On 20 September 2011 the ECHR delivered its judgment with respect to the YUKOS case. Overall, the judgment gives an impression that the majority of the ECHR judges tried to make it balanced,[1] so that either party could be satisfied with the results of the hearings. Considering the parties’ response to the judgment, the judges have succeeded in their efforts. Nominally, the judgment may be divided into two parts: YUKOS’ “victory” and the Russian Government’s “victory.” Below is my detailed analysis of both parts.
YUKOS’ Victory:
The Court found that the Russian Government violated YUKOS’ rights under Article 6 of the Convention and Article 1 Protocol No. 1 to the Convention.
Article 6 of the Convention:
The Court found that YUKOS’ rights to a fair trial were violated due to the following reasons: (1) YUKOS “did not have sufficient time to study the case file at first instance,” and (2) “the early beginning of the hearings by the appeal court unjustifiably restricted the company’s ability to present its case on appeal.”
(1) YUKOS had insufficient time for preparation of the defense at first instance.
The Court’s finding is based on the following facts and reasoning:
a. During the first-instance trial YUKOS did not have access to most of the documents in the court file until 17 May 2004, while the hearings in the case commenced on 21 May 2004. Those documents constituted an additional body of evidence filed by the Ministry, amounting to at least 43,000 pages.
b. Given the above, and considering the magnitude and complexity of the YUKOS case, the Court concluded that four days were insufficient for YUKOS to study such a voluminous case file and to prepare properly for the trial hearings. The Court also noted that neither the number of lawyers in YUKOS defense team nor the amount of other resources available to YUKOS would have changed its findings on this matter.
c. The Court also reiterated that the concept of a fair trial includes, inter alia, the fundamental right that criminal proceedings should be adversarial. And, while recognising the importance of conducting proceedings at good speed, the Court noted that “this should not be done at the expense of the procedural rights of one of the parties.”
(2) Early beginning of the appeal hearings restricted YUKOS’ ability to present its case on appeal.
The Court reached this conclusion based on the following facts and reasoning:
a. The full text of the first-instance judgment became available to the parties on 28 May 2004 and appeal proceedings began on 18 June 2002, despite YUKOS’ requests for adjournment.
b. Though the Russian Government explained such promptness of the proceedings by the statutory requirement to examine the appeals by the parties within a month of the date of their filing,[2] the Court was not persuaded by this argument. The Court believed that the 1 month time-limit should start running on the expiry of the time-limit for lodging an appeal and not simultaneously with its filing. This interpretation was recently adopted by Russian authorities themselves.
c. Moreover, recognizing “the legitimate goal of conducting proceedings at good speed”, the Court reiterated that it “should not have been achieved at the expense of the procedural rights of one of the parties.”
Article 1 Protocol No. 1:
The Court found that Russia violated Article 1 of Protocol No. 1 on account of the following: (1) “2000-2001 Tax Assessments in the part relating to the imposition and calculation of penalties”, and (2) Russia’s failure “to strike a fair balance between the aims sought and the measures employed in the enforcement proceedings against the applicant company.”
(1) Contribution of the Constitutional Court of the Russian Federation to the violation of Article 1 Protocol No. 1
YUKOS claimed, inter alia, with respect to the Tax Assessment 2000, that the domestic courts had failed to apply the statutory time-bar set out in Article 113 of the Tax Code. Thus, Article 113 provided for a three year time-limit for holding a taxpayer liable and this period ran from the first day after the end of the relevant tax term. Meanwhile, the decision establishing YUKOS tax liability for 2000 was adopted on 14 April 2004, which was outside the three year time-limit. Therefore, the Tax Assessment for 2000 constituted unlawful interference with YUKOS property.
The issue of the interpretation of the Article 113 time limit arose during numerous proceedings in domestic courts. This issue was referred by domestic courts to the Constitutional Court of the Russian Federation. The latter gave its decision on 14 July 2005 introducing changes to the interpretation of Article 113. Namely, stating that the time-bar rule does not apply in cases when a taxpayer has impeded inspections by the tax authorities; in which case the running of the time-limit could be suspended by the adoption of a tax audit report. This interpretation was subsequently applied by the domestic courts in the YUKOS case finding that YUKOS had been actively impeding the tax inspections, and thus the Tax Ministry did not miss the time-limit period.
The ECHR found that the decision of the Constitutional Court influenced the outcome of the domestic proceedings against YUKOS, and did not meet the requirement of lawfulness. Namely, the Court was not persuaded that such change could have been reasonably foreseen. Thus, the Court stated that:
“the decision of 14 July 2005 had changed the rules applicable at the relevant time by creating an exception from a rule which had had no previous exceptions (see paragraphs 86 and 88). The decision represented a reversal and departure from the well-established practice directions of the Supreme Commercial Court (see, by contrast, Achour, cited above, § 52) and the Court finds no indication in the cases submitted by the parties suggesting a divergent practice or any previous difficulty in connection with the application of Article 113 of the Tax Code at the domestic level (see paragraphs 407-408). Although the previous jurisprudence of the Constitutional Court contained some general references to unfavourable legal consequences which taxpayers acting in bad faith could face in certain situations, these indications, as such, were insufficient to provide a clear guidance to the applicant company in the circumstances of the present case.”
Having concluded that the decision of the Constitutional Court was unlawful and that it directly influenced the outcome of the Tax Assessment 2000 proceedings, the Court found that Russia violated YUKOS rights under Article 1 Protocol No. 1. This conclusion encouraged the Court to find that the 2001 Tax Assessment was also unlawful in the part concerning the double fines, since YUKOS was charged with a repeated offence due to the results of the 2000 Tax Assessment proceedings.
(2) Unlawfulness of enforcement proceedings against YUKOS
The Court did not have any doubts that the measures undertaken by the Russian enforcement authorities had a lawful basis, as well as that law provisions concerning enforcement were sufficiently clear and precise. However, the Court was not persuaded by the Russian Government that the enforcement measures were proportionate to the legitimate aim pursued. In its finding the Court was governed by the following:
a. The ECHR established that YUKOS had no cash funds in its Russian bank accounts to pay its tax debts immediately, and considering the nature and amount of the debt “it was unlikely that any third party would agree to assist the company with a loan or some form of security.”
b. It was obvious for the ECHR that OAO Yuganskneftegaz was YUKOS’ “only hope of survival” and that the decision to sell it at auction as the first item “was capable of dealing a fatal blow to” YUKOS’ ability “to survive the tax claims and to continue its existence.” This decision and the speed with which the auction had been carried out were the crux of YUKOS case.
c. In the Court’s view the Russian authorities were “unyieldingly inflexible as to the pace of the enforcement proceedings, acting very swiftly and constantly refusing to concede to the applicant company’s demands for additional time,” which had “a negative overall effect on the conduct of the enforcement proceedings” against YUKOS.
d. The Court also found that a 7% enforcement fee imposed on YUKOS “instead of inciting voluntary compliance… contributed very seriously to the applicant company’s demise.”
The Russian Government’s Victory:
The Court found no violation of Article 1 Protocol No. 1 to the Convention as regards the rest of the 2000-2003 Tax Assessments, and of Articles 14 and 18 of the Convention.
Article 1 Protocol No. 1
Under Article 1 Protocol No. 1 to the Convention YUKOS, inter alia,[3] claimed, with respect to the 2000-2003 Tax Assessments, that it used lawful “tax optimisation techniques” which were only subsequently condemned by the domestic courts, and that the legal basis for finding it liable was insufficiently accessible, precise and foreseeable. The Court rejected YUKOS’ arguments due to the following reasons:
a. Considering the materials of the case and the parties’ submissions, the Court did not have doubts that the domestic courts proved the “sham nature” of the YUKOS trading entities and unlawfulness of the tax arrangement at issue. And YUKOS failed to “give any plausible alternative interpretation of this rather unambiguous evidence.”
b. The ECHR found the domestic rules rather clear, that the contractual arrangements made by the parties were only valid in so far as the parties were acting in good faith and that the tax authorities had broad powers in contesting the legal characterization of such arrangements before the courts. Moreover, in the Court’s view, the applicable legal rules “made it quite clear that, if uncovered, a taxpayer faced the risk of tax reassessment of its actual economic activity in the light of the relevant findings of the competent authorities,” which actually happened to YUKOS.
Article 14
YUKOS complained that the 2000-2003 tax and enforcement proceedings were arbitrary and discriminatory in nature. However, the Court found no discriminatory treatment with respect to YUKOS due to the following reasons:
a. Nothing in the case file suggests that the authorities passively tolerated or actively endorsed YUKOS tax arrangements.
b. YUKOS did not prove that is was the only one to have been prosecuted for its tax arrangements since it failed to demonstrate that “any other companies were in a relatively similar position.” And the Court could not “speculate on the merits of the tax arrangements of third parties on the basis of data contained in non-binding research and information reports and that therefore it cannot be said that the situation of these third parties was relevantly similar to the situation of the applicant company in this respect.”
Article 18
YUKOS claimed that the aim of the proceedings against it was to destroy the company and to take control of its assets. The ECHR disagreed and found no violation of Article 18 of the Convention due to the following reasons:
a. According to the ECHR case-law, in order to hold a State liable under this provision an applicant should provide “an incontrovertible and direct proof” in support of its allegations.” The Court assumed that YUKOS’ tax debt resulted from legitimate actions by the Russian Government and, therefore, the burden of proof rested on YUKOS.
b. While the Court recognized that YUKOS case attracted “massive public attention” and that various comments were made by numerous bodies and individuals in this respect, those statements had little evidentiary value for the Court. Additionally, YUKOS did not provide any other proof of defects in the proceedings against it, which would enable the Court conclude that there has been a breach of Article 18 of the Convention.
Conclusion:
Pursuant to Article 46 of the Convention Russia is obliged “to abide by the final judgment” of the Court. According to the ECHR case-law Russia has two obligations with respect to execution of the judgment in the YUKOS case: (i) the obligation to make reparation, and (ii) the obligation to prevent similar violations in the future with regard to other persons that might be affected by the same violations.
As to the reparation, the issue of damages has not yet been determined by the Court. The parties have been given three months to settle the case, otherwise the Court will intervene. However, Russia usually complies with its payment obligations under the ECHR judgments. Insofar as the second obligation is concerned, presuming that neither party will appeal to the Grand Chamber of the Court and that this judgment will be final, the question emerges if this judgment will bring any positive changes to law and order in Russia, thereby inducing the Russian authorities to prevent similar violations in the future. I believe that probably not due to the reasons stated below.
Though the Court did find that Russia violated several Articles of the Convention, it also recognized that the Russian authorities had a legal basis and a legitimate aim in prosecuting YUKOS for tax evasion, and that such prosecution was not discriminatory in nature or politically motivated. While the Tax proceedings did have some deficiencies (e.g., inflexibility and speed of the enforcement proceedings, good speed of the legal proceedings has been achieved at the expense of YUKOS’ procedural rights, retrospective and unforeseeable change of Article 113 time-limit provision), they are not of a great importance to the Russian Government particularly given that the state-owned company Rosneft now controls OAO Yuganskneftegas, the main YUKOS’ asset.
Thus, the violations of the Convention found by the Court cannot be the grounds for challenging the sale of OAO Yuganskneftegas at auction and subsequent gain of control over its shares by Rosneft. Moreover, according to Gazeta.ru the ECHR judgment neither affected share prices of Rusneft, nor the sentiment of potential foreign investors in the Russian economy. The only measure that might somehow make the Russian Government take the ECHR judgment seriously is the payment of the damage to YUKOS, provided its amount is as high as at least the one awarded by the ECHR to Stran Greek Refineries in 1994 in the case against Greece, which constituted 22 million USD and was the biggest award in the history of the ECHR judgments on just satisfaction.
[1] The only judge who found in favor of the Russian Federation on each of the Court’s findings was, in fact, the judge from the Russian Federation.
[2] The Russian Government explained that the Appeal Court received the first appeal on 1 June 2004, which was lodged by one of the parties to the case, OOO ‘YUKOS’ Moskva, and thus had to examine the appeal by 1 July 2004.
[3] YUKOS also alleged that there was no basis in law to deny the repayment of VAT in respect of the export of oil and oil products, that the domestic courts had failed to apply Articles 20 and 40 of the Tax Code, that it should have been dispensed from payment of interest surcharges under Article 75 (3) of the Tax Code and that in respect of the year 2000 the company had been subjected to double taxation in respect of the profits of the sham entities. All these claims were rejected by the ECHR. It based its conclusion mainly on the provisions of the domestic law and findings of the domestic courts.
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