YUKOS DECISION COULD BE MAJOR IRRITANT FOR YEARS

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 002945

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DEPT FOR EUR/RUS, EEB/ESC/IEC GALLOGLY AND GREENSTEIN,
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DOC FOR JBROUGHER
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E.O. 12958: DECL: 12/03/2019
TAGS: EPET ENRG ECON EINV PREL RS
SUBJECT: YUKOS DECISION COULD BE MAJOR IRRITANT FOR YEARS

Classified By: Ambassador John R. Beyrle for Reasons 1.4 (b/d)

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YUKOS CASE TO DRAG ON FOR YEARS
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1. (SBU) The November 30 decision by a tribunal of the
Permanent Court of Arbitration in the Hague that Russia is
bound by the Energy Charter Treaty (ECT) was a major blow to
the GOR. According to representatives of the plaintiffs in
the case, led by former Yukos shareholders now known as GML
Limited, the tribunal decided Russia, which had signed but
not ratified the ECT, must abide by the investment protection
provisions of the treaty. Furthermore, the tribunal decided
that the plaintiffs were entitled to those protections. The
ruling thus paves the way for the plaintiffs to pursue a suit
against the GOR based on their claim that the dismantling of
Yukos, then Russia's largest oil company, amounted to
expropriation. The plaintiffs have said they could be
entitled to compensation in the range of $100 billion if they
win, and that they could ultimately attach GOR assets abroad
if Russia refuses to pay damages. The GOR has thus far
refused to comment on the decision.


2. (C) Several legal experts with whom we spoke about the
case believed Russia would fight the case vigorously and that
it could drag on for many years, likely much longer than the
three years reported in various press articles. Furthermore
these lawyers and other analysts, citing both precedent and
the general propensity of the GOR, believed strongly that
there would be little chance of Russia complying with a
ruling involving multi-billion dollar damages. As some of
our contacts pointed out, even if the plaintiffs ultimately
win damages, the GOR would also likely fight every attempt to
attach GOR assets abroad. PM Putin's views on the matter
were evident in his harsh attacks on Yukos and Khodorkovsky,
its jailed former owner, during his December 3 annual
question and answer session with the Russian public (septel).
One contact suggested that Putin's portrayal of Yukos as a
criminal enterprise, and even Khodorkovsky's second trial,
are partly designed to support Russia's defense in Yukos
cases in international courts. Given Putin's direct interest
in the issue, we expect Russia to offer no conciliation in
the matter.

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WIDE-RANGING IMPLICATIONS
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3. (C) This decision, while only the first step in a long
process, is significant. One lawyer with whom we spoke,
noting the huge sums of money involved, called it the "legal
equivalent of nuclear war." The ruling and the coming
proceedings could have a major impact on the perception of
Russia's investment climate for years to come. If the GOR
ultimately wins the case, it could escape serious damage to
its image. However, if the GOR loses and shrugs off the
ruling, it will send a signal that investors in Russia cannot
be certain of international protections related to their
investments. Furthermore, the case (and any possible future
ones) will constantly remind international investors of the
perils of investing in Russia.


4. (C) The case could also have consequences for a broad
range of entities beyond investors in Russia's energy sector.
If the case involved a few million dollars, or even several
tens of millions of dollars, its broader impacts might be
more limited. However, if damages are awarded anywhere near
the scale suggested by the plaintiffs, the case could result
in major legal and diplomatic headaches for any country in
which Russia has assets. While some analysts have pointed
out that Russia's assets abroad would never approach the sums
claimed by the plaintiffs, the plaintiffs have raised the
possibility of seizing (state-owned) Rosneft's oil shipments
abroad, (state-owned) Gazprom's gas shipments, or
(state-owned) Aeroflot's airplanes. Foreign governments
could thus find themselves in the uncomfortable position of
having to enforce their own courts' orders against what would
surely be enormous political pressure applied by the GOR.
While such scenarios wouldn't play out for several years, if
ever, the case merits close scrutiny in the meantime.

MOSCOW 00002945 002 OF 002


Beyrle