In a previous post on this blog, Sam raised the possibility that under the logic of World Duty Free v. Kenya, investment treaty arbitration rules might actually encourage state officials to engage in corruption, because corrupt acts by an investor (even when the state is also implicated) can be used to escape state liability in investment arbitration. Even if Sam’s point is true, however, it is important to acknowledge that investment arbitration can be a check on corruption in many instances. In fact, as the Yukos v. Russian Federation award issued against the Russian government this past summer demonstrates, Sam may be pointing out the exception, not the rule. Indeed, this $50 billion award – the largest international arbitration award in history – demonstrates the power of investment arbitration to bring corruption to light and act as an outside check on corrupt states.
The dispute in Yukos arose from the politically motivated targeting of Mikhail Khodorkovsky and the Russian government’s breakup of the Khodorkovsky’s firm, the oil and gas giant Yukos. In a nutshell, the Yukos shareholders claimed that Russia, through the breakup of the company, illegally expropriated their investments in Yukos in violation of the Energy Charter Treaty.
Russia attempted to argue that Yukos could not recover under the treaty because Yukos did not come to the tribunal with “clean hands”–an argument on its surface similar to the argument that Kenya successfully invoked as a defense to liability in World Duty Free. Yet the tribunal rejected that argument for two reasons. First, the tribunal held that under the ECT itself, only illegal wrongdoing at the very moment of the making of an investment, which was absent here, could bar a claim by an investor. Second, the tribunal denied the existence of an “unclean hands” doctrine as a “general principle of law recognized by civilized nations” that could deny investors access to claims in investor-state disputes.
Although there is no direct doctrinal link between the two awards (the Yukos tribunal did not refer to World Duty Free) and the “unclean hands” doctrine encompasses a broad swath of wrongdoing beyond corruption, the Yukos award does contradict the spirit of World Duty Free when the wrongdoing at stake is corruption or bribery. Therefore, the Yukos arbitration is a good example of how powerful investment arbitration can be where the perverse incentive identified by Sam in his post does not apply.
Enforcement of the award will be difficult and full recovery likely impossible. However, even if and especially if the award is never enforced, the award could change behavior in the Russian regime–and, in particular, could discourage corruption in the foreign investment context–through two mechanisms.
- First, the award legitimates and memorializes accusations of corruption against the Russian government. The 600-page award spells out corruption in the highest ranks of the Russian government in great detail. For example, the award specifies that the General Prosecutor’s office (the politicized culture of which is described in greater detail in my previous post on the topic) created a “special unit…comprised of approximately 50 people” that “work[e]d exclusively on fabricating evidence against Mr. Khodorkovsky and Yukos.” Even if this dirty laundry has been aired in the past, the organization of this information by an arbitral tribunal carries special weight and is particularly embarrassing and damning for the Russian government.
- Second, the award might impact foreign investment in Russia, especially if the award is never enforced. There is some, albeit mixed, evidence that the availability of effective investment arbitration encourages foreign direct investment. If foreign investors expect that recovery against Russia in investment arbitration proceedings will be difficult, no matter how flagrant Russia’s wrongdoing is, foreign investment could be dampened. Waning enthusiasm for foreign investment in Russia could be exacerbated by the abolition of the Supreme Arbitration Court, the highest court in the Russian commercial courts system. Now, the politicized Russian Supreme Court will have appellate jurisdiction over cases in the commercial courts, which are widely perceived as more independent than the courts of general jurisdiction. Russia’s resistance to such a high-profile award, coupled with tighter political control of the courts that handle commercial disputes, could create an even greater sense of lawlessness in the commercial sphere. Now that Putin is feeling the pain from recent sanctions and falling oil prices, the ruling regime might become more sensitive to fostering foreign investment and economic growth. Such a sensitivity could create an incentive to tamp down corruption in the economic sphere as a result of the Yukos award.
Thus, those that are skeptical of the role that international arbitration can play in the fight against corruption could take heart. Even when corruption isn’t relevant to the outcome of an arbitral award in a doctrinal sense because of burden of proof issues or other barriers, the Yukos award suggests not only that concerns about the implications of the World Duty Free scenario might be exaggerated, but also that international arbitration awards might help expose and discourage corruption by destination countries.