Taxation and Expropriation - the Destruction of the Yukos Oil Empire

Article excerpt

  I. INTRODUCTION   II. THE RISE--YUKOS IN THE ERA OF COWBOY CAPITALISM      A. The Yeltsin Period--1990 to 1999      B. The Putin Period--2000 to 2008  III. THE FALL--EXPROPRIATION BY LITIGATION   IV. THE AFTERMATH--LITIGATION EVERYWHERE      A. Russian Claims on Foreign People and Property      B. Attacking the Yukos Transactions in National Courts      C. International Adjudication    V. IMPLICATIONS FOR THE GLOBAL ECONOMIC ORDER   VI. CONCLUSION 

I. INTRODUCTION

The rise, fall, and death agony of the Yukos conglomerate have all the elements of great literature. The tale features strong personalities, sudden twists of fate, and profound clashes of principle. The arc of the plot tracks Russia's deepest struggles in the two decades since the demise of the Soviet Union and Soviet Communism. Real individuals have suffered, one dying horribly in prison. The events have inspired books and movies, and the story is not close to ending. (1)

This article does not have literary aspirations, but it does press the importance of the Yukos affair as a window into contemporary Russia and, more generally, modern efforts to impose order on the world economy. It focuses not on the human drama of the story, great though it is, but rather on the episode's significance in the ongoing struggle over economic freedom and state sovereignty. Most importantly, the Yukos story indicates the limits to the international rule of law.

In a nutshell, the rise and fall of Yukos illuminates four narratives about the modern world economy. First, it exposes the challenges--some might say insuperable barriers--to creation of a liberal society on Russian soil. Second, it shows the deep problems with top-down law reform in societies undergoing rapid and wrenching political, economic and social change. Third, it demonstrates how renationalization works in a particularly high-stakes context. Finally, it reveals the capabilities and limits of international dispute settlement through courts, arbitration, and diplomacy when confronting profound conflicts between private rights and fiercely guarded national interests.

As for the first point, one must carefully distinguish liberalism from democracy. A democratic society gives the population power and influence through effective mechanisms that translate the popular will into government policy. Liberalism entails the maintenance of institutions, both public and private, that check government power and open up a space for private transactions and expression. Russia since the fall of Communism has enjoyed a robust if imperfect democracy. By every conceivable indicator, President Putin enjoys widespread popular support, with his actions against Yukos in particular bolstering his approval. But democracy does not necessarily lead to constraining the state, as the Yukos affair demonstrates. The voice of the polis can call out for and cheer on the destruction of over-mighty private actors: In Russia, it did. (2)

Law reform was a worldwide growth industry in the 1990s, the era that spawned the Yukos empire. The transition from totalitarian and authoritarian states with government monopolies over economic activity to something that might resemble liberal democracy inspired many to look to law as the midwife of a new order. Foreign specialists, myself included, flocked into the former Warsaw Pact countries in hopes of building new institutions, with law as the bricks and mortar. But for many of the reasons that liberalism did not take to Russian soil, legal reform all too often became a tool for expanding, rather than constraining, state power. The Yukos story is an exemplary tale of the perversion of legal instruments to empower arbitrary and exploitative bureaucrats to destroy private wealth. It also suggests something more general about the limits of law in shaping social change.

On a technical level, Yukos provides a textbook example of how formal legal requirements, in particular tax law, can lend themselves to a program of renationalization of the commanding heights of the economy. …