Leonid Nevzlin, whose share of the Yukos award is roughly $33 billion, seated beside his collection of Japanese ivory dolls in June 2005 in Herzlya, Israel.
Leonid Nevzlin, whose share of the Yukos award is $35 billion, seated beside his collection of Japanese ivory dolls in June 2005 in Herzlya, Israel. (Photo by Esteban Alterman)

To hold the Russian Federation liable for its cynical plundering of OAO Yukos Oil Company, as a tribunal in The Hague did in a historic ruling announced Monday, is a triumph for the oft-criticized system of investment arbitration. Unlike the European Court of Human Rights in Yukos v. Russia, the arbitrators in Yukos Majority Shareholders v. Russia passed the test of speaking truth to power. The tribunal belied the critique that investment arbitration is always at odds with human rights. To the contrary, investment arbitration is a powerful club for the disempowered (but not impoverished) to wield against the body that has always been the worst abuser of human rights: the state.

So it’s easy to see the justice in taking $50 billion from Russia. The hard part is to justify giving $50 billion to five wealthy friends of Mikhail Khodorkovsky.

As I wrote in a previous column, “We live in an age when wealthy investors (individual or corporate) enjoy special advantages in both law and politics—but nothing trumps the power of the state. When an oligarch is persecuted, I’m on the side of the oligarch.” At the same time, we should not give persecuted oligarchs a free pass.

Let’s review some not-so-ancient history. In 1995—as part of the “loans for shares” program that preceded Boris Yeltsin’s reelection—Mikhail Khodorkovsky’s Bank Menatep lent the government money in return for the right to organize the auction that would privatize Yukos. Russia alleges that Bank Menatep rigged the auction by blocking rival bidders and then bought what became the crown jewel of the Russian economy at an absurdly low price, partly using Yukos’ own money. In late 1995, Menatep entities bought 78 percent of Yukos for $309 million, plus an additional investment obligation of $200 million and an assumption of $3 billion in debt. Menatep entities picked up the rest in 1996, with the total price usually given as $350 million.

Eight years later, Russia grabbed Yukos back in a singularly underhanded way. Khodorkovsky went to prison, and handed off his half of the company to trusted colleague Leonid Nevzlin. The “Majority Shareholders” in this week’s headlines are Nevzlin and four friends. Together they controlled about 70 percent of Yukos through offshore investment units of Group Menatep Limited. Together they asked a panel in The Hague to hold Russia accountable.

Russia told the arbitrators that these men got rich the dirty way, and claimants with unclean hands cannot recover. The fallen oligarchs responded that Russia set the rules in the privatization, and that any alleged irregularities are based on innuendo. They also noted that Yukos was a commercial mess at the time of its original auction. Much of its ultimate value is owed to their skillful management, and Khodorkovsky’s.

The tribunal agreed that men who came by their investment illegally are not entitled to the protection of an investment treaty. But it declined to wade into the murky facts of Russian state capitalism in its muckiest days.

The arbitrators reasoned simply that Bank Menatep is distinct from the Group Menatep entities that acquired Yukos shares in 1999 and now seek to protect their investment. As a result, the legality of capitalist Russia’s sinful founding moment was never properly examined.

Nesting inside an opinion of magisterial clarity and wisdom, the tribunal’s reasoning on unclean hands is formalistic and unsatisfying. Ironically, in a key holding, the arbitrators faulted Russia for excessive formalism—in refusing to attribute the tax paperwork of Yukos subsidiaries to their parent. Yet the arbitrators themselves fell back on formalism in refusing to draw a line from Bank Menatep entities in 1996 to Group Menatep entities in 1999. To the naked eye, the real parties in interest appear highly similar. Nonetheless, the arbitrators accepted the oligarchs’ corporate games, and without examining the cleanliness of their hands, gave them $50 billion.

We come now to the battle over enforcement, where the issue of corporate formality pops up yet again.

In order to collect their $50 billion, the claimants may need courts around the world to treat Russian state-owned enterprises as instrumentalities of state—and to pierce the corporate veil. It pains me to say it, but there would be some poetry if the claimants are defeated by a rigid adherence to corporate form on the part of enforcing courts.

Of course, it would be even more poetic if the victims of the Yukos affair enforce their judgment against OAO Rosneft, which was built on the carcass of their former company. The YNG unit of Yukos, which passed to Rosneft by farcical means in late 2004, accounted for $56 billion of Rosneft’s $80 billion value in its 2006 IPO. As Group Menatep counsel Emmanuel Gaillard of Shearman & Sterling has said, “Rosneft is Yukos by another name.”

In the most poetic ending imaginable, the oligarchs would return their winnings from Rosneft to the Russian people, whence they derived. The most fitting destination for this $50 billion would be to recreate the Open Russia Foundation. Such a step would honor the noblest instincts of Mikhail Khodorkovsky and Leonid Nevzlin, who launched Open Russia in 2001 to promote Russian civil society on the model of George Soros.

The legacy of Yukos and its arbitration should be to create a counterweight to an overweaning Russian state. Its appropriate mission would be to prevent a repetition of Russia’s excesses, some well-proved, and some never-adjudicated.

Does Leonid Nevzlin have a sense of poetry?

Please see here for The American Lawyer’s full coverage of the Yukos arbitration, including the definitive inside story of how Shearman persuaded the tribunal to hold Russia to account.