Investment Arbitration as a Check on Corruption: The Yukos Award

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.

7 thoughts on “Investment Arbitration as a Check on Corruption: The Yukos Award

  1. This is really interesting, Ana. As to your second point, while it seems that the difficulties involved in enforcing the award will certainly decrease foreign investment, I wonder whether such an effect would actually deter corruption, rather than just punish past corruption. If past efforts at enforcing arbitration awards are indicative, this could take several years and numerous subsequent lawsuits to collect. Could significant drops in foreign investment over several years do more harm than good? Is it possible that Russia will seek out more sophisticated means of suppressing investors to escape additional liability? If investors are also concerned about litigation surrounding enforcement, it seems that they might not even be significantly swayed by a crack down on corruption.

  2. Ana, you are obviously far more an expert on Russia than I, but in response to your first bullet point, my sense–perhaps exaggerated by US-based media–is that Russia seems pretty loathe to change its behavior in response to foreign pressure (often reacting in a way opposite to what other countries are telling it to do). Is that is the case, is there something special about this particular naming-and-shaming that we think is going to cut against that trend (beyond the economic pressures that link to your second bullet point)? Is the fact that criticism is not specifically American making a difference? This may be a bit off-base, since I haven’t really been following it, but I seem to remember reports a few months ago (but post-Yukos v. Russian Federation) a recent house arrest of a man who ran a big Russian company that happened largely because he wouldn’t sell a/the company to someone close to Putin. If that sort of thing is still happening (and if it was political), has Yukos really caused much of a change among Russian actors?

    • Great post Anna. I just wanted to pick up on Katie’s observation here about the degree to which we believe that the medium through which criticism is delivered might impact Russia’s willingness to respond to accusations of corruption. I agree with Katie (though also am far less experienced than you in this area) that Russia has not (traditionally) been particularly amenable to foreign pressure, particularly from the United States or other organizations which it might, rightly or wrongly, believe to be biased against it. However, I think that this fact makes your point regarding the potential impact of the finding in Yukos v. Russian Federation all the more powerful. In light of the fact that investment arbitration is, as I understand it, viewed as being fairly neutral in political affairs is it possible that Russia and others will ascribe a greater degree of legitimacy, or be more willing to change in response, to its findings than it might other entities whose motives it might doubt?

  3. Anna, thank you for an interesting post which, together with Sam Birnbaum’s entry, makes a fascinating read. I am not sure, though, whether the Yukos award is irreconcilable with the spirit of World Duty Free or for that matter other arbitration awards that dealt with corruption.

    In World Duty Free v. Kenya, the tribunal was faced with claims grounded in a contract procured by bribery. In effect, the arbitrators chose not to enforce the contract for the reason that it was vitiated with corruption (para. 179). While the decision is bound to generate unfairness inter partes, it is hardly objectionable. (Moreover, I feel that the tribunal should have declined jurisdiction in the first place as Judge Lagergren did in the ICC Case No. 1110. The arbitrators’ cursory remarks in para. 187 shed no light on the source of tribunal’s jurisdiction.)

    In contrast to World Duty Free, Yukos did not request the tribunal to adjudicate on claims that directly arose out of contracts procured through wrongdoing. Thus the tribunal rightly rejected Russia’s arguments. At the same time, by recognizing that no protection would have been accorded to investments made in violation of Russian laws the arbitrators adopted a stance similar to that of the World Duty Free tribunal.

    I think this merely reinforces your point that investment arbitration can and should serve as a tool for promoting transpareness and accountability by exposing corruption at international fora. Unfortunately, whether it will create financial disincentives for corruption is less clear: the burden of compensating investors will probably not be borne by the ruling elites of countries like Russia.

  4. Anna — Since you’re far more in tune with the intersection of Russian politics and corruption, I imagine you’ve already seen this. But just in case, I wanted to reinforce the idea that the Russian General Prosecutor’s Office is a particularly scary obstacle to broader social/political reform in Russia. After all, it is a main weapon used by the state to punish dissidents and secure political power. And unfortunately, the unit itself is corrupted not just by Putin’s political power, but by money as well. It was this office, in fact, that was bribed by officials of Hewlett Packard in recent memory.

  5. Great post, Ana (though I’m a bit late to the party). You pointed out that full enforcement is unlikely, but I wonder whether even partial enforcement creates a fairly strong deterrent. For example, the string of judgments against the Iranian government–many dating back to the 1979 hostage crisis–have played a significant role in isolating capital controlled by the Iranian government. In other words, even if the award isn’t collected, its existence may preclude certain investments by the Russian government in other nations where the award is enforceable. I’m no expert on this, so I’m not sure how this would interact with sanctions (and/or whether sanctions have already basically maxed out the isolation of Russian capital), but I’d imagine it could potentially have a compounding effect–reinforcing your point further.

  6. Pingback: Corruption: The use of a bribe as a defence in International Investment Arbitration. Are chocolate covered fingers a defence? - Corporate Accountability Project

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