“With regards to provisions in several FTAs that give foreign investors the right to sue governments directly in foreign tribunals, I will ensure that foreign investor rights are strictly limited and will fully exempt any law or regulation written to protect public safety or promote the public interest.”
—Senator Barack Obama, on the campaign trail in 2008
The Argentine decision to avoid paying ICSID expropriation judgments is finally coming back to haunt it. A few weeks ago, the Obama administration announced that it would begin to vote against credits for Argentina from multilateral lending organizations. A few days ago, the administration announced that Argentina will no longer be eligible for duty-free access to the U.S. market under the Generalized System of Preferences (GSP).
Argentina exported $477 million to the U.S. under the GSP in 2011, mostly cheeses, candy, leather, strawberries, wine, and lithium. Removing GSP will cost Argentina $17 million per year, assuming, of course, that it continues to export the same amount.
The Presidential authority comes from the Trade Act of 1974, so named at a time when Congress did not give legislation stupidly cutesy names but called laws what they were. Subchapter V mandates that a country which “has nationalized, expropriated, or otherwise seized ownership or control of [American-owned] property” and “fails to act in good faith in recognizing as binding or in enforcing arbitral awards in favor of United States citizens or a corporation” will not qualify for the GSP unless ...
- “Prompt, adequate, and effective compensation has been or is being made to the citizen, corporation, partnership, or association”;
- “Good faith negotiations to provide prompt, adequate, and effective compensation under the applicable provisions of international law are in progress”;
- “A dispute involving such citizen, corporation, partnership, or association over compensation for such a seizure has been submitted to arbitration under the provisions of the Convention for the Settlement of Investment Disputes, or in another mutually agreed upon forum.”
No country has ever been punished for expropriation under the Trade Act. That may be because no country before now has ignored ICSID rulings. In 2005, CMS Gas received $133.2 million. In 2006, Azurix received $165.2 million. (The awards will accrue interest as long as they are unpaid.) In September 2007, Argentina lost its petition to annul the award against CMS. In May 2008, CMS sold its claim to Bank of America. (More accurately, it sold the claim to a subsidiary of BofA called Blue Ridge Investments.) By then, the $133 million award had grown to $180 million, counting interest. (That is a lot of interest!)
We don’t know how much Blue Ridge paid , but the State Department estimated that it paid around $54 million for the claim and CMS’s 23% stake in the TGN pipeline company. Blue Ridge’s original plan was to flip the claim as quickly as possible. (The Wikileaks cable is fascinating in that regard: Blue Ridge wanted to threaten Argentina with the possibility of selling its claim to a vulture fund that would take them to court in the United States; Argentina apparently planned to use its control over pipeline rates to force Blue Ridge to sell its claim to a government crony.)
About 16 months later, the Azurix case reached the end of the line when an ICSID appeals panel refused to annul the judgment against Argentina. Soon after, in September 2009, Azurix filed a petition to suspend Argentina’s GSP preferences. Blue Ridge signed on. The petition then ground its way through the USTR bureaucracy ... and finally, now, Argentina is facing sanctions.
There are two points to make about Argentina’s recalcitrance. First, the country has done remarkably well at ICSID. Several decisions have been annuled by ICSID review panels. In at least one case, against a British company, the D.C. Circuit Court ruled that since the contract specified that the company had to first exhaust all local remedies, their decision to go direct to arbitration vacated a $185 million award. Second, in terms of justice, pretty much all the companies going up against Argentina are in the wrong. But that’s a subject for a different post ... as is the question of whether President Obama is living up to the position stated in the epigraph of this post. (He is.)
Do the companies have options other than getting the U.S. government to go to bat for them? If they were natural resource exporters, then the legal remedies would be fairly powerful: ultimately, Argentina would lose the ability to sell production from the expropriated assets. These are service companies, however. It isn’t clear that the courts will rule their way, and it isn’t clear that Argentine has many assets that the courts can seize. (Short version: since the Argentine central bank was not using its New York funds for commercial purposes, creditors could not go after them. I am not a lawyer and cannot say if that would apply in an expropriation case, but I suspect that it would.) Getting the U.S. government involved in muscling Argentina may be their best way forward.
But it is a sign that the arbitration system may crack when used for cases other than natural resource companies. Back to the 1970s!
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