Hulley v. Russia 2014

512. Respondent emphasized Yukos’ earlier tax problems in its comments on the February 2003 meeting. Respondent noted in its Closing Statement that President Putin publicly told Mr. Khodorkovsky that the political protection or assistance he was allegedly receiving from the Kremlin until that meeting would be removed, and he added that “we’ve talked about taxes before.”509

513.Based on the extensive record that was presented to it, the Tribunal is unable to accept the proposition that the February 2003 confrontation created Yukos’ tax problems and that, but for such a confrontation, Yukos would have avoided any and all tax reassessments against it. While this meeting may well have marked a turning point in the relations between Yukos and the Russian Federation, as the Tribunal observed in the previous chapter, within the senior management of Yukos, and well before February 2003, there were individuals who were aware that the company’s tax optimization mechanisms were vulnerable and could be challenged by the tax authorities. Some of the evidence presented to the Tribunal also revealed that there was at least some awareness within Yukos that a successful challenge to the Yukos tax structure would result in “substantial tax claims”510 or “significant losses associated with the additional assessed amount of tax and related interest and penalties”511 and possibly even criminal liability. At the same time, the Tribunal notes that the tax assessments and decisions against Yukos led not just to “substantial tax claims” or to “significant losses” but to its bankruptcy and destruction, and to the transfer of the principal assets of Yukos to Rosneft, a company controlled by the Russian Federation.

514.The crucial question addressed in this chapter of the Award, therefore, is whether Claimants have discharged their burden of proof and established that the tax assessments, and the enforcement processes of the Russian Federation which followed, are more consistent with the conclusion that they evidence a punitive campaign against Yukos and its principal beneficial owners with sanctions entirely disproportionate to the company’s tax liability, rather than with the conclusion that they were a legitimate exercise of tax enforcement.

509Transcript, Day 18 at 113. Counsel for Respondent interprets this as “I am not going to protect Mr. Khodorkovsky anymore. He is on his own.” Ibid. The full quote of the President’s remark is: “We have already discussed it with you recently, that your company, for example, has had problems with the payment of taxes.” Transcript of the 19 February 2003 Meeting, Exh. C-1396.

510E-mail from P.N. Maly to O.V. Sheyko, 14 May 2002, Exh. R-184. See paragraph 491 above.

511Facsimile transmission from Natalia Kuznetsova to Stephen Wilson, 23 July 2002 p.134, Exh. R-1477. See paragraph 491 above.

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petition in respect of the lawfulness of the 2000 Decision.523 In her decision, Judge Cheburashkina wrote that the seizure of such assets would “cause significant damage to the Applicant’s activities and make it impossible to execute the judicial act” and that “the Applicant has presented evidence demonstrating that the consequences indicated in Article 90(2) of the RF Arbitrazh Procedure Code might arise, and that serious damage and disruption might be caused to production activities.”524

524.On 26 May 2004, Yukos made a motion in the collection proceedings (those initiated by the Tax Ministry) to join the Republic of Mordovia in those proceedings.525 The motion was not successful. Presumably, Yukos sought the joinder of Mordovia, by far the major focus of its trading companies’ activities and investments, in the expectation that Mordovian officials would support the legitimacy of Yukos’ tax optimization procedures and attest to the value of Yukos’ substantial investments in Mordovia.

525.In the collection proceedings, the court had also denied Yukos’ motion to stay the

proceedings.526 In a decision dated 26 May 2004 and released on 28 May 2004, Judge Grechishkin of the Moscow Arbitrazh Court granted the Tax Ministry’s petition, allowing the collection of tax arrears, interest and fines in the amount of RUR 99,375,110,548 (USD 3.48 billion) pertaining to the 2000 Decision.527

526.Judge Grechishkin found that Yukos had acted in bad faith,528 that the use by the trading companies of tax benefits was illegal because it was “not aimed at strengthening the economy of the Republic of Mordovia” but rather was used to “evade payment of taxes.”529 The judge adopted the same reasoning as the Tax Ministry on the VAT issue, writing that: “In order to use its right to the benefit, the taxpayer had to declare its right and confirm its right by documents in accordance with the current legislation. . . . The taxpayer—OAO Yukos Oil Company—did not declare its desire to use its benefit either in 2000 or later.”530 However, this

523Ruling of the Moscow Arbitrazh Court to suspend the effect of Decision No. 14-3-05/1609-1 of 14 April 2004, Case No. A40-21839/04-75-276 p. 2, 19 May 2004, Exh. C-112.

524Ibid.

525Motion to join a third party to the proceeding, Case No. A40-17699-04-09-241, 26 May 2004, Exh. C-115.

526Ruling of the Moscow Arbitrazh Court, Case No. A40-17699-04-09-241, 14 May, 2004, Exh. C-111.

527Decision of the Moscow Arbitrazh Court, Case No. A40-17699-04-09-241, 26 May 2004, Exh. C-116.

528Ibid., p. 14.

529Ibid., p. 15.

530Ibid., p. 19.

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judgment could not be executed by the Tax Ministry as the interim relief in the parallel proceedings prevented enforcement until a determination of the lawfulness of the 2000 Decision was made.

527.On 11 June 2004, Judge Cheburashkina, the presiding judge in the case brought by Yukos against the lawfulness of the 2000 Decision, was challenged by the Tax Ministry for bias towards Yukos in the granting of interim relief on 19 May 2004.531 The Tax Ministry cited several reasons as a basis for her removal for bias towards Yukos, including: the allegation that the interim measures “did not comply with the principles of justice in a democratic constitutional State”;532 the allegation that the judge granted a “recess solely for OAO Yukos Oil Company to file a petition to stay proceedings in the [parallel] case to collect tax arrears, interest and fines,” which the Tax Ministry saw as “evidence of the Judge’s interest in the outcome of the proceedings in favor of the taxpayer”;533 her “behavior” in the preliminary court proceedings;534 the allegation that the judge declined the petition of the Tax Ministry to abandon these proceedings in favour of the other set of collection proceedings initiated by the Tax Ministry;535 and the allegation that the Tax Ministry was not granted extra time to copy documents to bring to court.536 The challenge was upheld by the Moscow Arbitrazh Court the same day.

528.On 15 June 2004, Judge O.R. Mikhailova, a deputy chair of the Moscow Arbitrazh Court, was appointed to replace Judge Cheburashkina.537 On 22 June 2004, Judge Mikhailova set the date of 19 July 2004 for the hearing of the merits phase of the case on the lawfulness of the 2000 Decision. She also directed the Tax Ministry to provide originals of the documents rather than photocopies and to organize the documents, including explanations “in order to confirm which circumstances they support.”538

531Russian Federation Ministry of Taxes and Levies, Challenge to Judge N.P. Cheburashkina, Moscow Arbitrazh Court, Case No. 21839/04-76-276, 11 June 2004, Exh. C-117.

532Ibid., p. 2 (emphasis in original omitted).

533Ibid. (emphasis in original omitted).

534Ibid.

535Ibid., p. 3.

536Ibid., pp. 3–4.

537Ruling of the Moscow Arbitrazh Court, Case No. 21839/04-76-276 p. 1, 22 June 2004, Exh. C-119.

538Ibid.

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529.In the proceedings to initiate collection of the taxes assessed in the 2000 Decision, on 29 June 2004, a resolution of the Moscow Arbitrazh Court reduced the amount to be collected to approximately USD 3.42 billion.539

530.In a decision dated 23 June 2004 but published on 30 June 2004, the interim measures granted by Judge Cheburashkina were annulled by an appeal panel of the Moscow Arbitrazh Court.540 The court reasoned that as the Tax Ministry had not, at the time of the filing of the request, placed any direct collection orders in accordance with Article 46(4) of the Russian Tax Code on Yukos’ bank accounts, the interim measures had been granted without the proper basis in law.541 It also concluded that there were other specific procedures that could be followed under Article 91(1)(5) (in lieu of the interim relief granted under Article 90(2)) that did not require interim measures.542

531.Also on 30 June 2004, a resolution of Bailiff Solovyova was issued initiating enforcement proceedings.543 The bailiff then issued several more resolutions freezing cash in 16 Yukos bank accounts up to the total amount of taxes then due.544

532.On 30 June 2004, the Tax Ministry obtained the reversal of the interim measures and initiated enforcement proceedings. On the same day, the Field Tax Audit Report for 2001 was released.545 It assessed taxes, interest, and fines totaling approximately USD 4.1 billion.546

533.On 1 July 2004, another resolution was issued by Bailiff Solovyova limiting Yukos’ rights pertaining to securities of 37 production, refining, and research subsidiaries.547

539Appeal Resolution of the Moscow Arbitrazh Court, Case No. A40-17699/04-109-241, 29 June 2004, Exh. C-121.

540Appeal Resolution of the Moscow Arbitrazh Court, Case No. A40-21839/04-76-276, 23 June 2004, Exh. C-120.

541Ibid., p. 4.

542Ibid.

543Resolution of Bailiff I.D. Soloyvova to initiate enforcement proceeding No. 10249/21/04, 30 June 2004, Exh. C-123.

544Resolution of Bailiff I.D. Solovyova to seize monies No. 10249/21/04, 30 June 2004, Exh. C-124.

545Repeat Field Tax Audit Report No. 30-3-14/1 (2001), 30 June 2004, Exh. R-345.

546Ibid. at 132–33. The results of the audit will be discussed below at paragraphs 545–56, in connection with the Tax Ministry decision to which it relates.

547Resolution of Bailiff I.D. Solovyova to restrict the rights of the securities owner, 1 July 2004, Exh. C-125; see also Memorial ¶ 341.

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534.On 9 July 2004, Bailiff Solovyova issued a resolution for a seven percent enforcement fee for the proceedings relating to the 2000 Decision.548 The fee amounted to approximately more than RUR 6.8 billion (approximately USD 240 million).

535.On 13 July 2004, further resolutions were issued by the bailiffs to seize Yukos’ 14.5 percent stake in Sibneft which had been ordered by the Chukotka Arbitrazh Court as an interim measure in those proceedings.549 The Chukotka proceedings had been initiated by Mr. Roman Abramovich and they related to disputes following the Yukos–Sibneft aborted merger. The Tribunal notes that while this seizure was not directly related to Yukos’ trading companies, as will be seen later, it limited the options available to Yukos to satisfy the payment demands it was facing.

536. On 14 July 2004, pursuant to another resolution of the bailiffs, 43 ordinary shares and 13 preferred shares of Yukos in YNG were seized.550 At the same time, a resolution to restrict the rights of the securities owner with respect to those shares was issued.551

537.On 16 July 2004, Mr. Steven Theede sent a letter signed by Mr. Bruce Misamore to Mr. Alexei Kudrin, then Minister of Finance. In the letter, Yukos petitioned the Ministry, “[i]n consideration of the unprecedented nature of the sum that is subject to collection from OAO Yukos Oil Company” for deferral of, or the opportunity to pay in installments, the amount imposed by the collection decision of the Moscow Arbitrazh Court issued on 28 May 2004.552 When he gave evidence, Mr. Theede acknowledged that the letter was not perfect (the proposals did not have a great deal of detail) but he described the letter as an attempt “to create a dialogue [between Yukos and the Russian Federation].”553

538.In the days leading to the Hearing on the Merits in the case brought by Yukos against the lawfulness of the 2000 Decision, certain statements were made “in the mass media relat[ing] to

548Resolution of Bailiff I.D. Solovyoya No. 10249/21/04 to collect an enforcement fee, 9 July 2004, Exh. C-132;

549Resolutions of Bailiff A.Yu. Seregin to initiate enforcement proceedings Nos. 10599/10/04, 10603/10/04, 10606/10/04, 10607/10/04 and 10608/10/04, 13 July 2004, Exh. C-133; see also Memorial ¶¶ 225–28

550Decision of the Moscow Arbitrazh Court, Case No. A40-36718/04-79-445, 6 August 2004, p. 2, Exh. C-141 (referring to 14 July 2004 seizure of Yukos’ shares in Yuganskneftegaz (hereinafter “YNG”).

551Ibid., p. 1.

552Letter from Steven Theede to Alexei Kudrin, signed by Bruce Misamore, 16 July 2004, Exh. C-138.

553Transcript, Day 10 at 53–55.

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the [Yukos] case.”554 The statements apparently included charges of bias against Judge Mikhailova because she had previously written articles for a magazine edited by one of Yukos’ lawyers, Mr. Sergey Pepeliaev.555 While Judge Mikhailova denied the accusations of bias, she nonetheless asked to be recused.556 On 19 July 2004, the day Judge Mikhailova had originally scheduled a hearing on the lawfulness of the 2000 Decision, the Moscow Arbitrazh Court granted her request to resign.557

539.On 6 August 2004, Yukos in-house counsel, Mr. Gololobov, sent a letter to the Chief Bailiff of the Russian Federation renewing Yukos’ request to give priority to its 20 percent stake in Sibneft above other assets. The same day, the Moscow Arbitrazh Court found that a 14 July 2004 bailiff’s resolution to seize shares of YNG was issued in error and that, instead, Yukos’ 20 percent stake in Sibneft should have been seized.558 The court ruled that federal law on enforcement proceedings outlines a priority order for enforcement against a debtor’s assets and enforcement against lower assets is only possible when the higher assets are insufficient to settle the debts.559 Since the shares in YNG were of a lower priority than the more liquid Sibneft shares, they should not have been seized before the Sibneft shares.560 Claimants consider this to be a “rare victory” by Yukos before the Russian courts.561

540.On 12 August 2004, a ruling of the Moscow Arbitrazh Court denied Yukos’ petition to pay by installments the amount levied by the Moscow Arbitrazh Court on 28 May 2004.562 Five days later, the same court denied Yukos’ application that the bailiffs undertake enforcement against its 34.5 percent stake in Sibneft before enforcement against other assets.563

541.In a decision of 18 August 2004 released on 23 August 2004, Yukos’ “rare victory” was

overturned by the Ninth Arbitrazh Court of Appeal. The court quashed the 6 August 2004

554Ruling of the Moscow Arbitrazh Court, Case No. A40-21839/04 76-276, p. 1, 19 July 2004, Exh. C-139 (emphasis in original omitted).

555Ibid., p. 3.

556Ibid., p. 4.

557Ibid.

558Decision of the Moscow Arbitrazh Court, Case No. A40-36718/04-79-445, p. 26, 6 August 2004, Exh. C-141

559Ibid.

560Ibid.

561Memorial ¶ 349.

562Ruling of the Moscow Arbitrazh Court, Case No. A40-1397/04ip-109, 12 August 2004, Exh. C-142.

563Decision of the Moscow Arbitrazh Court, Case No. A40-34962/04-94-425, 17 August 2004, Exh. C-143.

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