20 years later: why Russia proves the illegality of the privatization of Yukos

On March 23, the Russian news Agency Interfax reported that Russian law enforcement agencies uncovered evidence that former top managers of Yukos had received the company’s shares illegally, on March 25, the official representative of the Investigative Committee Vladimir Markin told what the basis of this version: the auction of shares in Yukos was orchestrated, and the winner paid other people’s money (clients of Bank “Menatep”). “Thus, the shares were received free of charge Khodorkovsky, on other people’s money, effectively stolen”, — concluded the representative of the RCDS.

Why do the authorities remembered about the privatization of Yukos?

Logic is simple: if the purchase of Yukos was illegal, says Markin, then the former owners of Yukos had no right to sue Russia in international arbitration in the Hague. In July 2014, the court awarded former Yukos shareholders Hulley Enterprises, Yukos Universal and Veteran Petroleum compensation of $50 billion to give it to him, they would have to part with a quarter of all incomes of the Federal budget for 2015. And for that giant amount accrue interest: now they are approaching $1 billion.

Russia refused to pay, but former shareholders have an international instrument — the enforcement of the award in the countries of the new York Convention. Hulley, Veteran and Yukos began with the fact that petitioned for recognition of the decision on the $50 billion in the US, the UK, Belgium, France and Germany, as in France and Belgium has already secured the seizure of assets more than €1 billion. Among them are, for example, land in Paris on which to build a Russian Orthodox Cathedral (the project is financed from the budget and is estimated at €170 million). At risk are the assets of state-owned companies and state-owned enterprises: several Federal assets already frozen, ready to take the risk of VEB (the state Corporation) and Gazprom (open joint stock company).

Russia hopes that if her lawyers can prove in the courts of the third countries that the privatization of Yukos in the mid-1990s were conducted with gross law violations, this could be the argument that the courts rejected the former shareholders in the recognition and enforcement of Hague decisions on $50 billion Operating in Russia for foreign lawyers already use this argument in the courts of the Netherlands and the USA. Thus, in the court of the district of Columbia protect Russia lawyers White & Case argue that the “oligarchs” took over Yukos, “by deception of the Russian Federation during the pledge auction in 1995” and hid from the Hague arbitration Tribunal, the fact of its “fraud”.

Key date for Russia in challenging the decision of the Hague — April 20, 2016, when the district court of the Hague plans to rule on the legality of compensation at $50 billion ways to review on the merits the decision of the Hague arbitration in Russia, but the national Dutch court (as the seat of the arbitration was the Hague) to set aside an award on limited grounds. If a Dutch court will side with Russia, courts in most jurisdictions are likely to refuse to execute an arbitral award in favor of Yukos shareholders, as previously reported, although in countries such as France, Austria or Belgium, courts can continue to rely on the verdict of the arbitration Tribunal of the Hague.

“We must pay tribute to Mr Markin. This is a rare case where the TFR does not hide its objectives: they’re somehow trying to discredit the decision of the Hague arbitration”, — says the lawyer Konstantin Rivkin representing interests of former head MFO “Menatep” Platon Lebedev. According to him, the logic of the investigation in this case is: Russia will not fulfill the decision of the arbitration court including the fact that former shareholders of Yukos illegally received oil company. But, said the lawyer, the Statute of limitations on all possible articles on which the TFR may bring charges in connection with the privatization of 1995 has expired.

Why the Hague Tribunal did not set about clearing up the question of the legality of the privatization?

Myself Hague arbitration was recognized in the $50-billion-dollar decision, that “an investor who invested in the host state solely as a result of its fraudulent actions or violations of the law of the host state, should not benefit by the Energy Charter Treaty” (ECT, it sued the former owners of Yukos and the Russian Federation). “The court agrees that the plaintiff has no right to use remedies under the ECT if its investments have been made in bad faith or in violation of the law of the host state”, — was stated in the decision.

The reason the court did not parse the legality of the privatization transactions is that, according to the court, the acquisition of the plaintiffs (Hulley, Yukos and Veteran) of the shares of Yukos were lawful and have been since 1999, while the alleged illegal actions in the framework of the privatization of Yukos were committed in 1995 and 1996, “Bank Menatep and the oligarchs — society and by persons not affiliated with the plaintiffs, one of which — Veteran — did not even exist”. Russia “has failed to establish that the alleged unlawful conduct [on the privatization of Yukos] sufficiently linked to final deal, which the plaintiffs exercised their investments”, stated the judgement. Russia disagrees and insists that the entire chain of transactions — from the pledge auction in 1995 and to the consolidation of the majority of Yukos shares on the balance Hulley to the early 2000s — was one big fraud. These shares never left from under the control of “oligarchs”, but only moved between offshore companies dummy during the “secret” fictitious transaction, approves Russia with reference to the analysis of the movement of shares on the register of shareholders of Yukos.

Who is behind Hulley, Yukos Universal and Veteran Petroleum?

Hulley Enterprises and Veteran Petroleum (Cyprus) and Yukos Universal (Isle of man) were the plaintiffs in Hague arbitration as owners of more than 70% of actions of Yukos at the time of filing of the claim in 2005. Hulley and Yukos Universal (Veteran controlled by the latter) are 100% subsidiaries of Gibraltar Group Menatep Limited (GML). In turn, for GML are seven trusts in Guernsey, the beneficiaries of which are Leonid Nevzlin, Platon Lebedev, Vladimir Dubov, Mikhail Brudno and Vasily Shakhnovsky. Mikhail Khodorkovsky officially ceased to be a beneficiary of these trusts in 2005, as he was replaced by Nevzlin. Khodorkovsky has repeatedly said it will not receive any financial benefit from the decisions of the Hague arbitration and that after his arrest he transferred the shares to his Deputy GML Nevzlin. “Shareholders of group “Menatep” are trusts. Beneficiaries of trusts I and several of my friends who ultimately are the potential beneficiaries of these funds”, — said Leonid Nevzlin in July 2014 in an interview with “Radio Liberty”.

Is it true that the privatization of Yukos was unfair?

In 1995, about a year before the presidential election, the government decided to privatize the largest state assets through auctions collateral. This plan was to ensure the re-election of Boris Yeltsin by supporting the largest core banking groups. Scheme shares auctions were as follows: the government receives a loan from a private company under the pledge of shares in state-owned enterprises, and in case of default the lender may foreclose on the collateral. The sense was that the business receives the property of today, but retains her tomorrow just in case of defeat of Communists on elections.

Plan “a loan in exchange for stocks” in March 1995, the government presented three banker — the head of ONEXIM Bank Vladimir Potanin, the head of Bank “Menatep” Michael Khodorkovsky and the head of the Capital Bank of savings of Alexander Smolensky. “In March 1995, the idea of mortgaging auctions, which subsequently led to a barrage of criticism. I do not disown the authorship of this idea, but in the process of implementation has been adjusted beyond recognition,” wrote Potanin in 2000 in the corporate magazine “Interros”. Among the most significant changes compared to the original idea of mortgaging auctions it is called, for example, the ban on the participation of foreign investors.

At the Deposit auction in December 1995, it sold a 45% stake in Yukos. The winner became joint-stock company “the Lagoon”, the guarantors of which were Bank Menatep, Tokobank, and Capital Bank of savings. These three banks were the guarantors and the sole opponent of the “Lagoon” — JSC “Reagent”. With a starting price of mortgaging auction of $150 million “Reagent” offered $150,1 million, and “Lagoon” — $159 million a year, after the state failed to repay the loan, the Laguna sold his stake of Yukos of the company “Mont Blanc”, which was also affiliated to “Menatep”.

The competition they tried to compete with the consortium of Alfa-Bank, Bank “the Russian credit” and Inkombank, but it have not admitted to trading on formal reasons — some of the necessary components for auction they are made in the form of t-bills that did not suit the organizers. The participants of the consortium on the eve of the auction held a press conference where he stated that they are against “unequal conditions created for the participants”. In particular, they pointed to the fact that “Menatep” not only in fact had intended to participate in the auction, but was one of its organizers, and was going to use the funds of the Ministry of Finance (the government has placed on Deposit in this Bank $120 million). However, their attempts to challenge auction results in court have been unsuccessful.

Dishonest were other auctions. So, during a trial in London in 2011, Roman Abramovich has admitted that the auction of Sibneft was fictitious and it was initially agreed that to win it needs the structure controlled by him and Boris Berezovsky. Moreover, Abramovich said that most of the money for the purchase of Sibneft it received from the enterprises of the company who have taken loans against future oil supplies.

In 2014 in an interview with “Vedomosti” Khodorkovsky argued that when the privatization issue from buyers “was not the money that you have to pay to the state, and in the presence of human resources” and for the shares of Yukos “there was no competition in that sense.” He stressed that “alpha” with partners herself refused to participate in the auction, and then changed his mind: “the problem with [the President of Inkombank Vladimir] Vinogradov, and “alpha” has arisen precisely because at the start they said, “No, we don’t need”, and then said, “We also want to participate.”

Now Khodorkovsky denies the charges Markina. On Friday, the businessman said that the money for the purchase of shares of Yukos in the form of loans gave banks “Menatep”, “Capital” and “Most” and “some of [his] exporting enterprises of the defense complex”. The question was discussed whether in advance the winner of the auction, Khodorkovsky answered: “the Winner [of the auction] definitely not nominated”. On Saturday on his page on Facebook he wrote that the privatization of Yukos was “unfair”, but as “all other” participants shares auctions, he bought the company “the law then”.

“We could not choose between “honest” or “dishonest” privatization, because privatization implies a fair clear rules, established a strong government that can enforce the law,” recalled one of the authors of the Russian privatization Anatoly Chubais in an interview with Financial Times in November 2004. “We have no choice. If we had not conducted a security privatisation, the Communists would win the elections in 1996, and it would be the last free election in Russia, because these guys just so the government does not give,” he explained.

In the early 2000s, Khodorkovsky was offered to the winners of mortgaging auctions paid extra for privatization. A note through the then Prime Minister Mikhail Kasyanov was passed to Vladimir Putin, but supposedly he said, “Now is not the time,” Khodorkovsky told Vedomosti. On Saturday, he said in his Facebook that together with partners can return to the budget of $5-7 billion.

Russia has new evidence of the illegality of the privatization of Yukos?

Russia still at the stage of case consideration in the arbitration of the Hague declared that the Yukos shares were originally acquired for the violations, and continues to put forward this thesis. In particular, in an American court in October 2015 Russia presented the testimony of Lithuanian GITAS of Povile of Anilionis, who ran a company called RTT. This company, according to Anilionis, mainly dealt with the fact that created the entity, the function of which was, “in fact, hiding the real owners”. All these companies only look independent, but in fact actually controlled by the owners of the Bank “Menatep”. According to the testimony of Anilionis, the network of these companies include Russian organizations 450-500 100-120 plus offshore. “In a private conversation, Mr. Lebedev, I was informed that Mr. Khodorkovsky wanted to buy OAO “NK “YUKOS”, influencing the lien auction,” says the witness. Anilionis argues that in order to participate in the auction PTT established a shell company — “the Lagoon” and “Reagent”. In a U.S. court and were presented similar testimony of Arkady Zakharov — a former employee of PTT.

Is it worth it now to be afraid of other participants in the privatization of the 1990s?

30 January 2012 the newspaper “Vedomosti” published an article by Vladimir Putin “About our economic problems”. “Many in society say that privatisation 1990-h years, including mortgaging auctions, was dishonest. And I completely agree. But taking ownership now, as some propose, would simply stop the economic paralysis companies and a surge in unemployment,” wrote Putin.

October 2, 2014 at the forum “VTB Capital” “Russia calls!” Putin repeated his opinion: “No mass revision of privatization results will not be”. However, the President noted: “At the same time, one case from another always systematically and accurately may vary. Therefore, if law enforcement agencies have any questions, we have no right to deny them that this particular case was investigated and was made a decision”. This reservation is understandable — after all, their opinion Putin said in response to a question the chief investment officer of Prosperity Capital Management Alexander branisa about the situation around of “Bashneft”, which was taken from AFK “System” Vladimir Yevtushenkov. And in December 2014 the company actually came under the control of the state.

Now the situation with Yukos can be interpreted as a case of contesting of the results of privatization, but he is unlikely to have implications for other owners of assets, who acquired them under the scheme of mortgaging auctions, believes managing partner of Goltsblat BLP Andrei Goltsblat. He refers to the fact that in Russia there is no case law, and accordingly, consider now the situation with Yukos as a legal precedent is a question related to investment climate, with the stability of ownership. “Is there a risk for other assets? For them the risks were always,” concludes the lawyer.