Annex 2
THE ECT AND
GML'S CLAIM
Key Points
In early 2005, GML Limited subsidiaries, Yukos
Universal Limited ("Yukos Universal") and Hulley Enterprises
Limited ("Hulley") who, together, hold a 50.97% shareholding
in Yukos, commenced arbitral proceedings claiming damages of not
less than $33 billion against the Russian Federation pursuant
to the terms of the Energy Charter Treaty (the "Treaty")
which Russia signed in 1994 and by which Russia is legally bound.
This is the largest commercial arbitration claim
ever filed.
The claims are based upon the Russian Federation's
violation of the provisions of the Energy Charter Treaty which
protect investors' rights in cases where investors are subjected
to discriminatory measures by which their investments are expropriated
without payment of prompt, adequate and effective compensation.
Substantive hearings regarding Yukos Universal
and Hulley's claims were due to begin on 11th June 2007 in The
Hague. The Tribunal has bifurcated the hearing so it will hear
arguments on jurisdictional and admissibility issues first and
assuming Yukos Universal and Hulley successfully demonstrate that
there are no jurisdictional and/or admissibility issues which
prevent the claim from proceeding, the merits of the case will
then be explored at a further hearing to be set by the Tribunal.
The initial hearing was postponed due to sudden unavailability
of GML's nominated arbitrator and is now due to take place in
early 2008 although a date is yet to be set.
RUSSIA AND
THE ENERGY
CHARTER TREATY
The Russian Federation signed the Treaty on
17 December 1994 and, pursuant to the provisions of the Treaty,
is legally bound thereby, notwithstanding the fact that the Treaty
has not, to date, been ratified by the Duma.
Article 45(1) of the Treaty states that:
"Each signatory agrees to apply this
Treaty provisionally pending its entry into force for such signatory
in accordance with Article 44 to the extent that such provisional
application is not inconsistent with its constitution, laws or
regulations".
The Russian Federation chose not to opt out
of applying the Treaty pending ratification when it signed it
provisionally. If a country chooses not to apply the Treaty provisionally
(such as Australia, Iceland and Norway) they must state their
decision when signing the Treaty
Furthermore the Russian Federation has stated
on several occasions that it attaches great importance to the
Treaty as part of its energy policy. On 17 December 2002 at the
Energy Charter Conference, Andrei Denisov, the then Deputy Foreign
Minister and the head of the Russian delegation to the conference
stated that:
"Russia views the Energy Charter as an
important instrument for international energy cooperation, and
reiterates its intention to continue its participation in discussions
on a wide range of issues related to energy transit, trade, investments
and energy efficiency within the framework of the Charter process".
On 28 November 2003, Victor Khristenko, then
Deputy Prime Minister of the Russian Federation, met the head
of the Energy Charter Conference and the General Secretary of
the Energy Charter Secretariat. At this meeting it was confirmed
that Russia would participate in accordance with the Treaty to
ensure the stability of world and regional energy markets. Going
one step further, Russian Finance Minister, Alexei Kudrin said,
on 8 February 2006:
"Russia must develop its gas network
in order to provide [pipeline] access to everyone, including private
companies, and we are working on it. In that context we are going
to ratify the charter [Energy Charter Treaty], although we cannot
set a date for the moment".
However, Presidential aide, Igor Shuvalov, and
Foreign Minister Sergei Lavrov have both contradicted this. Shuvalov,
quoted in RIA Novosti on 20 June 2006 said:
"the Russian Federation has signed the
Energy Charter . . . The principles contained within it are correct,
but Russia will not yet undertaken any commitments to ratify it
. . . There are a few things that do not correspond to Russia's
interests".
Foreign Minister Lavrov said, on 23 October
2006:
"We share the principles that are laid
down in the charter. However, the principles that are laid down
in the Treaty to the charter seem unfair to us".
The Russian Federation however does apply the
provisions of the Treaty selectively in its dealings with countries
with whom Moscow is on friendly terms, as President Putin said
on 12th February 2007, quoted in the Russian Financial Control
Monitor:
"The underlying principles of the charter
are acceptable" he said, adding that Russia is using them
in relations with German, Italian and Ukrainian Partners".
It is noteworthy that the Russian Federation
still participates in the inter-state cooperation and institutional
arrangements of the Treaty. In particular, the Vice-Chairman of
the Energy Charter Conference is the Russian Federation's representative,
Mr Ivan Materov (State Secretary and Deputy Minister of Industry
and Energy). In addition, the Deputy Secretary General of the
Energy Charter Secretariat, Dr Andrei Konoplyanik, is also a Russian
national.
HEARINGS IN
THE HAGUE
As stated above, hearings regarding Yukos Universal
and Hulley's claims were due to commence in The Hague in early
summer 2007 but have been postponed until 2008 due to the sudden
unavailability of GML's nominated arbitrator. GML has since appointed
Dr Charles Poncet as its nominated arbitrator. The Arbitral Tribunal
will first discuss and rule upon jurisdictional and admissibility
issues before examining the merits of the case.
The arbitration proceedings are confidential.
However, it is thought that the Russian Federation will argue
that it does not have to apply the Treaty due to the proviso contained
in Article 45(1) of the Treaty that it should only be applied
provisionally to the extent that domestic laws permits it to do
so. The Russian Federation may also argue that, constitutionally,
it is the Duma, not the Government that has the power to bind
the Russian Federation. If that were the case, the Russian Federation
should have opted out of provisional application when it signed
the Treaty in 1994.
Yukos Universal and Hulley are represented in
the proceedings by Shearman & Sterling's Paris office (led
by the internationally renowned arbitration lawyer Emmanuel Gaillard),
The Russian Federation is represented by Cleary Gottlieb Steen
& Hamilton's Paris office (Robert Grieg).
Yukos Universal and Hulley has nominated Dr
Charles Poncet of, Geneva law firm, ZPGCL to act as an arbitrator
with the Russian Federation nominating as an arbitrator Stephen
M. Schwebel, the former head of the International Court of Justice.
The chairman of the arbitral tribunal, Yves Fortier of Ogilvy
Renault in Montreal, the honorary vice president of the London
Court of International Arbitration, was appointed by the Permanent
Court of Arbitration in The Hague.
If GML is successful in demonstrating to the
Tribunal that there are no jurisdictional and/or admissibility
issues which prevent the case from proceeding, the Tribunal will
then set a further procedural timetable leading up to a hearing
on the merits of the case. It is unlikely that a final decision
on the claim will be forthcoming before 2010.
HISTORY OF
THE ECT
The roots of the Energy Charter Treaty date
back to political initiatives in Europe following the end of the
Cold War in the early 1990s. It was clear that opportunities existed
for mutually beneficial cooperation between East and West in the
energy sector. Russia and many other countries within the Commonwealth
of Independent States and Central and Eastern Europe were rich
in energy resources. However, the development of these energy
resources required major investment. It was to encourage such
investment that Russia entered into the Energy Charter Treaty.
Western European states had a strategic interest
in diversifying the sources from which they obtained their energy
supplies in order to reduce their dependence upon other areas
of the world. It was recognised that there was a need to ensure
that a commonly accepted foundation existed to develop energy
cooperation between states of the Eurasian continent.
In December 1991, the European Energy Charter
(or the Energy Charter Declaration) was signed in The Hague. This
document was a declaration of political intent to promote cooperation
between states within the energy sector. The Energy Charter Treaty
was developed upon the basis of the Charter. However, unlike the
Charter, the Treaty is a legally binding, multilateral treaty
dealing specifically with inter-governmental cooperation within
the energy sector.
The fundamental aim of the Treaty is to strengthen
the Rule of Law on energy issues by creating a level playing field
of rules to be observed by all governments who are signatories
to the Treaty, thus minimising the risks associated with energy
related investments and trade.
The Treaty was signed on 17 December 1994 and
entered into force on 16 April 1998. Alongside the European Community,
51 nations have signed the Treaty. 46 nations have ratified the
treaty with 2 nations applying the treaty "provisionally"
until it is formally ratified. 3 nations opted out pending ratification,
Russia did not opt out and applies the treaty provisionally.
One of the focal points of the Treaty is the
promotion and protection of investments within the energy sector.
The investment protection regime is found in Part III of the Treaty
entitled "Investment Promotion and Protection". The
key provisions are Articles 10 (covering promotion, protection
and treatment of investments) and 13 (providing for the compensation
of investors whose investment has been the subject of nationalisation
or expropriation).
Article 26 of the Treaty provides for a binding
international dispute settlement procedure in the event that a
signatory to the Treaty and an investor cannot resolve a dispute
amicably.
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