Venezuela quit ICSID. Who gained?

Venezuela quit the International Centre for Settlement of Investment Disputes this year. The World Bank’s arbitration organisation has been criticised as an imposition on national sovereignty that prevents countries from imposing new controls on multinational corporations. From that perspective, it should be a good thing when a country — especially one that is trying all sorts of restraints on corporate behaviour — leaves the structure. But who really gains from a country getting out of this structure?

The issue that everyone talks about is that when companies have a less predictable investment environment, they are less likely to invest in a country. And if they do invest, they will demand higher rates of return on their investment. Bringing that idea down to earth, that means that today, the profit margins for companies operating in Venezuela are often huge. You hear the same thing from everyone, whether they sell dental services, irrigation tubing, used cars, you name it. And other companies don’t do the usual thing — go in, undercut prices a little bit, and make a pile of cash. The big available profits aren’t big enough to make it worthwhile.

So the big winners from a decision like this are profiteering corporations. The same ones that anti-globalisation leftists are supposed to oppose. Lacking competition, companies charge whatever they like. In Venezuela, this is termed “speculation” and often leads to price controls. Those controls are almost always feckless — control the price on dairy, and profits flow to the yogurt makers. Control yogurt, and they move on to making strawberry milk. Even when prices are officially held down and the big companies can’t take the profits, consumers end up paying the price to middlemen, kickback-seeking salesmen, and other profiteers. In the end, consumers pay more for a lot of basic goods than they would if there were competition, and suppliers make money.

Of course you can’t draw a straight line from “no ICSID” to “no competition.” Venezuela has lacked competition for years while within ICSID, while there are probably countries outside ICSID where competition is healthier. But you can make a link between “lack of judicial security” and lack of investment (both foreign and domestic). The pullout from ICSID just takes away one of the few remaining tidbits of security that companies had.

The other winners are lawyers. Today, the ICSID list of pending cases has another addition: Owens Illinois, the US-based glassmaker, filed a second arbitration case over the expropriation of its bottle plants. The ICSID case list now has five consecutive cases against Venezuela from the last three weeks. With the January announcement that it would pull out of the ICSID treaty, Venezuela started a six-month clock ticking for companies that might have a claim. Companies had to submit arbitration notifications by July 25 or be blocked from the arbitration forum. In some cases, the only other option for dispute resolution is Venezuela’s courts, which even if they were fair and impartial (they’re not), are so overloaded and underfunded that resolution could take forever.

According to Venezuelan lawyer Carlos Bellorin, a lot of companies sent “trigger letters” before the deadline. Publicly traded companies, as he noted on Twitter, may be liable to their shareholders if they don’t use every possible measure to recover expropriated investments. Letting the ICSID withdrawal pass without a claim could leave money on the table. Bellorin says yet more cases are yet to come.

I understand that the legal fees for international arbitration cases are relatively inexpensive — a few million bucks here or there isn’t going to bankrupt a country. All the same, a bunch of rich, English-speaking lawyers in New York and London are going to be able to buy extra cases of champagne from the fees in these cases. Fees paid by the government of Venezuela. In part, with the sales taxes that millions of Venezuelans pay on their $10-a-litre yogurt. Some of these cases wouldn’t have been filed in the first place if Venezuela hadn’t been on the verge of pulling out of ICSID, so the act of pulling out on its own is helping the lawyers.

So then why the pullout? Even the sometimes impulsive Chávez government must have its reasons. Oh, look. This fellow says that condemning ICSID may have an effect on how easily winners of arbitration cases against Venezuela are able to collect their winnings. That is interesting, isn’t it?

By denouncing the Convention, the government seems to be sending a political message: we think this system is unfair, we disavow it and refuse to cooperate with it in future. The part about the future is very important because it relates to the collection of damages to be ordered by ICSID tribunals against Venezuela.

Interesting to note in this connection is the government’s view, or at least its portrayal, of ICSID as pandering to transnational corporations. According to the Foreign Ministry’s 2012 press-release, ICSID tribunals have “ruled 232 times in favor of transnational interests out of the 234 cases filed throughout its history.” While a gross misrepresentation of ICSID’s record (in fact, so far states have won more cases in ICSID than they have lost), it nevertheless reveals the Venezuelan government’s view of this forum.

Accusing ICSID of bias gives ideological backing to President Chávez’s statement that the Republic “will not recognize any ICSID decisions.” The government has already moved its gold reserves from foreign banks to Caracas (160 tons valued at nearly US$9 billion); it was also reported as preparing to transfer US$6 billion in cash reserves held in European and U.S. banks to Russian, Chinese and Brazilian banks. The latter, presumably, are seen as less likely to accommodate freezing orders and to facilitate the enforcement of arbitral awards against Venezuela. Experience has shown that it can be a challenge to enforce an award (be it ICSID or non-ICSID) outside the territory of the respondent country as a lot of state assets are protected by the sovereign immunity doctrine.

More interesting stuff there in that article.

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One thought on “Venezuela quit ICSID. Who gained?

  1. Francisco Toro

    Ricardo Villasmil renders a similar insight with the kind of first-week-of-econ-class simplicity you can only admire:

    (Paraphrasing) “One of the basic insights of our profession is that factors of production are subject to the law of supply demand. Where labour is scarce, like in Europe after the Black Death, wages rise. Where land is scarce, like in Manhattan, rents rise. Well, in Venezuela they’ve declared war on capital, and so capital is scarce…so guess what’s been happening to profits…”

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