Embassy, May 28th, 2008
COLUMN

Chavez Starts New Trend by Pulling Plug on Agreement

By Luke Eric Peterson

If it's postmarked from Holland, Hugo Chavez is returning it to sender.

Stung by a series of billion-dollar lawsuits launched by foreign energy companies, the Venezuelan president has recently notified the Dutch government that he plans to terminate a long-standing economic treaty.

The treaty has become a diplomatic sore-spot between the two nations because it sets the bar incredibly low for foreign business corporations looking to acquire a Dutch "passport."

Multinationals headquartered in the U.S., China, Japan—or anywhere else—need only open a postal box in the Netherlands in order to be able to fly the Dutch flag.

Once that step has been accomplished, these newly deputized Dutchmen can take advantage of a generous series of economic treaties concluded by the Dutch government with developing countries.

The treaties are designed to protect Dutch investments made abroad, and they oblige other nations to arbitrate any disputes that might arise.

When the Chavez government moved to nationalize lucrative oil fields held by U.S. energy giants Exxon Mobil and Conoco-Philips, the firms lacked any such protective treaties between the U.S. and Venezuela.

However, Exxon and Conoco surprised the Venezuelan government by adducing long-lost Dutch relatives in their respective corporate-family tree. Using these Dutch subsidiaries, the U.S. firms were entitled to sue Venezuela for losses arising out of the oilfield seizures.

Mind you, it wasn't as clever a move as it might seem.

These days, if you're looking to invest outside of your own country, any decent lawyer will tell you that you should structure your investments so that they are protected by international treaties.

If something goes wrong—be it a nationalization or a windfall tax on oil revenues—you can invoke the treaty in a bid for compensation.

One Alberta-based lawyer told me recently that a major Calgary energy firm employs the same tricks. Although Canada signed an investment protection treaty with Venezuela in the mid-90s, its terms are not deemed as generous as those of the Netherlands-Venezuela pact. So Canadian investments flowing to Venezuela simply get routed through Dutch intermediaries.

This is the way cross-border transactions take place in the 21st century. With no single global treaty or agreement providing for common rules governing business investments, there is simply a mish-mash of bilateral treaties. And investors and their lawyers work over time to ensure that cross-border business deals can shelter under the protective canopy of one or another of these pacts.

But, for governments, this shell-game can be infuriating.

At times, local businesspersons can even set up off-shore companies and then re-invest into their own countries—albeit as "foreigners" now protected by international treaties providing for far more generous legal rights than those owed to "local" businesspersons.

Not surprisingly, some governments are beginning to question the wisdom of all of this corporate maneuvering, especially when it is used by businesses to elude the jurisdiction of local courts.

At the end of April, the Venezuelan government wrote to the Dutch government to inform them that Venezuela would be terminating the 15-year-old treaty between the two countries.

The gesture won't derail those cases that are already under way, including those by Exxon and Conoco. But, in the future, it could ensure that genuinely Dutch investments made in Venezuela lack any sort of international safety net.

While the recent rebuke by Venezuela marks the first time that a fed-up government has gone so far as to terminate one of these investment protection treaties, it's not likely to be the last.

Earlier this year, Bolivia announced that it would withdraw from a World Bank facility which arbitrates many foreign investment disputes—the same venue where Venezuela's hearings with Exxon and Conoco are being held.

While Bolivia has not started tearing up treaties with individual trading partners, it may yet do so. Others may well follow suit.

What remains to be seen, however, is whether this will leave a growing legal vacuum. Or whether governments will use the specter of outright termination in order to re-negotiate undesirable economic pacts and close loopholes—including the ones which permit companies to take on multiple national identities for the sake of future legal convenience.

For the time being, the fate of the system of international agreements protecting foreign investments appears very much up in the air.

Luke Eric Peterson is the editor of Investment Arbitration Reporter, a news service tracking legal disputes related to foreign investment. (www.iareporter.com)

editor@embassymag.ca