Yesterday, Russia's erstwhile largest oil company, YUKOS (OTC BB: YUKOY), won a single legal skirmish in a land far from home. Over in Houston, the company had filed for Chapter 11 bankruptcy protection earlier this week. YUKOS wanted an injunction against the Russian government's planned sale of YUKOS' key oil-producing subsidiary, Yuganskneftegaz, to raise funds to pay YUKOS' $28 billion tax debt. The sale is scheduled to take place this Sunday.
Of course, YUKOS knew that even if it won the injunction, the win would be of little use to it. Nations usually enforce each other's court judgments on a principle of reciprocity -- the international political equivalent of "you scratch my back, I'll scratch yours." Unfortunately for YUKOS, U.S. courts have no intention of scratching any Russian backs -- or enforcing rulings from Russian courts -- in the U.S. And so, the chances that any Russian court will enforce the Houston court's Thursday ruling are pretty slim.
Which is why, whenever you read about this case, the word "arbitration" never fails to appear near the end of each article. More than anything else, YUKOS wants the U.S. Bankruptcy Court to issue an order for YUKOS and the Russian state to enter into international arbitration to resolve their tax dispute. So why all the fuss about arbitration?
It's quite simple. There's a big difference between enforcement of court decisions and arbitration decisions among nations. With court decisions, you need reciprocity. With arbitration, you don't. The reason is that both Russia and the U.S. have signed the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Under the terms of that treaty, an arbitral decision issued in the U.S. must (in theory) be recognized and enforced even in Russia.
The trick for YUKOS now, and for Bankruptcy Judge Letitia Clark, will be to figure out how to legally require a sovereign nation like Russia to agree to international arbitration of an internal (albeit possibly illegal) tax claim against one of its own domestic companies.
In other news
Judge Clark handed YUKOS at least one useful victory on Thursday when she enjoined the would-be financiers of the would-be buyer of Yuganskneftegaz, Gazprom (OTC BB: OGZPF), from financing Gazprom's bid. With its consortium of backers, including marquee names such as J.P.Morgan Chase (NYSE:JPM), ABN AMRO (NYSE:ABN), and Deutsche Bank (NYSE:DB), gone missing, Gazprom is going to have a hard time coming up with the rubles to buy Yuganskneftegaz for the $8 billion-plus asking price. That could put the kibosh on Yuganskneftegaz's sale, unless Gazprom comes up with some alternative method of financing its purchase.
Read all about YUKOS' tribulations in:
- Coming to America (to Die)
- YUKOS' American Brain Drain
- Death and Taxes in Russia
- Russia Names Its Price
- ConocoPhillips Looks East
- YUKOS: From Dismal to Worse
- Russian Market in Gulag
- YUKOS' Slippery Situation
Fool contributor Rich Smith has no position in any company mentioned in this article.
