Corporate Sovereignty Tribunal Makes $50 Billion Award Against Russia
from the arbitrary-arbitrals dept
Techdirt has been writing about the dangers faced by nations that sign up to treaties containing corporate sovereignty clauses for some time now. These chapters are typically included in so-called trade agreements like TAFTA/TTIP and TPP -- although they actually go far beyond regulating trade -- but are also found elsewhere. For example the Energy Charter Treaty (ECT) includes one, as Germany found to its cost when the Swedish company Vattenfall used the investor-state dispute settlement (ISDS) mechanism to claim €3.7 billion after the Germany state decided to phase out nuclear power stations -- thus reducing Vattenfall's future profits. Now the ECT's corporate sovereignty chapter has struck again on an even more staggering scale:In an historic arbitral award rendered on July 18, 2014, an Arbitral Tribunal sitting in The Hague under the auspices of the Permanent Court of Arbitration (PCA) held unanimously that the Russian Federation breached its international obligations under the Energy Charter Treaty (ECT) by destroying Yukos Oil Company and appropriating its assets. The Tribunal ordered the Russian Federation to pay damages in excess of USD 50 billion to our clients who were the majority shareholders of Yukos Oil Company.That comes from a press release issued by the lawyers acting for the Yukos shareholders, who are also doing quite nicely:
The Tribunal also ordered the Russian Federation to reimburse to our clients USD 60 million in legal fees, which represents 75% of the fees incurred in these proceedings, and EUR 4.2 million in arbitration costs.Even for an oil- and gas-rich country like Russia, this is obviously a massive amount of money. A detailed and insightful post by Kavaljit Singh puts it in context:
In relative terms, the compensation award is equivalent to around 11 per cent of Russia's foreign exchange reserves, 10 per cent of annual national budget and 2.5 per cent of country’s GDP. Given the magnitude of compensation, the Award could be more damaging to the Russian economy than all the economic sanctions imposed by the West against Russia for its actions in Ukraine.He goes on to point out one of the most worrying aspects of these awards by tribunals:
What is most astonishing is that the arbitral tribunal has not provided any standard or credible rationale behind awarding $50 bn in compensation to claimants. The calculations of total damages put forward by claimants are based on assumptions and hard evidence is lacking. The tribunal found that the claimants contributed to 25 per cent "to the pejudice they suffered at the hands of the Russian Federation." Hence, the amount of damages to be paid by Russia is reduced by 25 per cent to $50 bn from $67 bn. In its lengthy 615-page verdict, no explanation has been given by the tribunal on how did it arrive at 25 per cent of claimants' contributory fault? Why not 30 or 40 or 50 per cent?The arbitrary nature of these awards, and the fact there seems to be literally no limit to the amount that might be awarded, are just some of the many problems afflicting investor-state dispute settlements. Singh notes another disturbing aspect of the current verdict:
It needs to be emphasized here that Russia only accepted the provisional application of the ECT (pending ratification) in 1994 meaning that the country will only apply the Treaty "to the extent that such provisional application is not inconsistent with its constitution, law or regulations." Same was the approach adopted by Belarus, Iceland, Norway and Australia.That is, although Russia signed the treaty, it never ratified it. And yet under its terms, it can still be sued, as here -- another good reason never to sign up to these kind of agreements. Whether it will pay up is quite a different matter, of course. As Singh points out:
Russia never ratified the ECT and announced its decision to not become a Contracting Party to it on August 20, 2009. As per the procedures laid down in the Treaty, Russia officially withdrew from the ECT with effect from October 19, 2009.
Nevertheless, Russia is bound by its commitments under the ECT till October 19, 2029 because of Article 45 (3) (b) states that "In the event that a signatory terminates provisional application…any Investments made in its Area during such provisional application by Investors of other signatories shall nevertheless remain in effect with respect to those Investments for twenty years following the effective date of termination."
Shareholders will soon find it extremely difficult to enforce the Award as Russia has already decided to challenge it. The shareholders could seek to seize commercial assets of Russia (owned by country's state-owned corporations and sovereign wealth funds) in 149 countries which are signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Award (popularly known the New York Convention).As he writes, the enormous award against the Russian government should stand as the starkest warning yet about the dangers of entering into these kinds of agreements:
In any case, it is going to be a time-consuming and uphill process to enforce the tribunal Award in 149 contracting parties of New York Convention.
Even though this Award is related to ECT, it provides important policy lessons to other countries which have already signed or currently negotiating bilateral investment treaties (that allow investor-to-state arbitration -- ISA) without any consideration of consequences and potential costs.Here's why:
The existing investment protection agreements have failed to address the balance of rights and responsibilities of foreign investors as it offers numerous legal rights for investors without requiring corresponding responsibilities for them.That's a hugely important point that all those countries taking part in the negotiations for TAFTA/TTIP, TPP and CETA would do well to consider carefully -- or they may find themselves on the wrong end of $50 billion award, as Russia now does.
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Filed Under: corporate sovereignty, energy charter treaty, isds, russia
Companies: yukos oil company
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Re:
I am surprised that they get hit for a treaty they have not even ratified.
That would seem to imply that if the European Commission (which is not democratically controlled and basically a bunch of lobbyists) goes on a treaty rampage without the parliament actually ratifying any of that, the bills for that will still end up at the tax payers.
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Second, the idea that even when they hadn't fully signed in to the 'agreement', and in fact turned it down, they still fell under it's rules seems just a titch out there. If other corporate sovereignty agreements have clauses like that, the various countries who've signed up with them are pretty much screwed, since even if they drop the 'agreements' now they'd still be beholden to them.
Hopefully this will serve as a good warning to others to flat out reject and refuse to sign any treaty or agreement that comes packaged with any corporate sovereignty clauses in the future.
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Re:
So the case is pretty clear in terms of responsibility and guilt has been concluded pretty well before too.
The problem here is that the arbitration seems arbitrary. Corporate sovereignty is crap, but when you risk these kinds of nationalisations if you invest in a business in a certain country, the interest in investing there will be low.
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Re: Re:
The story seems more complicated however as it appears that the shareholders themselves acquired the company - initially from the Russian government - through corruption so it seems a bit hypocritical of them to complain about the Russian government's corruption in stealing it back.
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Re: Re: Re:
I guess there is a certain level of politics in it: Do you punish all investors at the time of the breakup or do you let the corrupt ones get away with it because of clean ones coming in?
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Re: Re: Re: Re:
"Yeah Russia since the dissolution of the Soviet Union was extremely corrupt.."
err 2nd try:
"Yeah Russia since the dissolution the Tsarist regime was extremely corrupt.."
3rd try:
"Yeah Russia in the later years of Tsarist regime was extremely corrupt..."
Bah:
"Yeah Russia has always been extremely corrupt..."
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I don't think this is quite the same sort of dispute
But this case doesn't look to be that sort of case. Russia was being charged with "stealing" the Yukos through various methods. That the head of the company was known to be anti-Putin lends their claims a certain credibility.
If that is the case, then this might be the sort of thing that actually should be covered by a treaty. Much in the same way that eminent domain, compulsory purchase, etc requires reasonable compensation.
But that then would lead to the question of how the company was valued at $50 billion. An even bigger question is how on earth do you spend $60 million on legal fees.
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Re: I don't think this is quite the same sort of dispute
Bribes?
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Re: I don't think this is quite the same sort of dispute
Based on my sample of one, lawyer fees are often a percentage of the value at issue. So the 60 million is nothing more than a fixed percentage of whatever they won in this case.
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Re: I don't think this is quite the same sort of dispute
This includes taking into account things like: weather patterns, governmental impacts on your investment, government corruption, government stability, crime, phase of the moon if it's relevant to the investment, rate of return and so on.
The riskier the investment, the bigger the return IF it pays off.
There is NEVER a guarantee of an investment breaking even, let alone paying off. Even government bonds are not 100% (tho generally speaking pretty close to it, ask those people who invested in Argentinian government bonds in the 90's how safe that was ...) secure.
If you invest in a region of high instability or corruption, that should be taken into account in the investment. Whats the chance of losing it all? Whats the potential return? Does the potential return warrant the risk of losing it all? Can I afford to lose what I've invested in that country if it does go down the tubes?
Unless you have answers to all those questions, you shouldn't be investing. If the Risk vs Reward equation is not in your favour, don't invest. If you can't afford the downside (losing it all) don't invest.
You don't need corporate sovereignty rules. Either you trust the courts in the country to not be corrupt, or you do. And that should be taken into account:
"Yes I trust the courts, I trust the government, so it's a safe investment, so I only expect 5%p.a. return"; or
"No, the courts are corrupt, the government is corrupt, so I won't invest what I can't afford to lose, and since I have a good chance of losing it, if it pays off I expect a 60%p.a. return."
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$50,000,000,000.00
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Re: $50,000,000,000.00
What are the odds?
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The owners of the assets in the end are Putin's best buddies. The gas and oil industries are pretty much what keeps Russia afloat these days, and getting his friends to control the taps is key to Russia being able to bully countries in Eastern Europe and such.
50 billion ain't nothing compared to what shareholders lost.
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Re:
Yes, and?
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Re:
Maybe, maybe not, the issue is that they seem to have pulled that '50 billion' number out of thin air, with no backing evidence to support it. Had they done that, provided documented evidence to support the claimed 'losses', and given what Russia had apparently done in this case, a lot less people would have a problem with this I'm guessing.
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Tort reform removes accountability for corp[orate negligence.
Sounds like an adolescent wet dream.
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Pffft
If these things can claim sovereignty, then one should be able to declare war against them. Make them an enemy of the state.
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If there is ever a just case for this kind of decision...
I mean, this is a situation where - to enrich his own coffers, and bolster his power, Putin jailed the owner of the company for a decade, and broke up and seized the country. The charges are pretty much universally agreed to be trumped up. And there's no redress, because Russia is pretty much under Putin's thumb.
So... what's the plan? Because while the idea of "corporate sovereignty" makes me want to throw up, it makes sense to me to have SOME kind of recourse when a dictator simply steals your company.
While there's no question that if this kind of treaty IS the solution, there need to be much better checks and balances, written standards, etc., I think it's a much tougher question than Glyn makes it out to be.
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Re: If there is ever a just case for this kind of decision...
And if you do build a company there, become friend with him,so he doesn't steal your company?
From what I've read, that guy was asking for Putin to do something to bim, and Putin did.
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Re: If there is ever a just case for this kind of decision...
If you're doing business in a country where you have no such recourse, then you're a fool. Don't do business there.
And THAT is the pressure that will cause nations to develop their own laws to prevent such theft. If they don't they get no outside investment.
Things like ISDS are 100% unnecessary and harmful.
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Re: Re: If there is ever a just case for this kind of decision...
In that case, then hopefully USA will NUKE Russia - since you don't seem to think Russia should follow the Rule of Law.
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Re: Re: Re: If there is ever a just case for this kind of decision...
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Re: If there is ever a just case for this kind of decision...
Secondly, Yukos was mostly bought by Chodorovsky for 310 million, even though it was probably worth far more. Putin is of course horrible, but, in a way, Chodorovski and the shareholders stole this money from the Russian people through corrupt officials, and they do not deserve the 50 billion either:
"[O]wnership of some of Russia's most valuable resources was auctioned off by oligarch-owned banks... Although they were supposedly acting on behalf of the state, the bank auctioneers rigged the process-and in almost every case ended up as the successful bidders. This was how Khodorkovsky got a 78 percent share of ownership in Yukos, worth about $5 billion, for a mere $310 million..."
— http://en.wikipedia.org/wiki/Yukos_Oil#Privatization_.281995.29
Third, if this had been a Western company wronged by the Russian government, the more desirable situation would be for its country to stick up for it, not enabling a few very rich people to get an arbitrary amount of money from a country through an arbitrary tribunal. As in the WTO, it should be country v. country, if anything.
Lastly, in general, I think nationalisation and otherwise depriving foreign companies of assets or profits is not always so bad per se, especially if the company's interests legitimately conflict with those of the country. And companies are free not to invest in a country that might do this. So do we need any mechanism at all to fight this?
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Pacta sunt servanda
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Re: Pacta sunt servanda
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Re: Re: Pacta sunt servanda
A state government is not some poor granny who got scammed by a doorstep seller due to obfuscatory fine print. If a state signs a treaty, they are expected to have had a horde of lawyers double-check every comma before.
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Re: Pacta sunt servanda
Treaties are normally not valid until Ratified.
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Re: Re: Pacta sunt servanda
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What about the minority shareholders?
So, screw the little guy shareholders who didn't have enough stock to be declared a 'majority' shareholder?
Never have I seen a more blatant admission that these measures are met to protect the rich, not the middle class or poor who also happened to have some investments at stake in a foreign country. But hey, it's consistent with how collection agencies never pay up the money owed to the little guys.
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Re: What about the minority shareholders?
In arbitration, I am not sure how that kind of thing works. If it is only to protect majority shareholders and companies against legislation, the problems of this kind of arrangement should be obvious since "due process" and/or "equality to the law" is basically non-existance in that kind of environment...
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does that 'principle' work for the 99% too ? ? ?
but if i get fired, can't i sue for 'loss of future profits' ?
if not, why not ?
ain't i as good as any korporate-person ? ? ?
(don't answer, i already know...)
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Re: does that 'principle' work for the 99% too ? ? ?
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US
Well we already know the answer to that from the WTO case between the US and Antigua.
Don't expect Russia to behave any differently.
(And by the way the WTO that found against the US is far more fair, open and even handed than the tribunals the rule on the investor-state disputes)
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You simply can't lose what does not exist yet.
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…unless the people running the nation are actually working for the corporations rather than the nation itself.
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Finally! At last!
https://en.wikipedia.org/wiki/Special_301_Report
But they won't be messing with paltry sums like $50 Billion. After all, the RIAA says that copyright infringement alone is worth $75 TRILLION. (Just google for 'RIAA 75 trillion'. But do it quick before someone uses the 'right to be forgotten / censored'.)
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Re:
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Err, Russia DID steal/destroy Yukos and arbitrarily imprison its founders
Eff Putin and Russia.
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