Corporate Debt Review

A Twist in an International Oil Fraud Case

Feels Like the Old Days

Don’t let anybody tell you that trying to track oil assets in the post-Soviet region is easy. As the story I’m about to tell you makes clear, this can become very complicated.

This one also may well include a factor that neither side wants to see the light of day.

It’s certainly not news that claims of fraud persist in oil and natural gas cases in the post-Soviet region. The structure (or lack thereof) of ownership rights, usage of shell companies to hide governments’ official stakes, and outright collusion remain major impediments.

So, developments last week in a Dutch court should come as no surprise. First, let me catch you up on what’s
been transpiring in this interesting case, one that indicates how complicated these can become.

The latest wrinkle is the Amsterdam Court of Appeals agreeing to consider allegations that a more than $500 million arbitration award issued against Kazakhstan to two Moldovan oil and gas investors is tainted by fraud.

Three Courts in Three Countries

Astana revealed the Dutch decision in papers filed Thursday in the U.S. DC Circuit Court of Appeals where the country had been challenging continuing U.S. enforcement efforts. In the filing, Kazakhstan revealed that the Dutch court had provided an opportunity to support the nation’s claim that the investors, Anatolie Stati and son Gabriel Stati, had inflated the value of their investment to influence the damages calculation undertaken by the tribunal.

A more than $500 million award had been issued to the Statis and their companies – Ascom Group SA and Terra Raf Trans Trading Ltd., by a Swedish tribunal in 2013. That decision had been reached after the 2010 Kazakh seizure of the companies’ oil operations inside the country and a subsequent pressure move to have state-run KazMunaiGaz (KMG) take over.

Both the Dutch and American courts are considering actions to enforce that Swedish arbitration decision.

For its part, the U.S. court had provisionally allowed the Statis to begin assessing Kazakh state assets in the U.S. subject to seizure to enforce the tribunal decision. Basic to the American court’s holding was a denial that Kazakhstan could rely on any claim of fraud because, the court concluded, the Swedish arbitrators had not relied on any allegedly fraudulent evidence when making its determination.

Kazakhstan claims in appeal that this decision was incorrect, and that the judge wrongly concluded that the fraud allegations were “futile” without permitting the country to present its proof.

In addition, and this is decisive in all the court actions underway, what constituted genuine damages arising from the Kazakh state action remains debatable. Here, Kazakhstan has claimed the amount claimed by the Statis and their shell companies resulted from significant fraud.

Kazakhstan is maintaining that the Dutch court is suspending any application of the arbitration tribunal’s
decision “without an in-depth examination of all evidence supporting Kazakhstan’s allegations that the award was obtained by the Stati parties’ fraud on the tribunal.”

The Other Side of the Coin

However, a statement from attorneys representing the Statis and their companies saw the Dutch action quite differently. They contend that the decision is actually to the advantage of their clients, claiming it demonstrated that the ruling indicated the father and son had sufficiently refuted the fraud allegations.

The Dutch court, which claims, by the way, that it has jurisdiction in the case, still states its assumption that an English court would be conducting a trial on the fraud allegations. However, this case took place in the Netherlands in June, but the English court had dismissed the fraud case in August following the decision by the Stasis to end attempts to enforce the Swedish decision in the UK.

The Dutch court did not allow either side to update their pleadings.

Now, the same Dutch court has decided in its latest ruling that Kazakhstan has until early February to make further written submissions on its fraud defense, with hearings to resume thereafter.

The Statis filed in D.C. and London in what their attorney claimed were moves in a global effort to secure the Swedish judgment. In fact, court actions in a number of jurisdictions have already tied up some $6 billion in Kazakh assets in advance of a decision.

But an English appeals court in August closed the action because the investors had abandoned the proceeding. Here is the underlying reason why and it is a matter that may well make its appearance in the U.S. court: The father and son decided to drop the UK court proceeding after an English judge ordered a trial to examine more closely Kazakhstan’s claims that the Statis inflated certain figures used to calculate damages.

Everything Old is New Again

Kazakhstan had argued that a trial on its fraud allegations would help courts in other countries determine whether they should enforce the award. But the UK appellate panel pointed out in its judgment that the trial would only help to determine whether enforcing the award would violate English public policy, noting there was no evidence that such a ruling would be relevant to enforcement proceedings abroad.

Nor were the judges swayed by an argument that the trial should go ahead because the Statis had committed a fraud on the English court since the Statis hadn’t misled the court about the award, which the Statis have the right to seek to enforce in other countries, according to the decision.

Once again, both sides claimed victory when the English court dismissed the case.

Both sides are tap dancing around the main issue that neither wishes a court to consider. My sources close to these cases have been telling me right along that the value of the oil assets initially coerced for sale to KMG, the fraud charged, and the damages sought as a consequence all hide silent involvement of government individuals and state-related entities located in at least four post-USSR countries: Kazakhstan, Moldova, Ukraine, and Russia.

The books, in other words, are not likely to balance.

Any detailed examination of fraud claims or damages threaten to reveal the asset shuffle perpetrated below the surface. Word is that the Kazakh fraud claim is based on revealing such chicanery by the companies connected to the Statis.

In turn, should the financing basis of that $500 million plus arbitration award be investigated (it was not in the Stockholm proceedings), vulnerabilities on the other side would surface.

Welcome to the new world of oil assets in this part of the world. Looks a lot like the old way.

About the Author


Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment.

He serves as an advisor to the highest levels of 27 countries, including the U.S., Russian, Kazakh, Chinese, Iraqi, and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s served as a consultant to private companies, financial institutions and law firms in 29 countries, and has appeared more than 2,300 times as a featured radio-and-television commentator. He appears regularly on ABC, BBC, Bloomberg TV, CBS, CNBC, CNN, NBC, Russian RTV, and the Fox Business Network.

A prolific writer and lecturer, his six books, more than 2,700 professional and market publications, and over 650 private/public sector presentations and workshops have appeared in 47 countries.