Just when it looked as if tensions between Russia and the West couldn’t get any worse, an international arbitration tribunal in The Hague is set to make a ruling on Monday that could have far-reaching consequences for relations with Moscow. It’s the culmination of a decade long legal battle by the former majority shareholders of Yukos Oil to secure compensation for the expropriation of their assets by the Russian state in 2004. It is also the largest arbitration claim in history. If it loses, Russia could be out of pocket by as much as $100bn; a huge financial hit for any country, especially one flirting with recession and facing an escalating campaign of international sanctions.
Couldn’t President Putin ignore a ruling against him and simply thumb his nose at the outside world like he has done on many occasions before? Not this time, because it turns out that the long arm of international law can be very long indeed. Russia may have renounced the Energy Charter Treaty on which the case is built, but it was legally bound by it at the time of the Yukos affair. Furthermore, the terms of the treaty allow any financial award against it to be enforced under the provisions of the New York Convention. If Russia refuses to pay up, its assets in any country that has ratified the convention could be seized to the full value of the award. This encompasses 148 countries, including the US, every member state of the EU and even China.
It is certainly possible that the ruling could go Russia’s way. But legal observers point out that international tribunals have already considered the same evidence in two smaller cases and found against Russia on both occasions. Judges dislike contradicting their peers without compelling new evidence. If Monday’s decision goes the same way, Putin faces a tricky dilemma that could profoundly alter the course of Russian policy for the remainder of his presidency.
The response that would fit most naturally with the new Putin Doctrine of muscular nationalism would be to reject the ruling and threaten economic retaliation against any country that allowed its enforcement under the New York Convention. Putin doesn’t recognise a separation of judicial and political power, so he would be probably regard decisions by foreign courts to seize Russia property as essentially political acts. Russian politicians have already threatened to seize foreign assets in response to Western sanctions over Ukraine, so the idea is already out there.
The problem with this is that it would require a sharp re-direction of Russian economic strategy. Despite the rhetoric of ‘sovereign democracy’ – an ideology based on the rejection of foreign influence – Russia is deeply embedded in the global economy. It needs not only access to foreign trade, but also inflows of foreign capital and technology to modernise and thrive. The investment requirement for its dilapidated energy sector alone stands at $2.7 trillion over the next twenty years. Without this Russia faces the threat of a return to the kind of long-term stagnation that brought an end to the Soviet era.
A strategy based on economic autarky and a closed ‘Russian world’ isn’t really viable. Russia doesn’t have either the capital or the technology needed to build new infrastructure and open new energy production in the Arctic North. Besides, the Russian elite love their Swiss bank accounts and Park Lane apartments. An ‘Asian pivot’ and the friendly embrace of the BRICS might provide a degree of short-term diplomatic comfort, but Chinese money will always come with plenty of strings attached, especially since Beijing will sense Russia’s desperation. In any case, China can’t offer the technology Russia needs or the lifestyle options its oligarchs crave.
Putin understands this perfectly well. It is probably the only thing that has persuaded him to pull back from a full-scale invasion of Ukraine. At some point he will need to convince foreign companies that Russia is a safe place to invest once again. With net capital outflows already running at $75bn in the last six months, he is clearly a long way from achieving that goal. The last thing he needs to do is demonstrate that Russia is a country where property rights have no standing by seizing foreign assets and completely abandoning the rule of law. The damage would take a generation to repair.
If Russia loses on Monday, the pragmatic move would be for the Kremlin to swallow its pride and find a way of settling the claim quietly. The Yukos affair was in many ways Putin’s ‘original sin’. It was the moment when it became clear that he was determined to centralise political power and dismantle any democratic or legal safeguards that stood in his way. Drawing a line under the affair might become a symbol of Russia’s willingness to put relations on a more businesslike footing.
Admittedly, that seems unlikely given the acrimony over Ukraine. But it wouldn’t be entirely out of character either. The early phase of Putin’s leadership was based on pragmatic modernisation, constructive relations with the West and a desire to nurture Russia’s economic recovery. The question is whether too much bad blood has now passed between Russia and the West to make a return to that approach possible. The answer will tell us whether Russia is destined to remain a source of instability and confrontation for as long as Putin remains in the Kremlin.
David Clark is the founder and editor of Shifting Grounds, and served as special adviser to Robin Cook at the Foreign Office from 1997 to 2001. He is chair of the Russia Foundation.