FEDERAL COURT OF AUSTRALIA

Alumina and Bauxite Company Ltd v Queensland Alumina Ltd [2024] FCA 43

ORDERS

THE COURT ORDERS THAT:

1.    The Amended Originating Application dated 17 August 2022 be dismissed.

2.    The Applicants pay the Respondents’ costs of the proceeding.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

O’BRYAN J:

A.    INTRODUCTION

1    On 24 February 2022, Russia invaded Ukraine. As at the date of this judgment, the war in Ukraine is continuing. Thousands of lives have been lost to date. The Australian Government has condemned the invasion as illegal and unjustified and as a serious threat to the international rules-based order which underpins global security.

2    In mid-March 2022, and in response to the invasion, the Australian Government imposed sanctions (the Russia Sanctions) against Russia and certain Russian business-people pursuant to the Autonomous Sanctions Regulations 2011 (Cth) made under the Autonomous Sanctions Act 2011 (Cth). In general terms, the Russia Sanctions prohibit:

(a)    supplying, selling or transferring alumina to a person where, as a direct or indirect result, the alumina is transferred to Russia, for use in Russia or for the benefit of Russia; and

(b)    directly or indirectly making an asset available to or for the benefit of two Russian businessmen: Oleg Deripaska and Viktor Vekselberg.

3    The Russia Sanctions have impacted the operations of the alumina refinery conducted by Queensland Alumina Ltd (QAL) in Gladstone, Queensland (the Gladstone Plant). QAL operates the Gladstone Plant under an agreement (the Participants Agreement) with:

(a)    three companies that are subsidiaries of United Company Rusal IPJSC (UC Rusal): Alumina and Bauxite Company Ltd (ABC), Rusal Limited and JSC Rusal (who are the applicants in this proceeding and who, in the context of the commercial arrangements concerning the Gladstone Plant, are referred to collectively as the Russian parties); and

(b)    five companies that are part of the Rio Tinto Group: Rio Tinto Plc, Rio Tinto Limited, RTA Holdco Australia 5 Pty Ltd (RTA Holdco), Rio Tinto Aluminium (Holdings) Limited and Rio Tinto Aluminium Limited (RTA) (collectively, the Rio parties).

4    UC Rusal is registered as an international public joint stock company in the Russian Federation. UC Rusal and its subsidiaries (Rusal Group) engage in business activities involving bauxite and nepheline mining, alumina production, electrolytic production of primary aluminium, and the production of value-added aluminium products. UC Rusal conducts its business activities globally. Relevantly, the Rusal Group is Russia’s only primary aluminium producer and currently operates nine aluminium smelters in Russia. The parent company of UC Rusal is En+ Group IPJSC (En+), which is also a company registered as an international public joint stock company in the Russian Federation, and which holds approximately 56.88% of the shares in UC Rusal. Each of Messrs Deripaska and Vekselberg indirectly holds significant shareholdings in UC Rusal.

5    Under the Participants Agreement, QAL refines bauxite into alumina on a toll basis for ABC, RTA Holdco and RTA (collectively, the Participants). ABC holds 20% of the shares in QAL and RTA Holdco and RTA collectively hold 80%.

6    It is convenient to refer to the business venture between QAL, the Russian parties and the Rio parties as the Gladstone alumina joint venture. In using that expression, it is not intended to give the phrase “joint venture” any particular legal significance.

7    QAL, the Russian parties and the Rio parties are also parties to a series of Tolling Contracts, under which a percentage of the capacity of the Gladstone Plant is allocated to each Participant. There are five Tolling Contracts because new contracts were made at various times when the capacity of the Gladstone Plant was increased: the Initial Tolling Contract, the First Expansion Tolling Contract, the Second Expansion Tolling Contract, the Third Expansion Tolling Contract and the Fourth Expansion Tolling Contract. The contracts are in substantially the same terms.

8    The Rio parties have also entered into the following agreements with the Russian parties relating to the supply of bauxite to ABC and the shipment of the bauxite to the Gladstone Plant for processing into alumina:

(a)    the Monohydrate Bauxite Supply Agreement and the Low Mono Bauxite Supply Agreement both dated 16 February 2022 (collectively, the Bauxite Supply Agreements) under which RTA supplies bauxite from its mines in Cape York, Queensland and Gove, Northern Territory, to ABC to be processed into alumina at the Gladstone Plant; and

(b)    the Shipping Agreement dated 31 December 2021 under which RTA ships the bauxite that has been supplied to ABC to the Gladstone Plant.

9    QAL, ABC, RTA Holdco and RTA are also party to the Caustic Soda Supply Agreement dated 31 December 2020 under which each of ABC on the one hand, and RTA Holdco and RTA on the other hand, agree to supply their proportionate (equity) share of caustic soda to QAL for use in the production of alumina at the Gladstone Plant.

10    In late March 2022, following the implementation of the Russia Sanctions by the Australian Government, QAL corresponded with ABC with respect to the effect of the Russia Sanctions on the Gladstone alumina joint venture. On 24 March 2022, ABC responded to QAL and offered to give certain undertakings which, it claimed, would ensure that ABC’s continuing participation in the Gladstone alumina joint venture would not contravene the Russia Sanctions. The proposed undertakings included an undertaking that ABC would not provide any alumina received from QAL to Russia or to UC Rusal or any of its subsidiaries, with all alumina to be sold by ABC directly to third parties outside Russia and subject to contractual prohibitions against on-supply to Russia.

11    On 4 April 2022, QAL invoked Art 14A of the Participants Agreement and implemented the step-in arrangements pursuant to that Article in reliance upon the Russia Sanctions. The effect of the step-in arrangements was to reallocate ABC’s entitlement to refine bauxite into alumina at the Gladstone Plant to RTA and RTA Holdco, and thereby exclude ABC from participation in the Gladstone alumina joint venture for the duration of the Russia Sanctions. From midnight on 4 April 2022, QAL ceased to accept bauxite and caustic soda deliveries from ABC and ceased to refine and deliver alumina to ABC in accordance with the Participants Agreement and the Tolling Contracts.

12    On 8 April 2022, RTA invoked force majeure provisions in the Bauxite Supply Agreements and the Shipping Agreement in reliance upon the Russia Sanctions. Since then, RTA has ceased to supply bauxite or shipping services to ABC under those agreements.

13    On 17 August 2022, the applicants commenced this proceeding against QAL and the Rio parties (collectively, the respondents) seeking declaratory and injunctive relief and damages. The applicants allege that, in the circumstances that pertained on and since 18 March 2022, the acceptance of bauxite by QAL from ABC, the refining of alumina by QAL for ABC, and the delivery of alumina by QAL to ABC for sale to third parties outside Russia, did not amount, would not have amounted, and would not now amount, to a contravention by QAL of the Russia Sanctions and that Art 14A of the Participants Agreement was not applicable. The applicants allege that QAL has breached its contractual obligations under the Participants Agreement and the Tolling Contracts by ceasing to deliver alumina to ABC pursuant to those agreements. The applicants further allege that the Rio parties have breached their contractual obligations under the Bauxite Supply Agreements and the Shipping Agreement by ceasing to supply and ship bauxite to ABC at the Gladstone Plant pursuant to those agreements.

14    By their respective defences, the respondents contest the claims made by the applicants. The matters raised by QAL by way of defence are in a narrower compass than the matters raised by the Rio parties.

15    By its defence, QAL alleges that it is relieved of its obligations to deliver alumina to ABC by Art 14A of the Participants Agreement. Article 14A stipulates that the step-in arrangements in Appendix E apply if, relevantly, an Australian Government authority imposes sanctions on UC Rusal, ABC or any of their affiliates that are likely to prevent QAL from undertaking business activity with ABC and its affiliates. The issues in dispute between the parties concern the meaning and effect of Art 14A in the context of the Russia Sanctions, including the questions whether either of the Russia Sanctions:

(a)    have been imposed on UC Rusal, ABC or any of their affiliates; and

(b)    are likely to prevent QAL from undertaking business activity with ABC and its affiliates.

16    By their defence, the Rio parties allege that QAL is relieved of its obligations to deliver alumina to ABC on three bases:

(a)    first, by Art 14A of the Participants Agreement (in the same manner as alleged by QAL);

(b)    second, because the imposition of the Russia Sanctions was such as to render the performance by QAL of the Participants Agreement and the Tolling Contracts illegal and was accordingly a supervening illegality that excused QAL from compliance with those obligations; and

(c)    third, because the imposition of the Russia Sanctions was an event of force majeure for the purposes of Art 17 of each of the Tolling Contracts, which provides that QAL is not liable for failure to perform the Tolling Contracts if the failure was caused by force majeure.

17    The Rio parties further allege that, in circumstances where QAL is relieved of its obligations to deliver alumina to ABC, RTA is relieved of its obligations to supply and ship bauxite to ABC at the Gladstone Plant by the operation of:

(a)    the consequential contractual rights arising under para 1(c) of Appendix E to the Participants Agreement;

(b)    alternatively (if Art 14A did not apply), the force majeure provisions in Art 21 of the Monohydrate Bauxite Supply Agreement, Art 18.1 of the Low Mono Bauxite Supply Agreement and cl 11.1 of the Shipping Agreement.

18    The Rio parties also allege that, independently of QAL’s contractual rights and actions, RTA is relieved of its obligations to supply and ship bauxite to ABC at the Gladstone Plant by the operation of each of Art 26.2 of the Monohydrate Bauxite Supply Agreement, Art 19.3(b) of the Low Mono Bauxite Supply Agreement and cl 12.2 of the Shipping Agreement, which concern the imposition of sanctions.

19    Each of the above defences raise a large number of issues for determination. Most of the issues concern the proper construction of the Russia Sanctions and the contractual provisions relied upon by the respondents. However, one matter should be highlighted at the outset. There is a significant legal difference between the defence based on Art 14A of the Participants Agreement and the other defences advanced by the Rio parties. On its terms, Art 14A applies if the relevant sanctions are likely to prevent QAL from undertaking business activity with ABC and its affiliates. Each of the other defences, including the defence of supervening illegality, apply if the Russia Sanctions prevent QAL or the Rio parties from performing their contractual obligations.

20    Having regard to the range of defences raised by the respondents in the proceeding, it is convenient and efficient to consider the meaning and effect of the Russia Sanctions before considering each of the relevant contractual provisions, including Art 14A. The question that arises for determination is whether the production of alumina by QAL for ABC and the delivery of alumina to ABC pursuant to the contractual arrangements that govern the Gladstone alumina joint venture would be unlawful by reason of the imposition of the Russia Sanctions. Although a contravention of the Russia Sanctions would constitute a criminal offence, the question of illegality in this proceeding is to be determined on the civil standard of proof.

21    The provisions of the Autonomous Sanctions Regulations that are in dispute in this proceeding have not previously been the subject of judicial consideration. The provisions have been framed with an economy of language and raise difficult questions of construction as to the intended scope of the sanctions.

22    The factual background against which the issues in dispute must be determined is largely uncontroversial. There are three principal areas of factual dispute:

(a)    first, there is a relatively narrow dispute with respect to the effective shareholding interest held by Mr Deripaska in UC Rusal;

(b)    second, there is a more substantial dispute concerning the likelihood that alumina produced at the Gladstone Plant for ABC would be transferred to or for the benefit of Russia; and

(c)    third, there is a dispute concerning the expected Russian tax treatment of revenue and profits generated from ABC’s business activities in connection with the Gladstone alumina joint venture.

23    In relation to the second area of factual dispute, the likelihood that alumina produced at the Gladstone Plant for ABC would be transferred to or for the benefit of Russia, the applicants proffered undertakings (the Rusal Group Undertaking or Undertaking) to the Court on the last day of the hearing which, they submitted, would remove any risk that ABC’s continuing participation in the Gladstone alumina joint venture would contravene the Russia Sanctions. The terms of the Rusal Group Undertaking are as follows:

Each of the Applicants, United Company Rusal IPJSC (UC Rusal), Libertatem Materials Limited, United Company Rusal Alumina Limited and RTI Limited, by their counsel, undertakes to the Court that until further order, whether by themselves, their servants, agents, associates or otherwise:

1.    they will not supply any alumina that is supplied to the first applicant (ABC) by the first respondent (QAL):

a.    to UC Rusal or any of its subsidiaries; or

b.    to, for use in or for the benefit of Russia or part of Russia;

2.    they will not enter into or perform any swap or other arrangement, the effect of which is to provide that upon any alumina supplied to ABC by QAL being supplied by ABC to the counterparty under that arrangement, the counterparty shall supply an equivalent quantity of alumina:

a.    to UC Rusal or any of its subsidiaries; or

b.    to, for use in, or for the benefit of Russia or part of Russia;

3.    all alumina supplied to ABC by QAL will be sold by ABC directly to third parties located outside of Russia, on terms that:

a.    prohibit the buyer of such alumina from transferring such alumina, and/or any resultant aluminium refined from such alumina, to, for use in, or for the benefit of Russia or part of Russia; and

b.    require that the buyer of such alumina, in the event of on-sale by that person of such alumina and/or any resultant aluminium refined from such alumina, sell only on terms of sale containing the prohibition in paragraph 3(a) above;

4.    they will not act on or otherwise seek to enforce or perform the contract of sale, being Contract No. ABC/RT/05 dated 15 September 2005 between ABC and Rual Trade Limited, and novated by deed of novation dated 5 December 2012 by between ABC (as Seller), Rual Trade Limited (as Buyer) and RTI Limited (as New Buyer); and

5.    ABC will not declare and distribute any dividends.

24    Thus, it is also necessary to consider whether and in what manner the Rusal Group Undertaking affects the parties’ rights and liabilities, and any relief that might be granted by the Court in the proceeding.

25    While the area of factual dispute between the parties is relatively narrow, the parties disagree on the vast majority of issues concerning the interpretation of the Russia Sanctions and the relevant contractual provisions and their application to the facts of this case. Given the scope of the dispute, it has been necessary to make detailed factual findings and then traverse the issues in dispute at some length.

26    Although the causes of action alleged and the form of relief sought in the proceeding by the applicants are primarily based in contract law, I am satisfied that this Court has jurisdiction to hear and determine the claims made in the proceeding. The controversy between the parties arises under laws made by the Commonwealth Parliament within the meaning of s 39B(1A)(c) of the Judiciary Act 1903 (Cth). The dispute does not merely involve the interpretation of federal law (which is insufficient to found federal jurisdiction: Felton v Mulligan (1971) 124 CLR 367 at 374 (Barwick CJ), 382 (Menzies J), 396 (Owen J), 408 (Walsh J) and 416 (Gibbs J)). Rather, the rights in issue owe their existence to federal law: R v Commonwealth Court of Conciliation and Arbitration; Ex parte Barrett (1945) 70 CLR 141 at 154 (Latham CJ). That is because the contractual rights arise from the operation of federal law, being the Russia Sanctions imposed under the Autonomous Sanctions Regulations made under the Autonomous Sanctions Act: see by way of illustration LNC Industries Ltd v BMW (Australia) Ltd (1983) 151 CLR 575 at 581 (Gibbs CJ, Mason, Wilson, Brennan, Deane and Dawson JJ). Further, as submitted by QAL, the relief sought by the applicants includes declarations that ABC’s participation in the Gladstone alumina joint venture would not amount to a contravention of the Russia Sanctions. Although QAL submitted that declaratory relief in that form is misconceived, the relief sought is not colourable and is sufficient to found jurisdiction. Additionally, the Rio parties place direct reliance on the effect of the Russia Sanctions to plead supervening illegality as a defence to the contractual claims.

27    For the reasons that follow, the proceeding should be dismissed with costs. I find that:

(a)    on the balance of probabilities, at all times since the Russia Sanctions were imposed, the production of alumina by QAL for ABC and the delivery of alumina to ABC pursuant to the Gladstone alumina joint venture would have been contrary to the Russia Sanctions;

(b)    QAL is not relieved of its obligations to produce and deliver alumina to ABC by Art 14A of the Participants Agreement, but it is relieved of its obligations by the force majeure provisions in Art 17 of each of the Tolling Contracts (and would also have been relieved by the common law doctrine of supervening illegality);

(c)    RTA is relieved of its obligations to supply and ship bauxite to ABC at the Gladstone Plant by the operation of:

(i)    the force majeure provisions in Art 21 of the Monohydrate Bauxite Supply Agreement, Art 18.1 of the Low Mono Bauxite Supply Agreement and cl 11.1 of the Shipping Agreement; and

(ii)    the “sanctions provisions” in Art 26.2 of the Monohydrate Bauxite Supply Agreement, Art 19.3(b) of the Low Mono Bauxite Supply Agreement and cl 12.2 of the Shipping Agreement; and

(d)    without deciding the question of the Court’s power to accept the Rusal Group Undertaking, the Undertaking should not be accepted by the Court as a basis on which the Court would grant declaratory and injunctive relief on a prospective basis.

B.    OVERVIEW OF THE EVIDENCE

B.1    Evidence adduced by the applicants

28    The applicants called four lay witnesses (Kirill Strunnikov, Aleksey Gordymov, Vladimir Runov and Dzianis Sidarkevich) and one expert witness (Natalia Kuznetsova), and tendered documents. Each of the witnesses was cross-examined. There was no serious challenge to the credit of any of the lay witnesses and I consider that each of the lay witnesses gave truthful evidence. As discussed below, the respondents were critical of some aspects of Ms Kuznetsova’s evidence. The following is an overview of the evidence given by each of those witnesses.

Kirill Strunnikov

29    Kirill Strunnikov is the Head of International Practice at the Legal Department of UC Rusal, a position he has held since 2018. Mr Strunnikov was educated at the Moscow State Law Academy, the Central European University in Budapest and the University of Connecticut School of Law. He has been employed by UC Rusal since its incorporation in 2007. Until 2018, he held several positions in UC Rusal’s Moscow headquarters with responsibilities mainly focused on overseas operations and international disputes. In his affidavits affirmed 3 November 2022 and 24 May 2023, Mr Strunnikov gave evidence concerning:

(a)    the shareholding in UC Rusal, with a particular focus on the indirect shareholding interests of Messrs Deripaska and Vekselberg;

(b)    UC Rusal’s compliance policy which sets out UC Rusal’s standards for compliance by it, its subsidiaries, and all employees, with (amongst other things) regulatory requirements of the jurisdictions in which it conducts business, including sanctions requirements; and

(c)    the designation by the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) of Mr Deripaska and certain entities associated with Mr Deripaska, including En+ and UC Rusal, on the list of “Specially Designated Nationals and Blocked Persons” (SDN List), the subsequent restructuring of En+ and UC Rusal to “sever Mr Deripaska’s ownership and control of UC Rusal” and the removal of En+ and UC Rusal from the SDN List.

30    At the trial, I admitted the evidence concerning the OFAC designation (paras 18 to 28 of Mr Strunnikov’s affidavit) on a provisional basis subject to relevance. The respondents submitted that the only possible relevance of the evidence was as background circumstances that assisted in the construction of Art 14A of the Participants Agreement, but argued that it was not established that those circumstances were known to the respondents at the time that Art 14A was inserted into the Participants Agreement.

31    I have concluded that the evidence, other than para 20 of Mr Strunnikov’s affidavit, is relevant on two bases and should be admitted. First, I consider that the evidence is relevant to the construction of Art 14A which was inserted into the Participants Agreement after the events narrated in the evidence occurred. I infer that the insertion of Art 14A was prompted by those events. Further, and as discussed later in this judgment, I infer that the respondents were aware of the matters referred to in the evidence having regard to the public disclosures that were made about those matters and the commercial relationship between the parties by reason of the Gladstone alumina joint venture. I draw that inference more confidently in circumstances where the respondents chose not to give evidence about the extent of their knowledge of those matters. Second, the evidence explains the changes that have occurred in the indirect shareholding interests held by Messrs Deripaska and Vekselberg in UC Rusal, and the reasons for those changes, and is therefore has some general relevance to the question whether either of Mr Deripaska or Mr Vekselberg should be considered an affiliate of UC Rusal within the meaning of Art 14A. The matters referred to in para 20 of Mr Strunnikov’s affidavit are unlikely to have been known to the respondents and have no relevance to the issues to be determined.

Aleksey Gordymov

32    Aleksey Gordymov is the Head of Business Support (Head of Supply Chain) in UC Rusal, and is also a director of QAL. Mr Gordymov has never held a direct role or office in ABC, but part of his duties involves managing ABC’s procurement and shipment of alumina. Mr Gordymov has held senior management positions in alumina production since 2005. From September 2014 until November 2017, he was employed as Deputy Head of the Alumina Division of UC Rusal. In 2017, Mr Gordymov became the Head of Business Support (Head of Supply Chain) of UC Rusal. In that role, he is responsible for supervising the operations of UC Rusal and its subsidiaries, including the sale, logistics, transportation and delivery of raw materials and consumables. One of Mr Gordymov’s responsibilities is to manage UC Rusal’s alumina book effectively and ensure the uninterrupted supply of alumina to UC Rusal’s aluminium smelters. In 2021, UC Rusal produced approximately 8.4 million tonnes of its own alumina, purchased approximately 800,000 tonnes of alumina, sold approximately 600,000 tonnes of alumina and obtained approximately 1 million tonnes through swap deals in order to optimise logistics. In his affidavits affirmed 2 November 2022 and 15 March 2023, Mr Gordymov gave evidence concerning:

(a)    the global trade in alumina, including the determination of contract prices;

(b)    the business activities of the Rusal Group;

(c)    the Gladstone alumina joint venture;

(d)    the status of ABC’s business operations as at March 2022 and actions taken by Mr Gordymov with respect to shipments of alumina immediately following the imposition of the Russia Sanctions by the Australian Government;

(e)    the correspondence between ABC and QAL in relation to the imposition of the Russia Sanctions; and

(f)    swap agreements entered into by UC Rusal entities, including ABC, in respect of the supply of alumina.

Vladimir Runov

33    Vladimir Runov is the Head of Tax for the international business of UC Rusal and a legal advisor to the Chief Financial Officer of UC Rusal. Mr Runov graduated with honours in 1997 from the Moscow State Finance Academy in International Economics specialising in accounting and audit. He also studied law between 1997 to 2000 at the Institute of State and Law in Moscow. Mr Runov has worked in the field of tax for over 28 years, with a particular focus on international taxation, both in industry and in a professional advisory capacity in accountancy firms (including PwC and Ernst & Young) in Russia and Europe. In 2007, Mr Runov joined the Rusal Group as an overseas tax officer based in Dublin and, in 2010, Mr Runov relocated to Moscow as the Head of Tax Policy for all the Rusal Group and continued in that role for over 12 years. In his affidavit affirmed 12 October 2022, Mr Runov gave evidence concerning:

(a)    UC Rusal’s corporate structure, shareholding, financial reports and tax returns; and

(b)    ABC’s business operations and financial returns.

Dzianis Sidarkevich

34    Dzianis Sidarkevich is the sole director of Libertatem Materials Ltd (Libertatem), a company incorporated in the Republic of Cyprus and a wholly owned subsidiary of UC Rusal. Libertatem was incorporated to consolidate UC Rusal’s foreign assets (including ABC) which were previously held and managed in Cyprus directly by UC Rusal Plc. The incorporation was part of a restructure of the Rusal Group that took place between 2018 and 2020. The restructure involved the redomiciliation of UC Rusal Plc to the Russian Federation and the transfer of the Cyprus offices of UC Rusal, its employees and UC Rusal’s international assets to Libertatem, which restructure was finalised in December 2020. From about 2015 or 2016 until 1 May 2020, Mr Sidarkevich was a General Manager of UC Rusal Plc. On 1 May 2020, Mr Sidarkevich became the sole director of Libertatem and assisted in the redomiciliation of UC Rusal to Russia. In his affidavit dated 24 May 2023, Mr Sidarkevich gave evidence concerning Libertatem’s corporate structure, commercial activities and dividend policy.

Natalia Kuznetsova

35    Natalia Kuznetsova is a partner with the firm BST Consulting based in Moscow. Her curriculum vitae states that she was a partner in the Tax & Legal Department at Deloitte Russia until May 2022 and that her “experience in tax exceeds 20 years and includes a tax partner position (Head of International Tax for 10 years) with another Big Four firm in Russia and a tax directorship in a major private equity fund, focusing on investments in Russia and the CIS”.

36    Ms Kuznetsova prepared a primary report dated 7 October 2022, a supplementary report dated 3 May 2023 and a further supplementary report dated 3 June 2023. In her primary report, Ms Kuznetsova gave her opinions in respect of the following questions:

(a)    What is the purpose and effect of the Russian Controlled Foreign Company Rules (CFC Rules)?

(b)    What are the applicable exemptions to the CFC Rules?

(c)    Whether ABC is exempt from the CFC Rules as an active business by virtue of Paragraphs 3 and 4, Article 25-13.1 of the Russian Tax Code?

(d)    Whether UC Rusal is exempt from the CFC Rules until 2029 by reason of Paragraph 58, Section 1, Article 251 of the Russian Tax Code?

(e)    Whether UC Rusal and/or ABC are subject to any other exemptions to the CFC Rules in respect of income derived from ABC’s business operations with QAL?

(f)    Whether, if ABC pays tax on Australian business operations in Australia (i.e. tax paid to the Australian Taxation Office), any tax is payable in the Russian Federation on those Australian business operations?

(g)    Whether dividends paid by Libertatem to UC Rusal directly or indirectly are taxable in the Russian Federation?

(h)    Whether, if QAL supplied, sold or transferred alumina to ABC, such supply, sale or transfer could or would result in the taxation of ABC or related companies in the Russian Federation?

37    In her supplementary report, Ms Kuznetsova provided a response to the report of Professor Paul Brooke Stephan dated 25 April 2023 filed on behalf of QAL.

38    In her further supplementary report, Ms Kuznetsova considered whether further information concerning Mr Vekselberg’s shareholding interest in SUAL Partners ILLC affected any of the opinions previously expressed.

39    Throughout her written reports and during cross-examination, Ms Kuznetsova displayed extensive knowledge about the Russian Tax Code. I generally accept her evidence about the specific provisions of the Russian written law in that respect. However, there are limitations in Ms Kuznetsova’s evidence with respect to the application of the Russian tax law to the Rusal Group.

40    First, Ms Kuznetsova’s evidence was subject to significant caveats. She stated that, in preparing her report, she had not performed any verification of the information provided to her which included significant factual assumptions including the tax residence of the entities referred to in her report, whether UC Rusal or any other Russian companies mentioned in the report meet the conditions for being recognised as international holding companies under the Russian Tax Code, and the business activities of Libertatem.

41    Second, I accept QAL’s submission that, during cross-examination, it became clear that Ms Kuznetsova’s evidence was not entirely impartial and that she was at pains to downplay any risks attending the application of the written law in the case of UC Rusal. That is not to say that Ms Kuznetsova was an advocate for the applicants’ case. Rather, as submitted by QAL, Ms Kuznetsova wished to defend the integrity of the Russian tax system, even when that stance was difficult to maintain in the face of statements in UC Rusal’s own annual reports and other documents. On a number of occasions, rather than simply answer a question asked of her, she went on an excursus about the rules-based predictability of Russian tax law. The following evidence, which was given honestly, was revealing of that motivation:

Do you understand that your role is to independently assist the court, not argue the case for the applicants?---I do understand but, to a certain extent, I feel a little bit upset about what Dr Stephan or Professor Stephan wrote about Russian tax system because, in a way, what he presented in his report, it was like as if there were no 20 years of development and there was. And I am a tax professional and, basically, this environment it is not easy but it has certain rules of the game and there is a person who says that this is all sort of like doesn’t matter because somebody can come and throw it away. Well, I do not agree with this. I think there are still certain principles and certain bases that have to be followed in order to put a case against any company. There should be substance and, in most cases, the substance is [missing word] by the authorities. ...

Let’s break this down. So what he has said has upset you as a professional in Russian taxation?---Yes.

I take it the manner and the content of your evidence today has, in part, been because you have wanted to defend and stand up for that system?---Because I think there is certain fairness in the system and there are certain rules in the system and there is law and there is tax case and there are developments around that and that basically we have to respect and I, as a tax professional, have to respect it. So that’s why I am like, yes – I mean, there are certain things that basically we have to – you just cannot say that this – the law can be applied arbitrary. No, there are certain rules that have to be followed.

42    The principal issue on which Ms Kuznetsova was cross-examined was the risk of the Russian tax authorities applying an interpretation of Russian tax laws that is selective for particular taxpayers and different to previous interpretations and practices. While Ms Kuznetsova was reluctant to agree with that proposition, she ultimately conceded that there is some risk of selective application of Russian tax laws to particular taxpayers.

B.2    Evidence adduced by QAL

43    QAL called two lay witnesses (Elizabeth Baker and Gerhard Pienaar) and two expert witness (Alan Clark and Prof Paul Stephan), and tendered documents. None of those witnesses were required for cross-examination. In respect of Ms Baker and Mr Pienaar, I accept their evidence given by affidavit. In respect of the expert reports of Mr Clark and Prof Stephan, I accept the opinions expressed by them subject to some relatively minor qualifications referred to later in these reasons. In that regard, I observe that, while the rule in Browne v Dunn is applicable to expert evidence, the failure to challenge the opinions of an expert witness (by cross-examination) does not require the Court to accept the expert’s evidence over other contrary evidence: Bulstrode v Trimble [1970] VR 840 at 848 (Newton J). As stated by the New South Wales Court of Appeal in M & E M Hull Pty Ltd v Thompson [2001] NSWCA 359 at [21] (Rolfe AJA, Sheller JA and Davies AJA agreeing):

Prima facie if there is no cross-examination of an expert, (and indeed most witnesses), there is no basis for a Judge not to accept the unchallenged evidence. I say “prima facie” because there are circumstances in which evidence in a report may be rejected or subject to criticism or doubt. This may occur where, for example, the report is ex facie illogical or inherently inconsistent; or where it is based on an incorrect or incomplete history; or where the assumptions on which it is founded are not established. However, in the absence of such matters, there is no rational reason to not accept unchallenged evidence.

44    Similarly, in Griffiths v TUI (UK) Ltd [2023] UKSC 48 at [61]-[70] (Lord Hodge, Lords Lloyd-Jones, Briggs, Burrows and Stephens agreeing), the Supreme Court of the United Kingdom reiterated the application of the rule in Browne v Dunn in the context of expert evidence, but explained that there are a number of circumstances in which the rule will not apply, including where an expert opinion is unsupported by reasoning or the factual assumptions on which the expert opinion is based are not established.

Elizabeth Michel Baker

45    Elizabeth Michel Baker is the Company Secretary and Legal Counsel of QAL. She has held the position of Company Secretary since June 2020 and the position of Legal Counsel since July 2000. In her affidavit sworn 20 December 2022, Ms Baker gave evidence concerning:

(a)    the corporate structure of QAL and the agreements governing the Gladstone alumina joint venture;

(b)    the imposition of the Russia Sanctions by the Australian Government;

(c)    correspondence between QAL and ABC concerning the effect of the sanctions with respect to QAL’s business dealings with ABC; and

(d)    the decision taken by QAL to invoke Art 14A of the Participants Agreement and the step-in arrangements.

Gerhard Able Pienaar

46    Gerhard Able Pienaar has been the General Manager of QAL since 18 September 2019. Prior to that, Mr Pienaar held the position of Manager-Utilities at QAL from 21 November 2017 until 30 May 2019, and the position of Acting General Manager of QAL from 31 May 2019 to 17 September 2019. In his affidavits sworn 19 and 21 December 2022, Mr Pienaar gave evidence concerning:

(a)    QAL’s business operations, including the delivery of alumina to the joint venture participants;

(b)    ABC’s bauxite, alumina and caustic soda balances from March 2022; and

(c)    the status of ABC’s scheduled shipments after the imposition of the Russia Sanctions.

Alan George Clark

47    Alan George Clark is the founder and Managing Director of the CM Group, which is an independent research advisory group specialising in the analysis of global base and minor metals industries. Mr Clark holds a Bachelor of Applied Science (Metallurgy) from the University of South Australia and a Master of Business Administration (Management of Technology) from the University of Melbourne. He has over 25 years’ industry experience in base metals, specialising in supply-side analysis, cost assessment, primary production, technology development and process improvement. Mr Clark began his career as a research engineer with Rio Tinto Aluminium (formerly Comalco), followed by several roles in research, process improvement and marketing, before establishing Clark & Marron in 1999 which became the CM Group in 2011. Mr Clark’s experience covers many of the world’s base, minor metals and minerals industries, including bauxite, alumina, aluminium, nickel, magnesium, scandium, tungsten, tin, mineral sands, molybdenum and manganese. He has particular expertise on the global aluminium value-chain, particularly bauxite and alumina. Through the CM Group, Mr Clark advises the world’s largest aluminium producers, investment banks, fund managers, traders, industry bodies and research houses as well as governments and major industry groups, such as the International Aluminium Institute, the Australian Aluminium Council and the Aluminum Association.

48    In his report dated 28 March 2023 and his supplementary report dated 28 April 2023, Mr Clark expressed his opinion on the following questions:

Question 1: Please give a brief overview of how smelter grade alumina is produced and what it is used for.

Question 2: Is smelter grade alumina fungible? To any extent to which it has classes or variations or the like, what are these and what implications do they have for smelting?

Question 3: Can smelter grade alumina be stockpiled indefinitely or does it need to be used within some period, and if so why and what is that period?

Question 4: Please give an overview of the global alumina market as at the start of 2022, including addressing:

(a)     major centres of production and consumption;

(b)     any particular drivers or features of supply and demand;

(c)     how alumina is or can be traded;

(d)     to what if any extent swap arrangements are used, and how they operate;

(e)     how prices are determined and expressed; and (f) the market price of alumina between January 2019 and April 2022.

Question 5: As at the start of 2022, what were the major aluminium smelting companies in Russia, where were their smelters, what was their approximate annual consumption of alumina and what were their major sources of supply of alumina?

Question 6: What are the consequences for an aluminium smelter of a shortage or lack of alumina supply?

Question 7: Approximately how long is required for the construction of an alumina refinery and what is the approximate capital cost of such construction?

Question 8: Having regard to your answers to questions 1-7 above, if and as you consider those answers of relevance, and to any other relevant considerations, please describe the state of the Russian smelters’ demand for, and ability to obtain, alumina in April 2022.

Question 9: If ABC obtained from QAL the tonnage of alumina referred to in section 2 of this letter and sold it to third parties in China or otherwise outside Russia, as referred to in section 2 of this letter, what effect, if any, would this have on the availability of alumina to Russian smelters? In answering this question, please refer to the following, if and as you consider relevant:

(a)     your answers to questions 1-8 above;

(b)     the tonnage of China’s annual alumina requirements;

(c)     the use (if any) of swap arrangements; and (d) whether such sale of alumina by ABC would free up other sources of alumina for supply into Russia and, if so, where those sources would come from.

Question 10: If ABC obtained from QAL the tonnage of alumina referred to in section 2 of this letter and sold it to third parties in China or otherwise outside Russia on contractual terms prohibiting the buyers from on-selling that alumina to Russia, as referred to in section 2 of this letter:

(a)    would there remain a possibility that the alumina would end up in Russia, and, if so, how likely would that be and how would it occur?; and

(b)     would there be any way of ensuring or monitoring compliance with the contractual prohibitions referred to?

49    I accept the opinions expressed by Mr Clark subject to a relatively minor qualification referred to below.

Professor Paul Brooke Stephan

50    Paul Brooke Stephan is a Professor of Law at the University of Virgina in the United States of America. He was awarded the degrees of Bachelor of Arts (History) in 1973 and Master of Arts (Russian Studies) in 1974 from Yale University, and a Juris Doctor in 1977 from the University of Virginia. Prof Stephan’s areas of specialisation include international law, foreign relations law, post-Soviet law, international business transactions, contract law, federal taxation, and US constitutional law.

51    In his report dated 17 March 2023, Prof Stephan expressed his opinion on the following questions:

Question 1: Please provide a brief overview of whether – and, if so, how – Russian tax is imposed on or in relation to:

(a)    business profits;

(b)    dividends;

(c)    increase in the value of shares; and

(d)    capital gains made by reason of the sale of shares.

In answering this question, please identify the basis on which natural persons and companies are subject to tax (e.g. residence, citizenship, place of incorporation, place of business).

Question 2: What are the sources of tax law in Russia? In answering this question, please explain:

(a)    the extent to which the imposition of tax follows the written law; and

(b)    if the imposition of tax ever departs from the written law:

(i)    how and why that happens; and

(ii)    how often that happens.

Question 3: Please provide an overview of the Russian controlled foreign company (CFC) rules. In answering this question, please identify and explain any exceptions to the CFC rules relevant to the activities and ownership structure of ABC as known to you.

Question 4: Having regard to your answer to Question 3, what is your opinion as to whether it is likely that ABC is exempt from the CFC rules.

Question 5: If ABC were to make a profit by reason of QAL supplying alumina to ABC, what would the likely tax consequences be for the natural and legal persons with direct or indirect interests in ABC (including but not limited to the companies referred to above under the heading ‘Corporate structure’)? In answering this question, please address (without limitation) the various scenarios in which dividends are or are not paid up the corporate chain.

Question 6: To the extent not otherwise addressed in your answers to Question 1 to 5 above, please set out whether you agree with the opinions stated in Ms Kuznetsova’s report. In answering this question, please:

(a)    identify any areas of disagreement and explain why you disagree; and

(b)    identify any matters not addressed in the report which you consider are of relevance for the issues the subject of the report.

52    As an American law professor, it is not immediately obvious that Prof Stephan would have the expertise to express opinions on those questions. However, in his report, Prof Stephan described his training, study and experience relevant to the questions, which includes the following:

(a)    From the start of his academic career, Prof Stephan has concentrated on Soviet and Russian law, politics and economics, in addition to tax law, international law and the organization and regulation of international business transactions. Prof Stephan has taught a course related to Soviet or Russian law in virtually every one of the 44 years he has worked as a law professor. He reads Russian and has substantial facility with Russian legal terminology. Prof Stephan has taught tax law since the beginning of his career. He has worked on various projects on behalf of the US Tax Court and has practised before it. Prof Stephan has published scholarly articles on both US tax law and comparative tax law, as well as Russian tax law.

(b)    After the dissolution of the Soviet Union, Prof Stephan took part in the law reform process in the former republics of the Soviet Union, with the bulk of his activities involving the Russian Federation. From 1992 to 1993, legal specialists working on behalf of the Russian Government solicited his advice concerning the framing of the Russian Federation’s new Constitution, which was ratified at the end of 1993. During this period, Prof Stephan also advised members of the State and Law Administration of the Office of the President of the Russian Federation concerning organization of the judicial system and the conditions for promoting judicial independence. Prof Stephan played a central role in establishing the presence of the American Bar Association’s Central and East European Law Initiative in Russia.

(c)    From 1993 to 1998, Prof Stephan was employed by a number of government and international bodies in connection with law reform projects in the region, including the International Monetary Fund, the World Bank, the Organization for Economic Cooperation and Development, the US Department of the Treasury, and the US Federal Bureau of Investigation. The lion’s share of the work performed on behalf of the US Department of Treasury involved the drafting of the Russian Tax Code. Prof Stephan also organised or directed programs to train Russian lawyers and judges, which were funded by the US Agency for International Development.

(d)    For the last 25 years, Prof Stephan has appeared as an expert on Russian law in numerous cases in US and foreign courts as well as various international arbitrations.

(e)    Since the inception of the Russian invasion of Ukraine, Prof Stephan has published articles, advised the general counsels of stakeholders, and conducted workshops for the Office of the Legal Adviser and congressional staff on the legal issues surrounding the imposition of sanctions on Russia.

53    In a number of instances, Prof Stephan’s report did not reveal or explain the primary facts or source materials on which his opinions were based. As such, it was not possible to be satisfied that those opinions expressed by Prof Stephan were “wholly or substantially based on” specialised knowledge as the reasoning process leading to the formation of the opinion was not exposed. In those instances, the opinions were ruled inadmissible on the basis that the opinions did not satisfy the requirements of s 79 of the Evidence Act 1995 (Cth) as explained in HG v The Queen (1999) 197 CLR 414 at [39]-[44] (Gleeson CJ) and Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588 at [42] (French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ).

54    There was substantial agreement in the opinions of Ms Kuznetsova and Prof Stephan with respect to the provisions of the Russian Tax Code. The primary area of disagreement concerned the administration and enforcement of the Russian tax law by the relevant authorities, and the likelihood of arbitrary rulings being made. The applicants elected not to cross-examine Prof Stephan and accordingly did not challenge the opinions expressed by him with respect to the likelihood of arbitrary rulings. Despite choosing not to cross-examine Prof Stephan, the applicants submitted that Prof Stephan’s opinions carry little weight given his reliance on “an outdated account of Russian case law” (which was focused on the 2005 Yukos decision – Presidium of the High Arbitrazh Court of Russia, No. 8665/04, 4 October 2005) and without due regard to contemporary developments in both case law and legislation. As discussed further below, while there is some force in that criticism of Prof Stephan’s report, the difference in the opinions of Ms Kuznetsova and Prof Stephan proved to be relatively narrow. As noted above, Ms Kuznetsova ultimately conceded a risk of arbitrary rulings during cross-examination.

B.3    Evidence adduced by the Rio Parties

55    The Rio parties called two lay witnesses (Alfred Patrick Grigg and Fraser Brian O’Donnell), and tendered documents. Neither of those witnesses were required for cross-examination and I accept their evidence given by affidavit.

Alfred Patrick Grigg

56    Alfred Patrick Grigg is the Chief Counsel, Minerals at Rio Tinto. Mr Grigg graduated with a Bachelor of Laws (Hons) and a Bachelor of Business (Management) from Monash University in 1999 and was admitted to practice as a Solicitor in the Supreme Court of Victoria and the High Court of Australia in 2000. After working as a solicitor in private practice and then as in-house counsel, in 2007 Mr Grigg joined Rio Tinto as a Corporate Counsel and has undertaken several legal roles in support of Rio Tinto’s aluminium product group. At the time of his first affidavit affirmed 12 December 2022, he was acting General Manager, Energy & Joint Ventures, Pacific Operations, Aluminium at Rio Tinto Services Limited (the Rio Tinto entity which employs corporate personnel), and his substantive role was Chief Counsel, Aluminium and Strategic Partnerships at Rio Tinto. In his affidavits affirmed 12 December 2022 and 23 May 2023, Mr Grigg gave evidence concerning:

(a)    the Gladstone alumina joint venture and the contractual arrangements under which the venture operates;

(b)    the imposition of the Russia Sanctions by the Australian Government; and

(c)    the notices given by RTA to the Russian parties under Appendix E of the Participants Agreement and under the force majeure provisions of the Bauxite Supply Agreements and the Shipping Agreement.

Fraser Brian O’Donnell

57    Fraser Brian O’Donnell is a solicitor employed by Allens, the solicitors for the Rio parties. In his affidavit affirmed 23 May 2023, Mr O’Donnell gave evidence concerning the steps he took to compile a bundle of legislation, regulations and instruments imposing sanctions in respect of a number of countries (including Russia, Syria, Iran, North Korea and the Crimea Region of Ukraine) by the following countries and intergovernmental organisations: Australia, the United Kingdom, Canada, the United States of America, the European Union and the United Nations.

C.    FACTUAL BACKGROUND

C.1    Global trade in alumina

58    The following description of the global trade in alumina is drawn from the expert report prepared by Mr Clark.

59    Alumina is aluminium oxide (chemical formula Al2O3) and is usually produced as a white crystalline powder. Approximately 95% of all alumina produced in the world is used to smelt primary aluminium metal in electrolytic aluminium smelters. The remaining alumina is used in a variety of other applications with significantly smaller markets, including refractories, abrasives, chemicals, batteries, lighting, fillers and cosmetics.

60    Aluminium smelters require a continuous supply of alumina. The primary aluminium smelting process is a high-temperature, fully continuous process that takes place in large electrolytic cells. Each cell is connected in series through an electrical circuit to a number of other cells, collectively known as a potline. The operation of each electrolytic cell relies on the steady, uninterrupted supply of alumina and electricity to maintain operational stability. Any interruption to the supply of either into an electrolytic cell, no matter how small, will impact the performance and the stable operation of the cell. Small interruptions to alumina supply can be tolerated, although they would unavoidably impact the stability and integrity of the operation, as well as reducing output and increasing costs. Lengthier interruptions to alumina supply will lead to serious process and operational instability, in particular, the risk that the electrolytic cells will undergo what are referred to in the industry as “anode effects”. When anode effects occur, the voltage in the electrolytic cell increases dramatically and the electrolysis process becomes unstable and uncontrollable. The cell can then quickly lose its heat balance, leading to a complete loss of control of the process. If this happens to multiple cells in a potline, it would result in the potline being forcibly shut down, which is a catastrophic event for an aluminium smelter. This is because every electrolytic cell not receiving alumina would need to be cooled from a temperature of around 900oC to ambient temperature, resulting in the freezing of its entire contents. This freezing event not only causes irreversible and irreparable damage to the cells, it also results in months of outage. For an aluminium smelter to forcibly shut down an entire potline, the losses incurred are substantial. For that reason, smelters hold sufficient alumina inventory to avoid short-term disruptions.

61    Approximately 139 million tonnes of alumina (chemical and metallurgical grade) were produced globally in 2021, from an estimated world alumina capacity of 153 million tonnes per annum. China was the largest alumina-producing country in 2021, at approximately 75.3 million tonnes, accounting for 54% of the world total. Australia was the second largest, producing approximately 20 million tonnes, with the third largest being Brazil at over 10 million tonnes. Together, these three countries accounted for 77% of the world’s 2021 production.

62    Over the past decade, China consolidated its dominant position as the world’s largest alumina producer, by steadily growing its domestic capacity. In 2014, China’s total refining capacity accounted for over half the world’s total for the first time, and its proportion has been increasing ever since, reaching 54% in 2021. China became a significant net exporter of alumina in 2018, before swinging back to a net importer in 2019.

63    Australia’s 2021 alumina production was 20.4 million tonnes, of which an estimated 89% was exported.

64    Mr Clark expressed the opinion that alumina can be considered as fungible, meaning it is interchangeable or replaceable with identical material, and that this is the basis on which global alumina is traded, contracts are swapped and material interchanged in different parts of the world. Mr Clark explained that, while alumina is considered to be fungible, different alumina refineries do produce alumina of different qualities, different levels (and types) of impurities and alumina of different crystalline structure.

65    Mr Clark also explained that, in theory, alumina has an unlimited shelf life, although it must be stored in conditions which minimise exposure to moisture. In practice, the longer alumina is stored, the higher the likelihood it may come into contact with moisture, typically natural moisture in the atmosphere. It could also be exposed to fluctuations in temperature, which may affect its properties, as well as other potential contaminants, such as carbon, which can affect the performance of the alumina in the smelting process. Storage periods for alumina vary widely depending on the location of the refinery, the means of transport of alumina from the refinery (eg rail vs shipping), the frequency of despatch, transport distances and the storage facilities and inventory management systems in place at the destination smelter. Alumina is regularly stored in bonded warehouses prior to completing customs clearance requirements or waiting to be on-sold. Storage times in bonded warehouses are often measured in weeks and months depending on market conditions at the time.

66    As China began to emerge as the world’s largest producer and consumer of alumina, global trade patterns began adjusting to accommodate a new global supply/demand balance. The result is in effect a dual market, whereby China’s domestic alumina production generally met the requirements of its domestic smelting sector, and alumina supply in the rest of the world (ROW) met ROW smelting demand. The ROW market can be further divided between the Atlantic and Pacific markets, with the difference in prices reflecting supply/demand and freight differentials between the two regions. Mr Clark reported that, heading into 2022, under what he considers as “steady-state” global alumina market conditions, China’s market was absorbing surplus alumina from the ROW market under favourable economic conditions. In other words, the Chinese alumina market was acting as a “sponge” for surplus alumina produced in the ROW market.

67    Mr Clark reported that swap arrangements are a common instrument used in the global alumina market. They can be broadly categorised into two groups: planned and unplanned. Planned swaps are usually between two alumina suppliers, which can include refining companies, traders or other groups, and involve swapping of alumina in different geographical regions to save on transport costs and are agreed in advance of production. Unplanned swaps are between suppliers typically on a short-term basis to cover some unforeseen set of circumstances that have led to either a shortage or oversupply of alumina emerging in a specific location.

C.2    Russia’s aluminium industry and UC Rusal’s business operations

68    Mr Gordymov deposed that the Rusal Group engages in business activities involving bauxite and nepheline mining, alumina production, electrolytic production of primary aluminium, and the production of value-added aluminium products (eg aluminium billets, ingots and foil). UC Rusal conducts its business activities globally, including in Armenia, Australia, Germany, Guinea, Guyana, the Republic of Ireland, Italy, Jamaica, Kazakhstan, Nigeria, Russia, Sweden and Ukraine.

69    UC Rusal owns eleven aluminium smelters, of which nine are in Russia, one is in Sweden, and one is in Nigeria (which is currently idle). A tenth Russian smelter commenced operations at the end of 2021, but is only running at a very low production rate because of market conditions (making aluminium production unprofitable). In the financial year ending 31 December 2022, UC Rusal’s Russian smelters had a requirement for 7.9 million tonnes of alumina. Mr Clark reported that UC Rusal is Russia’s only primary aluminium producing company.

70    UC Rusal owns ten alumina refineries, of which four are in Russia, two are in Jamaica, one is in Ireland, one is in Ukraine, one is in Italy, and one is in Guinea. The Mykolaiv refinery in Ukraine ceased operating on 26 February 2022 following Russia’s invasion of Ukraine. Prior to that, it produced approximately 1.75 million tonnes of alumina per annum of which about 98% was supplied to UC Rusal’s aluminium smelters in Russia. The Ukrainian city of Mykolaiv is transliterated as Nikolaev in Russian, and the latter name is used alternatively in UC Rusal’s annual reports when referring to the alumina refinery.

71    Through ABC, UC Rusal also has an interest in the Gladstone Plant operated by QAL. Immediately prior to April 2022, ABC received an annual entitlement of 760,000 tonnes of alumina from the Gladstone alumina joint venture. QAL ceased the delivery of alumina to ABC at midnight on 4 April 2022.

72    Pursuant to a contract of sale entered into on 15 September 2005, ABC sold all of the alumina produced at the Gladstone Plant to which it was entitled to another subsidiary of UC Rusal, Rual Trade Limited. Under that contract, the purchaser obtained title to the alumina once it passed the ship’s rail at QAL’s wharf. On 5 December 2012, the purchase obligations under the contract of sale were novated to a different subsidiary of UC Rusal, RTI Limited (RTI), by a deed of novation. On 23 November 2018, the term of the contract of sale (now with RTI) was extended to 31 December 2025.

73    Mr Gordymov gave evidence that, prior to the imposition of the Russia Sanctions, UC Rusal also acquired a further 750,000 tonnes of alumina from Australia under swap agreements with Rio Tinto, Glencore International AG and Norsk Hydro. The purpose of those arrangements was to optimise the logistics of alumina supply to UC Rusal’s subsidiaries in Russia. The swap arrangement with Rio Tinto involved the swap of alumina produced at UC Rusal’s Aughinish refinery in Ireland for alumina produced by Rio Tinto in Australia. The swap was suspended on 21 March 2022. The swap arrangement with Norsk Hydro involved a swap of alumina produced at different locations in Australia. That arrangement was suspended on 18 March 2022.

74    Mr Gordymov agreed in cross-examination that, following Russia’s invasion of Ukraine, UC Rusal lost the supply of approximately 3.4 million tonnes per annum of alumina in aggregate from the Mykolaiv refinery and from Australia, which equated to approximately 40% of UC Rusal’s Russian requirements. At that time, UC Rusal became a net purchaser of alumina, rather than a seller of alumina. It acquired alumina from traders, including alumina sourced in China, as well as through its own subsidiary based in China. Alumina acquired in China is able to be transported to Russia by truck or barge.

75    Mr Clark reported that, according to China Customs data, Russia has imported approximately 1.1 million tonnes of alumina from China over the 14-month period ending February 2023.

C.3    The Gladstone alumina joint venture

76    QAL is the owner and operator of an alumina refinery in Gladstone, Queensland. QAL’s facilities include the refinery, two storage sheds and a wharf known as South Trees.

77    The shares in QAL are owned by ABC (as to 20%) and by RTA Holdco and RTA (as to 80%). From March 2022 until the date of trial, the Board of QAL has comprised:

(a)    Mr Gordymov;

(b)    Mr Geoffrey Ian Blatch (alternate director for Mr Gordymov);

(c)    Mr Daniel John van der Westhuizen (until 26 July 2022);

(d)    Mr Mudiwa Gwisai; and

(e)    Mr Armando Antonio de Oliveira Torres (alternate director for Messrs Westhuizen and Gwisai from 4 April 2022 to 26 July 2022, and director from 26 July 2022).

78    QAL receives bauxite from ABC and the Rio Tinto companies, RTA Holdco and RTA, and processes that bauxite into alumina on a toll basis for those companies. QAL’s operations are governed by the Participants Agreement and the Tolling Contracts. The parties to those agreements are QAL, the Russian parties and the Rio parties. The Participants Agreement has been amended and restated a number of times. The Tolling Contracts have also each been restated and extended a number of times.

79    Article 2 of the Participants Agreement states the purpose of the Gladstone alumina joint venture in the following terms:

ARTICLE 2. The Project. The Participants (or their predecessors in interest) formed QAL for the sole purpose of constructing the Gladstone Plant at Gladstone, Queensland, Australia, and thereafter operating it for the conversion into alumina, on a toll basis, of bauxite owned by the Participants. Title to the bauxite furnished by a Participant, the material in process and the alumina into which it is converted shall at all times remain in that Participant. Where materials are commingled in transportation, storage or processing, a Participant shall have an undivided interest in such materials.

80    The Participants Agreement was most recently amended and restated pursuant to a Deed of Amendment and Restatement entered into on 31 December 2019. Relevantly, that Deed introduced Art 14A and the accompanying Appendix E which alters the parties rights and obligations in the event that the Australian Government imposes sanctions on UC Rusal, ABC or any of their affiliates that are likely to prevent QAL from undertaking business activity with ABC and its affiliates. The application of Art 14A and Appendix E are central to the issues in dispute between the parties and are considered in detail below.

81    Bauxite is supplied to QAL on board vessels which are unloaded at the western end of QAL’s wharf known as South Trees West. The bauxite is obtained from Rio Tinto’s bauxite mines at Weipa in North Queensland and Gove in the Northern Territory. ABC purchases its bauxite from RTA pursuant to the Bauxite Supply Agreements, and the purchased bauxite is then shipped to Gladstone by RTA pursuant to the Shipping Agreement. When delivered, ABC’s bauxite is comingled with Rio Tinto’s bauxite. During the period from 2005 to 2021, QAL received an average of approximately 8.4 million tonnes of bauxite per year.

82    QAL is also supplied with caustic soda, which it uses in the refinery process, by ABC, RTA Holdco and RTA. The caustic soda is delivered on board vessels at South Trees West. Prior to 31 May 2021, QAL procured caustic soda on behalf of the Participants. However, other than purchases already committed by QAL, from that point onwards the Participants agreed to assume responsibility for the purchase and supply of caustic soda in their own right pursuant to the Caustic Soda Supply Agreement.

83    QAL refines approximately 3.65 million tonnes of alumina per year. QAL delivers and loads the processed alumina on board vessels chartered or owned by the Participants at the eastern end of its wharf which is known as South Trees East. As part of its operations, QAL prepares an Annual Shipping Schedule for shipments of alumina from QAL’s wharf, based on the expected balances of alumina to the Participants and input from the Participants. The Annual Shipping Schedule contains details of, among things, the country of destination for the alumina.

84    As noted above, Art 2 of the Participants Agreement stipulates that the Participants retain title to the bauxite, the material in process and the alumina into which it is converted. Where materials are commingled in transportation, storage or processing, the Participants have an undivided interest in those materials in proportion to their interests in QAL. QAL charges the Participants for the conversion of bauxite to alumina in the form of a tolling charge, expressed as a cost per tonne of alumina produced. The tolling charge is based on the cost of operations and maintenance of the refinery, inclusive of labour, materials and utilities, determined on a tax basis. The tolling charge also includes a capital recovery component, based on tax depreciation.

85    The evidence shows that, prior to the imposition of the Russia Sanctions in March 2022, the vast majority of alumina produced for ABC at the Gladstone Plant was shipped to Russia.

C.4    Domicile, ownership and governance of the Russian parties and UC Rusal

86    ABC is incorporated in the British Virgin Islands. It is an indirect wholly owned subsidiary of UC Rusal which, as stated above, is registered as an international public joint stock company in the Russian Federation. Each of Rusal Limited and JSC Rusal are also wholly owned subsidiaries of UC Rusal. Rusal Limited is incorporated in Jersey and JSC Rusal is incorporated in the Russian Federation. By way of further elaboration, all of the shares in ABC are held by United Company Rusal Alumina Limited (a company incorporated in Cyprus); all of the shares in United Company Rusal Alumina Limited are held by Rusal Limited; all of the shares in Rusal Limited are held by Libertatem; and all of the shares in Libertatem are held by UC Rusal.

87    The applicants did not contend that ABC has any management independence from UC Rusal. The Independent Auditor’s Report on the separate financial statements of ABC for the year ended 31 December 2021, which are dated September 2022, stated that:

(a)    ABC is a wholly owned and indirect subsidiary of UC Rusal;

(b)    the directors of ABC consider the immediate parent of UC Rusal to be En+; and

(c)    ABC is economically dependent upon the Rusal Group, its operating and financing decisions and a significant part of its transactions and settlements are controlled by UC Rusal, and UC Rusal has the power to direct the transactions of ABC at its discretion and for the group’s benefit.

88    This is also consistent with Mr Gordymov’s evidence. Mr Gordymov is a senior manager for UC Rusal but is responsible for managing ABC’s procurement and shipment of alumina.

89    UC Rusal was incorporated in Jersey and, until December 2020, known as United Company Rusal Plc. Also prior to December 2020, UC Rusal was a tax resident in Cyprus and managed and controlled from Cyprus. In December 2020, UC Rusal was redomiciled from Cyprus to Russia and is now registered in the Russian Federation and known as United Company Rusal IPJSC. As noted earlier, as part of the redomiciliation process, Libertatem was incorporated in November 2018 in Cyprus to consolidate UC Rusal’s foreign assets (including ABC) which were previously held and managed in Cyprus directly by UC Rusal. The incorporation was part of a restructure of the Rusal Group that took place between 2018 and 2020. The restructure involved the transfer of the Cyprus offices of UC Rusal, its employees and UC Rusal’s international assets to Libertatem. Mr Runov gave evidence that, in and from 2018, Russian authorities were encouraging Russian corporations who were not domiciled in Russia to redomicile in Russia and Russian laws were enacted in 2018 to give redomiciled companies greater certainty about their tax treatment.

90    UC Rusal’s shares are listed on the Hong Kong Stock Exchange and the Moscow Exchange. UC Rusal is a tightly held public company with the two largest shareholders being En+ (holding approximately 56.88%) and SUAL Partners ILLC (SUAL) (holding approximately 25.52%). The public hold only 17.59% of the issued shares. As noted earlier, En+ is a company registered as an international public joint stock company in the Russian Federation. Its shares are listed on the Moscow Exchange. SUAL is an international limited liability company incorporated in the Russian Federation.

91    It is common ground that Messrs Deripaska and Vekselberg are significant indirect shareholders of UC Rusal and thereby ABC. The parties calculated the “overall” shareholding interests of Messrs Deripaska and Vekselberg in UC Rusal by way of compounding the percentage shareholding in each intermediate company. For example, the parties calculated that Mr Deripaska had an overall interest of 25.58% in UC Rusal (ignoring En+’s indirect shareholding in itself, which is discussed below), and Mr Vekselberg had an overall interest in UC Rusal of approximately 12.58%. While that approach to calculating indirect shareholding interests provides an appropriate estimate of economic interests, it has a tendency to obscure the degree of control or influence that may be able to be exercised at each level of the corporate tree. For that reason, the following paragraphs set out details concerning the relevant chain of shareholdings.

92    In relation to Mr Deripaska, it is common ground that he holds 0.01% of the issued share capital in UC Rusal via a nominee, and 44.95% of the issued shares in En+ (which, as stated above, holds approximately 56.88% of the shares in UC Rusal). As discussed further below, by an agreement between En+, UC Rusal and OFAC made on 18 December 2018 which removed En+ and UC Rusal from OFAC’s SDN List, En+ agreed to ensure that:

(a)    Mr Deripaska reduced his shareholding in En+ from 70% to 44.95% (including by the transfer of 14.33% to VTB Group, with the voting rights in those shares exercisable by an independent third party); and

(b)    Mr Deripaska is prohibited from voting more than 35% of En+ shares, which was to be achieved by Mr Deripaska assigning voting rights above that level to a voting trust that is obligated to vote in the same manner as the majority of shares held by shareholders other than Mr Deripaska.

93    On 6 February 2020, En+ acquired, through a wholly owned subsidiary, 21.37% of its own shares from VTB Group. The parties disputed the effect of that transaction. QAL and the Rio parties submitted that the acquisition had the effect of increasing Mr Deripaska’s indirect shareholding interest in En+, and thereby in UC Rusal and ABC, because Mr Deripaska’s shareholding interest in En+ now includes an indirect interest in those further shares in En+. The applicants submitted that the arrangements governing the acquisition ensure that Mr Deripaska’s shareholding interest in En+ is not increased, conformably with the agreement reached with OFAC. I accept aspects of both submissions.

94    At the time of the acquisition, En+ publicly stated that:

(a)    the object of the transaction was to simplify the ownership structure of En+;

(b)    at the transaction price, the acquisition would be value accretive to En+ shareholders;

(c)    there was no intention to cancel the shares (in order to preserve the ownership structure under the OFAC agreement) and En+ may choose over the longer term to undertake a secondary offering of all or part of the shares to increase public ownership of En+ (and improve trading liquidity); and

(d)    the pre-existing trustee voting arrangement for the 14.33% shareholding would be retained and the votes attaching to the balance of the 7.04% shareholding would be exercised by the Chair of the Board of En+.

95    I have no reason to doubt that those arrangements conform with the OFAC agreement and ensure that Mr Deripaska is unable to exercise voting rights in excess of 35% of the shares in En+. However, it is also the case that Mr Deripaska’s effective financial interest in En+ has been increased by the transaction, albeit that his present rights to receive dividends have been frozen under the OFAC agreement (and are paid into an escrow account), as referred to below. As submitted by QAL and the Rio parties, Mr Deripaska’s effective financial interest in En+ has been increased to 54.56% and his effective financial interest in UC Rusal has been increased to 31.03%. It is also relevant to note that Mr Deripaska is by far the largest shareholder in En+. The next largest shareholder is En+’s subsidiary that holds 21.37% of the shares in En+, followed by Glencore which holds 10.55%.

96    In relation to Mr Vekselberg, it is common ground that he holds substantial indirect interests in the issued shares in SUAL (which, as stated above, holds approximately 25.52% of the shares in UC Rusal). Through the Renova Group, Mr Vekselberg holds:

(a)    directly and indirectly all of the shares in New Aluminium Investments ILLC, which holds approximately 36.39% of the shares in SUAL; and

(b)    approximately 42.28% of the shares in EMP Group LLC, which holds all of the shares in Aluminvest Holding ILLC, which in turn holds approximately 30.56% of the shares in SUAL.

97    Mr Vekselberg’s effective financial interest in UC Rusal is therefore approximately 12.58%.

C.5    OFAC Sanctions

98    On 6 April 2018, OFAC designated Mr Deripaska and entities associated with him including En+ and UC Rusal, and Mr Vekselberg and entities associated with him comprising the Renova Group, on its SDN List pursuant to Executive Order 13661 of 16 March 2014 (Blocking Property of Additional Persons Contributing to the Situation in Ukraine) and Executive Order 13662 of 20 March 2014 (Blocking Property of Additional Persons Contributing to the Situation in Ukraine) (the OFAC Sanctions). A press release dated 6 April 2018 issued by OFAC included the following statements:

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), in consultation with the Department of State, today designated seven Russian oligarchs and 12 companies they own or control, 17 senior Russian government officials, and a state-owned Russian weapons trading company and its subsidiary, a Russian bank.

“The Russian government operates for the disproportionate benefit of oligarchs and government elites,” said Treasury Secretary Steven T. Mnuchin. “The Russian government engages in a range of malign activity around the globe, including continuing to occupy Crimea and instigate violence in eastern Ukraine, supplying the Assad regime with material and weaponry as they bomb their own civilians, attempting to subvert Western democracies, and malicious cyber activities. Russian oligarchs and elites who profit from this corrupt system will no longer be insulated from the consequences of their government’s destabilizing activities.”

…

All assets subject to U.S. jurisdiction of the designated individuals and entities, and of any other entities blocked by operation of law as a result of their ownership by a sanctioned party, are frozen, and U.S. persons are generally prohibited from dealings with them. Additionally, non-U.S. persons could face sanctions for knowingly facilitating significant transactions for or on behalf of the individuals or entities blocked today.

…

Oleg Deripaska is being designated pursuant to E.O. 13661 for having acted or purported to act for or on behalf of, directly or indirectly, a senior official of the Government of the Russian Federation, as well as pursuant to E.O. 13662 for operating in the energy sector of the Russian Federation economy. Deripaska has said that he does not separate himself from the Russian state. He has also acknowledged possessing a Russian diplomatic passport, and claims to have represented the Russian government in other countries. Deripaska has been investigated for money laundering, and has been accused of threatening the lives of business rivals, illegally wiretapping a government official, and taking part in extortion and racketeering. There are also allegations that Deripaska bribed a government official, ordered the murder of a businessman, and had links to a Russian organized crime group.

…

Viktor Vekselberg is being designated for operating in the energy sector of the Russian Federation economy. Vekselberg is the founder and Chairman of the Board of Directors of the Renova Group. The Renova Group is comprised of asset management companies and investment funds that own and manage assets in several sectors of the Russian economy, including energy. In 2016, Russian prosecutors raided Renova’s offices and arrested two associates of Vekselberg, including the company’s chief managing director and another top executive, for bribing officials connected to a power generation project in Russia.

…

EN+ Group is being designated for being owned or controlled by, directly or indirectly, Oleg Deripaska, B-Finance Ltd., and Basic Element Limited. EN+ Group is located in Jersey and is a leading international vertically integrated aluminum and power producer.

…

United Company RUSAL PLC is being designated for being owned or controlled by, directly or indirectly, EN+ Group. United Company RUSAL PLC is based in Jersey and is one of the world’s largest aluminum producers, responsible for seven percent of global aluminum production.

…

Renova Group is being designated for being owned or controlled by Viktor Vekselberg. Renova Group, based in Russia, is comprised of investment funds and management companies operating in the energy sector, among others, in Russia’s economy.

99    During 2018, En+ and UC Rusal negotiated with OFAC for their removal from the SDN List. On 19 December 2018, En+, UC Rusal and OFAC entered into an agreement by which En+ and UC Rusal agreed the following measures and OFAC agreed to remove En+ and UC Rusal from the SDN List:

(a)    Mr Deripaska’s shareholding interest in En+ was reduced from approximately 70% to 44.95% and subsequently would not be increased above 44.95%. Certain of the shares (being 14.33%) were required to be transferred to VTB Bank and the voting rights over those shares would be assigned to an independent third party with no ties to Mr Deripaska.

(b)    Mr Deripaska would not be entitled to vote more than 35% of the shares in En+. The voting rights attaching to Mr Deripaska’s remaining shareholding (being 9.95%) were required to be assigned to a voting trust that is obligated to vote those shares in the same manner in which the majority of shares are voted on a matter by En+ shareholders other than Mr Deripaska.

(c)    En+ agreed to create a board of 12 directors, and Mr Deripaska would have the right to nominate no more than 4 directors, with the remaining directors to be independent of Mr Deripaska.

(d)    En+ agreed that future shareholder dividend payments to Mr Deripaska by En+ or UC Rusal will be placed in a blocked account or an escrow account approved by OFAC.

(e)    En+ retained its right to nominate the CEO of UC Rusal.

(f)    En+ and UC Rusal agreed that the board of UC Rusal would consist of 14 directors and that none of the directors will have any business, professional or family ties to Mr Deripaska.

(g)    The agreement contained requirements for an annual audit and a monthly certification of compliance, and an obligation to inform OFAC of any changes to the ownership and control of EN+ and UC Rusal.

100    On 27 January 2019, OFAC publicly announced the removal of En+ and UC Rusal from the SDN List with immediate effect. The removal was subject to and conditional upon the satisfaction of a number of conditions including the fulfilment of the agreement with OFAC. Mr Strunnikov deposed that, since that time, OFAC has not re-designated En+ or UC Rusal and has not notified UC Rusal of any material non-compliance with the terms of the agreement.

101    The inclusion of En+ and UC Rusal on the SDN List, and their subsequent removal, were also publicly disclosed by each of those companies in their annual reports and in an announcement by UC Rusal to the Hong Kong Stock Exchange.

102    In the absence of evidence to the contrary adduced by the respondents, it is open to infer, and I do infer, that the respondents were aware of the above disclosures made by OFAC, En+ and UC Rusal. As the Rio parties submitted, the Rio Tinto Group engages in international trade where it is necessary to be familiar with sanction regimes imposed by different countries. I infer that both QAL and the Rio parties would have been acutely conscious of the effect of the OFAC Sanctions on UC Rusal given its involvement in the Gladstone alumina joint venture.

103    The 2018 annual report for En+ was published in about April 2019 (the report discloses that the Board of Directors approved it on 26 April 2019). The OFAC Sanctions are referred to and described in many parts of that annual report. The first page of the annual report contains the following disclosures:

During 2018, the Company’s business was impacted by the imposition of the OFAC Sanctions (defined below) beginning in April of 2018 and lasting through to the end the year. The OFAC Sanctions were lifted from the Company on 27 January 2019. The Company has since adopted an enhanced compliance program and mechanisms, including at the Board level, to facilitate ongoing compliance with US sanctions and requirements following the removal of sanctions from the Company and its subsidiaries.

…

Shareholders and potential investors should be aware that on 6 April 2018, the Office of Foreign Assets Control of the Department of the Treasury of the United States of America (the “OFAC”) designated certain persons and certain companies which are controlled by some of these persons added to its Specially Designated Nationals List (the “OFAC Sanctions”). The designated persons/entities included Mr Oleg Deripaska, a non-executive director of the Company and its ultimate beneficial owner at the time that OFAC imposed sanctions, as well as the Company, United Company RUSAL Plc (“RUSAL”), JSC EuroSibEnergo, and two of the Company’s direct major shareholders at the time, B-Finance Ltd (a BVI company), and Basic Element Limited (a Jersey company), each controlled by Mr Deripaska.

On 27 January 2019, OFAC removed the Company, UC RUSAL Plc, and JSC EuroSibEnergo from the OFAC Sanctions. In removing the Company from the OFAC Sanctions, OFAC stated:

“Under the terms of their removal from OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”), En+, RUSAL, and ESE have reduced Oleg Deripaska’s direct and indirect shareholding stake in these companies and severed his control. This action ensures that the majority of directors on the En+ and RUSAL boards will be independent directors – including US and European persons – who have no business, professional, or family ties to Deripaska or any other SDN, and that independent US persons vote a significant bloc of the shares of EN+.”

104    The foregoing matters also featured in the “Chairman’s Review” section of the annual report and elsewhere.

105    The 2018 annual report for UC Rusal was also published in about April 2019 (the Chairman’s Statement was dated 29 April 2019). The OFAC Sanctions are also referred to and described in a number of parts of that annual report. In the notes to the financial statements, the following disclosure appeared:

On 6 April 2018, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) designated, amongst others, the Company, as a Specially Designated National (“SDN”) (the “OFAC Sanctions”).

As a result, all property or interests in property of the Company and its subsidiaries located in the United States or in the possession of U.S. Persons were blocked, must have been frozen, and could not be transferred, paid, exported, withdrawn, or otherwise dealt in. Several general licenses were issued at the time of the designation and later on authorizing certain transactions with the Company, its majority shareholder En+ Group Plc (“En+”), and with their respective debt and equity.

On 27 January 2019 OFAC announced removal of the Company and En+ from OFAC’s SDN List with immediate effect. The removal was subject to and conditional upon the satisfaction of a number of conditions including, but not limited to, corporate governance changes, including, inter alia, overhauling the composition of the Board to ensure that independent directors constitute the majority of the Board, stepping down of the Chairman of the Board, and ongoing reporting and certifications by the Company to OFAC concerning compliance with the conditions for removal.

106    I infer from those disclosures that, as at the date the Participants Agreement was amended to insert Art 14A, the respondents were aware of the matters so disclosed. Those matters have some relevance to the proper construction of Art 14A.

C.6    Suspension of Gladstone alumina joint venture following the imposition of the Russia Sanctions

107    The Russia Sanctions, and the legislative framework under which they are imposed, are discussed in detail below. For present purposes, it is sufficient to note that:

(a)    on 17 March 2022 (and with effect on 18 March 2022), the Minister for Foreign Affairs made the Autonomous Sanctions (Designated Persons and Entities and Declared Persons—Russia and Ukraine) Amendment (No 7) Instrument 2022 (Cth) which had the effect of including Messrs Deripaska and Vekselberg on the Autonomous Sanctions (Designated Persons and Entities and Declared Persons – Russia and Ukraine) List 2014 (Cth), being the list of designated persons for the purposes of regs 6(a) and (b) of the Autonomous Sanctions Regulations (the Designated Persons Sanction); and

(b)    on 19 March 2022 (and with effect on 20 March 2022), the Minister for Foreign Affairs made the Autonomous Sanctions (Export Sanctioned Goods—Russia) Designation 2022 (Cth) which had the effect of designating (amongst other things) aluminium ores and concentrates and aluminium oxide as export sanctioned goods for Russia for the purposes of reg 4(3) of the Autonomous Sanctions Regulations (the Export Sanction).

108    On 22 March 2022, QAL wrote to ABC stating that it was concerned that it could breach the Designated Persons Sanction if it continued to process bauxite on behalf of ABC and believed it was likely that it would be in breach of the Export Sanction if it continued to deliver alumina to ABC. The letter requested information from ABC with respect to Mr Deripaska’s interests in UC Rusal (and thereby ABC) to enable QAL to determine whether Art 14A of the Participants Agreement had been triggered by the imposition of the Russia Sanctions. Ms Baker, who authored the letter, deposed that at the time of the letter she was not aware of Mr Vekselberg’s interests in UC Rusal.

109    On 24 March 2022, ABC wrote to QAL providing information concerning Mr Deripaska’s interests in UC Rusal (and thereby ABC), including the restrictions imposed on his interests by reason of the OFAC agreement made in December 2018. The letter stated that, by reason of those restrictions (and also by reason of the fact that ABC has never distributed dividends and will not do so in the future), Mr Deripaska does not and cannot receive any benefit (directly or indirectly) from an asset made available to ABC for the purposes of the Autonomous Sanctions Regulations. With respect to the Export Sanction, the letter stated that ABC had taken the following measures to ensure that there is no breach of the Autonomous Sanctions Regulations:

(a)    ABC will not provide any alumina it receives from QAL to Russia or to UC Rusal or any of its subsidiaries;

(b)    all alumina delivered to ABC from QAL will be sold by ABC directly to third parties located outside Russia and sales will be subject to a provision in the contract that:

(i)    prohibits any alumina supplied, or resultant aluminium derived from the alumina supplied, from being sold or otherwise supplied to Russia; and

(ii)    requires all sales contracts in respect of such alumina or aluminium to contain the same prohibition; and

(c)    any current agreements which were inconsistent with these arrangements have been or will be terminated or suspended.

110    The letter reiterated that ABC has never distributed dividends and does not propose to do so in the future and further stated that ABC is taxable in Australia, is not taxable in Russia directly or indirectly and does not pay tax to the Russian Federation, as:

(a)    ABC is exempt from Russian Controlled Foreign Company Rules (CFC Rules) as an active business (Paragraph 3, Article 25-13.1 of the Russian Tax Code); and

(b)    the ultimate parent company of ABC, UC Rusal, is exempt from CFC Rules until 2029 (Paragraph 58, Section 1 Article 251 of the Russian Tax Code).

111    The letter stated that ABC was prepared to give a binding undertaking to QAL which reflected the above matters.

112    On 25 March 2022, Ms Baker prepared and sent a memorandum to the QAL Board which referred to legal advice received by the company that QAL would contravene the Russia Sanctions if Mr Deripaska holds an interest in the Rusal Group and QAL continues to process bauxite on behalf of ABC and QAL is likely to contravene the Russia Sanctions if it processes bauxite on behalf of ABC, delivers alumina to QAL’s wharf and loads the alumina on vessels for shipment by ABC regardless of the intended destination of the alumina. QAL was advised that, in those circumstances, Art 14A of the Participants Agreement was likely to be enlivened.

113    On 29 March 2022, Ms Baker prepared and sent a further memorandum to the QAL Board which provided an update on the advice the company had received concerning ABC’s letter of 24 March 2022 and the risk of contravening the Russia Sanctions. In short, the advice received by QAL did not change.

114    On 29 March 2022, ABC wrote to QAL stating that it disagreed with the advice that was summarised in the QAL Board memorandum of 29 March 2022.

115    On 1 April 2022, Ms Baker prepared and sent a further memorandum to QAL’s Board (dated 30 March 2022) which provided an update on the correspondence received from ABC dated 29 March 2022. The memorandum stated that QAL management intended to issue a letter on 4 April 2022 to ABC and Rio Tinto notifying them that the step-in procedure provided for in Art 14A of the Participants Agreement had been triggered.

116    On 2 April 2022, Ms Baker received a letter dated 1 April 2022 from Mr Gordymov requisitioning a meeting of the QAL Board on 7 April 2022 to consider and make a determination on whether to implement the step-in arrangement provided for in Art 14A and Appendix E of the Participants Agreement. Mr Gordymov also requested confirmation that QAL would continue to accept ABC’s bauxite deliveries and introduce its bauxite to the refinery process until such time as QAL’s Board had resolved to implement the step-in arrangement and that, pending the requisitioned Board meeting, QAL management would not take any steps to implement the step-in arrangement provided for in Art 14A of the Participants Agreement.

117    On 4 April 2022, QAL’s General Manager, Mr Pienaar, sent a letter (Step-in Notification) to ABC, RTA Holdco and RTA (which was incorrectly dated 4 April 2021) advising that:

(a)    QAL management remained of the view that, to protect QAL from the risks associated with a breach of the Russia Sanctions, it was necessary to implement the step-in procedure provided for in Art 14A and Appendix E of the Participants Agreement; and

(b)    the step-in procedure had been triggered and, for the purposes of Appendix E of the Participants Agreement, the “Bauxite Cessation Date”, the “Production Cessation Date” and the “Shipping Cessation Date” would be 11.59pm (AEST) on Monday, 4 April 2022.

118    On 4 April 2022 at 11.59pm (AEST), QAL gave effect to the step-in procedure provided for in Art 14A and Appendix E of the Participants Agreement, whereby it ceased to accept delivery of ABC’s bauxite, introduce ABC’s bauxite to the refinery process, and load ABC’s alumina shipments.

119    Mr Grigg deposed that he was not involved in the process by which QAL’s management came to make the decision to issue the Step-in Notification, and nor was he involved in the issuing of the Step-in Notification. Mr Grigg further deposed that he was not aware of any action taken by the Rio parties to cause QAL management to issue the Step-in Notification and that, if such action had been taken by the Rio parties, he would have expected that in the ordinary course of business it would have come to his attention in his role as acting General Manager, Energy and Joint Ventures.

120    Mr Grigg deposed that, due to the Step-in Notification, from the Bauxite Cessation Date of 11.59pm (AEST) on 4 April 2022, QAL would not permit any kind of bauxite owned by ABC to be delivered to QAL’s wharf. The effect of this was that RTA could not unload the bauxite supplied to ABC pursuant to the Bauxite Supply Agreements and shipped to the port of Gladstone under the Shipping Agreement. Therefore, due to the Step-in Notification and to QAL not accepting delivery of ABC’s bauxite, RTA could not perform its obligations to supply and deliver bauxite under the Bauxite Supply Agreements and the Shipping Agreement.

121    On 8 April 2022, RTA sent notices to the Russian parties of the occurrence of circumstances constituting force majeure events and the suspension of the supply of bauxite pursuant to para 1(c) of Appendix E of the Participants Agreement and cl 11.1 of the Shipping Agreement, Art 21 of the Monohydrate Bauxite Supply Agreement and Art 18.1 of the Low Mono Bauxite Supply Agreement.

C.7    ABC’s attempted shipment of alumina between 20 March and 4 April 2022

122    Mr Gordymov deposed that, as a result of the imposition of the Export Sanction, ABC ceased exports from Australia to Russia in March 2022.

123    The evidence discloses that, as at 20 March 2022, ABC had two scheduled shipments of QAL alumina to Russia and delivery to UC Rusal’s aluminium smelters. The first was a shipment of ABC alumina scheduled for 4 April 2022 to be loaded on the vessel Majesty Star, and the second was a shipment of Rio Tinto alumina pursuant to a swap agreement to be loaded on the vessel MV Ernest Vinberg. Mr Gordymov deposed that the swap agreement was suspended on 21 March 2022.

124    Following the announcement of the Export Sanction, Mr Gordymov deposed that he began looking for ways to divert ABC alumina to non-Russian ports for on-sale to third party customers. On 23 March 2022, Mr Gordymov arranged for the MV Ernest Vinberg to be nominated for the shipment of 57,000 tonnes of ABC alumina for discharge at the port of Qingdao in China. Mr Gordymov deposed that he intended that the alumina would be unloaded into the port storage and packed in so called “big bags” (flexible bulk containers), which would enable ABC to store alumina at the port of Qingdao until a suitable customer in China was found. Mr Gordymov deposed that Chinese ports are the only ports that offer such storage and that it is common practice among alumina sellers, including Alcoa and Rio Tinto, to deliver alumina to Chinese ports for storage. Mr Gordymov further deposed that, in parallel, he caused negotiations to begin on behalf of UC Rusal to sell ABC’s share of the alumina produced by QAL to customers in Europe, India and the Middle East.

125    Mr Gordymov deposed that negotiations regarding the cargo to be loaded onto the MV Ernest Vinberg fell through due to commercial and logistical reasons, while further negotiations regarding this cargo and negotiations regarding further cargoes became redundant when QAL refused to load ABC alumina following the issue of the Step-in Notification.

C.8    Effect of suspension of Gladstone alumina joint venture on the Rusal Group

126    The suspension of ABC’s participation in the Gladstone alumina joint venture contributed to a material increase in the cost of alumina acquired by the Rusal Group in the financial year ending 31 December 2022. UC Rusal’s 2022 annual report stated that:

The cost of alumina increased by USD1,106 million, or by 149.3%, to USD1,847 million in 2022 as compared to USD741 million in 2021 primarily due to the increase in alumina purchase price by 14.9% as well as the increase in alumina purchase volume by 263.4% between the periods following the ban of Australian government for the export of alumina and bauxite to Russia introduced in March 2022 and temporary suspension of production at Mykolaiv Alumina Refinery Company Ltd due to developments in Ukraine starting from 1 March 2022.

127    The annual report also stated that the increase in the cost of alumina was one of the factors that contributed to a reduction in gross profit from US$3.721 billion for the year ended 31 December 2021 to US$3.204 billion for the year ended 31 December 2022.

128    Later, in the notes to the financial statements which refer to the “going concern” basis of preparing the statements, the annual report stated:

Ban of Australian government for the export of alumina and bauxite to Russia introduced in March 2022 and temporary suspension of production at Mykolaiv Alumina Refinery Company Ltd due to developments in Ukraine starting from 1 March 2022 influenced the availability of alumina and bauxite or increase the purchase prices for the Group. Difficulties with logistics caused the Group to rebuild the supply and sales chains and lead to additional logistics costs. If the situation in Ukraine and overall geopolitical tension persists or continues to develop significantly, including the loss of significant parts of foreign markets, which cannot be reallocated to new markets, it may affect the Group’s business, financial condition, prospects and results of operations.

…

The facts described above, as well as the volatility of commodity markets, stock, currency markets and interest rates, create material uncertainty in the Group’s ability to meet its financial obligations on time and continue as a going concern entity. …

C.9    Whether ABC alumina is likely to be exported to Russia

129    A significant area of factual dispute between the parties concerns the likelihood that alumina delivered to ABC by QAL would ultimately be exported to Russia or would be supplied in a manner that would result in other alumina being supplied to Russia (for example, pursuant to a swap agreement).

130    Absent a binding and enforceable commitment given by ABC, there can be no doubt that, on and after March 2022, alumina delivered to ABC by QAL would have been, and would in the future be, exported to Russia for use in UC Rusal’s aluminium smelters. Mr Gordymov’s evidence was that ABC had, historically, shipped almost all of the alumina it obtained from QAL to Russia for use in UC Rusal’s aluminium smelters. As stated above, UC Rusal has a large demand for alumina for its Russian aluminium smelters (some 7.9 million tonnes per annum) and, following Russia’s invasion of Ukraine, had lost supply of alumina from the Mykolaiv refinery in Ukraine (which had produced approximately 1.75 million tonnes of alumina per annum) and from all Australian sources (760,000 tonnes per annum from QAL and 750,000 from other Australian producers).

131    As referred to above, on 24 March 2022, ABC wrote to QAL stating that ABC had taken certain measures to ensure that there would be no breach of the Export Sanction. Those measures were: first, that ABC would not provide any alumina it received from QAL to Russia or to UC Rusal or any of its subsidiaries; second, that all alumina delivered to ABC from QAL would be sold by ABC directly to third parties located outside Russia and sales would be subject to a provision in the contract that prohibited any alumina supplied, or resultant aluminium derived from the alumina supplied, from being sold or otherwise supplied to Russia, with all sales contracts in respect of such alumina or aluminium to contain the same prohibition; and third, that any current agreements which were inconsistent with these arrangements have been or will be terminated or suspended. The letter also stated that ABC was prepared to give a binding undertaking to QAL which reflected the above matters.

132    The respondents submitted that the letter carries no evidentiary weight for the following reasons. First, ABC never gave an enforceable undertaking in the terms of the letter, whether by way of deed poll or otherwise. Second, no evidence was adduced in the proceeding showing that the contract of sale, by which ABC had sold to RTI, until December 2025, all of its entitlement to alumina from the Gladstone alumina joint venture, had been terminated or suspended. Third, ABC has no control over where its alumina is shipped because ABC has no management independence from UC Rusal. Decisions concerning the sale and shipment of ABC’s alumina are made by UC Rusal. UC Rusal never gave any assurances concerning the sale and shipment of ABC’s alumina, let alone a legally enforceable commitment. Fourth, on its terms, the letter would not have prevented ABC entering into swap agreements, whereby ABC might swap alumina produced at the Gladstone Plant for alumina produced elsewhere, and thereby procure the supply into Russia of the “swapped” alumina.

133    I accept the respondents’ submissions. The statements made in ABC’s letter of 24 March 2022 cannot be characterised as binding and enforceable commitments. The statements are mere representations by ABC as to its intended future conduct. The statements were not given in the form of legally binding covenants. Further, the statements were made at a high level of generality and did not contain any verification or enforcement mechanisms. No evidence was adduced showing that the contract of sale between ABC and RTI had been terminated or suspended. In any event, the evidence showed that management decisions with respect to the sale and shipment of ABC’s alumina were made by UC Rusal and not by ABC. Furthermore, the statements made in the letter did not apply to swap arrangements.

134    For those reasons, I consider that the statements made in ABC’s letter of 24 March 2022 have no material bearing upon the assessment of the likelihood that alumina delivered to ABC by QAL would ultimately be exported to Russia or would by supplied in a manner that would result in other alumina being supplied to Russia (for example, pursuant to a swap agreement).

135    On the last day of the hearing, the applicants offered the Rusal Group Undertaking which sought to address the criticisms made by the respondents of ABC’s letter of 24 March 2022. It was common ground between the parties that the Undertaking could have no bearing on the determination of issues up until the time that it is accepted by the Court, and therefore cannot affect the determination of issues concerning past events or the grant of relief in respect of past events. That is because a proffered undertaking has no legal force until it is accepted by the Court. The Rusal Group Undertaking can only affect the grant of declaratory relief concerning the future. The question whether the Court has power to accept the Undertaking in the present case as a condition of granting relief, and whether the Court should do so in the circumstances of this case in the exercise of its discretionary powers concerning relief, is considered later in these reasons.

136    Mr Clark was asked to express his opinion concerning the likely effect on the supply of alumina to Russian aluminium smelters if QAL supplied alumina to ABC pursuant to the Gladstone alumina joint venture. In his report, Mr Clark assumed that, as at April 2022, UC Rusal would have had only weeks of alumina stocks on site. Mr Gordymov contradicted that assumption, stating that, at that time, UC Rusal had alumina stocks equivalent to two and a half months supply. Regardless of that difference, it is uncontroversial that UC Rusal’s demand for alumina did not reduce at that time and UC Rusal was forced to source alumina from other suppliers (including from China).

137    Mr Clark reported that China exported a total of 168,000 tonnes of alumina in April 2022 of which 124,000 tonnes was exported to Russia, accounting for 74% of the total. This resulted in China becoming a net exporter of alumina for the first time since 2018, despite no obvious price arbitrage opening between the Chinese and ROW markets. Mr Clark further reported that, in March and April 2022, China imported a total of 263,000 tonnes of alumina, 94% of which was sourced from Australia. Further, a report published by Wood Mackenzie in May 2022 titled “Can China keep Russian aluminium smelters afloat” stated that “more than 38% of China’s alumina exports (64kt) in April were identified as shipments from Customs’ warehouses” and concluded “it is likely that a sizeable portion of imported Australian alumina was transhipped to Russia”. Mr Clark considered that conclusion to be reasonable. Data presented by Mr Clark in his reports showed that alumina exports from China to Russia increased substantially in March 2022 from levels in the preceding years and remained elevated through to the time of Mr Clark’s report. As noted above, according to China Customs data, Russia has imported approximately 1.1 million tonnes of alumina from China over the 14-month period ending February 2023.

138    In question 9, Mr Clark was asked to express his opinion on the following question:

If ABC obtained from QAL the tonnage of alumina referred to in section 2 of this letter [approximately 730,000 to 760,000 tonnes] and sold it to third parties in China or otherwise outside Russia, as referred to in section 2 of this letter [on contractual terms prohibiting the buyers from on-selling that alumina to Russia], what effect, if any, would this have on the availability of alumina to Russian smelters?

139    Mr Clark reported that, heading into 2022, the ROW alumina market was generally balanced, meaning sufficient alumina was available to meet the requirements of ROW smelters and any surplus alumina produced in the ROW was sold into the Chinese market. The Chinese alumina market, however, was not balanced heading into 2022. China’s installed alumina refining capacity totalled 92.9 million tonnes per annum whereas its annualised production was estimated at 76.6 million tonnes per annum, approximately equivalent to its domestic aluminium smelting demand (being around 76 million tonnes per annum of alumina which is equivalent to approximately 38 million tonnes per annum of primary aluminium production). This is a difference in installed alumina refining capacity of 16.3 million tonnes per annum, representing a utilisation rate of only 82%. Thus, China’s domestic alumina industry had sufficient installed alumina refining capacity to produce a significantly larger volume of alumina which, if required and attractively priced, could have produced alumina to supply world markets in the first quarter of 2022. However, despite the structural overcapacity in China at the time, the country was a net importer of alumina, as it mostly is when the price arbitrage between domestic prices and ROW prices is sufficiently large to import alumina at a profit.

140    Mr Clark expressed the opinion that, given the balanced nature of the ROW market at the time, the fungibility of alumina and the structural overcapacity evident in China’s alumina industry at the time, the sale of any surplus alumina from QAL would most likely “free up” an equivalent volume of alumina elsewhere in the world. The most likely destination for the surplus alumina from QAL would be China, given the size of the market and the typical trading patterns at the time. However, with China’s market already in oversupply, any additional alumina would need to be “pushed” into China rather than “pulled”, meaning it would need to be offered into the Chinese market on more attractive terms than the current market price. Furthermore, with China’s market already saturated, pushing more alumina in would increase the likelihood that Chinese companies would seek to find export opportunities, including to Russia. Therefore, the most likely destination for QAL alumina tonnage supplied to ABC would be China, and supply to China would increase the likelihood that surplus alumina in China would find its way onto world markets, including Russia.

141    I accept those opinions. It was not controverted by any other evidence.

142    In question 10, Mr Clark was asked to express his opinion on the following question:

Question 10: If ABC obtained from QAL the tonnage of alumina referred to in section 2 of this letter [approximately 730,000 to 760,000 tonnes] and sold it to third parties in China or otherwise outside Russia on contractual terms prohibiting the buyers from on-selling that alumina to Russia, as referred to in section 2 of this letter:

(a)     would there remain a possibility that the alumina would end up in Russia, and, if so, how likely would that be and how would it occur?; and

(b)     would there be any way of ensuring or monitoring compliance with the contractual prohibitions referred to?

143    Mr Clark reported that, when alumina is physically delivered under a contract to a customer, it cannot be traced with any degree of confidence. From a regulatory and compliance perspective, records are kept of alumina exports, including bills of lading, shipping records, insurance records, customs declarations and port records. Publication of this data by each country is usually in aggregate, meaning that, for example, port export data will provide monthly export volumes and countries of destination only. Once alumina arrives at its original country of destination, the chain can be easily lost and the original seller has no knowledge of, nor any means of checking, what happens to the alumina, whether for example it is processed by the buyer into aluminium or on-sold to a third party.

144    Mr Clark expressed the opinion that, given the state of the global alumina supply/demand balance over the past two years, particularly the structural overcapacity in China, UC Rusal could source Chinese alumina from a wide variety of suppliers without great difficulty and have it shipped to Russia and UC Rusal would not necessarily know the origins of that alumina.

145    Mr Clark also expressed the opinion that, if ABC obtained alumina from QAL, then that alumina could arrive in Russia through several different means, including:

(a)    a series of subsequent on-selling transactions following the original purchase;

(b)    through a swap arrangement;

(c)    through blending the QAL alumina with alumina from another source; and

(d)    following long-term storage in a bonded warehouse (ie a warehouse located in a jurisdiction that has not cleared any customs).

146    Mr Clark expressed the opinion that monitoring or ensuring compliance with contractual prohibitions on supply to Russia would not be possible.

147    Mr Clark’s opinions were not controverted by any other direct evidence. With one qualification, I generally accept those opinions. I do not accept the absolute nature of Mr Clark’s opinion that it would not be possible to design contractual arrangements, together with monitoring and enforcement mechanisms, that would prevent alumina delivered to ABC being supplied to Russia. I consider that the opinion was expressed with reference to the type of undertakings described in ABC’s letter of 24 March 2022, and I accept the opinion to that extent. Mr Clark cannot be understood as having considered every possible form of contractual restriction on alumina supply, and nor would I regard Mr Clark as necessarily having the expertise to do so.

C.10    Whether ABC’s business activities would have generated tax revenues in Russia

148    The second significant area of factual dispute between the parties concerns the question whether ABC’s business activities would have generated tax revenues in Russia and thereby constituted a benefit for Russia. Questions about Russian tax law are questions of fact which are to be determined on the basis of expert evidence: Neilson v Overseas Projects Corporations of Victoria Ltd (2005) 223 CLR 331 at [115] (Gummow and Hayne JJ).

149    A necessary factual premise for a conclusion that ABC’s business activities would have generated tax revenue in Russia is that, from March 2022, the sale by ABC of alumina produced by QAL to third parties would have been profitable. I do not understand that that factual premise is disputed. As submitted by QAL, the applicants could not deny that premise consistently with their claim in the proceeding for damages for lost profits.

150    Nevertheless, some initial observations should be made about ABC’s financial statements and their disclosures concerning ABC’s profitability and retained earnings.

151    First, two types of financial statements concerning ABC were adduced in evidence: financial statements titled “Management Accounts” were adduced in respect of the financial year ended 31 December 2021; and financial statements titled “Separate Financial Statements” were adduced in respect of the financial years ended 31 December 2019, 2020 and 2021. The latter statements were audited (by KPMG Russia in respect of 2019 and 2020 and by a Russian company identified as “TSATR – Audit Services Limited Liability Company” in respect of 2021). The two sets of accounts in respect of the overlapping financial year ending 31 December 2021 differed in material ways, as set out below.

152    Second, and as noted in the Separate Financial Statements, the revenue earned by ABC is through a sales contract with another wholly owned subsidiary of the Rusal Group (presently, RTI). It follows that the amount of ABC’s gross profit from the sale of Gladstone alumina is determined by the terms of that contract, which is able to be varied by the parties from time to time under the control of UC Rusal.

153    Third, and as noted in the Separate Financial Statements, ABC is funded by both equity and loan capital, with the loans being advanced by its immediate parent company, Rusal Limited. It follows that the amount of ABC’s net profit from the sale of alumina is affected by the applicable interest rate charged on those borrowings.

154    The Management Accounts and the Separate Financial Accounts in respect of the year ended 31 December 2021 disclosed the following (rounded) figures:

(a)    the Management Accounts record total equity of US$453 million comprising share capital of $231 million, “additional capital” of US$57 million and retained earnings of US$165 million, whereas the Separate Financial Statements record total equity of negative US$2 million comprising share capital of US$231 million and reserves of negative US$251 million;

(b)    both the Management Accounts and the Separate Financial Statements record total borrowings from a related party of approximately US$444 million incurring an annual interest charge of approximately US$16 million; and

(c)    the Management Accounts record operating profit before finance costs and income tax of approximately US$24.5 million, profit before income tax of approximately US$7.9 million and a net loss after income tax of approximately US$4.2 million, whereas the Separate Financial Statements record operating profit before finance costs and income tax of approximately US$23 million and net profit of approximately US$7.9 million (with no income tax expense).

155    Having regard to the discrepancies between the Management Accounts and the Separate Financial Statements, and also having regard to the nature and extent of related party transactions undertaken by ABC (in respect of both the sale of alumina and the use of loan capital), ABC’s historic financial statements are not a reliable guide to the profitability to ABC, and the Rusal Group as a whole, of ABC’s participation in the Gladstone alumina joint venture as at early 2022.

156    The case advanced by the Russian parties requires an assumption that, following the imposition of the Russia Sanctions, ABC would only supply alumina produced at the Gladstone Plant to third parties and outside Russia. Thus, the assumption required by that case is that ABC would not supply alumina to RTI pursuant to the related party contract first entered into in 2005, but would supply to third parties at market negotiated prices. As submitted by QAL, a comparison of ABC’s historical cost of sales of alumina, as disclosed by its financial statements and invoices, and the market price for alumina in Mr Clark’s report, shows that the sale of alumina by ABC would have been profitable to it.

157    Finally, a strong inference that the sale of alumina by ABC would have been profitable to it can be drawn from the fact that this proceeding has been brought by ABC in which ABC is seeking orders that would enable it to continue to participate in the Gladstone alumina joint venture. It would be irrational for ABC to seek that relief, including on the basis of the Rusal Group Undertaking that has been offered to the Court (which requires ABC to sell its alumina to third parties outside Russia), unless that participation was expected to be profitable to ABC.

Ms Kuznetsova’s first report

158    Ms Kuznetsova’s first report addressed the potential direct or indirect taxation under the Russian Tax Code of profits earned by ABC from trading in alumina produced at the Gladstone Plant. Her first report focused on taxes that may be levied on UC Rusal, En+ and SUAL, but did not address taxes that may be levied on other shareholders in UC Rusal with respect to the receipt of dividends or the sale of their shares. Those potential taxes were considered in Prof Stephan’s report and were the subject of comment in Ms Kuznetsova’s supplementary report.

159    Ms Kuznetsova gave evidence that, under the Russian Tax Code, foreign-sourced income may be taxable in Russia in the following cases:

(a)    when a Russian company has a permanent establishment in a foreign jurisdiction that generates income;

(b)    when a Russian tax resident, be it a legal entity or a natural person, is recognised as a controlling person of a Controlled Foreign Company (CFC) which generates income; or

(c)    when a Russian tax resident receives income from a foreign source (eg dividends distributed by a foreign company).

160    Ms Kuznetsova was instructed that none of the Russian entities of the Rusal Group has a permanent establishment in Australia in connection with the activities of ABC in Australia, and therefore category (a) is inapplicable. The respondents did not challenge that assumption.

161    In relation to the CFC Rules (category (b) above), Ms Kuznetsova stated that the purpose of the Rules is to counteract undue profit shifting from Russia. The CFC Rules provide for the taxation of the profit of foreign entities and structures controlled by Russian tax residents in the hands of those residents regardless of whether the profit is distributed or not; that is, Russia may tax the undistributed profits of foreign companies regarded as CFCs. For these purposes, control means having an interest in the foreign entity of more than 25%. This means that each of UC Rusal, En+ and SUAL are subject to the CFC Rules, as each of those entities are tax residents of Russia and hold interests of more than 25% in ABC.

162    However, the Russian Tax Code recognises that there may be cases when Russian tax residents establish profit centres outside Russia for genuine economic purposes. For these cases, the Russian Tax Code provides for exemptions from taxation of CFC profit.

163    Relevantly, the exemptions include active foreign companies, which are foreign companies where “passive income” does not exceed 20% of total income. Ms Kuznetsova expressed the opinion that, having regard to the 2021 financial statements for ABC, it should benefit from that exemption. Accordingly, in Ms Kuznetsova’s opinion, the CFC Rules should not apply to ABC’s income.

164    Another exemption, which applies until 1 January 2029, is in respect of companies that have the status of an international holding company (IHC) for Russian tax purposes. Ms Kuznetsova was instructed to assume that UC Rusal has the tax status of an IHC, but she did not undertake any investigation or verification of that assumption. Ms Kuznetsova explained that, assuming UC Rusal is an IHC and benefits from this exemption, companies higher in the corporate chain would not gain the benefit of that exemption unless they were also IHCs. Ms Kuznetsova stated that she understood that En+ and SUAL were redomiciled to Russia similar to UC Rusal and, as a result, they may also have a status of IHCs. The Russian parties did not, however, adduce evidence with respect to the tax status of En+ and SUAL.

165    If a Russian tax resident is liable for tax on the profits of a CFC, the liability will be reduced by the amount of foreign tax paid by the CFC. Ms Kuznetsova observed that the profits earned by ABC would be subject to taxation in Australia at the rate of 30%, whereas the corporate tax rate in Russia is 20%. Accordingly, it is possible that the taxation paid in Australia would eliminate any Russian taxation. Ms Kuznetsova acknowledged, however, that this conclusion is subject to the application of tax credits in Australia to reduce Australian tax.

166    In respect of dividends (category (c) above), Ms Kuznetsova considered the tax treatment of dividends that may be distributed from ABC through the corporate chain to Libertatem and then to UC Rusal. Ms Kuznetsova stated that, under the Russian Tax Code, a 0% tax rate applies to dividends received by Russian organisations from Russian and foreign companies, provided that:

(a)    on the day of decision on dividend distribution, the organisation receiving dividends has continuously held at least 50% interest in the capital of the organisation paying dividends for at least 365 calendar days; and

(b)    the jurisdiction of tax residence of the dividend paying company must not be included in the list of offshore zones of the Ministry of Finance of the Russian Federation.

167    Ms Kuznetsova stated that Cyprus is not currently included in the list of offshore zones. However, Jersey is included in this list. Ms Kuznetsova stated her understanding that UC Rusal has held all of the shares in Libertatem for more than 365 calendar days and that Libertatem is registered in and a tax resident of Cyprus. Therefore, the conditions for application of the 0% tax rate to dividends received by UC Rusal from Libertatem are satisfied. Ms Kuznetsova qualified her opinion by acknowledging a risk, which she assessed as low, that the application of the 0% tax rate to dividends from Libertatem received by UC Rusal could be challenged by the Russian tax authorities. The challenge would be on the basis that:

(a)    Rusal Limited is a tax resident and therefore the 0% tax rate would not have been applicable to dividends paid by Rusal Limited; and

(b)    Libertatem was incorporated prior to the redomiciliation of UC Rusal from Jersey to Russia and interposed between Rusal Limited and UC Rusal.

168    Ms Kuznetsova stated that, on the basis of the information that had been provided to her, Libertatem performed real functions in relation to its foreign subsidiaries and has sufficient economic substance in Cyprus to perform these functions, which should provide sufficient grounds to sustain the position that the exemption should be applicable.

Prof Stephan’s report

169    With respect to the provisions of the Russian Tax Code, Prof Stephan’s report was largely consistent with Ms Kuznetsova’s report. However, Prof Stephan’s report also noted that the Russian Tax Code provides for the taxation of dividends received by corporate and individual shareholders, including a withholding tax of 15% in respect of dividends paid to foreign companies and individuals. The Russian Tax Code also provides for the taxation of gains made from the sale of shares in Russia.

170    Prof Stephan’s report differed from Ms Kuznetsova with respect to the application of unwritten law in the administration and enforcement of the Russian Tax Code. In that regard, Prof Stephan expressed the opinion that:

Russia, like most civil-law countries, does not embrace the concept of judicial precedent as a source of law as understood in common-law countries. At the same time, Russia law embraces the concept of non-discriminatory and non-arbitrary application of the law. As a result, the law enforcement agencies and the judiciary are expected to act consistently with the interpretation of the law espoused by earlier judicial decisions, especially as to courts that are superior in the judiciary hierarchy. Thus the decisions of the two apex courts – the Constitutional Court and the Supreme Court – are considered authoritative statements of law. In the case of the Constitutional Court, Article 106 of the Federal Constitutional Law on the Constitutional Court provides explicitly that the reasoning of the Court’s decisions, and not just the outcomes of its cases, constitute authoritative and binding law within the Russian legal system.

171    Prof Stephan stated that Russian tax law recognises several doctrines developed by the tax authorities and endorsed by the Russian courts that give the tax authorities a discretionary right to recharacterise transactions or disqualify otherwise eligible persons from tax benefits based on the concept of bad faith or excessive tax benefit relative to taxpayer cost. Prof Stephan expressed the opinion that there was a significant risk that ABC’s profits would be attributed to UC Rusal under the CFC Rules, and that dividends payable by Libertatem may not gain the benefit of the 0% tax rate, on the basis of the foregoing doctrines.

172    Prof Stephan’s opinions were substantially based on litigation relating to the Yukos Oil Company in the early 2000s which has been the subject of his research (see Paul B Stephan, ‘Taxation and Expropriation—The Destruction of the Yukos Oil Empire’ (2013) 35(1) Houston Journal of International Law 1). Prof Stephan explained that, with respect to the various cases during the 2003-2006 period brought against Yukos, its principal shareholders, and its affiliated companies, the taxpayers were perceived as presenting a significant challenge to the Russian Government’s policy of renationalising natural resources, especially oil and gas, as well as to the political status quo generally.

173    Prof Stephan observed that reliable press reports indicate that Mr Deripaska has consistently criticised the Russian invasion of Ukraine. In an article published in the Irish Times on 8 April 2022, Mr Deripaska was reported as calling for severe punishment of the persons responsible for the murder of civilians in Bucha. In an article published in Forbes magazine on 28 June 2022, Mr Deripaska was reported as describing the war aims as a “colossal mistake” and questioning “whose victory” the war represents.

174    Prof Stephan expressed the opinions that the Russian Government had increasingly cracked down on war critics in the months following June 2022. Prof Stephan observed that an article published in the Financial Times on 20 December 2022 reported that a Russian court had ordered the seizure of Mr Deripaska’s luxury hotel complex in Sochi, valued at US$1 billion, and that the suit was brought by an organisation closely associated with President Putin and has been widely perceived as retaliation for Mr Deripaska’s criticism of the war. Prof Stephan observed that UC Rusal is one of the largest aluminium producers in the world and that aluminium is a critical resource for arming Russia. Prof Stephan expressed the opinion that, in the past, Russia has used the discretion implied in its tax rules to oust other industrial magnates so as to bring strategic industries under direct government control. Prof Stephan said that, in his judgment, the risk is substantial that Russian tax authorities will use their discretion to impose tax penalties on UC Rusal, and exploit these penalties to gain greater control over the company. Increasing UC Rusal’s tax liabilities by attributing to it ABC’s profits would further such a plan.

Ms Kuznetsova’s supplementary report and cross-examination

175    In her supplementary report, Ms Kuznetsova agreed with Prof Stephan that Russian tax may be payable by shareholders in UC Rusal (other than the shareholders who have a controlling interest) on dividends received by them or on the sale of their shares.

176    Ms Kuznetsova disagreed, however, with Prof Stephan’s opinions with respect to the recharacterisation of transactions and the concept of bad faith in Russian tax law. Ms Kuznetsova expressed the view that Prof Stephan’s opinions were outdated and do not reflect current Russian tax law and practice. In that regard, Ms Kuznetsova observed that Prof Stephan’s opinions were based solely on Russian court cases prior to 2006. Ms Kuznetsova stated that:

The concept of “bad faith” did exist in the Russian court practice, but in 2006 it was refined as a result of which the concept of “unjustified tax benefit” appeared along with a description of the approach to assessment of presence or absence of unjustified tax benefits, including principles and criteria for such an assessment. Since then, the Russian tax authorities and courts were mainly guided by the “unjustified tax benefit” doctrine which had clearer criteria for assessment compared to the “bad faith” doctrine. Furthermore, in 2017, the “unjustified tax benefit” concept developed into special provisions introduced in the Russian tax code (hereinafter – the “RTC”) as Article 54.1 named “Limits on exercising the rights to calculate tax base and (or) amount of tax, levies, social security contributions” which, in its essence, is a general anti-avoidance rule in the Russian tax legislation. Article 54.1 of the RTC contains both objective and subjective criteria.