As US, Europe Confront Russia, Another Costly Dispute Is Set to Heat Up

Russia Faces Deadline in Twelve Weeks to Pay Biggest-Ever Arbitration Penalty

By James Rupert

Ambassador Urban Rusnak, a Slovak diplomat who serves as the secretary general of the Energy Charter Secretariat, discusses Russia's energy relations with the West in an October 20 forum at the Atlantic Council.

Just eighty-seven days before Russia is mandated to pay a $50 billion penalty to the former owners of the Yukos oil company, there is no public sign yet of a settlement in the dispute, raising the chances that courts in Europe and the US will be asked early next year to authorize the seizures of Russian state-owned airliners, ships, real estate or other commercial property. That step would only further embitter the relations between Russia and the West that have hardened this year over Russia’s invasions of Ukraine.



A ruling against Russia in July by a Dutch arbitration tribunal means that legal machinery is in place to begin such seizures, said Urban Rusnak, the secretary general of the Energy Charter Secretariat, an international treaty organization that seeks to stabilize global energy commerce. At an Atlantic Council forum, Rusnak said he would not be surprised if Russia and the former Yukos shareholders work toward a settlement. In an interview, Atlantic Council analyst David Koranyi, expressed doubt that a settlement is likely.

Rusnak, a Slovak career diplomat, spoke to energy commerce and policy specialists October 20 at the Council. At the forum, he and other participants also said the risk appears to be limited that the Russia-Ukraine conflict will trigger a true crisis in gas supplies to Europe this winter.


The Yukos Case: Seize Russian Assets?

The Yukos case is rooted in the Russian government’s campaign, a decade ago, to undercut the influence of Yukos’s owner, Mikhail Khordokovsky, who had become the country’s richest person and a frequent critic of President Vladimir Putin. Putin’s government arrested and imprisoned Khodorkovsky for a decade, and then seized Yukos for what it said were unpaid taxes. The Netherlands-based Permanent Court of Arbitration ruled in July that the seizure had been a political attack rather than a regulatory act, and said Russia should pay $50 billion in compensation to the company’s former stockholders.

Russian Justice Minister Aleksandr Konovalov said this month Russia will appeal that ruling and a similar one in the case by the European Court for Human Rights. But “getting an appeal, much less winning it, does not look likely,” said David Koranyi, the deputy director of the Atlantic Council’s Dinu Patriciu Eurasia Center. Koranyi also voiced doubt that Putin’s government would retreat from what was “a political decision” to dismantle Yukos by negotiating a settlement with its former owners. (Khodorkovsky, whom Putin released from prison into exile last year, vowed in August to revive his political challenge to the Russian leader.)

A lawyer for the ex-shareholders, Tim Osborne, told the German newsweekly Der Spiegel that his clients will begin suing in German, British, US, Dutch, and French courts for Russian assets in those countries to be seized on their behalf. (Diplomatic and other properties protected by Russian state sovereignty would not be subject to seizure.)

Such an escalation of the dispute would cap what Marat Terterov called “a ‘special’ year for relations with Russia”—indeed the worst, he told the Atlantic Council audience, since the early 1980s, when the Soviet Union had invaded Afghanistan and the West had boycotted Moscow’s 1980 Olympic Games. Terterov heads the non-profit Brussels Energy Club, which co-hosted Rusnak’s appearance at the Council.


Europe Has Options for Winter-time Gas

Rusnak and other participants in the October 20 forum also discussed the risks of energy shortages in Europe this winter in the event that the Ukrainian-Russian dispute prompts Moscow to interrupt the Russian gas supplies that or pass through Ukrainian pipelines to European customers. Rusnak and Chris Goncalves, a senior analyst in Washington on gas and energy markets for Berkeley Research Group, said media coverage may have created too great a public concern about absolute shortages of gas in Europe.

“Russia prides itself on its reliability” as a supplier to its gas customers, Goncalves told the audience, and is unlikely to let its dispute with Ukraine interrupt the flows. Also, the continent has broadly adequate capacity to import liquid natural gas (LNG) to compensate for any Russian cutoff, Goncalves said. “If they cut off supply, LNG is going to come in at twelve or thirteen [dollars per million BTUs] instead of nine or ten, and the market’s going to be resolved,” he said. Still, the LNG solution would leave several countries out in the cold, said Koranyi. Bulgaria, Serbia, Slovakia, Poland, and "to some extent Hungary" lack pipeline connections to LNG terminals, and be unable to access those imports, he said.

Other points in the discussion included these:

• While US gas exports are set to increase, they “are not a silver bullet” that will allow Europe to end its reliance on Russian gas, Rusnak said. US gas will flow as well to competing markets, and the planned 2016 completion of expansion work at the Panama Canal will facilitate the flow of US gas westward to Asia instead of eastward to Europe, he said.
• Rusnak will meet US officials in Washington this week to discuss a “revitalization of US participation in the Energy Charter process,” he said. The Energy Charter Treaty, signed in 1994, has 52 signatory states, which are bound to rules meant to establish open energy markets and non-discriminatory treatment for energy companies and investors. The United States and several additional countries are observers to the process who have signed an earlier, non-binding agreement. Russia signed the treaty but did not ratify it, and announced in 2009 that it would withdraw from its provisions.

James Rupert is an editor at the Atlantic Council.