are unlikely to be substantial, the decision could influence the arbitration in The Hague—where a jackpot judgment is easily imagined. (Collecting such a judgment is another matter.) And the impending human rights ruling in Strasbourg may be crucial to the more realistic hidden strategy of the former Yukos management behind the ECHR claim.

To understand how the battlefronts fit together is to see the state of play in international business disputes, fought in multiple venues and requiring litigants to engage in ever more complex strategic calculus. As the Yukos dispute reaches the age of reason, it’s time for a look back and a look forward.

The Yukos camp has largely persuaded Western opinion leaders that it was the victim, and its lawyers speak as if they can skip straight from jurisdiction to damages without the intermediary step of proving their claims. “The Russians’ best arguments were all on jurisdiction and they’ve lost all of them,” asserts O. Thomas Johnson, Jr., of Covington & Burling, who represents minority Yukos shareholders. “The only real issue left is deciding how much Yukos was worth.” Agrees Emmanuel Gaillard of Shearman & Sterling, who represents the majority shareholders in the Hague arbitration: “Russia’s strategy is to postpone the inevitable point at which they lose.”

But Russia concedes nothing. Russia was fully justified in cracking down on a tax cheat, say its lawyers—speaking for the first time with the press in the hope of starting to reframe the public narrative.

“If you begin with the premise that Yukos committed fraud,” argues Michael Goldberg of Baker Botts, who counsels Russia on strategy, “then the government of any country in the world had a right to go after that fraud to the full extent of the law.” Russia has no intention of rolling over on the merits.

The fall of Yukos began when the man who had built it, Mikhail Khodorkovsky, was arrested on hotly contested charges of fraud and tax evasion in late 2003 ["Russian Roulette," August 2004]. (He and leading shareholder Platon Lebedev were eventually sentenced to eight years of prison, and are now being tried on money laundering charges carrying a sentence of 22 years.) Yukos itself was audited, and on April 14, 2004, the company was given two days to pay a €2.9 billion tax reassessment [see "Seven Years and Counting," opposite]. The next day its funds were frozen. Tax reassessments for 2000–2003 would eventually climb to between €15–20 billion.

In December 2004, Russia auctioned off Yukos’s core unit, known as YNG—which by itself pumped as much oil as Libya—for €6.9 billion, to OOO Baikal Finance Group. The short-lived Baikal—which gave as its address a provincial storefront housing a seedy bar—flipped YNG to state-controlled OAO Rosneft Oil Company within two weeks.

Baikal was “an obvious front company, funded by Rosneft and acting as its puppet,” asserts Yukos barrister Piers Gardner of Monckton Chambers. “YNG was therefore sold in a bogus false auction to a sham bidder on behalf of the state at half-price to meet unlawful tax liabilities. That was expropriation.”

After Rosneft acquired YNG, the tax claim on YNG was slashed by 90 percent, and Rosneft was given the luxury of time for repayment. Meanwhile, the mounting tax claims on Yukos forced the company into bankruptcy, and eventual liquidation, with the other main pieces purchased either by Rosneft or the other state energy champion, OAO Gazprom.

Who then speaks for the dismantled company? There are three camps:

•The Majority Shareholders. Five Khodorkovsky friends owned about three-quarters of Yukos at its demise. Their holding company, GML Ltd. (formerly Group Menatep Ltd.), is managed by Osborne, who is a tax lawyer at London’s Wiggin Osborne Fullerlove. About 70 percent of GML is owned by Leonid Nevzlin, now of Israel, to whom Khodorkovsky’s stake was transferred. GML does not struggle to pay its bills. For starters, the fallen oligarchs own most of $5 billion in Swiss bank funds that Russia failed to freeze, and $850 million from the sale of a Lithuanian refinery. Through offshore entities, GML is pushing claims for expropriation and unfair treatment under the Energy Charter Treaty before the Permanent Court of Arbitration in The Hague.

This case is the main event, as real damages are a distinct possibility. The final curtain is three to five years away.

•The Minority Shareholders. Two small European stockholder groups have separate arbitrations before the Stockholm Chamber of Commerce. RosInvestCo UK Ltd.—an affiliate of the American distressed-asset investor Elliott Associates—aims to recover up to $200 million, under the U.K.–Russia investment treaty, on an estimated purchase of less than $20 million. A Spanish fund called Renta 4 S.V.S.A. has brought a similar claim—funded by GML—under the Spain-Russia investment treaty. A final award for RosInvestCo is imminent, and for Renta about a year away, with parallel challenges to both proceedings under way in the Swedish courts.

These claims are substantial only to the degree that other European investors, accounting for perhaps 5 percent of the company, follow suit. U.S. and Russian investors, representing about 15 and 5 percent of Yukos, respectively, lack the benefit of an investment treaty [see "The Battlefields," page 21].

•The Former Management. A trio of American managers hired by Khodorkovsky—Steven Theede, Bruce Misamore, and David Godfrey—form a sort of government-in-exile in Houston and Honolulu. Crucially, they have persuaded the Dutch courts to disregard Yukos’s Russian bankruptcy proceedings. (Russia has appealed.) This has enabled the managers to maintain control over two sets of European subsidiaries, including Yukos Finance B.V. Through these entities, the managers can fund litigation—they estimate accessible funds at nearly $200 million—and pursue sizable asset claims.

The most prominent claim they are pushing is a petition filed before bankruptcy by Yukos Oil Company at the European Court of Human Rights (ECHR), arguing that Russia violated its right to property, as well as due process. (It is well established that the European Convention protects the rights of companies.) The ECHR claim is the only one that covers 100 percent of the loss.Although a first judgment on the merits is expected in 2010, the appeal to a so-called Grand Chamber of the court is likely to delay the end result another year or two.

If Russia’s strongest arguments were on jurisdiction—as Yukos lawyers claim—the adjudicators were unimpressed. Russia was unable to block the claims of the Yukos plaintiffs at either The Hague, at the ECHR in Strasbourg, or in Stockholm.

Russia thought it might get off the hook in The Hague because it never ratified the treaty under which the arbitration had been brought, the Energy Charter Treaty. No such luck. The tribunal showed persuasively that Russia routinely follows unratified treaties, while reserving the right to opt out, and that the Energy Charter Treaty contemplates such an arrangement.

Nor did it bother the Hague arbitrators that a treaty designed to protect western European investors in the Soviet sphere has enabled Russians to sue Russia through offshore entities. The arbitrators gave a strict textual reading to the treaty’s definition of “investment,” which focuses on the claimant’s place of incorporation. Like it or not, this was in keeping with virtually all arbitral precedent on the nationality of investors.

In the Stockholm arbitrations the Russians got two split decisions, and somehow still lost twice. The RosInvestCo panel ruled that the treaty under consideration didn’t apply directly, but the treaty’s “most-favored-nation” clause allowed them to incorporate a broader treaty. The Renta panel concluded the opposite on both points. Either way, the case moved forward.

At the ECHR in Strasbourg, Russia correctly observed that the victim and applicant, Yukos Oil Company, is dead. That fact made no difference to the court. “Human rights cases before the court generally also have a moral dimension,” the judges ruled, “which it must take into account when considering whether to continue with the examination of an application after the applicant has ceased to exist.”

To bar the claim, the court reasoned, would only encourage countries to kill companies.

In March the ECHR heard the case for- warded by Yukos’s former management. The confidentiality requirements of international arbitration mean that the arguments in the arbitrations at The Hague and in Stockholm will largely remain secret. But the story aired in Strasbourg underlies all the claims.

The central issue for each tribunal is the legitimacy of Yukos’s massive tax liability. Before its demise, Yukos had set up a series of shell companies to channel profits through Russia’s low-tax regional investment zones. In early 2004, Russia’s tax service ruled these companies invalid. This ruling had two effects.

First, Russia imposed on Yukos billions of dollars of corporate profit taxes that it had tried to dodge. (Yukos argues that Russia widely blessed such arrangements until it suddenly, for political reasons, imposed a retroactive commercial purpose doctrine with no roots in Russian law.)

Second, Russia imposed on Yukos even more billions in value-added tax (VAT)—even though oil exports were routinely exempted from VAT. Yukos had requested the VAT exemption through its shell companies. But while Russia imputed the shell profits to Yukos, it refused to impute the shell paperwork to Yukos. The result was a uniquely crushing tax burden. After the reassessments, Yukos’s tax burden for 2000–2002 ranged from 47 to 59 percent of revenue, according to the company.

“Look, you don’t have to understand the tax assessments to understand the motivations behind them,” says Covington’s Johnson. “If the motivation was collecting taxes, Yukos would never have been liquidated. That simply isn’t what any revenue service does if it wants to collect taxes, and it’s dealing with a very profitable enterprise like Yukos. A revenue service that’s interested in collecting taxes gives a profitable taxpayer time to pay. To my mind that’s always been the proof of political motivation.”

Some journalism accounts of the Kremlin’s motives focus on Khodorkovsky’s political ambitions, his purchase of political influence, and his funding of progressive nonprofits. Putin’s Oil by Martin Sixsmith gives primacy to Khodorkovsky’s public confrontation of Vladimir Putin over Kremlin-linked corruption, and the executive’s plan to sell a majority stake to Exxon Mobil Corporation. As soon as Exxon chief Lee Raymond told Putin of the plan, writes Sixsmith, Putin set loose the prosecutors.

Russia counsel Goldberg tells an altogether different narrative. The real story, he says, is that Khodorkovsky operated a fraudulent company and arrogantly obstructed justice when called to task. This was not true of Yukos’s peer companies, he says. OAO Lukoil ended its tax evasion as soon as it was confronted, and OAO Siberian Oil Company (Sibneft) truly invested in the low-tax regions. Goldberg argues that VAT tax is always applied formalistically, and if the fraudsters suffered in consequence, that was perfectly appropriate.

Goldberg rejects the basic premise of Yukos’s tale: that the company would have paid the taxes if only Russia had allowed it to. On the contrary, Goldberg says the oli­garchs of GML continued to pay themselves billions in dividends, while sitting on billions more. He flatly denies that Baikal, the purchaser of YNG, was a front for Rosneft, and he also notes that the price Baikal paid for YNG was not far below the unit’s low-end valuation. Ironically, he says, Baikal had to mask its identity—and was able to pay a lower price in the absence of competing bids—as a consequence of GML’s intimidatory threat of a “lifetime of litigation.”

The Kremlin’s supposed fear of foreign influence in the oil industry is nonsense, says Goldberg. Rosneft itself has gone public, and if the Kremlin wished to limit foreign control, it could have done so through regulation. The rest of the political speculation he dismisses as empty rumor.

The Hague arbitration might give both sides room to introduce political subtexts. Osborne says GML is not presently focused on proving the Kremlin’s xenophobia or corruption. But for its part, Russia plans to shovel at the oligarchs all the dirt it can find. In arguing that the claimants have “unclean hands,” it will likely dredge up the criminal charges brought at the trials of Yukos’s leaders in Russia, as well as critiques of Yukos’s corporate governance in the 1990s. Most fundamentally, Russia might attack Menatep’s controversial purchase of Yukos in 1996 for a bargain price of $309 million plus the assumption of $3 billion in debt, in return for allegedly financing Boris Yeltsin’s reelection.

Yukos’s counsel in the Hague arbitration is ready for any dirt flung his way. “The unclean hands defense will recycle all the accusations,” Gaillard says. “We may lose a lot of time on it. But it’s all made up.”

If Yukos or its shareholders can get past the merits to the damages phase of the proceedings, then everyone may need high-digit calculators. The potential damages are enormous, even on the low-end calculations. In the RosInvestCo arbitration in Stockholm, Russia has taken the position that, if an expropriation took place—which Russia does not concede—it took place when the first tax reassessment was made in April 2004, when the market value of the company was arguably as low as $30 billion (minus any legitimate tax offsets). RosInvestCo has taken the position that the expropriation took place in August 2007, at the end of liquidation. In the interim the price of oil had skyrocketed, pushing the company’s implied valuation north of $100 billion.

At the ECHR in Strasbourg, the debate has focused less on value than on who would recover and how. In a theatrical and rather personal oral argument, Russia’s barrister, Michael Swainston of Brick Court Chambers, hinted broadly that the case—filed on behalf of all Yukos shareholders—was a front for the oligarchs who make up GML. “M’learned friend won’t identify the shareholders who stand to gain from any compensation now awarded,” Swainston said in his peroration. “This court is not in the habit of awarding substantial compensation where such speculation is required.”

Yukos’s ex-managers, who are shepherding the ECHR case, respond that any award would be distributed to all Yukos shareholders under court supervision with the aid of a computer model. “The suggestion that this [litigation] is somehow being funded by Russian criminals is a joke,” says Cyrus Benson of Gibson, Dunn & Crutcher, who works on enforcement and arbitration for the independent Yukos entities controlled by the managers. “Our clients are real companies prosecuting and defending claims in the interest of marshaling assets.”

Strasbourg is very likely to find in the Yukos claimants’ favor. Statistically, the chances of an ECHR claimant winning on at least one claim, once its case has been admitted, is roughly 95 percent. The court is unlikely to diverge from the international consensus that the attack on Yukos was politically motivated. (Other European courts, ruling on various issues in the sprawling dispute, have tended not to side with Russia: The Dutch courts found the Russian Yukos bankruptcy invalid, the Swiss courts declined to freeze Yukos funds, and the British and Israeli courts refused Russia’s requests for extradition of GML’s principals. The ECHR’s legislative counterpart, the Parliamentary Assembly of the Council of Europe, broadly adopted Yukos’s account in a 2005 resolution.)

But Swainston is right that the ECHR is not in the habit of awarding substantial compensation, period. The chances of an ECHR claimant winning billions is roughly zero. The current record, very much an outlier, is $31 million awarded against Greece in 1997 for backing out of an oil refinery project. A more typical damages sum is the €50,000 levied against Russia for procedural violations in trying Khodorkovsky’s colleague Lebedev. The court has already suggested that the Yukos case was admitted mainly for the sake of establishing human rights principles, rather than to provide individual relief. Presumably an applicant with “moral” standing can only collect moral damages.

Could a Strasbourg result backfire on the Yukos camp? Some of its lawyers admit off the record that—depending on the court’s reasoning—an early, token damages award could hurt their only real chances of big recovery, in arbitration. Russia would certainly argue that it is preclusive.

“We couldn’t care less about the other disputes,” responds Gaillard, who represents the majority shareholders at The Hague. “[Our] tribunal has already said that [the ECHR claim] is a different action by different parties under a different treaty.”

RosInvestCo’s lawyer, John Townsend of Hughes Hubbard & Reed, is equally sanguine. “There’s no problem in international law with multiple remedies,” he says. “There’s a problem with multiple recoveries.” If the shareholders collect billions, and Russia wishes to offset a few euros from Strasbourg, these lawyers won’t complain.

The chief legal officer of independent Yukos goes further, and argues that a token win in Strasbourg would be a boon to the management team. “The ECHR is for us the linchpin, the first domino,” says David Godfrey. “When it falls in our favor, it should assist us everywhere else. Even if it’s just a moral victory, it will be very helpful.”

In practice, the ex-managers behind the ECHR claim seem focused on preserving their corporate foothold, and advancing a series of smaller but far-from-trivial asset claims by the independent Yukos entities. First, a determination by Strasbourg that Russia violated the European Convention on Human Rights would almost surely lead the Dutch Supreme Court to uphold its lower courts in disregarding the Russian bankruptcy. This would guarantee the independence of Yukos-in-exile, and would immediately unfreeze some $800 million left from asset sales that were permitted by the Dutch courts.

Yukos-in-exile could then go after Russian state business. The ex-managers have up their sleeves some $5–10 billion in arbitration claims against the other parts of Yukos, now mostly owned by Rosneft or Gazprom, that are based mainly on internal loans within the old Yukos structure. Russia counsel Jay Alexander of Baker Botts says disdainfully of these claims: “If I take your money from you without paying you for it and then lend it back, do you owe me the money with interest?” Yet independent Yukos has already won four such arbitrations in Russian-based arbitration, and—in a little-noted development—Russia’s Rosneft has posted $650 million in security pending enforcement proceedings in the Netherlands and Britain. The $5–10 billion in forgotten claims will doubtless be defended ferociously, but they look to be highly enforceable.

Finally, there are the damages claimed by the majority shareholders’ arbitration in The Hague. GML will likely claim more than $100 billion with interest. But enforcement will be the rub: Even if Gaillard is correct that token damages in Strasbourg will not reduce the judgment in The Hague, the oligarchs would face a fearsome challenge to enforce against Russia itself. “No one on earth is stupid enough to believe they’re going to extract tens of billions from the Russian Federation,” says Bruce Bean, a former partner in the Moscow offices of Clifford Chance who now teaches at Michigan State University College of Law.

Maybe not. But Gaillard, for one, professes faith in international law. “Investment treaties are very effective at compensation,” he says simply. “We have the New York Convention [on the Recognition and Enforcement of Foreign Arbitral Awards].”

To enforce tens of billions against Russia would require an immense number of small opportunistic asset seizures—or a groundbreaking decision to pierce the corporate veil of state-owned companies like Rosneft. At the very least, it would make commercial life difficult for Russia, and give the Yukos oligarchs leverage in potential talks with Russia, whether for money or for the freedom of their caged brethren Khodorkovsky and Lebedev.

The director of the majority shareholders group, Timothy Osborne, who famously threatened “a lifetime of litigation” against Yukos’s enemies, says that his words have often been misinterpreted. But he doesn’t back away from them. “It was the Russian Federation that stole our assets, shares, and company,” Osborne declares. He adds: “We will pursue a lifetime of litigation against the Russian Federation, of which I consider Rosneft to be a part. I didn’t mean we’d sue everybody at every turn, and I didn’t mean we’d keep going if we’re done. If it takes a lifetime, it takes a lifetime. Looking at how it’s going, it’s looking like a lifetime.”