In recent months, Argentina has suffered yet another setback at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). On June 11, arbitrators held the country liable to pay more than $200m in compensation to the former investors in the province of Mendoza’s electricity distribution network.

At least on paper, the ruling represents a huge legal victory for the French multinational EDF International and its fellow investors in the Mendoza electricity project. When Argentina was buffeted by a financial crisis a decade ago, the authorities effectively tore up EDF’s contract and failed to come to new terms that would let the electricity project continue on a viable footing.

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EDF and its partners bailed out of Argentina in 2005, and sued the country under a reciprocal investment protection treaty between France and Argentina. The recent outcome of that arbitration process was an almost total victory for the investors.

A hollow victory?

However, as the dust settles, the 'victors' can look forward to more years of litigation with Argentina. The Argentine government is likely to try to overturn the award before a new review panel. Even if that fails, Argentina may decline to pay the debt, and leave the claimants to scour the earth for any Argentine state-owned assets that might be seized to satisfy it. The reality is that EDF and its partners are latecomers to a dinner-party where Argentina long ago hid the good silver, and left its growing list of creditors to jostle for crumbs.

And Argentina is not alone in this regard. While some governments readily reach for their chequebook when they lose a fight with a foreign investor, others dig in their heels. The Russian Federation, along with several other former USSR nations, have declined to compensate foreign investors – even when ordered to do so by international arbitration tribunals. The records of some African states also leave much to be desired. Foreign investors can find themselves in unfamiliar territory when they hold a judgment against a state, but have no clear path for collecting it.

In principle, investors could sell off these debts to the vulture funds that specialise in purchasing and collecting sovereign debts. However, the prices typically offered – no more than 15 cents on the dollar – can seem like a cold shower for foreign investors who were led to believe that they had 'won' their arbitration with their former host-country.

A new way to settle

One long-time distressed debt specialist, Michael Sheehan of the Washington-based Debt Advisory International, concedes that many investors cannot bring themselves to part with these debts on such terms.

But, if a state digs in its heels against paying an arbitral award, the 'victorious' investor might spend years running up legal bills that far exceed their initial arbitration costs. So, increasingly, Mr Sheehan sees creative arrangements where hedge funds come on board as investors of a different type: investing their time, money and know-how in collecting on the arbitration judgments – and taking a percentage of any recovery as part of the bargain.

It is all a long way from the optimism that characterises the early days of foreign investment transactions. But, given the frequency of disputes between foreign investors and states, it is not entirely surprising that there is a growth in the secondary financial market surrounding the legal judgments that arise out of high-stakes FDI disputes.

Luke Eric Peterson is the publisher of Investment Arbitration Reporter(http://www.iareporter.com) an online news and analysis service monitoring foreign investment law disputes.