Good Luck Collecting the $50 Billion

Private property is a central tenet of capitalist theory. Aristotle said the concept is ingrained in man’s nature and will lead to progress. It therefore should be safeguarded. The state should not materially interfere or put limits on wealth. 

On the contrary, communist economies don’t even allow it. In the case of the former Russian oil company Yukos, Vladimir Putin showed his communist side.

During a falling-out with its oligarch owner Mikhail Khodorkovsky over alleged tax evasion, Russia appropriated Yukos and Khodorkovsky served a jail sentence of almost 10 years.

Now an arbitration court in The Hague ruled the appropriation was “politically motivated” and ordered Russia to pay $50 billion, a bit less than half of the $113 billion the shareholders around Khodorkovsky sought.

This is good news for property rights and capitalism, but also shows that the system only works if everybody wants to play ball.

Low Chance of Collection

Despite the ruling being final, Russia will try to use all legal means to challenge it in Dutch courts. It claims it has never ratified the treaties the ruling is based on.

But even if this approach won’t work, Russia probably won’t have to pay the $50 billion either way. The reason: Shareholders would have to convince international governments to expropriate Russian state assets, which can be found in more than 150 countries around the world.

And even though the legal infrastructure for these proceedings is in place—recall that a New York-based hedge fund recently had Ghana confiscate an Argentine Navy ship in a dispute—this will be a dangerous exercise.

It is as dangerous as slapping Russia with tough sanctions over the Ukraine dispute. It so far hasn’t happened because Western companies and economies are dependent on Russia.

Europe imports most of its gas and oil from Russia. Not only that, over 6,000 German companies do business in Russia. Surely Angela Merkel doesn’t want them to get entangled in tax evasion lawsuits and then see their assets disappear.

BP of the U.K. holds almost 20 percent of Russia’s state owned oil company Rosneft, the company that swallowed most of Yukos’s assets.

ExxonMobil is Rosneft’s exclusive partner for developing arctic energy reserves. The list goes on. The CEO of Germany’s industrial conglomerate SIEMENS AG said recently: “You don’t want to sanction anyone you depend on.”  

Energy Prices

If indeed Russian energy assets will be appropriated around the globe and the economic war escalates, energy prices in the West are bound to rise, especially in Europe.

This will squeeze an already fragile economy around the world over a matter that really only concerns one Russian oligarch and his cronies.

But how will signatories of the 1958 New York Convention avoid expropriating Russian assets? They will use a central tenet of a capitalist economy in practice, the filibuster. Delay, deny implementation on the basis of national laws, renegotiate.

This is bad news for property rights. Alas, capitalism is not as simple in practice as it is in theory.