The Tristangate Dispute
The original award and multiple subsequent court orders compelling Kazakhstan to pay the award are now final, binding and non-appealable yet the Kazakh authorities are continuing a litigation fight that they have already lost.
For more than eight years, Kazakhstan has refused to compensate the owners and international bondholders of Tristan Oil, a company which had been set up primarily to fund oil and gas projects in Kazakhstan and whose assets were illegally nationalized by the Government of Kazakhstan in July 2010. This website provides a detailed background on the dispute and this specific abuse of foreign investors’ rights in Kazakhstan.
In December 2013, an international arbitration tribunal constituted under the rules of the Arbitration Institute of the Stockholm Chamber of Commerce awarded approximately US$ 500 million to the owners of Tristan Oil under the auspices of the Energy Charter Treaty (ECT), which is designed to protect foreign investors in energy sectors of signatory countries including Kazakhstan. To date, no payments have been made to discharge the award and over US$ 540 million is now due (including legal cost awards).
The tribunal found that Tristan Oil owners’ Kazakh operating companies and their assets were illegally nationalized in 2010 following a “harassment campaign” launched by the Kazakh authorities on the basis of, among other things, false accusations of illegal conduct, fabricated criminal prosecutions and unwarranted tax assessments and criminal penalties.
The dispute resolution process has now resulted in a final, binding and non-appealable award in favor of the owners, who have further assigned 70% of the proceeds under the award to their international bondholders of Tristan Oil. This was implemented by way of a sharing agreement in late 2012 and then by way of a consent solicitation and exchange offer in 2013.
As a result of Kazakhstan’s refusal to honor its commitments and pay the award recognized by various courts in Europe and the U.S., the Claimants have succeeded in freezing approximately US$ 600 million of Kazakh state assets in multiple jurisdictions.
Kazakhstan’s response has been to delay the process by filing claims in various courts claiming that the award was allegedly procured by fraud. In the summer of 2020, Kazakhstan filed a separate lawsuit in New York against Tristan Oil’s largest U.S. bondholder, Argentem Creek Partners.
Tristangate has set a negative precedent for U.S. and other foreign investors in Kazakhstan and is damaging to the country’s efforts to attract much-needed foreign capital. Tristan Oil’s bondholders, several of whom are longstanding investors in Kazakhstan, aim at a resolution of this dispute in line with international law.
History of the Dispute
In 2006, Black River, from which Argentem Creek is a spin-off, bought bonds issued by a company called Tristan Oil, which had been set up by Moldovan investors to fund the development of oil and gas assets in Kazakhstan. Tristan Oil was investing in the fields as well as building a new LPG facility, together with its then joint venture partner, Vitol Group.
In July 2010, Tristan Oil owners’ assets were forcibly and illegally nationalized by the Kazakh authorities following a coordinated harassment campaign which began in October 2008 and included multiple false accusations of criminal conspiracy, pressing of legal charges against local management, continuous unannounced inspections and audits, withdrawal of necessary licenses, and a massive unjustified tax bill. This campaign ultimately led to the Tristan Oil management being forced out of business and out of the country. Immediately thereafter, the Kazakh national oil and gas company KazMunayGas (KMG) took over the assets.
The owners of Tristan Oil decided to recover what they had lost as a result of the forced nationalization via a Swedish arbitration, pursuant to the Energy Charter Treaty dispute resolution mechanism. In December 2013, a Swedish arbitration tribunal ruled in favor of the investors. The tribunal acknowledged that the allegations levelled by the Kazakh government against Tristan Oil’s owners had no foundation and were designed to construct a pretext for the illegal take-over of the company. The tribunal ordered Kazakhstan to pay approximately US$ 500 million in damages to the investors.
“[Kazakhstan’s] measures, seen cumulatively in context to each other and compared with the treatment of the Claimants’ investments before the Order of the President of the Republic [Nursultan Nazabayev] on 14/16 October 2008, constituted a string of measures of coordinated harassment by various institutions of [Kazakhstan]. These measures must be considered as a breach of the obligation to treat investors fairly and equitably, as required by Art 10(1) ECT”
The Kazakh authorities have since refused to comply with the arbitral tribunal’s decision and to pay the award. Instead, Kazakhstan claims that the investors allegedly obtained the award by fraud by making certain misrepresentations to the arbitral tribunal in the course of the arbitration. Kazakhstan repeatedly made these arguments to the Swedish courts which have supervisory jurisdiction over the award, but on two separate occasions – in October 2017 and May 2020 – the Swedish Supreme Court upheld the award in full.
The Kazakh authorities have made similar arguments in the U.S., where enforcement of the ECT award has been granted. Those claims have also failed, with the D.C. Circuit Court upholding the award in April 2019, thus making it enforceable everywhere on U.S. soil. In Sweden and the U.S., all appeal remedies brought by Kazakhstan against the award have already been fully exhausted.
To put it clearly: the Energy Charter Treaty’s dispute resolution process has resulted in a final, binding and non-appealable award in favor of Tristan Oil’s owners and certain affiliated entities, however, Kazakhstan has refused to pay the award despite being a party to the ECT. The total value of the award, including all accrued interest and costs, stands at approximately US$ 544 million as of January 2021.
As a result of a sharing agreement that the owners of Tristan Oil entered into with their bondholders in 2012, and a consent solicitation and exchange offer in 2013, approximately 70% of the award proceeds would be payable to bondholders.
Despite Kazakhstan’s repeated claims that the award creditors committed fraud, courts in Sweden, the United States, Italy, Luxembourg, and France have all recognized the award. In addition, various assets belonging to the Kazakh state in Sweden and Luxembourg have been successfully attached and frozen by the award creditors in their efforts to enforce the award, so far locking up approximately US$ 600 million by way of cash, shares and receivables owned by Kazakhstan.
To date, Kazakhstan is thought to have spent some tens of millions of dollars in legal fees to fight the case, and seem willing to spend even more. In a new and extraordinary turn of events, and demonstrating yet more contempt for the rule of law and for the Energy Charter Treaty, the Kazakh authorities have filed a series of new lawsuits in various jurisdictions to play for time.
In June 2020, they filed a civil case against several affiliates of Argentem Creek and its senior executives in New York alleging Argentem Creek’s team played a part in the alleged fraud. The Kazakh authorities also persuaded a third party to file a new civil claim against the Stati Parties in Gibraltar in September 2020, again trying to resurrect the past claims of fraud which have already been rejected in multiple jurisdictions.
These new litigations are a belated attempt on the part of the Government of Kazakhstan to avoid complying with its binding Energy Charter Treaty obligations which have now been confirmed by courts in five different jurisdictions (Sweden, Luxembourg, Italy, France and the United States).
However, these attempts by Kazakhstan are drawing an ever-increasing rebuke from various courts. Thus, a Washington, D.C. federal judge has recently admonished Kazakhstan and its legal team in unusually strong terms for failing to honor clear orders from the U.S. courts, in an attempt to avoid and delay discovery in the U.S. award enforcement proceedings.
This strategy to delay the payment of the award and avoid the country’s obligations under the Energy Charter Treaty may come at a very high cost for Kazakhstan’s economy at a time when it seeks foreign investment more than ever.