With World Trade Organisation (WTO) talks off the rails, many observers expect trade negotiations to continue along bilateral pathways – with governments pursuing one-on-one agreements with other like-minded partners. Such a shift would place trade liberalisation on the same bilateral pathways that have been used to negotiate international agreements on foreign direct investment.
Indeed, the multilateral negotiating arena is looking increasingly desolate, as governments find that they lack the consensus to move forward with multi-party negotiations on trade or investment. In the mid-1990s, the Organisation for Economic Co-operation and Development failed in its bid to cobble together a so-called Multilateral Agreement on Investment.
A few years later, the WTO proved no more successful in its own bid to negotiate a global investment pact as part of the Doha Round.
Meanwhile, bilateral investment agreements have proved remarkably easy to negotiate. UN figures chart a precipitous increase in the number of these one-on-one investment agreements – from 385 at the outset of the 1990s to 1857 at the end of the decade. Today, some 2500 bilateral investment treaties have been negotiated, and investment guarantees are also written into an increasing number of bilateral and regional trade agreements, such as the North American Free Trade Agreement.
In the absence of a single global agreement on investment, foreign investors have to engage in some creative legal footwork to ensure that their operations fall under the protective canopy of an international agreement – incorporating subsidiaries or holding companies in countries such as the Netherlands or the UK, which boast extensive networks of bilateral protection treaties.
However, one of the downsides of such a morass of bilateral agreements is the fact that legal disputes are not handled under a single roof, but are scattered across a dizzying array of arbitration venues. Rules on confidentiality differ widely from forum to forum, which means that global companies (much less the public) may not learn about lawsuits that bear on issues of interest.
Argentina may be recovering from the financial crisis that hit in 2001, but the country still struggles to patch things up with foreign investors. Dozens of international companies filed lawsuits under investment protection treaties, alleging that the country’s response to the crisis violated contractual stability promises made during the 1990s. The government has taken a hard line towards these lawsuits, and coaxed many investors to settle their claims outside of arbitration. However, some companies are soldiering on, planning to exit the country – hopefully with some form of compensation.
At the same time, Argentina is still wrestling with several major lawsuits that pre-date its financial crisis, and which arise out of an ill-fated experiment with the privatisation of water and sewage services. Both the French firm Vivendi and the Enron-subsidiary Azurix have pursued claims for hundreds of millions of dollars, alleging that politicians and local regulators subjected their local operations to politicised and arbitrary treatment.
This July, a World Bank arbitration tribunal found in favour of Azurix – awarding the US company $165m in compensation, and finding that Argentina had failed to live up to its obligations under a 1993 investment protection treaty with the US. Vivendi’s claim was heard before a separate tribunal, with a decision expected this autumn.
When Russian President Vladimir Putin hosted the G8 Summit earlier this year, an unnamed Spanish institutional investor could not resist the opportunity to slap Russia with a lawsuit for losses related to the fund’s investments in the doomed Yukos Corporation.
Yukos’ majority shareholder, Group Menatep, has already launched a blockbuster $30bn arbitration against the Russian Federation, but the Spanish case could mark the first of several arbitration claims to be brought by foreign funds which held smaller equity positions in Yukos before the firm was run into the ground by Russian tax authorities.
If Menatep wins a multi-billion dollar award it could require the services of a talented collections agency. Russia has shown little inclination to abide by the terms of the various investment protection treaties which it signed shortly after the end of communism. Moreover, as former Yukos shareholders pursue multiple arbitrations against Russia, they run the risk that different tribunals will come to different views as to Russia’s liability for Yukos’ implosion.
While any shareholder winning its arbitration could move to enforce that judgment in countries where Russian assets are based, a series of conflicting arbitration rulings would give Russia political ammunition in its effort to discredit the legitimacy of international business arbitration.
Luke Peterson is a journalist and research consultant based in Ottawa, Ontario. He publishes an investigative news service, Investment Treaty News, for a Canadian think tank. (www.iisd.org/investment/itn)