Yukos vs. Russia: Former Oil Magnate Initiates Legal Proceedings in Armenia

Yukos Oil Company, which once extracted oil in Russia, is now seeking to reclaim its loans in Armenia. Shareholders of Yukos have initiated legal proceedings against the Russian Federation, represented in Armenia by the Russian Embassy.

A request has been submitted to the Civil Court of General Jurisdiction in Yerevan on behalf of Yukos Capital, a company registered in the British Virgin Islands, for the recognition and enforcement of an arbitration ruling established according to the rules of the United Nations Commission on International Trade Law.

The arbitration court determined on July 23, 2021, that the Russian Federation had confiscated the loans of Yukos Capital and must compensate for the losses related to the loan agreement from December 2003. The arbitration court estimated this loss at 77 billion rubles, which, based on the exchange rate as of December 31, 2008, amounts to approximately 2.6 billion dollars. Additionally, unpaid contractual interest at an annual rate of 9% has been added, bringing the total compensation to around 5 billion dollars.

Yukos Capital asserts that it lent money to its parent company, Yukos, operating in Russia, which was not returned because the Russian authorities bankrupted and dissolved Yukos. The Russian side, however, has labeled these loans as fraudulent, claiming that they were used to remove the company's assets from the country and to avoid paying taxes.

The Russian Federation has refused to comply with the arbitration court's ruling, citing that although Russia signed the Energy Charter in 1994, it did not ratify it, and in 2009 it terminated its membership in the Charter.

Representatives for Yukos have referred to the Energy Charter, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and the RA Law on Commercial Arbitration while filing their request in Armenia. Armenia ratified the Energy Charter on December 15, 1997, and the New York Convention came into force on March 29, 1998. Specifically, based on Article 26(8) of the Energy Charter, the arbitration court’s ruling is final and binding on the claimant and debtor.

Arsen Hovhannisyan, a representative of Yukos Capital, has also requested that the court apply protective measures for the lawsuit, as the approval of the request for the recognition and enforcement of the foreign arbitration court’s ruling presumes enforcement of the judicial act. Within the framework of compulsory enforcement, an enforcement proceeding will be initiated, and if property is discovered, a process of confiscation will begin.

The plaintiff acknowledges that the debtor in this case is the Russian Embassy in Armenia, which is a subject endowed with sovereign jurisdiction and has absolute authority over asset management. The enforcement of a foreign arbitration court’s ruling envisages applying restrictions on property owned by the Russian Federation in Armenia and possibly confiscating it in the future. Given these circumstances, Yukos Capital has requested the court to apply proportional restrictions that would allow for the execution of the final judicial act.

The need for protective measures is based on the fact that if this request is granted, all property owned by the Russian Federation will not be subject to execution but rather the final arbitration ruling will only be enforced against property belonging to the Russian Federation in Armenia. Any change in the factual status of this property, encumbrance with the rights of third parties, or cessation of Russia's right to property will exclude the possibility of executing the judicial act.

Based on this, he requested that the Russian Federation be prohibited from alienating any property it owns in the Republic of Armenia, encumbering it in any fashion in favor of third parties, reducing the nominal value of shares or participations owned in Armenia, paying them off, registering legal entities elsewhere, reorganizing legal entities, or otherwise terminating its ownership rights over properties located in Armenia or undertaking actions that would in any way deteriorate the status or diminish the value of the property.

The judge at the Arabkir Court, Artush Avagyan, decided to return the application of Yukos Capital. Upon reviewing the application and attached documents, the court noted that the application is filed against the Russian Federation, a foreign state, and granting it would naturally lead to compulsory enforcement actions against the property owned by a foreign state in the territory of Armenia. The court concluded that there is judicial immunity, and the consent of competent authorities is not presented, nor does Armenian international agreements provide otherwise.

Also involved in this case is attorney Grigor Bekmezian, a former member of the Council of Justice. In an interview with us, he mentioned that they have appealed the decision to return the application because they disagree with the court's position. According to Bekmezian, this reasoning pertains to lawsuits, while they have filed for the recognition of an arbitration court's ruling. 'Even if we assume this is a lawsuit, which we do not agree with, two international treaties exclude immunity: the Energy Charter and the New York Convention. Our appeal has been accepted for consideration by the Court of Appeal, but no decision has been made yet.'

The Law on Commercial Arbitration clearly defines the cases in which such applications can be rejected. Grigor Bekmezian argues that the court only needs to examine whether those cases are present in this matter. No other grounds for rejection can exist, and essentially, the Armenian court has no right to review the case, as it has already been done by the arbitration.

Grigor Bekmezian noted that if the Court of Appeal also issues a similar ruling, they might see a constitutional issue and appeal to the Constitutional Court. Cases of recognition of foreign arbitration court rulings have occurred in Armenia before, again related to Yukos, but those involved a corporation rather than a state, and the attorney did not recall any other precedent involving a state where an arbitration court ruling had been executed.

'There was a political element at that time, but now there shouldn't be because I hope our judicial system is independent, and no third power should influence the courts in reviewing such a case,' says Grigor Bekmezian.

When asked what property Russia owns in Armenia and which of that property would be subjected to confiscation, the lawyer stated that this will be determined at the time of enforcement. In response to our question of whether this would extend to the property of the Russian Embassy, Bekmezian said that the decision lies with the enforcement authority, but since the embassy is an entity with immunity, it may not be affected. Conversely, any other property owned by Russia may be subject to enforcement. 'Property that has commercial significance, for example, shares of the company, can be subject to confiscation,' notes Bekmezian.

Regarding why Yukos' application was submitted in Armenia and whether attempts have been made in other countries to recognize or enforce the arbitration court's ruling, Bekmezian responds that the arbitration ruling can be enforced in any country that has joined the Energy Charter because it was made based on the Energy Charter, which obliges states to protect foreign investments made in their territories. Bekmezian states that Armenia is the first country in the region attempting to recognize this arbitration ruling, perhaps also because Yukos cases have been previously examined in Armenia, and Yukos management is familiar with it. In addition, if previously Russia could influence the Armenian judicial system or the issuance of decisions, then now, according to Bekmezian, the judicial system is more independent and cannot be subjected to such influence.

We attempted to clarify with Armen Mikayelyan, the former director of Yukos' Armenian company, Yukos СНГ Investment LLC, whether attempts have been made in other countries to recognize and enforce the arbitration court's ruling. He declined to answer this question, citing commercial confidentiality.