BUS614: International Finance

Bilateral Investment Treaties [BITs] and Multilateral Investment Treaties [MITs] are means of promotion and protection of investors whereby states agree to offer investors of respective states a series of incentives that would allow them to facilitate their investments.

Normally, these treaties include clauses aimed at limiting expropriation of investors' properties, means of compensation, National Treatment, Fair and Equitable Treatment, Treatment no Less Favorable than that awarded to investors of other states in addition to other clauses in which investors are offered specific rights when it comes to remitting their earnings among others.

When it comes to currency exchange and transfer, one of the examples can be found in the BIT between the Kingdom of Denmark and the Bolivarian Republic of Venezuela whereby in Article 7 of this treaty the parties agreed to allow the free transfer of capital and proceeds of the investment. It also drew the line when it comes to transfer of currency where currency may be convertible on the basis of the market rate on the date of the transfer.

Additionally, article VIII of the BIT between Venezuela and Canada, awarded investors the right to freely transfer the investment funds in the currency of which the investment was originally made with or in any convertible currency the contracting state and the investor agrees on and in the rate of exchange applicable on the date of transfer.

When investors experience losses to their property rights in the host state, they resort to the International Centre for Settlement of Investment Disputes [ICSID] to settle any disputes arising between them and host states in relation to the proper application or interpretation of BITs or an MITs.

The following examples are recent cases settled by ICSID in which at least one of the claims made by the Claimants was related to Currency Exchange or Transfer.

a. Rusoro v Venezuela

When a Canadian registered company acquired the rights of a number of gold mining sites in Venezuela through owning the company which held the mining rights in Venezuela, Rusoro did not anticipate the forthcoming changes in law within Venezuela that eventually led to the nationalisation of the gold mining sector as a whole.

Among the claims against Venezuela submitted to ICSID, Rusoro stated that it suffered losses from the Currency Exchange rate introduced by the Central Bank of Venezuela.

These losses, according to the company, amounted due to the artificially boosted value of the Venezuelan Bolivar and due to the abolishment of the Swap Market, a currency exchange market which was tolerated by the Venezuelan government until the introduction of the new law which made activities in this market illegal.

Additionally, Venezuela implemented a number of restrictions on exporting gold putting private companies at a disadvantage compared to public companies. Although the government re-introduced no legislation equalising the treatment of gold exporting companies irrespective of its ownership structure.

The important factor in this case in relation to Currency Exchange and Transfer was the Tribunal's analysis where the Tribunal agreed that "States have the sovereign right to establish and amend, in furtherance of their economic policy, exchange control regulations which defines the relationship between the State's own currency and that of other sovereigns".

This case represents an example of how Currency Exchange may be considered as a Political Financial Risk given that the host state changed its regulatory framework to rely on the official rate introduced by the Central Bank rather than allowing investors to use a gray market that determine the currency exchange rates on different merits.

b. CMS v Argentina

In light of the economic hardship Argentina was experiencing, the government decided to suspend some of the incentives awarded to foreign investors and to unpeg the Argentine Peso from the US dollar.

Additionally, some of the incentives awarded to foreign investors in public utilities by the Argentinian Government was their right to adjust tariffs according to the US Producer Price Index [US PPI] biannually and to calculate tariffs in US dollar whereby the rate of the Argentine Peso to the US dollar was pegged on the basis of 1 to 1.

This, however changed due to the economic situation since these incentives were halted resulting in losses on part of foreign investors like CMS the US Gas Transmission Company and resulting in severe flight of foreign capital. This is especially true since the rate of the Argentine Peso after it became unpegged to the dollar was valued at 3 Pesos per Dollar. The underlying issue here was calculating the tariffs where these were calculated in Peso the adjusted according to Argentina's Consumer Price Index and then later converted to US dollar and subjected to the dollar adjustment in accordance with Argentina's Convertibility Law of 1991.

What is notable is that the Tribunal saw that it does not have the authority to decide whether the economic policies enacted by Argentina were right or wrong rather it aims to examine whether these measures resulted in "adverse consequences" for the CMS.

In its decision, the Tribunal found that the BIT between Argentina and the US stipulates that parties to this treaty are to respect any legal and contractual obligation connected to an investment. In that respect, the incentives that Argentina awarded to investors, including tariff incentives, was considered as legally binding and as such, not respecting such obligations is in violation of Article II(2) c.

This case is an example of how currency exchange could be regarded as a Pure Political Risk given the fact that Argentina decided to unpeg its currency and suspend the special treatment awarded to foreign investors through changing and suspending laws governing special tariffs and exchange rates. And although, it is up to the host state to decide on its financial and economic policy in any way it deems appropriate, the fact that Argentina did not adhere by and respect the contractual obligations it made with investors means that such risk is a Pure Political Risk.