In January 2012, the Bolivarian Republic of Venezuela denounced the ICSID Convention, becoming the third country – after Bolivia and Ecuador – to do so. The exit from the global forum for the settlement of investment disputes signals these countries’ apparent loss of faith in the system and raises questions about the Convention’s fitness for purpose. This article looks at the possible reasons which prompted Venezuela to take this step, the impact it is likely to have and some broader issues arising from it.
The Foreign Ministry’s 2012 press-release points out that the country acceded to the Convention in 1993 by “a decision of a provisional and weak government, devoid of popular legitimacy, and under the pressure of transnational economic sectors involved in the dismantling of Venezuela’s national sovereignty.” The current government thus sees itself as correcting the mistakes of the earlier one. Far-reaching economic reforms by President Hugo Chávez’s government also indicate that – in the view of those currently in power – joining ICSID was one of many things where the previous regime had gone wrong.
Chávez’s economic programme seeks to re-establish the role of the state in the economy, especially in strategic sectors, farmed out to foreign corporations in the 1990s. Over the past few years, Chávez’s government has carried out a wave of nationalizations of domestic-and foreign-owned assets in petroleum, steel, agribusiness, construction, tourism, telecommunications, banking and some other industries. Most foreign investors’ grievances against the government are the fallout of these claw-back policies; the main issue in dispute is usually whether the amount of compensation offered by the government is sufficient.
Impact on pending and future claims
From a purely legal perspective, withdrawal from ICSID does not offer any immediate benefits to Venezuela. Being second only to Argentina in this respect, the country currently has 20 cases pending against it at ICSID (ten of them initiated in 2011) and faces the prospect of having to pay billions to successful claimants. These pending cases are in no way affected by Venezuela’s denunciation of the ICSID Convention. Furthermore, disgruntled foreign investors will still be able to initiate new cases during the six months between the notice of denunciation and the date when it becomes effective (25 July 2012).
The question whether investors would have a right to continue bringing claims after 25 July 2012 has been a subject of some debate due to the unclear formulation of Article 71 of the ICSID Convention. The predominant view is that such claims, when they are based on a bilateral investment treaty (BIT), will not be registered, despite the fact that Venezuelan BITs remain in force and retain a reference to ICSID arbitration. This is because BITs are understood to record a country’s unilateral offer of consent to arbitration which must be “perfected” by an investor (by submitting a request for arbitration) before the country ceases to be a member of ICSID. (By contrast, where consent to ICSID arbitration has been given by the country, for example, in a concession agreement with an investor, ICSID proceedings could be started even after the denunciation takes effect. This is because, unlike BITs, both parties to the contract give their advance consent to arbitration.)
However, of the 26 BITs in force for Venezuela, only two (with Chile and with Germany) name ICSID as the sole arbitral venue available to investors. All other BITs provide, in addition to ICSID, an opportunity to arbitrate under UNCITRAL Arbitration Rules and ICSID’s Additional Facility Rules. This means that even after the withdrawal from ICSID becomes effective, investors from the covered countries will still be able to sueVenezuela outside its domestic courts.
ICSID v. UNCITRAL
What is special about arbitration under the ICSID Convention by comparison to the UNCITRAL or ICSID Additional Facility rules? The most important difference is that ICSID arbitral awards are equivalent to “a final judgment of a court” in all of the ICSID Contracting States (i.e., they do not require internal judicial procedures to enable enforcement), and are therefore directly executable in most countries around the world. (This reading of the Convention has been opposed by Argentina’s lawyers who insist that claimants, who have received an ICSID award against Argentina, must still apply to an Argentine court to have the ICSID award executed in the country.)
In contrast, arbitral awards rendered under the UNCITRAL Arbitration Rules (or the ICSID Additional Facility Rules) do require additional domestic enforcement procedures. This process, however, is greatly facilitated by the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which (1) contains only very limited grounds for refusing recognition and enforcement, and (2) enables enforcement in any state party to the New York Convention (currently, 146 states). Even if the enforcement procedures are thus more cumbersome than under the ICSID Convention, it is still feasible to execute these awards in countries around the world where Venezuela has assets.
Ideological battleground over enforcement
If exiting from ICSID does not solve Venezuela’s problem with foreigners bringing international claims against it, what is its main purpose? The reasons appear to be more political than legal. 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.
Is ICSID the one to blame?
ICSID is a dispute resolution forum; arbitrators apply the rules, which are created by states and enshrined in bilateral investment treaties. Venezuela’s discontent with ICSID seems to go beyond the remit of this forum and concerns a much broader issue regarding the ability of BITs to deal with economic and political reforms. This issue is not limited to Venezuela; it has universal significance in light of the general trend towards increasing state intervention in the economy and especially in countries undergoing regime change.
Venezuela’s disputes primarily concern nationalizations. The government has confirmed its commitment to pay “fair compensation […] in accordance with Venezuelan law” which it understands as the book value of an investment (i.e., determined by reference to the amounts invested) as opposed to the market value (based on the present value of future cash flows). The latter will often be significantly higher than the former, especially if an enterprise has good business prospects.
BITs routinely require compensation equal to the “fair market value” of the expropriated investment, even if the expropriation is in the public interest, non-discriminatory and carried out in accordance with due process of law. Commentators have pointed out that a rigid rule for full compensation (i.e. calculated on the basis of the market value of investment) would in reality render any major economic or social programme impossible.
The amount of compensation for assets lawfully expropriated, especially as part of a broad economic reform, should take into account equitable factors, unrelated to a strict business valuation exercise. For example, was the original “deal” agreed by an investor with the (earlier) government a reasonable bargain or was it granted on terms unfavourable to the country and against its national interests? Was there a change in circumstances (such as an increase in oil prices) that benefits one party only? Has the investor recouped its sunk costs and has it enjoyed a lengthy period of (highly) profitable operations by the time of the nationalization?
The law, as it currently stands in most BITs, practically wipes out the differences in compensation for lawful and unlawful expropriations. The rigid compensation rule in most BITs and a high risk of arbitrators rigidly enforcing it, thereby leading to outcomes perceived as unacceptable, unfair and unsustainable financially at home, push countries like Venezuela to look for ways to get out of the system.
Dealing with the BIT regime
To fully dismantle the system of arbitration under BITs, Venezuela would need to terminate – in addition to the ICSID convention – all of its BITs. After such termination it would have to wait for the expiry of the additional period of 10-15 years (depending on a treaty), during which the agreements will continue to apply to investments established prior to the treaty’s termination. All of Venezuela’s BITs have such a “survival” clause.
In 2008, Venezuela gave notice to terminate its BIT with the Netherlands thus triggering the sunset period, which will end in 2023. The Dutch BIT must have been a source of particular annoyance to the country as it has served as a basis of at least ten ICSID cases against Venezuela (the Netherlands is often used by firms from other countries for incorporating holding companies and structuring investments). Aside from the Dutch treaty, Venezuela has not moved to terminate any of its other BITs.
Withdrawals from ICSID by Bolivia, Ecuador and now Venezuela, and termination of BITs are a radical expression of a much broader trend to revisit key aspects of an international investment regime. In recent times, a significant number of countries have been reviewing their model investment treaties and renegotiating existing agreements in order to make them clearer, more balanced and conducive to fair outcomes. There is a pronounced need for further collective thinking and constructive engagement on these issues.
Author: Sergey Ripinsky is a legal affairs officer at the United Nations Conference on Trade and Development (UNCTAD), [email protected]. The author thanks Anna Lisa Brahms for research assistance and Elisabeth Tuerk, Nathalie Bernasconi and Natalia Guerra for valuable comments. The views expressed are solely those of the author.
 Convention on the Settlement of Investment Disputes between States and Nationals of Other States
 This number includes 16 ICSID arbitrations proper and 4 arbitrations under the ICSID Additional Facility Rules. See http://icsid.worldbank.org. According to UNCTAD’s information, there are no (publicly known) IIA-based claims pending against Venezuela in other international fora.
 For a fuller analysis, see UNCTAD “Denunciation of the ICSID Convention and BITs: Impact on Investor-State Claims” (IIA Issues Note, No.2, December 2010).
 Most of these BITs were concluded in the 1990s, and only three in recent years – with Iran in 2005, Belarus in 2007 and Russia in 2008.
 ICSID’s Additional Facility (AF) Rules can be used when only one of the relevant States (either the host State or the home State of the investor) is a party to the ICSID Convention. In AF cases, the ICSID Convention does not apply to the dispute; the Centre simply serves as an institution administering the proceedings.
 Article 54(1) of the ICSID Convention.
 “Argentina Rejects Azurix Claims on ICSID Award in Letter to Geithner”, Inside U.S. Trade, 16 September 2011, http://www.embassyofargentina.us/v2011/files/20110825-geithnerazurix9.pdf.
 According to UNCTAD’s statistics, by the end of 2011 states won 55 IIA-based ICSID cases and lost 36; 34 cases were settled.
 K. Vyas, “Venezuela’s Chávez: Won’t Accept Rulings by ICSID Court”, 8 January 2012, http://online.wsj.com/article/BT-CO-20120108-703460.html.
 Central Bank of Venezuela, “BCV completó histórica repatriación del oro monetario de la República”, 30 January 2012, http://www.bcv.org.ve/c4/notasprensa.asp?Codigo=9662&Operacion=2&Sec=False.
 J. De Córdoba, “Chávez Takes Steps to Exit Global Forum”, 13 September 2011, http://online.wsj.com/article/SB10001424053111903285704576560760106674594.html.
 One example is Franz Sedelmayer’s near 15-year enforcement saga against Russia in various countries of a relatively small award. See Y. Kryvoi, “Chasing the Russian Federation”, 13 July 2011, http://cisarbitration.com/2011/07/13/chasing-the-russian-federation/.
 See, for example, H. El-Kady, “Egypt’s Bilateral Investment Treaties: A Straitjacket in a New Era of Foreign Investment Re-regulations?”, Transnational Dispute Management, 12 December 2011.
 I. Brownlie, Principles of Public International Law (6th edn, Clarendon Press, Oxford, 2003) p. 513; E. Paasivirta, Participation of States in International Contracts and Arbitral Settlement of Disputes (Finnish Lawyers’ Publishing Company, Helsinki, 1990) p. 265.
 Minor distinctions do exist, but they can make a difference in rare circumstances only. For details, see S. Ripinsky with K. Williams, Damages in International Investment Law (BIICL, London, 2008), pp. 86-88.
 Note that in 2008, Ecuador terminated nine BITs – with Cuba, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Paraguay, Romania and Uruguay.