The Yukos vs. Russia lawsuit

A bit of world order in matters of the energy market

Last summer, The Hague Permanent Court of Arbitration awarded a record $50 billion in damages to the successors of the defunct Russian oil company Yukos, in a decision against the Russian government. The European media mostly hailed this as “payback” for Russia’s President Vladimir Putin. A few business papers murmered that it could “give ammunition to opponents of the Transatlantic Trade and Investment Partnership agreement: they fear that investors could bring the EU and individual countries before arbitration tribunals and weaken national regulations if they think their business activities are being hindered.” (Handelsblatt, 7.28.14). Less interest was taken in the question: where does the tribunal really get this extraordinary power to subject a not entirely insignificant country like Russia to the property rights of investors?

The Energy Charter

The legal standard used against Russia by The Hague Tribunal was the Energy Charter. Despite the fact that the Russian government had expressed reservations about the agreement and finally rejected it in 2007, the tribunal found that Russia was nonetheless bound to it. This is in keeping with the imperialist intention of the treaty. When it was first drawn up at the end of the Cold War, it was about gaining access to the former evil empire as it transformed into a new capitalist territory.

After the unexpected changes in the east, Europe had hit on a promising “mutually beneficial cooperation”: the (then) Soviet side felt a need for capital, which Europe had plenty of; and Europe vice versa planned to use its former arch-enemy as a future source raw materials for its growth. This “cooperation” was far from limited to the simple exchange of these two goods. The western countries took advantage of the east’s need for capital as their lever to obtain conditions from their new partners. Nothing less than a whole new legal system was demanded. Barely had these new states had the chance to set up their regulatory arrangements and Europe saved them the trouble by handing them their new tasks: not only state protection of private property, but recognition of property as a right of those states with which they now wanted to open commercial relations. The Energy Charter took this further than any previous multilateral treaty: it required international supervision of “investment protection” and jurisdiction over the shaping of Russia’s domestic legal system.

Capital comes to Russia

The successors of the Soviet Union in Moscow, having decided to adopt the capitalist system, dealt with supply questions of the toughest kinds, which led to a smashing success for the transition to capitalism: the economy as it once functioned went to the dogs while a few winners quickly catapulted from bootleggers to finance capitalists. More specifically, they enriched themselves so magnificently on the destruction and gutting of the Soviet economy that they soon were in a position of real power in relation to the state which had ordered the change of system.

In the twilight years of the USSR, Mikhail Khodorkovsky (ex-CEO of Yukos) and friends had plunged into the acquisition of scarce commodities and used their racket in popular, partially prohibited Western products – jeans, computers, booze – to increase their money. They liberated the ruble from its status as “book money,” the boring accounting unit of state planning, and used it in the black market as a means for procuring true money and undermining – at the fringes of a socialist legality already somewhat demoralized by perestroika – the state’s monopoly on foreign trade and currency. This business was attractive because several companies had already drawn considerable sums of foreign currency to the country, but were allowed to do so only rarely, while others were itching for this sort of money. Here the go-getting ex-functionaries of Komosol (the Communist Youth League) offered themselves as brokers, undercut the state’s foreign currency controls with bogus loan transactions, and took an extra profit on top of the black market rate.

Khodorkovsky divulges all these scams with commendable frankness in his “political confession.” His partner Vladimir Dubov recalls how they became bankers by acquiring the thing every bank needs, a state license:

This first license is a funny story. The central bank had decided to give us a license. So it had to be typed. The clerk, a very young guy, told me: ‘But not now! I can’t now. I have lunch, then a meeting ... Come back tomorrow!’ I responded: ‘Listen here, take a nice lunch while I type it.’ He nodded and ran off. So I sat there and typed, the phone clamped between my shoulder and my ear, and on the other end was Khodorkovsky and Lebedev. I typed and they told me what to write ... I screamed at them: ‘Not so brazen, you dogs, not so brazen!’ I wrote: ‘The bank is not entitled to keep open currency positions ...’ Lebedev screamed: ‘Is entitled! Is entitled! Don’t leave it out!’ I disagreed: ‘I will get in trouble!’ He responded: ‘If they catch it, we’ll rewrite it.’ You can imagine what a brilliant license we cobbled together. And it was signed! (Mein Weg, Munich 2012, p. 246)

The liabilities for the bank were generated by “business partnerships” kept with the accounts of state companies – and generally “the state was one of the largest customers” (p. 226). Under the first Russian president Boris Yeltsin, these partnerships flourished even more. Yeltsin consulted the new bank chiefs in making his reforms, promoted Khodorkovsky to Deputy Minister of Energy, and commissioned his Bank Manetep to “manage numerous investment programs,” thus directly feeding it state funds. So much for the criminal character of Russia’s founding capitalists!

By the early 1990s, Khodorkovsky and six colleagues in Moscow personified money capital in Russia and executed the newly acquired power of finance. They subjected formerly state-owned enterprises to the criterion of profitability and found not only capital resources wanting, but promising investments as well, thus duly refused loan requests according to the logic of their business. The result was more fundamental “supply shortages” than the ever brought about by the old planned economy. On the other hand, they very quickly identified the few companies which were worthy of credit: those which earned foreign exchange from the export of raw materials to international business. And they were especially active at the summit of the credit business, financing the state’s needs. Owing to the collapse of the Soviet economy, these needs were enormous, so the state was soon desperately in debt to the financial power, which could now insist on “collateral.” Yeltsin was persuaded to pledge the state’s few remaining sources of money in the raw materials sector in shares-for-loans swaps: Khodorkovsky and company offered loans to finance the national budget and demanded state shares as collateral which they would keep in their banks in case the state didn’t repay on time. By the end of 1995, five of the largest oil companies had been privatized in these security auctions. Yukos, the most important of these, was aquired by Khousorevsky and his associates at far below its market value. His Bank Menatep was not only the house bank of Yukos, but conducted the auction itself, considering no other bids – a scam at the highest level.

After this entrepreneurial looting of the Russian economy, the oligarchs ensured their continued favorable treatment from the state by financing Yeltsin’s presidential campaign and successfully buying votes to prevent a feared takeover by the Communist Party, which was threatening to revoke the glorious new freedoms.

Putin vs. Yukos

The next generation of Russian politicians under Putin saw itself faced with the need to rescue what remained of its world power before it turned into a banana or oil republic. This opened the struggle between Khodorkovsky and Putin, between the unleashed power of private property in the form of the oligarchs and the managers of what was left of Russian state power. In order to regain authority at all, the state fought to impose a regulatory system on the private power of property that would be under its sole control and would benefit the whole nation, creating Putin’s “Vertical Power.”

Khodorkovsky, a “democracy activist” (Wikipedia: “Open Russia”), was mostly active on behalf of his finances, but he also fought for a national energy policy in his interest and called for the “liberalization” of oil exports and transport, thus demanded nothing less than political control over the one handy tool in Russia’s foreign trade. The billionare then used his economic power for the conquest of political power and started buying allies in the Duma with the openly stated goal of replacing his adversary Putin as president.

For his power struggle with the state power commanded by Putin, he secured backing outside the country – an American manager, international consulting companies such as the Carlyle Group – and planned to merge “his” property with an American multinational (Chevron or Exxon) to avoid the jurisdiction of the Russian government. With his program of breaking up the state monopoly on the construction and operation of pipelines, Khodorkovsky acted completely in the interests of the USA. He also supported the US in the Iraq war (“it is not in our interest to stand on the side of France and Germany”) and won the world power as his patron.

The Bush administration was delighted with this type of oil man with his ambition for bigger things. It saw him leading to a new role for Russia within the American world order: he would shape it into an alternative crude oil supplier free from the requirements of the other great producers in the increasingly unstable Arab world which control the price, thus a counter to the “Saudi Arbian style” of the international oil market.

With the support of the world’s one remaining superpower, Khodorkovsky thus expanded his power struggle to the highest level. Putin responded with proceedings against Yukos which ended in the dismantling of the Yukos empire and the exemplary punishment of its management. This legal proceeding was not just about restoring the state’s monopoly – i.e., sovereignty – over the behavior of the oligarchs. The leaders of international capitalism stood behind the Russian tycoon with all the brutality of their demand that their property system be respected. In grandiose disregard of the Russian constitution, they declared themselves the protecting power of the oligarchs, recognized them as pioneers of private property – the only economy right for Russia – and treated the Russian state’s efforts to subject their wild capitalism to the law as an attack on the supreme values of the free market economy.

Khodorkovsky then underwent an extraordinary transformation from robber baron into a freedom fighter and innocent victim of “politically-motivated justice.” He was adopted by Amnesty International as a “prisoner of conscience” and widely championed by western parliaments. Vice versa, Russia became a “rogue state.”

The majority shareholders in Yukos, which just before the breakup of the company were able to transform it into companies with scenic offices in Cyprus and the Isle of Man, have since then secured the claims and the foreign business units of Khodorkovsky’s empire from access by the Russian courts. Their rights to the long liquidated former company Yukos would seem worthless – that is, if finance capital does not offer another way of creating value, not by producing oil or other such activities, but with the help of the 1991 Energy Charter and the long arm of international arbitration. The companies dedicated themselves to the task of suing for the papers’ monetary value, declaring the devaluation of the share capital in Yukos to be a loss inflicted on shareholders by the Russian state, and demanding compensation – not on behalf of its billionare owners, of course, but for the small pensioners who they only look out for.

Property over sovereignty

Russia’s need for suitable legal regulations – not unlike those adopted in all western European countries – must therefore bow down to the supra-nationally codified laws of property. If Putin looked after the need to rescue a semblance of Russian statehood after having inherited a crumbling state apparatus and national bankruptcy, then he turned against the international obligations signed by his predecessor. The Hague Tribunal spelled this out to the Russian sovereign, dismissing the fact that Russia didn’t ratify the Energy Charter by citing its “provisional application.”

The arbitration board fast-forwarded the slowly unfolding Yukos story by giving the earlier political and moral judgment on Russia – “unjust state” – the form of a legally certified judgment and, after eleven years, using it to strike another blow against it. This use of the Energy Charter against Russia illuminates the double achievement of these aspects of the international rules of business: the economic significance of the conditions formulated in it consists in the fact that the state agents of the world market clear the way for the competition of their successful companies in countries newly conquered for the market economy. At the same time, acceptance of the legally binding character of their interests is forced on the contracting partners. And this has implications which restrict Russian sovereignty, even domestically – this is the higher meaning of the “cooperation” between interests cited in the Energy Charter which has been submitted to the Russians by court order, as it were.

The plaintiffs are optimistic they will be able to get their award, which constitutes ten percent of Russia’s monetary reserves, despite the government in Moscow’s refusal to pay it. This is because Russia has also ratified a “New York convention” which enforces foreign arbitration awards. Their optimism is not misplaced. The right to property obviously has a completely different quality than other human rights. International courts regularly issue condemnations of states and order restitution which everybody knows only exist on paper. But these human rights are undermined on the basis of the interest of the founders of this international property system. And for investor’s rights, there are arbitration boards which exercise international power. These authorities not only have an executive in the state community, but also a means of execution – economic weapons. Thanks to Russia’s successful integration into the world market, an abundance of Russian state assets exist outside its borders and within the reach of other states which will enforce Russia’s compliance.

The human right to capitalist property finds a happy historical coincidence that this same community of states, led by the USA and assisted by the EU, has opened a new chapter in its ongoing efforts in making Moscow pliant: Russia is declared a state “pariah” and bullied accordingly, especially by the new way of market-based expropriation. The sanctions adopted over Ukraine aim to strangle Russia economically by reducing its international solvency perspective to zero and thus so fundamentally damaging it as a state integrated and dependent on the world market that it should want nothing more than to make amends.

Collection has’t yet been carried out, but combined with sanctions has had an effect in the attack on Russia’s creditworthiness – another blow to a nation that still reports a huge need for capital. Ultimately, modern Russia, even though it now intensely seeks alternative partners, remains dedicated to its growth through integration into international capitalist business and has no intention of leaving the international legal order that oversees it. In building itself into a capitalist power, it must therefore take note of another imperialist lesson – namely, how much political subordination is involved in participation in international capitalism.