November 24, 2017
Tuesday, July 29, 2014

Citizens will have to pay for Putin's victories

Russian Foreign Minister Sergey Lavrov speaks during his briefing in Moscow, Russia, yesterday.
Russian Foreign Minister Sergey Lavrov speaks during his briefing in Moscow, Russia, yesterday.
Russian Foreign Minister Sergey Lavrov speaks during his briefing in Moscow, Russia, yesterday.
By Leonid Bershidsky
Bloomberg News

Yukos fine to cost Moscow more than all Ukraine-related sanctions put together

A court in the Hague has done more to hurt Russia’s economy than all the Ukraine-related sanctions put together. The Permanent Court of Arbitration ruled that Russia must pay US$50.02 billion to the shareholders of the oil company Yukos, which was dismantled by President Vladimir Putin’s government beginning in 2004. The ruling is a reminder that Putin was no different a decade ago from the man who recently seized Crimea from Ukraine and continues to foment separatist unrest in that nation.

There is a measure of poetic justice in the decision. Although published yesterday, it was handed down in the Netherlands the day after Malaysia Airlines Flight MH17 was downed, apparently by pro-Russian rebels in eastern Ukraine. The Netherlands had more victims on the flight than any other country.

Although the ruling has nothing to do with Putin’s new geopolitical assertiveness, it punishes the Russian leader for a similarly aggressive approach to domestic policy during his first and second terms in power, from 2000 to 2008. In effect, the court, which was established to resolve international disputes, told Putin that, in the modern world, you can’t seize property without compensating the owners.

After he was handed power in 2000 by his ailing predecessor, Boris Yeltsin, Putin struggled to show he was in charge. The billionaire oligarchs who had enriched themselves under Yeltsin were deemed more powerful than the Kremlin. By the fall of 2003, Putin had gained the upper hand. He jailed the wealthiest, Mikhail Khodorkovsky, the founder of Yukos, Russia’s then-biggest oil company, largely on tax-related charges. Any of the oligarchs could have faced similar charges; Khodorkovsky’s imprisonment made them so docile that Putin confined himself to making an example of just one victim.

Khodorkovsky, released unexpectedly by Putin last December and now living in Switzerland, told me last month that the inept Russian investigators had failed to seize his personal wealth, enabling him, while in jail, to sell his share of the company to partners. The new shareholders, led by longtime Khodorkovsky partner Leonid Nevzlin, were left to fight a losing battle with the government. Saddled with multi-billion-dollar tax bills, Yukos sold off its oil extraction assets. The biggest, Yuganskneftegaz, was sold to a sole bidder, Baikal Finance Group, a freshly-minted firm founded with capital of less than US$400.

Even then, Putin sought deniability, just as he does now in the Ukraine conflict. During the arbitration proceedings in the Hague, Russian representatives claimed Baikal was not a front for the Russian state but for the oil company Surgutneftegaz, known to be friendly with the Kremlin. In any case, the Yukos assets were then resold, cheaply, to the state oil company Rosneft, which Putin now uses to cement business relationships in Europe and to stave off serious sanctions. Rosneft later acquired other Yukos assets, too — and went public just as Yukos was going bankrupt. It is now run by Igor Sechin, one of Putin’s closest associates.

As Khodorkovsky sewed gloves in a prison camp, Nevzlin and some former Yukos executives pursued the case in the Hague, arguing that their property had been expropriated by the Russian state. The Russian government argued first that the court had no jurisdiction and then that Yukos had gone bankrupt because of its failure to pay taxes. The arbitrators concluded that Yukos had not been an exemplary taxpayer but that taxes were only a pretext for bankrupting the company and redistributing its assets.

The court’s US$50 billion penalty represents about 2.4 percent of Russia’s gross domestic product. Ukraine-related sanctions threaten to shave about one percent off Russian GDP. Even if the European Union agrees to introduce tougher sanctions, they are not expected to cost Russia more than an additional 1.5 percent of GDP this year. Such estimates, in any case, are educated guesses. The Hague ruling, by contrast, is in hard cash, which Russia is required to put up by January 1, 2015. Foreign Minister Sergei Lavrov promised yesterday to appeal the ruling, but if the decision stands, Russian property abroad could be seized to satisfy the claimants.

“Putin, Sechin and others probably thought they would get anything cheaply: power, Yukos assets, Chinese money, European money, Crimea,” Maxim Trudolyubov, opinion editor at the Moscow daily Vedomosti, wrote on Facebook. “In fact, however, they only borrowed it, and now interest is piling up and it’s no longer their problem but everyone’s because they’ve pawned the country.”

Indeed, Russians may not understand it yet, but they are going to have to pay for Putin’s confiscations and annexations eventually. Illusions of this kind do not last forever.


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