A landmark ruling by an international arbitration court has dealt Russia and the world’s largest publicly traded oil company, Rosneft, a serious financial blow.
The Permanent Court of Arbitration, based in The Hague, ruled that Russia must pay $50 billion to the former shareholders of Yukos to compensate them for their lost assets when Yukos was expropriated by the Russian government.
Back in 2005, the Russian state accused the private oil firm Yukos of tax evasion and threw the company’s leader, Mikhail Khodorkovsky, in jail. The $40 billion company was taken over by the government, with most of its assets handed over to Rosneft, the state-owned oil company. Rosneft is now the world’s largest publicly traded oil company by production.
Once the richest man in Russia, Khodorkovsky spent 10 years in prison before being pardoned by Russian President Vladimir Putin in December 2013. Yukos’ shareholders, meanwhile, pursued international arbitration to recover their seized assets, and the ruling on July 28 granted them victory.
To be sure, actually extracting payment from Russia for the $50 billion awarded by the court will be exceedingly difficult. Russia called the court’s decision a “politically biased decision,” and vowed to appeal.
But whether or not Russia pays up, the court’s decision will inflict economic pain on the Russian economy. Rosneft was not a defendant in the arbitration case, but since it owns the assets of the defunct Yukos, it took a beating from the markets after news broke of the court’s decision.
Yields on Rosneft’s Eurobonds reached 6.90 percent -- their highest levels in over 12 weeks. Rosneft’s share price also dropped 2.1 percent on July 28.
And since the $50 billion levy represents around 2.5 percent of Russia’s total economic output, the court decision could weigh on Russia’s broader economy. The Moscow stock exchange (MICEX) was off 2.7 percent on July 28, as well.
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“Today’s news adds fuel to the fire and increases the pressure on Rosneft’s Eurobond prices, which have been underperforming the market,” Dmitry Makarov, an analyst at the Moscow-based UralSib Capital, told Bloomberg News.
On the other hand, the pressure on Russia’s economy was already worsening in the wake of the July 17 downing of a Malaysian Airlines passenger plane carrying 298 people, apparently from an area of Ukraine held by pro-Russian separatists suspected of using a Russia-supplied missile. The incident appears to have pushed many European leaders to overcome their hesitation at enacting punishing sanctions on Russia.
U.S. President Barack Obama, and his counterparts in France, the UK, Germany, and Italy participated in a five-way videoconference on July 28 and agreed to take additional measures to isolate Russia. “The five heads of state and government confirmed, under these conditions, their intention to adopt new measures toward Russia,” French President Francois Hollande said in a statement. German Chancellor Angela Merkel’s decision to move forward with additional sanctions proved to be critical in convincing France and Italy, according to The New York Times. Germany has been cautious thus far, given the fact that its economy is intricately tied to Russia’s, so Merkel’s new resolve is an important change.
Rosneft has already been the target of western sanctions, with President Obama recently moving to block it from obtaining loans with maturities longer than 90 days. The sanctions could complicate Rosneft’s ability to refinance $112 billion in debt that is maturing over four years, according to a report from Moody’s Investors Service.
Europe appears to be on the verge of enacting similar restrictions on long-term financing for Russia’s state-owned banks – taking European action against Russia to a new level – but still stopped short of cracking down on Russia’s energy sector.
The cumulative impact of the multiple rounds of sanctions, plus the latest court decision, is casting a cloud over the Russian economy, which could dip into recession this year. The onslaught may not let up, particularly since there is evidence to suggest that Russia has only stepped up its involvement in Ukraine’s civil war since the downing of the Malaysian Airlines flight. Russia may not feel the need to back down, but its economy is paying the price.
By Nick Cunningham