Argentina: a step towards international financial normalization?

In an apparent step towards rapprochement with the international investment community,

this past week the Argentine government announced that it would pay US$500mn in
dollar denominated government bonds to resolve disputes filed by five MNCs at the
World Bankss International Centre for the Settlement of Investment Disputes (ICSID).

Not coincidentally, the World Bank has just recently agreed to a US$3 billion lending
program for health, education and rural development.

ICSID Implications

Latin America has kept the ICSID extremely busy; of the 175 cases currently before the
Center, 75 are from Latin America. Many have speculation that Argentina would follow
Venezuela, Ecuador, and Bolivia by exiting in exiting the treaty.

Just last week Ecuadorean Deputy Foreign Minister Marco Albujha announced that
preparations for an UNASUR proposal for an alternative regional centre for investor-state
disputes.

So Argentinas move represents a step away from the regions leftist camp and their
fierce opposition to ICSID. Until last week, Argentina maintained a uniform policy of
non-compliance with ICSID awards. This decision marked a major change of tact on the
part of the Argentine government.

A bit of context

First proposed at the World Banks annual meeting in Tokyo in 1964 and inaugurated in
1966, ICSID came about as a response to a wave of national expropriations. The goal of
program was to create a neutral forum for the resolution investor-state disputes.

In order to qualify for ICSID arbitration two requirements must be met: the host state of
the investment and the home-state of the investor must be party to the Convention and
both parties must have consented to ICSID arbitration.

Consent to ICSID arbitration is usually provided by bilateral international investment
treaties (BITs). BITs provide a number of substantive provisions to protect investors
from political and regulatory risks.

In what became known as the el no de Tokyo, Latin American countries initially
rejected BITs and ICSID, clinging instead to the Calvo Doctrinefirst espoused by
Argentine jurist Carlos Calvo in 1868 and informed by the regions experience with
gunboat diplomacywhich rejected special protection for international investors and
required foreigners to bring their claims to domestic courts.

By the 1980s, with much of the region plagued by stagnant growth, hyperinflation, and
soaring public debt, the Calvo Doctrine was gradually swept away by neoliberalism. By
1997 only Brazil and Mexico were not party to ICSID.

The conclusion of the US-Argentina BIT and Argentinas entry into ICSID was
considered a milestone for the US BIT program because it marked a rupture with the
Calvo Doctrine in its very country of origin.

The Onslaught

It would be easy to interpret Argentinas refusal to pay up as merely a part of the
Kirchners general hostility towards the international investment community
highlighted by last years expropriation of YPF.

However the story is more nuanced; a closer look reveals that Argentina has legitimate
qualms with the validity of the decisions and the awards they have been ordered to pay.

The catastrophic proportions of the 2001 Argentine crisis is well documented (with
income per person halved and half of the population below the poverty line by late 2002.

Many of Argentinas 25 pending ICSID cases resulted from measures that altered tariff
agreements that resulted in major losses for foreign utility providers following the
countrys currency devaluation.

In what became known collectively as the Argentine gas cases CMS, Sempra, Enron,
and LG&E all brought cases before ICSID. There were four cases that were particularly
controversial due to their poor legal reasoning and inconsistent judgements.

Despite nearly the exact same fact patterns, the ICSID tribunals reached substantially
different conclusions. In each of these cases Argentina relied on a Non Precluded
Measures (NPM) clause, in US-Argentina BIT, which provided exceptions to BIT
breaches if the measures are deemed necessary in order to maintain public order and
protect essential security interests.

The CMS, Sempra, and Enron tribunals relied on a customary international law (CIL)
doctrine of necessity, rather than the NPMwhich requires that the measures be the the
only means available essential security and imminent periland awarded in favour of
the investor. Meanwhile, the LG&E Tribunal assessed both standards and found that
Argentina satisfied both.

Although ICSID does not have an appeals mechanism, it does have an annulment process
exclusively available to challenge the legitimacy of the Tribunals process and not the
substantive correctness of the decisions.

Argentina brought the CMS, Enron and Sempra decisions to annulment. In Enron and
CMS, the annulment committees found that the awards were not valid and creatively
worked their rulings into ICSID limited grounds for annulment. Meanwhile in the CMS
annulment decision, the committee found that the tribunal made manifest errors in law
by not applying the NPM clause. Nevertheless it declared itself hamstrung to annul the
decision based on ICSIDs limited annulment criteria.

Thus, Argentina was perversely asked to shell out US$133.2 million to CMS based on a
decision declared by the annulment committee to be based on bad law.

The Argentine crisis cases rocked the ICSID system by exposing its unpreparedness to
implement an appropriate or consistent standard of review for emergency measures taken
by states and major drawback of not having a formal appeals process.


Ideological Cloud and ICSID

Naturally, the rulings emanating from the Argentine crisis provided fodder for leftist
governments in the region, and led to their support to renunciation ICSID. These
detractors claim that ICSID is biased in favour of investment interests with little respect
for legitimate state measures. Ecuadors President Rafael Correa derided the system as
colonial in nature, with too much power resting in transnationals, Washington, and the
World Bank.

Clearly these countries had other motivations for exiting ICSID beyond legitimate
procedural criticisms of the Center. In each of the countries, the governments unilaterally
altered contracts leading to disputes being brought before ICSID. None of these measures
came out of the emergency measures enacted akin to those of Argentina; rather they
represent precisely the political risk that ICSID is meant to protect investors from.

The prospect of an UNASUR dispute settlement centre realistically replacing ICSIDs
role in the region is unlikely. Chile, Colombia and Peru would be unlikely to want to
damage their business friendly credentials by abandoning ICSID. Nevertheless, ICSID
should press forward to develop an appropriate and consistent standard of review and
strongly consider the adaptation of a true appeals process.


As for Argentina

Notably, two of the companies that Argentina has apparently settled with involve
disputes with two water service providers, French Vivendi and US-based Azurix. Non-
payment in these cases are likely perceived as particularly offensive to international
investors because they are pre-crisis disputes. Argentina has also offered Repsol $1.5
billion for last years expropriation.
http://online.wsj.com/news/articles/SB10001424127887323873904578569900644974598

By also compensating Blue Ridge Investments, who purchased CMSs interest in their
award described above, the Argentine government has demonstrated a willingness to take
one on the chin in order to convince for the US to jettison their policy of voting against
World Bank lending to Argentina. It could also be an attempt to illicit US government
support for Argentinas US court battle with hold-out bond holders.