10 Dec 2009

The Yukos Decision: Profound Implications for the EU-Russia Energy Relationship?

Alan Riley

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Following the bankruptcy of the oil giant Yukos by the Russian Federation in 2004 on grounds of alleged tax evasion, the majority shareholders of GML, together with the Yukos pension fund, filed an arbitration suit against the Russian Federation. The suit was filed under the Energy Charter Treaty (ECT), the world’s only multilateral investment treaty. GML relied on the investor protection provisions of the ECT to argue that it had been expropriated and sought recovery for all losses, which may well top $100 billion. The Russian Federation argued that the ECT did not apply as Russia had signed but not ratified the Charter. However, fatally for its case, Russia had accepted provisional application of the Treaty from the date of signature. It was on this basis that the arbitrators held that the ECT applied in full to Russia. There is now expected to be a hearing on the merits of the case in the next couple of years. At first sight this ruling looks like a pyrrhic victory for Yukos, particularly after the Russian withdrawal from provisional application of the Charter in October. However, on closer examination, explains Alan Riley of City University London, this ECT case is likely to have a significant impact on the EU-Russia energy relationship for at least the next two decades, and may well result in the Russian Federation reconsidering its approach to the Charter.