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. Last Updated: 07/27/2016

Menatep Sues Russia for $28Bln

Group Menatep served the Russian Federation with an arbitration notice Tuesday that it is seeking at least $28.3 billion in damages for the breakup of Yukos as the legal pressure surrounding the sale of Yuganskneftegaz mounted.

The group also said it was demanding that Yugansk's new owner, state oil firm Rosneft, make immediate repayment on the $900 million outstanding on a $1.6 billion loan.

Menatep's arbitration notice was filed under the terms of the Energy Charter, an international treaty that offers protection to investors against expropriation of assets by a state. Russia has signed the treaty, but has yet to ratify it, making the outcome of any case unclear.

"We have warned the Russian government about their continuing attacks against Yukos, its personnel and its shareholders, and we have warned any buyer of Yuganskneftegaz that they would face a lifetime of litigation. The time for warning is over, and actions to recover the value of our losses begin in earnest today," Osborne said in a statement.

News of the claim came as President Vladimir Putin's most outspoken adviser, Andrei Illarionov, made his first public appearance since his demotion last month and repeated his previous characterization of the Yugansk sale as theft. He called on the government to return the unit, which was once Yukos' main production facility, to its rightful owner.

The government sold Yugansk in a Dec. 19 auction as partial payment for $28 billion in back taxes against Yukos to Baikal Finance Group, a mysterious front company that was bought days later by Rosneft.

Menatep notified the government in a letter to Putin dated Nov. 2 that it planned to take its case to international arbitration for damages over the massive drop in Yukos' value since the attack on the oil major began. Under the terms of the Energy Charter, either party has three months after official notification to settle claims amicably before the case moves to international arbitration.

"The Russian Federation has totally ignored the notifications and has failed to settle amicably the dispute," the statement said.

Osborne said by telephone late Tuesday that Menatep and the Russian government now had to agree on which court the arbitration case would go to before any hearings would start. "This would probably be well-suited to The Hague," he said. Osborne said that Menatep had also decided Tuesday to press ahead with its demand that Rosneft make immediate repayment on the $900 million outstanding on a $1.6 billion loan guaranteed by Yugansk crude. "The decision has been taken in principle," he said. "Notice will be served."

He could not say, however, how soon that notice would arrive in Russia.

Rosneft is trying to negotiate its way out of a similar demand from another syndicate of Western banks that last week called on it to repay $540 million outstanding on a $1 billion loan guaranteed by Yugansk crude. The loan demands present the already heavily indebted Rosneft with a potential nightmare web of cross-defaults on its other international loans.

Rosneft's acquisition of Yugansk has locked it in a vicious legal tangle and set it on what seems to be a desperate search for financing under schemes that would protect its lenders from lawsuits. Yukos won a temporary stay against the sale in a Houston court in December as part of Chapter 11 bankruptcy proceedings. If the motion is upheld, any participant in the sale, including financial backers, could face legal sanctions.

As questions continued to swirl about where Rosneft had gotten the money to buy Yugansk, Finance Minister Alexei Kudrin said last Tuesday that Rosneft had attracted a $6 billion loan from Chinese banks, and Federal Energy Agency chief Sergei Oganesyan said the loan was prepayment for oil supplies to China over the next five years.

A day later, Rosneft and Kudrin both sought to deny that the loan was in any way connected with Rosneft's purchase of Yugansk.

On Tuesday, Illarionov said the only way out of the embarrassing mess was to return Yugansk to its rightful owner. "There is only one way to solve this problem and that is to return Yugansk to its owners," he said. "I am convinced that this will happen sooner or later. I can't say when or under what conditions, but the fact that this will happen sooner or later is absolutely clear."

"There is a Christian law that says, 'Thou shalt not steal.' I can't understand how a country can break such a basic tenet of civilized society," he told reporters on the sidelines of a news conference Tuesday. "Sooner or later we will have to correct the deviations that have occurred over the last 1 1/2 years."

Illarionov said it was still unclear how Rosneft had financed its acquisition. "There are no documents. As long as there are no documents, there can be no talk of there being any information on this sale." The loan from China was only announced last week, long after the 20-day deadline Rosneft had to transfer payment for Yugansk after the auction, he said.

When asked if a $6 billion drop in the Central Bank's foreign currency reserves last month was a sign that Rosneft had dipped into the bank's coffers to fund the purchase, Illarionov simply shrugged and smiled. He also shrugged and smiled when asked whether there was any other explanation for the drop in reserves.

Meanwhile, Yukos is querying whether the government has received funds from the sell-off of Yugansk. Yukos CEO Steven Theede has sent a letter to Kudrin demanding he provide proof that the cash has been transferred to the federal budget, Bloomberg reported. "We have grounds to believe that the sale didn't happen," Theede said in the letter, a copy of which was obtained by Bloomberg on Tuesday. "Rosneft is managing Yugansk illegally and control over the unit must be immediately returned to Yukos," the letter said.

Yukos is yet to receive any official notification from the Federal Property Fund that Yugansk has been sold, and has not been informed by the Federal Tax Service that its total tax bill has been reduced as a result.

Vedomosti on Tuesday cited documents it obtained from the Federal Treasury as saying 211.4 billion rubles was transferred into the Treasury Dec. 31, 19 billion rubles of which had gone to the Tyumen region and another 54.4 billion rubles to the Khanty-Mansiisk autonomous district. The remaining 138 billion rubles went to the federal budget, the treasury said.These transfers, however, have so far not been recorded in the Finance Ministry's official budget reports. Excess budget revenues from last year transferred into the stabilization fund on Feb. 1 totaled $7.8 billion and include about $4.5 billion in Yukos back taxes, $2 billion from the privatization of a government stake in LUKoil and $790 million from the privatization of Magnitogorsk, while the rest consisted of extra tax revenue from Gazprom, analysts have said.

But as late as last Tuesday, Kudrin was vague on whether the funds had been transferred to the budget or not, even indicating they had not gotten there yet. "Those revenues will later be distributed among the budgets of regions … and the federal budget," he said.

The Finance Ministry could not be reached for comment late Tuesday.

On Tuesday, Illarionov said he intended to continue to speak out about the government's handling of the Yukos affair and other policies. He described his refusal to toe the party line as being part of his job and said he intended to continue doing so "for some time."

Putin's decision to strip him of his duties as "sherpa" to the Group of Eight industrialized nations Jan. 3 had prompted widespread speculation the demotion was payback for his strong criticism of the Yugansk sale.

But Illarionov said Tuesday that the withdrawal of his duties as a G8 functionary had come at his own request. He said he had asked to step down because of his opposition to Russia's signing of the Kyoto Protocol.

"I had warned that if a decision was taken by [Russia to sign the treaty] it would not be possible for me to continue as sherpa," Illarionov said. "I am grateful to the president for freeing me from these duties. [To work on something] that deals a blow to your people is nothing more than a crime."