Russia's Defense on Appeal before the Court of Appeal in The Hague

703 Pages·2017·6.83 MB·English

UNOFFICIAL TRANSLATION
This text is an unofficial translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
Court of Appeal The Hague
Date 28November 2017
DEFENCE ON APPEAL
in the matter of:
Case No. 200.197.079/01 THE RUSSIAN FEDERATION,
seated in Moscow, Russian Federation,
Appellee
counsel: prof. mr.A.J. van den Berg
local counsel: mr. J.A. Dullaart
versus:
HULLEY ENTERPRISES LIMITED,
Nicosia, Cyprus,
VETERAN PETROLEUM LIMITED,
Nicosia, Cyprus,
YUKOS UNIVERSAL LIMITED,
Douglas, Isle of Man,
Appellants, together referred to as: HVY
counsels: mrs. M.A. Leijten, M. Ynzonides en
A.W.P. Marsman
local counsel: mr. M.A. Leijten
____________________________________
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UNOFFICIAL TRANSLATION
This text is an unofficial translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
Table of contents
I. INTRODUCTION.......................................................................................................................................8
A. Structure of this Defence on Appeal.........................................................................................8
B. Anticipationof the legal framework under Article 1065(1)(a) DCCP......................................9
C. Summary of the main arguments Article 45 ECT (Jurisdiction Ground1).............................10
D. The backgrounds; known and new facts and evidence............................................................10
E. The other grounds for setting aside.........................................................................................11
(a) HVY are notInvestors and have not made an Investment within the meaning of
Article 1(6) and (7) ECT (Jurisdiction Ground2)......................................................12
(b) HVY's claims concern allegedly unlawful taxation measures and not taxes, and
therefore fall outside the scope of the ECT pursuant to Article 21 ECT
(Jurisdiction Ground3)..............................................................................................12
(c) Failure to comply with the mandate...........................................................................13
(d) Violation of the duty to state reasons..........................................................................14
(e) Contrary to public policy............................................................................................15
II. GROUND FOR SETTING ASIDE 1 - NO VALID ARBITRATION AGREEMENT (ARTICLE 1065(1)(A)
DCCP).................................................................................................................................................16
A. Introduction.............................................................................................................................17
B. The District Court interpreted Article 45(1) ECT correctly....................................................21
(a) The ECT’s entry into force requires ratification.........................................................22
(b) Provisional application and the interpretation of Article 45(1) ECT.........................27
(c) The District Court correctly ruled that Article 45 ECT provides for limited
provisional application...............................................................................................32
(d) The District Court’s interpretation matches what had already been accepted as
the only correct interpretation of Article 45(1) ECT at the time.................................54
(e) The Tribunal’s interpretation of the treaty leads to absurd consequences.................70
C. The District Court correctly found that arbitration of HVY's claims is inconsistent with
the Russian Constitution and Russian laws.............................................................................71
(a) Introduction................................................................................................................72
(b) It is inconsistent with the Russian Constitution to apply Article 26 ECT
provisionally without the consent of Parliament........................................................78
(c) It is inconsistent with Russian Law to submit tax or expropriation disputes to
arbitration..................................................................................................................91
(d) It is inconsistent with Russian laws for shareholders to bring a claim in
connection with damage caused to the company......................................................119
D. HVY’s other –previously rejected or entirely new –arguments cannot succeed.................125
(a) Introduction..............................................................................................................125
(b) The majority of the arguments of HVY cannot be discussed in these proceedings...126
(c) The District Court and the Tribunal correctly ruled that a reliance on Article
45(1) ECT does not require a prior declaration pursuant to Article 45(2) ECT......138
(d) HVY’s previously rejected reliance on acquiescence and estoppel is untenable......149
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(e) The District Court correctly ruled that the pacta sunt servanda principle is not
violated (ground 5.19)..............................................................................................177
(f) HVY’s interpretation of the words “not inconsistent” is untenable (new
argument).................................................................................................................181
(g) HVY’s arguments regarding the broad powers of President Yeltsin fail (new
argument).................................................................................................................188
E. Discussion of the separate grounds for appeal and statements..............................................219
(a) Introduction..............................................................................................................219
(b) Ground for Appeal 1: the final conclusions and operative part of the Judgment.....220
(c) Ground for appeal 2.1: submitted documents...........................................................220
(d) Ground for appeal 2.2: the burden of proof rests on HVY.......................................224
(e) Ground for Appeal 2.3: the viewpoint of investors...................................................232
(f) Ground for appeal 3: the reliance on acquiescence and estoppel............................233
(g) Ground for appeal 4: the interpretation of Article 45 ECT......................................234
(h) Ground for appeal 5: inconsistency with Russian constitutional law.......................238
(i) Ground for appeal 6: inconsistency with the statutory provision on arbitrability....243
(j) Defence against HVY's expert opinions....................................................................244
III. BACKGROUND: THE UNLAWFUL ACQUISITION, EXPLOITATION, AND LOOTING OF YUKOS OIL
COMPANY...........................................................................................................................................247
A. Introduction...........................................................................................................................248
B. The unlawful conduct of the Russian Oligarchs and HVY...................................................253
(a) Phase 1 - The Russian Oligarchs Obtained HVY’s Yukos Shares by Fraud,
Bribery and Collusion: Bribes Were Paid by YUL...................................................254
(b) Phase 2 - The Russian Oligarchs created Hulley, YUL and VPL to conceal
control over Yukos Shares and Evade Dividend Taxes.............................................266
(c) Phase 3 - The Russian Oligarchs Abused Shell Companies to Commit Tax
Fraud in the Russian Federation’s Low-Tax Regions (1996-2004)..........................278
(d) Phase 4 - The Russian Oligarchs Obstructed Tax Enforcement, While
Simultaneously Stripping Billions of Dollars from Yukos Through HVY..................291
C. The Russian Oligarchs’ Continuous Deception Regarding Their Ownership and Control
of HVY.................................................................................................................................296
(a) 1996-2002 -The Russian Oligarchs Concealed Their Ownership of Yukos.............297
(b) 2006-2016 - The Russian Oligarchs Revealed Their Beneficial Ownership of
GML and HVY, But Falsely Concealed Their Continuous Control of GML and
HVY..........................................................................................................................301
D. Conclusion............................................................................................................................313
IV. GROUND FOR SETTING ASIDE 1 (CONTINUED) - NO VALID ARBITRATION AGREEMENT (ARTICLE
1065(1)(A)DCCP).............................................................................................................................314
A. Introduction...........................................................................................................................314
B. Legal Framework..................................................................................................................315
C. Jurisdictional Ground 2 – The Tribunal lacked jurisdiction because the ECT does not
protect HVY nor HVY's shares in Yukos.............................................................................315
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(a) Introduction..............................................................................................................317
(b) The ECT Does Not Protect HVY’s Yukos Shares Because They Are, At Bottom,
Investments By Russian Nationals In Russia............................................................318
(c) The ECT Does Not Protect HVY’s Investments Because They Were Made In
Violation Of Law......................................................................................................358
(d) Conclusion: the Tribunal lacked jurisdiction because HVY and their shares in
Yukos are not protected under the ECT....................................................................385
D. Jurisdiction Ground 3 -The Arbitral Tribunal had no jurisdiction pursuant to Article 21
ECT.......................................................................................................................................385
(a) Introduction..............................................................................................................387
(b) The carve-out of Article 21(1) ECT excludes arbitration pursuant to Article 26
ECT on taxation measures........................................................................................389
(c) The term “taxation measures” in Article 21(1) ECT includes any legislative,
executive and collecting measure.............................................................................391
(d) The term “taxes” does not include executive measures and collecting measures....393
(e) The contested measures of the Russian Federation are taxation measures but
not taxes....................................................................................................................397
(f) The carve-out of Article 21(1) ECT applies to any taxation measures that is
sufficiently clearly connected with a taxation law or regulation..............................398
(g) Even on the basis of the incorrect standard applied by the Tribunal, the taxation
measures of the Russian Federation are subject to the carve-out of Article 21(1)
ECT..........................................................................................................................401
(h) The ECtHR judgments in 2011 and 2013 confirm that the measures of the
Russian Federation concerned a legitimate exercise of the Russian Federation’s
power to levy taxes...................................................................................................404
(i) The measures of the Russian Federation are consistent with internationally
recognised tax policies and practices, including those of the Netherlands...............406
(j) Conclusion: on the basis of Article 21 ECT, the Tribunal had no jurisdiction in
respect of HVY’s claims............................................................................................407
V. GROUNDS FOR SETTING ASIDE 2AND 3-NON-COMPLIANCE WITH THE MANDATE OF THE ARBITRAL
TRIBUNAL AND THE COMPOSITION OF THE ARBITRAL TRIBUNAL (ARTICLE 1065(1)(C) AND (B)
DCCP)...............................................................................................................................................409
A. Introduction...........................................................................................................................409
B. Legal framework...................................................................................................................409
C. Mandate Ground 1 - The Tribunal has failed to refer the expropriation dispute to the
competent tax authorities......................................................................................................410
(a) Introduction..............................................................................................................412
(b) The provisions of Article 21(5) ECT.........................................................................412
(c) History, object and scope of Article 21(5) ECT........................................................413
(d) Course of proceedings and Tribunal's decision........................................................414
(e) Fallacies of the Tribunal; HVY's arguments cut no ice............................................417
(f) Consequences for crucial parts of the Final Awards................................................421
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(g) Conclusion: the Tribunal has not complied with its mandate and acted in
violation of public order by consciously ignoring Article 21(5) ECT.......................422
D. Mandate Ground 2 – The Tribunal violated its mandate by not allowing the Russian
Federation an opportunity to set out its position on the Tribunal's own method for
calculation damages..............................................................................................................422
(a) Introduction..............................................................................................................424
(b) The debate between the parties and the Tribunal’s conclusions...............................428
(c) The Tribunal’s own methodology.............................................................................432
(d) The valuation dates were determined in violation of Article 13 ECT.......................440
(e) The Tribunal's use of its own methodology without hearing both parties had
substantial consequences..........................................................................................441
(f) Conclusion: the determination of the damage was an inadmissible surprise
decision.....................................................................................................................450
E. Mandate Ground 3 – The Tribunal did not personally fulfil its mandate and
consequently the Tribunal was incorrectly composited (Article 1065(1)(c) and (b)
DCCP)...................................................................................................................................450
(a) Introduction and overview of delegation reproach...................................................452
(b) The prohibition on delegation of the ‘substantive’ arbitral task...............................467
(c) The scientific evidence that Valasek has written essential components of the
Final Awards............................................................................................................498
(d) Conclusion: the Arbitrators have, by delegating part of their task to their
assistant, violated their mandate and/or fulfilled it with a ‘fourth arbitrator’.........506
VI. GROUND FORSETTING ASIDE 4-AWARDS ARE NOT ADEQUATELY REASONED...................................507
A. Introduction...........................................................................................................................507
B. Legal Framework..................................................................................................................508
C. Reasoning Ground 1 - The Tribunal failed to state sound reasons for its essential
opinions in respect of estimating the amount of the damages...............................................511
(a) Introduction..............................................................................................................512
(b) Flawed reasoning.....................................................................................................513
(c) Conclusion: the estimate of the amount of the damages by the Tribunal lacks
(sound) reasons........................................................................................................521
D. Reasoning Ground 2 - The Arbitral Tribunal has not stated any sound reasons for its
incorrect opinion that the case file does not contain evidence showing that the
Mordovian companies of Yukos were sham companies, incorporated solely for the
purpose of avoiding Russian taxes........................................................................................521
(a) Introduction:.............................................................................................................523
(b) There is an abundance of evidence of the fraud Yukos committed in Mordovia
which is furthermore identical to the evidence of the fraud Yukos committed in
Lesnoy and Trekhgorny............................................................................................527
(c) The opinion of the Tribunal is incomprehensible and unsubstantiated.....................538
(d) Conclusion: an abundance of evidence, no tenable reason......................................540
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UNOFFICIAL TRANSLATION
This text is an unofficial translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
E. Reasoning Ground 3 - Several of the Tribunal's findings are based on its own
speculations; no sound reasoning..........................................................................................541
(a) Introduction..............................................................................................................542
(b) Speculation in respect of reattributing revenues of Yukos’ sham companies to
Yukos itself................................................................................................................544
(c) Speculation about fines imposed on Yukos...............................................................548
(d) Speculation about VAT assessments imposed on Yukos............................................548
(e) Speculations about Yukos’ bankruptcy proceeding..................................................549
(f) Speculation about sub rosa direction from Russian Federation to Rosneft..............550
(g) Conclusion: speculations do not amount to sound reasoning...................................551
F. Reasoning Ground 4 - The Tribunal’s finding regarding the YNG shares is internally
inconsistent; the reasoning is not sound................................................................................551
(a) Introduction..............................................................................................................552
(b) The unsubstantiated finding of the Tribunal that the YNG shares were sold for a
price far below their fair value contradicts its own valuation of Yukos as a
whole........................................................................................................................553
(c) The opinion on the YNG auction supported the award of the expropriation claim
in the Final Awards..................................................................................................554
(d) Conclusion: unsound reasoning because of internally inconsistent conclusion
with regard to the YNG auction................................................................................555
VII. GROUND FOR SETTING ASIDE 5 - THE YUKOS AWARDS ARE CONTRARY TO THE PUBLIC POLICY
(ARTICLE 1065(1)(E)DCCP)..............................................................................................................556
A. Introduction...........................................................................................................................556
B. Legal framework...................................................................................................................557
C. Public Policy Ground 1 -The Tribunal's violation of the right of both sides to be heard
and the right to equality of arms............................................................................................559
D. Public Policy Ground 2 -The Tribunal has violated public policy by basing its award on
speculation............................................................................................................................561
E. Public Policy Ground 3 - The Tribunal relied on its own views with regard to what
Russian law should have provided rather than on what Russian law actually provided........564
F. Public Policy Ground 4 -The Tribunal’s finding regarding the YNG shares is internally
inconsistent and is based on the Tribunal's own speculation.................................................566
G. Public Policy Ground 5 – HVY’s Fraud in the Arbitration Requires Set-Aside of the
Yukos Awards on Public Policy Grounds.............................................................................568
H. Public Policy Ground 6 – Enforcement of the Yukos Awards would violate Public
Policy regarding Fraud, Corruption, and other Serious Illegality..........................................573
I. Conclusion: Yukos Awards are contrary to the public policy...............................................577
VIII. REMAINING ISSUES.............................................................................................................................578
A. Defence against several irrelevant biased allegations in the introduction of the
Statement of Appeal..............................................................................................................578
(a) Allegations regarding the judiciary in Armenia.......................................................579
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(b) Allegations with regard to Mr. Aleksanyan and the alleged manipulation of
witnesses...................................................................................................................581
(c) Allegations on purported inappropriate diplomatic pressure...................................584
(d) Allegations relating to alleged mass propaganda....................................................587
(e) Allegations on purported disingenuous statements...................................................590
IX. EXHIBITS,OFFEROF PROOF AND CONCLUSION....................................................................................591
A. Exhibits and Offer of Proof...................................................................................................591
B. Conclusion............................................................................................................................593
X. ANNEX 1 - QUOTES FROM EVIDENCE ALREADY SUBMITTED IN THE ARBITRATIONS CONCERNING
YUKOS’SHAM COMPANIES IN LOW-TAX REGIONS,INCLUDING MORDOVIA...........................................595
XI. LIST OF DEFINED TERMS......................................................................................................................613
XII. LIST OF (LEGAL)AUTHORITIES (SECONDARY)....................................................................................628
XIII. OVERVIEW OF EXPERT REPORTS AND WITNESS STATEMENTS................................................................640
A. Overview of expert reports Defence on Appeal [without annexes].......................................640
B. Overview of witness statements Defence on Appeal [without annexes]...............................640
C. Overview of expert reports in First Instance and Defence on Appeal [with annexes]...........641
D. Overview of witness statements in First Instance and Defence on Appeal [with annexes]...674
XIV. OVERVIEW OF EXHIBITS......................................................................................................................684
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UNOFFICIAL TRANSLATION
This text is an unofficial translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
I. INTRODUCTION
A. Structureof thisDefence on Appeal
1. In its judgment of 20 April 2016, the District Court in The Hague ("District Court") set
aside the Yukos Awards on account of the lack of a valid arbitration agreement within the
meaning of Article 1065(1)(a) DCCP (“Judgment”).1 HVY has put forward grounds for
appeal against this judgment. In this Defence on Appeal, these grounds for appeal will first
be addressed.
2. The Tribunal deemed itself competent because according to the Tribunal Article 26 of the
Energy Charter Treaty (“ECT” or "Treaty") entailed an offer from the Russian Federation
to submit the dispute of HVY with the Russian Federation to arbitrators. The District Court
rightly held that the Russian Federation is not bound by the arbitration clause of Article 26
ECT in relation to this dispute, since the Russian Federation never ratified the ECT. Nor
did the ECT enter into force from the Russian Federation's point of view. As a Signatory,
the Russian Federation only undertook to provisionally apply the ECT to the extent that
provisional application is not inconsistent with its national law. The District Court ruled
that arbitration is inconsistent with Russian law, inter alia because public-law disputes
according to Russian law are not arbitrable. The consequence is that the Russian Federation
never agreed to arbitration. The Russian Federation will explain that the District Court's
conclusion is correct and will also demonstrate that HVY’s grounds for appeal against the
Judgment are unfounded. The Judgment of the District Court must be upheld.
3. Subsequently the factual background of the dispute will be discussed. These are important
for the various grounds for setting aside and will be described in an continuos storyfor the
sake of clarity.
4. In the following chapters, the Russian Federation will discuss the grounds for setting aside
that were advanced in the first instance. The Court of Appeal can, but is not obliged to,
confine itself to hearing the Appellant’s grounds for appeal.It may also, either immediately
or in addition or instead, hear and rule on the respondent’s other grounds of action still

1 Meanwhile, the District Court in Brussels has expressly recognised the correctness and validity of the
Judgment. According to the District Court in Brussels the fact that the Judgment was not irrevocable yet
did not stand in the way of this. See District Court Brussels 8 June 2017 (Exhibit RF-296).
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remaining as a result of the devolutive effect of the appeal proceedings.2 In the unlikely
event that this Court of Appeal first addresses HVY's grounds for appeal and is of the
opinion that the provisional application of the ECT does not stand in the way of the
Tribunal's jurisdiction, the other grounds for setting aside will be discussed again on the
basis of the devolutive effect of the appeal. In addition, HVY's arguments advanced in its
Statement of Rejoinder and Pleading Notes, which have not yet been contested in writing,
will be discussed. Naturally, this does not alter the fact that everything the Russian
Federation has argued in the first instance must be included in the context of the devolutive
effect.
5. The Defence on Appeal will be concluded with, inter alia, an Offer of Proof, the
Conclusion, a List of Defined Terms, a List of Sources, a List of Expert Opinions and a
List of Exhibits.
6. The Russian Federation maintains everything it stated in the first instance and adds new
evidence in this appeal. Insofar as necessary, it refers to the offers of evidence made in the
first instance and in this Defence on Appeal.
B. Anticipation of the legal framework under Article 1065(1)(a) DCCP
7. Based on Dutch procedural law, HVY bears the burden to demonstrate that there is a valid
arbitration agreement. If HVY cannot provide this incontrovertible evidence and doubts
remain, the Yukos Awards must be set aside on account of the lack of a valid arbitration
agreement. The fact that HVY were defendants in the first instance does not alter this.
HVY were claimants in the Arbitrations and had to prove the existence of the arbitration
agreement. That position does not change in these Setting Aside Proceedings.
8. Another procedural rule is that HVY's grounds for appeal that are in conflict with what the
Tribunal has ruled cannot succeed. HVY cannot attack rulings of the Tribunal that are
displeasing to them, because only positive rulings on jurisdiction can be addressed in
setting aside proceedings. After all, this Court of Appeal may only assess whether the
Tribunal has assumed jurisdiction on the correct grounds. Jurisdictional grounds rejected
by the Tribunal cannot be reconsidered. Nor can this Court of Appeal put a different
ground for jurisdiction under the arbitral award. The legal system does not offer room for

2 See, inter alia, Bakels et al., Asser Procesrecht 4, Hoger beroep, no. 134. See also Snijders/Wendels,
Civiel appel, no. 218.
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UNOFFICIAL TRANSLATION
This text is an unofficial translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
this. The court can only assess and then reject or allow the claim for setting aside. This is
different than in the chain District Court - Court of Appeal - Supreme Court, where the
judgment or ruling can be adjusted by a higher instance in a variety of ways.
C. Summary of the main arguments Article 45 ECT (Jurisdiction Ground1)
9. It has not been contested that the ECT never entered into force for the Russian Federation.
After all, the Russian Federation never ratified or approved the ECT. It was merely a
Signatory and was not a Contracting Party. For a Signatory the ECT is possibly
provisionally applicable. The scope of the provisional application is explicitly limited
pursuant to Article 45 ECTand depends on the Signatory's national law: “to the extent that
such provisional application is not inconsistent with its constitution, laws or regulations.”
10. The Russian Federation never agreed to provisionally apply Article 26 ECT. The District
Court correctly followed this position and correctly held in accordance with the rules of
interpretation for treaties of Article 31 VCLT that the only correct interpretation of Article
45(1) ECT is that the Russian Federation “was only bound by the treaty provisions
reconcilable with Russian law”.
11. The District Court rightly held that arbitration about this dispute on the basis of Article 26
ECT is inconsistent with the Russian constitution, laws or regulations: In this context the
District Court held that the provisional application of Article 26 ECT is inconsistent with
the principle of the separation of powers laid down in the Russian constitution. Moreover,
arbitration is contrary to Russian law because tax and expropriation disputes under Russian
law cannot be settled by arbitration.
12. HVY and the experts they engaged have not advanced any material based on which the
District Court’s conclusion can be disproved. Instead, HVY elaborately discuss (i)
arguments already expressly dismissed by the Tribunal and (ii) newly conceived
arguments. Such arguments – which needlessly complicate matters – cannot be addressed
in these setting aside proceedings.
D. The backgrounds; known andnew facts and evidence
13. The chapter about the backgrounds discusses issues including the illegal acquisition of the
Yukos shares (the “Investment”) in the Russian Federation in 1995 and 1996 by Russian
Oligarchs (the Russian nationals who created, own, and control HVY) through deceit,
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