Hulley v. Russia 2014

948.Disputing that Yukos’ offers suffered from any insurmountable defects, Claimants repeat that it was Yukos’ genuine intention to commence a dialogue with the Russian Federation aimed at finding a workable solution to pay off its tax debts.

949.In this section, the Tribunal first addresses the specific areas of disagreement between the Parties and then makes some general observations regarding Yukos’ settlement offers and the Russian Federation’s responses.

i.Whether all the Sibneft Shares were Either Encumbered or Disputed

950.Respondent submits that the Sibneft shares could not be accepted in payment of Yukos’ tax debts because Yukos’ ownership of these shares was disputed by Sibneft’s former shareholders.1135 This defect, says Respondent, affected all the offers made to the bailiffs, all the offers conveyed by Mr. Chrétien to Prime Minister Fradkov and President Putin, as well as the USD 21 billion settlement proposal allegedly made by Yukos in October 2004.

951.Claimants recognize that Yukos’ ownership of the 14.5 percent stake in Sibneft corresponding to the second tranche under the Share Exchange Agreement was challenged by Nimegan Trading Limited before the Chukotka Arbitrazh Court in proceedings initiated on 6 July 2004 and that those shares were attached by the Chukotka Injunctions of 9 July 2004, pending resolution of the merits of the dispute. Claimants assert, however, that the 20 percent minus one share stake in Sibneft acquired by Yukos under the Share Purchase Agreement was never encumbered or challenged in any legal proceeding.1136

952.As explained in paragraphs 2–915 and 922 above, the Tribunal considers that, although Yukos initially offered a 34.5 percent stake in Sibneft in payment of its tax debts to the bailiffs, after the Chukotka Injunctions it sought only to offer in payment the 20 percent minus one share stake in Sibneft that was not the object of the Injunctions.

953.As for this 20 percent stake, the Tribunal notes that a number of Sibneft’s original shareholders wrote to the Russian authorities in July and August 2004, opposing Yukos’ proposals to use Sibneft shares to settle its tax debts, since the shares’ ownership was disputed between them

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and Yukos. Thus, on 6 July 2004, these former shareholders wrote to the bailiffs, claiming that “rights to the shares of OAO Sibneft held by OAO NK YUKOS are the subject of the dispute and OAO NK YUKOS is unable to exercise its ownership rights to such shares.”1137 On 13 July 2004, the same former shareholders wrote to the Deputy Minister for Taxes, stating that “OAO NK YUKOS is not entitled to use the whole block of shares in OAO Sibneft held by it for settlements with its creditors, including with respect to tax liabilities.”1138 In a further letter dated 16 August 2004, the former shareholders specifically asserted that the Share Purchase Agreement and the Share Exchange Agreement constituted “a single transaction” and that “all 92 percent of shares in [Sibneft] that were transferred to [Yukos] under both agreements are in dispute.”1139

954.Despite these allegations, it is clear to the Tribunal that the Share Purchase Agreement was never formally challenged. The 6 July 2004 letter refers to an LCIA proceeding; yet, the only LCIA proceeding related to Sibneft shares that is in the record in this arbitration is LCIA Arbitration No. 4589, in the context of which Yukos sought damages arising out of the purported termination of the Share Exchange Agreement, but made no claim in relation to the Share Purchase Agreement.1140

955.In light of these findings, the Tribunal considers the bailiffs’ failure to respond in July 2004 to Yukos’ settlement offers to be inexcusable. On 2 July 2004, when Yukos first wrote to the bailiffs to request enforcement against its 34.5 percent shareholding in Sibneft, its ownership of these shares had not yet been challenged. The Chukotka court proceedings (challenging the transfer of the 14.5 percent stake) were commenced four days later, on 6 July 2004. This was also the date on which the former Sibneft shareholders, for the first time, wrote to the bailiffs claiming that Yukos was “unable to exercise its ownership rights” to the Sibneft shares. For four days, therefore, the bailiffs had no reason to believe that ownership of these shares by

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Yukos was disputed. Yet the bailiffs did not respond to Yukos’ offer during that period or at any time thereafter.

956.In addition, after Yukos, on 14 July 2004, reduced its offer to the 20 percent minus one share holding in Sibneft, the only basis for Respondent’s assertion that “the bailiffs had reason to believe that Yukos’ title to even this block of proffered shares was in dispute”1141 were the “warnings” received from the former Sibneft shareholders. The Tribunal is not persuaded that mere letters to the bailiffs from a third party asserting a claim to an asset held by the debtor (without asserting this claim vis-à-vis the debtor itself) can constitute a sufficient reason for the bailiffs to disregard the debtor’s request to use this asset for enforcement purposes.

ii.Whether Yukos Sought to Enter into Negotiations that are Not Permissible under Russian Law

957.According to Respondent, Yukos management believed erroneously that tax assessments provided an opportunity for a “business negotiation” that could end in a “compromise”.1142 Such negotiations, says Respondent, seeking a reduction, deferral or payment in instalments of tax arrears, are not permitted under Russian law.1143 Specifically, Respondent contends that, once “a resolution of the highest tax authority or a court judgment has entered into force, the tax authorities and bailiffs cannot reduce the amount of the tax that’s due.”1144 Nor, avers Respondent, can the tax authorities agree to a delay for payment of more than 6 months, or change the term for payment when the entity applying for such a change is the subject of proceedings for a tax offence..1145 Moreover, adds Respondent, the Moscow Arbitrazh Court was justified in rejecting Yukos’ request for payment in instalments of its tax arrears due to the absence of exceptional circumstances.1146

958.Respondent maintains that a major problem with Yukos’ settlement proposals was that the amounts offered were insufficient to cover the tax arrears, fines and interest assessed against

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Yukos at that time and thus demonstrated that Yukos never intended to pay its tax debts in full.1147

959.Respondent contends that, even if it accepted that Yukos’ 20 percent minus one shareholding in Sibneft was formally unencumbered, its value was nevertheless uncertain, since Yukos was unable to offer a controlling block of shares and the public controversy with respect to the shares could affect their market value.1148 The fact that Yukos did not itself sell the Sibneft shares is also proof of their illiquidity.1149 Respondent notes that Yukos’ Board, when authorising the sale of the shares in August 2004, expressly acknowledged that “certain terms of the sale of these stakes may differ from the existing market terms because of the need to sell the assets as soon as possible in order to discharge the Company’s tax liabilities.”1150 When the 20 percent minus one shareholding in Sibneft was tendered on 14 July 2004, it was valued by Yukos at USD 2.3 billion, which was insufficient to cover Yukos’ liabilities for the year 2000. The value of the Sibneft shares plus the shares in the other 15 companies offered by Yukos in its letters of 16 September, 24 November and 16 December was also insufficient having regard to Yukos’ tax debt assessed in the 2001, 2002 and 2003 Decisions.1151

960.As for Mr. Chrétien’s offer of USD 8 billion to settle the claims for the years 2000–2003, asserts Respondent, it would have covered only about half the amount then assessed against Yukos.1152 The USD 21 billion settlement offer allegedly made by Yukos in October 2004 was also insufficient, submits Respondent, since Yukos’ tax liabilities for the years 2000–2004 totalled USD 24.2 billion.1153

961.Claimants deny that Yukos was asking the authorities for a reduction in the amount of the tax arrears that were due.1154 As Mr. Theede testified at the Hearing, Yukos “never tried to make any kind of proposal that was less than the tax that was due . . . we didn’t try to negotiate the

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amount; we were willing to pay all the taxes back.”1155 Mr. Theede further observed that Yukos “could never in a million years have anticipated the level of taxes that would ultimately be presented to the company; and fines and VAT.”1156 Claimants submit that the Russian authorities could have ascertained the sincerity of Yukos’ intention if only they had bothered to discuss the settlement offers.1157

962.A dialogue, say Claimants, was necessary given the enormous amounts assessed against Yukos. During the Hearing, when asked by a member of the Tribunal: “when a State assesses taxes and the taxpayer has exhausted administrative and judicial recourse in respect of the assessments, is it normal for the State to enter into a dialogue to negotiate a settlement of the assessments with the taxpayer?,” Mr. Theede replied that while he was not “sure what is normal . . . , there was no way that we would have been able to pay the taxes without being able to talk to the authorities and come to some agreement. We felt like our feet were nailed to the floor and we were being asked to jump. It was very frustrating.”1158

963.Concerning the value of the Sibneft shares, Claimants assert that they were Yukos’ most liquid

asset.1159 Yukos’ assessment of the value of its 20 percent minus one shareholding at USD 2.3 billion in its letters to the bailiffs was not exaggerated since, as stated above, in the bankruptcy proceedings in 2006, Gazprom acquired these shares for USD 4.1 billion.1160 Under cross-examination at the Hearing, Mr. Theede acknowledged that Yukos did not try to sell the Sibneft shares itself.1161 He explained that Yukos did not know what the Russian authorities wanted. He testified that if the bailiffs had said to Yukos “‘[w]e don’t want the shares, but we will take the $3 billion. You can sell the Sibneft stock without any interference,’ [Yukos] would have done that in a second.”1162

964.Claimants also note that the settlement offers conveyed by Mr. Chrétien in July 2004 were well in excess of the tax debt that had been assessed at that time—USD 3.42 billion for the year

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2000.1163 At the Hearing, Mr. Theede explained that the USD 8 billion figure was arrived at by considering the 2000 tax assessment of USD 3.4 billion and scaling it back for subsequent years to account for the shorter period over which interest would be calculated.1164 In terms of Yukos’ ability to honor the proposal, Mr. Theede confirmed that Yukos would have been in a position to pay the first installment of USD 2 billion in July 2004, and states that, despite the absence of a response from the Tax Ministry, Yukos “did take immediate action to start accumulating the offshore cash … within a day or two of this letter.”1165 When asked to explain why the settlement offer remained at the level of USD 8 billion in the proposal of 10 September 2004, when the amount of taxes assessed against Yukos (for 2000 and 2001) had reached USD 7.5 billion, Mr. Theede stated as follows:

[W]hat [the 10 September proposal] is saying is: with what we’ve already paid, plus the [VAT] that you haven’t refunded us, we’ve nearly paid our 2000 tax arrears. I think it’s important to maybe explain . . . this [VAT], because by the end of the attack that . . .

unrefunded [VAT] amounted to nearly [USD] 5 billion of the total assessment against the company. And what it was is: when you sell oil in Russia, you pay a [VAT] on it; and then, if you export it, you automatically get that [VAT] back.1166

965. And Mr. Theede testified that in October 2004 Yukos made a USD 21 billion offer. Mr. Theede’s evidence on this alleged offer was confirmed by Mr. Misamore. However, the Tribunal notes that there is no documentary evidence of this offer in the record.

966.As for Respondent’s argument that the amounts and payment modalities of tax arrears cannot be negotiated under Russian law, Claimants submit that it is disingenuous, since the Russian Federation has entered into negotiations and agreed settlements of tax assessments with other Russian and international oil companies such as Sibneft, TNK-BP and Rosneft.1167

967.The Tribunal observes that according to press reports submitted by Claimants Sibneft was able to settle a 1 billion tax arrears claim by paying only 300 million,1168 while the one billion tax arrears claim against TNK-BP was reduced by “hundreds of million of dollars,” after a meeting

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took place between Lord Browne, BP’s chief executive, and President Putin.1169 As for Rosneft, the Tribunal notes that its financial statements reveal that, after Rosneft purchased YNG, the Russian authorities approved a restructuring plan allowing it to pay the tax arrears that had been assessed against YNG in February and October 2004 in quarterly payments over a period of 5 years starting in March 2008.1170

968.Claimants also affirm that Rosneft received a concession from Respondent in the guise of an 83 percent reduction in the amount of YNG’s tax arrears and a corresponding 89 percent reduction in fines.1171

969.Respondent answers that Yukos’ case is “totally different” from those of Sibneft or TNK-BP, because there is no evidence that these companies, contrary to Yukos, engaged in “knowing and longstanding tax evasion” and lied to the courts and tax authorities. From the limited record available in this arbitration in this respect, it does appear as if these companies cooperated with the tax authorities in order to settle the amount due. Moreover, there is no evidence that the authorities compromised after having reached a final assessment of liability.1172 For Respondent, “considering the flagrancy of Yukos’ violation, the not[o]riety of its failure to accept responsibility and indeed its efforts to undermine tax enforcement, common sense and straightforward deterrent interest would dictate different results.”1173

970.Regarding Rosneft, Respondent explains that, unlike Yukos, it was eligible for a “tax restructuring process” because it had, also unlike Yukos, been designated as a “strategic company” by the Russian Government. According to Mr. Konnov’s first expert report, Article 191 of the Federal Law on Insolvency “contemplates a possibility to restructure federal tax debt of certain ‘strategic’ companies in order to prevent their bankruptcy.”1174 A list of

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“strategic” companies was approved in early 2004, and Rosneft (contrary to Yukos) was eligible for inclusion on the list given its status as a state-owned company.1175

971.At the Hearing, counsel for Respondent provided the following explanation as to the requirements for a “strategic” company:

It was necessary to be State-owned. It was necessary that one of the ministries request that the company qualify to be a strategic company and to undertake responsibilities of a strategic company, and ultimately to be approved by the relevant federal agency, which involved the defence services; and in the case of Rosneft involved committing to supply

petroleum products to the Ministry of Defence of the Russian Federation. So these were all things that were not open to Yukos.1176

972.While Claimants appeared to suggest at the Hearing that, since “it’s the Government that decides which company is strategic,” it would have been “fairly easy” for Respondent to accept Yukos as a strategic company. The Tribunal notes that no specific requirements for purposes of designating a strategic company were proffered by either side.1177

iii.Whether Russian Law Permits Payment in Kind of Tax Arrears

973.Respondent submits that the Russian Federation could not accept Yukos’ shares in Sibneft and other companies as payment because Russian law does not allow a taxpayer to settle its liabilities in kind.1178 Specifically, Article 45(3) of the Russian Tax Code stipulates that “[t]he obligation to pay taxes/duties shall be executed in the currency of the Russian Federation.”1179 This defect affected all of Yukos’ settlement offers with the exception of those conveyed by Mr. Chrétien.

974.Claimants reply that Respondent misrepresents “both the legal context and the substance of Yukos’ settlement proposals.”1180 While Article 45(3) of the Russian Tax Code requires the payment of taxes in Russian rubles, Article 45(1) expressly provides that in case of late or incomplete payments, outstanding taxes may be collected through a forced sale of the taxpayer’s assets other than cash, as provided for in Articles 47 and 48 of the Russian Tax Code

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and Article 46 of the Federal Law “On Enforcement Proceedings”.1181 Respondent itself relies on the latter provision for the proposition that, for the purposes of the settlement of Yukos’ alleged tax liabilities, the company’s assets seized by the bailiffs were subject to a coercive sale.

iv.Concluding Observations

975.Having reviewed the totality of the evidence and the Parties’ representations, the Tribunal is of the view that Yukos’ settlement offers represented a good faith attempt by the company to initiate a dialogue with the Russian Federation regarding the payment of Yukos’ tax arrears. While it is true that these offers were for less than the total amount of taxes, fines and arrears assessed against Yukos, the Tribunal observes that, at the time when each offer was made, it either would have been sufficient to cover the amounts for which decisions had been issued by the Tax Ministry at the time, or was close enough to those amounts to allow the Russian Federation to assume that Yukos did indeed intend to discharge its tax liabilities. As for Yukos’ offer of its 20 percent minus one share holding of Sibneft shares, in the opinion of the Tribunal, since this shareholding was never formally disputed, it should have convinced the Russian Tax authorities that Yukos was serious in wishing to settle its tax liabilities.

976.Respondent’s argument that the Russian Federation does not negotiate tax liabilities is belied by the fact that it agreed to tax settlements with other companies. Given the paucity of evidence before this Tribunal regarding the settlements actually reached by Sibneft and TNKBP, the Tribunal cannot judge the extent to which their situations were similar to that of Yukos. However, the simple fact that these companies were able to negotiate the reduction of tax arrears initially claimed by the tax authorities suggests to the Tribunal that such negotiations can in fact take place under Russian law and practice.

977.Thus, even if Yukos’ settlement offers may not have resolved definitively all of its tax liabilities, the Tribunal sees no valid reason why the Russian Federation, if it sought only to collect taxes (and, presumably, to allow its largest taxpayer to continue in business) would not have reacted more positively to Yukos’ settlement offers at the very least to the extent of engaging constructively in discussion.

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978.The Russian Federation never showed any interest in Yukos’ offers. With the exception of the letter of 9 September 2004, the bailiffs never replied to Yukos, never even troubling to explain why they considered its offers inadequate. The Tribunal finds this silence very revealing, particularly in circumstances where the bailiffs’ views as to the unacceptability of the offers were based in part on correspondence they had received from a third party (the former Sibneft shareholders), which had not even been copied to Yukos. The settlement offers conveyed by Mr. Chrétien, at the end of the day, were also met with silence.

979.When the Russian authorities did provide responses to Yukos’ proposals, these were in the nature of blanket rejections. It is manifest that the authorities never seriously considered any one of Yukos’ proposals. The only letter from the bailiffs to Yukos (dated 9 September 2004) relies on the decision of the Moscow Arbitrazh Court of 17 July 2004, which merely addressed the issue of the Sibneft shares, but fails to explain why the shares in the other 15 companies offered by Yukos could not be accepted in payment. The Tribunal notes that the letter has a ring of finality to it, emphasizing as it does “the right of the bailiff to make the final decision.”1182 In the entire period from July to December 2004, the Russian authorities did not make a single counter-proposal to Yukos or even state that they were prepared to engage with the taxpayer. Mr. Rieger testified at the Hearing that “it was like a one way road: making proposals, talking, offering, and . . . no substantial feedback . . . no sitting down and willing to discuss.”1183 This statement aptly describes the impression that the Tribunal garners from the record.

980.In conclusion, Respondent’s total failure to engage with any of Yukos’ settlement proposals raises significant doubts in the Tribunal’s mind as to whether Respondent’s true and sole concern in its dealings with Yukos after the tax assesments were issued was the collection of taxes.

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