Argentina before the Law

Argentine President Cristina Fernández de Kirchner’s decision to renationalize the energy company YPF has raised a virtual tsunami of political diatribes, threats from unexpected places and players, heated commentary from journalists worldwide, and public outrage in Argentina, Spain, and many other countries. But Fernández is not likely to care about the complaints; renationalization is playing very well with her Peronist supporters at home.

So now Argentina will face international law. In addition to Repsol, the Spanish energy company that held a majority stake in YPF, Spain and the European Union (which, under the Lisbon Treaty, has acquired authority regarding investment matters in third countries) will fight the seizure with every legal tool that they can muster.

Argentina stands to lose economically by its actions as well. Given Fernández’s contempt for her country’s largest foreign investor, the renationalized YPF will find it difficult to find a new partner in international markets. Indeed, given Fernández’s arbitrary action, the Chinese firms that were negotiating with Repsol for a stake in YPF are likely to have second thoughts.

In the end, a solution must be found that is acceptable to all. So allowing tempers to cool and rhetoric to soften is now a high priority, and there is no better way to do that than by switching on the legal machinery. Repsol’s announcement that it will seek international arbitration before the International Center for Settlement of Investment Disputes (ICSID) is a useful first step.

But Repsol’s willingness to go to arbitration raises several questions for members of the general public, most of whom are unfamiliar with the workings of international law (which are sometimes incomprehensible even to experts). What does it mean to resort to the ICSID? How effective are its decisions when rendered against states?

The ICSID was established in 1965 as a part of the World Bank by the Convention on Differences Relative to Investments between States and Nationals of Other States, in response to the proliferation of requests for the Bank president’s ad hoc mediation in investment controversies. Its greatest virtue is that it offers two means of resolving controversies, conciliation and arbitration, in a process that places states and investors on an equal footing.

Historically, ICSID arbitration has enjoyed a high degree of acceptance by all parties to disputes. Undoubtedly, in addition to formal means of implementation, the impressive shadow of the World Bank, with its powerful influence over developing countries’ access to international markets, plays a key role. But, today, with more players able to set themselves up as an alternative to the World Bank, this influence has begun to dissipate, at least in some cases.

Over the past 15 years, since the first case was registered against a Latin American state (Costa Rica) in 1996, the number of investment arbitrations submitted to the ICSID from the region, mainly by foreign investors, has soared. Indeed, Latin America now accounts for nearly half of the ICSID’s caseload.

Argentina is, by far, the leading cause of the regional surge in investment disputes, accounting for roughly 25% of all ICSID cases, 50% of those originating in Latin America, and twice as many as any other country. Indeed, since 1996, Chile has been a party in only three cases, and Peru in fewer than 10.

Of course, it would be best if the dispute between Repsol and Argentina could be resolved by negotiation. But if precedent means anything – and it generally does – there is not much hope that the parties will resolve this case by direct agreement. So, once again, Argentina will stand out among that small group of countries that are reluctant to comply with legal custom, if not with legal findings.

Argentine leaders’ addiction to demagogic and populist behavior is one reason for the country’s exceptionalism in this regard. So, once again, that behavior must be censured, not only by other leaders, but also in legal proceedings. Only rigorous adherence to law can discourage the populist temptation to seek shortcuts to solving problems.

Investments and loans are two sides of the same coin; they flow only to where they are offered the security of a legal framework that prevents political leaders from exercising power arbitrarily. Because autarky is not an option – not even for North Korea – capricious decisions such as the renationalization of YPF cause immeasurably greater harm to the states that adopt them. It is no coincidence that the world’s most prosperous countries are those with the strongest institutions, the most predictable business climate, and a reputation for upholding the rule of law.

Ana Palacio is a former Spanish foreign minister, former senior vice president and general counsel of the World Bank, and current member of the Atlantic Council’s Board of Directors. This essay originally appeared on Project Syndicate.

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