Venezuela’s withdrawal from the ICSID Convention does not prevent foreign investors from relying on other mechanisms in order to protect their rights.
On 24 January 2012, the Bolivarian Republic of Venezuela formally deposited with the International Centre for Settlement of Investment Disputes (ICSID) – an international institution depending from the World Bank ‑ its “irrevocable denunciation” of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention), asserting that “Venezuela adhered to the Convention in 1993 due to a decision taken by a feeble and illegitimate government under pressure from translational economic interests dismembering the Venezuelan national sovereignty.” According to Article 71 of the ICSID Convention, the denunciation becomes effective six months after the notification of the State´s denunciation, which will become effective as from 25 June 2012.
There is no surprise
Venezuela’s denunciation of this important convention, currently in force in 148 States, did not came by surprise, since president Hugo Chávez had been declaring for years that the country intended to denounce the ICSID Convention in order to rely on a regional center for the resolution of disputes under the auspices of the Union of South American Nations (Unasur).
Venezuela is the State with the greatest number of arbitrations initiated before ICSID, right after Argentina. In 2012, it was involved currently in 27 cases, seven of which were closed and 20 were then pending. Venezuela followed on Bolivia and Ecuador’s footsteps. The former denounced the ICSID Convention on 2 May 2007 (entering in force in 3 November 2007) and the latter on 6 July 2009 (becoming effecting on 7 January 2010).
This decision reflected that, similarly to Ecuador and Bolivia, Venezuela disagreed with referring to an international arbitration tribunal the resolution of claims put forth by foreign investors oftentimes in connection with infrastructure concessions and the exploitation of natural resources.
The next step to be taken by Venezuela would be renegotiating its Bilateral Investment Treaties (BITs) done with several countries, since many of such instruments also allow the investor to rely on ICSID for resolving investment disputes. In addition to ICSID, several BITs executed by Venezuela also allow the investor to rely on other arbitration mechanisms. For instance, the investor may be able to commence ad hoc arbitration under the Arbitration Rules of the United Nations Commission for International Trade Law (UNCITRAL).
Therefore, the fact that Venezuela denounced the ICSID convention do not close the doors for foreign investors to use other mechanisms to defend their rights as they invest in that country.
Accordingly, Bolivia, Ecuador and Venezuela have been taking a stance that favors increased control over natural resources, which is contrary to the idea that an international arbitration tribunal may resolve disputes between foreign investors and the State. The situation is different in countries that support free market economy, such as Colombia, Chile, Peru and Uruguay, where it is clear that relying on international instruments such as the ICSID convention can and does favor investment promotion and the attraction of foreign capital flows.
Also in the South
Argentina is the State involved by far in the greatest number of ICSID arbitrations in 2012, when of its 49 cases, 25 were pending and 24 had been concluded. Many of such cases have been settled and a few others annulled; however, by relying on diversionist tactics, Argentina succeeded in avoiding payment of every award rendered in favor of investors.
This behavior did not only affect the ICSID system ‑ whose member States do honor arbitration awards ‑, but it also generated negative reactions. For instance, the US president, Barack Obama ordered the suspension of duty tax benefits to Argentina, especially the General System of Preferences (GSP), since it has failed to pay awards rendered in cases CMS and Azurix, where the arbitral tribunal decided in favor of the US investors.
Finally, the recent decision of the Argentinean government to nationalize 57% of the equity held by the Spanish company Repsol, leaving it with a mere 6% stake in the Argentinean oil giant YPF, travelled the world, giving rise to outcry not only in Spain, but also in the entire European Union. Repsol’s president, Antonio Brufau, indicated that he would take severe legal action, including an ICSID arbitration claiming billions of dollars in compensation of the expropriated equity holding.
[This article first appeared in the Peruvian magazine Semana Económica on 22 April 2012]