Dow Jones | October 12, 2007
INTERVIEW: Argentina Seeks Diplomatic Exit From ICSID Suits
By Shane Romig, Dow Jones Newswires
BUENOS AIRES -(Dow Jones)- Facing a flood of unfavorable arbitration rulings, Argentina is shifting from a legal strategy to a diplomatic one in a bid to dismiss billions of dollars in foreign investor claims arising from its 2002 financial crisis.
Under the new strategy, outlined by Chief Counsel for the Argentine Treasury Osvaldo Guglielmino in an interview with Dow Jones Newswires, the government will request that the U.S. formally recognize Argentina’s right to declare its 2001-2002 financial meltdown an emergency event that permitted it to break contracts otherwise protected by a U.S.-Argentine investment treaty. That treaty is the foundation for many of the outstanding complaints against Argentina at the World Bank-sponsored International Court for the Settlement of Investment Disputes, or ICSID.
"Argentina is going to assert that this is a political question under international law; the Foreign Ministry has finished preparing (the document) and will notify the U.S." State Department shortly, Guglielmino said.
The move to diplomatic channels comes after Argentina exhausted its appeals for the first time in a claim heard at the ICSID tribunal which upheld a $133 million decision for U.S.-based CMS Energy Corp (CMS) late last month. The appeals loss coincided with another ICSID ruling against Argentina, a $172 million award for U.S.-based Sempra Energy (SRE), in a dispute related to the company’s interest in two Argentine natural-gas holding companies.
In all, ICSID awards against Argentina now total $750 million, Guglielmino said.
There are more than 30 separate claims outstanding against Argentina at ICSID with a total potential value running into billions of dollars.
Nearly all of the cases stem from Argentina’s economic crisis earlier this decade when the country defaulted on its sovereign debt and devalued the peso, which had been pegged at one-to-one against the U.S. dollar. Amid the turmoil, the Argentine government issued an emergency decree in January 2002 that converted all contracts from dollars into devalued pesos. Among those affected were foreign-owned utilities, which also saw their newly devalued rates frozen.
The move prompted dozens of damages claims based on a breach-of-contract argument under various bilateral investment treaties established under the ICSID standard.
But Argentina has consistently argued that the extreme circumstances justified extreme action and, in the U.S. treaty’s case, were covered by a generic emergency clause in the bilateral agreement. Argentina argued that the clause was "self-judging," meaning that either country had the right to decide on its own terms whether a particular event falls within the scope of that emergency clause.
In principle, Guglielmino claims, the U.S. agrees with this position.
"We have an opinion letter from the U.S. State Department admitting that they interpret the treaty the same way we do (with respect to the crisis and the service contracts) and now we want that to be said officially," he said.
In a copy of that letter, dated September 15, 2006, State Department legal advisor James Thessin is quoted telling a potential witness in a separate ICSID proceeding that "the position of the U.S. government is that the essential security language in our FCN treaties and bilateral investment treaties is self- judging, i.e. only the party itself is competent to determine what is in its own essential security interests."
Argentina now wants this informally stated position on the self-judging nature of the clause to be formalized through an amendment to the two countries’ Reciprocal Encouragement and Protection of Investment Treaty signed in 1991. In theory, such an amendment would prevent the ICSID tribunal from ruling on the applicability of the emergency clause, effectively denying company complaints stemming from the economic crisis.
It’s not clear, however, that the U.S. would offer such sweeping support to Argentina’s position against U.S. companies. After a strong recovery from the crisis - Argentina is on track for a fifth-straight year of economic expansion at or above 8% - complainant companies are asserting that it’s time to pay up.
The Argentine government also counters that foreign companies should not have a greater claim to compensation than Argentines themselves, who were affected by the same measures in 2002.
"The ICSID is designed to protect against discrimination, expropriation, or when (a foreign company) is not offered fair and equal treatment," Guglielmino said. "There was no discrimination because we all fell together," he said.
"Returns on investments were high due to the risk involved. The risk was apparent, and when those risks materialized the companies come saying that they expected the stability of Switzerland," Guglielmino added.
The Argentine government also sees the arbitration court as inefficient, costly, and rife with conflicts of interests. Corporate advocates in some cases become arbitration judges in later cases, Guglielmino asserted.
Two years ago, then Justice Minister Horacio Rossati pronounced that Argentina might refuse to honor ICSID awards on the grounds that they were not consistent with its constitution. In the latest interview, Guglielmino expressed respect for international law but at the same time gave no indication the government has backed off from that threat. Indeed, he dismissed ICSID as a failed system.
"We are going to respect all the rules and international commitments we’ve made but we were promised (that the ICSID would be) a system of law and they haven’t provided it," Guglielmino said. "We’re seeing signs that investors aren’t interested in going to the ICSID, because they can see that it’s useless."