Analysis: Argentina faces world censure after seizure of energy company

ARGENTINE President Cristina Fernández de Kirchner’s decision to renationalise 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; renationalisation 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.

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Argentina stands to lose economically by its actions as well. Given Ms Fernández’s contempt for her country’s largest foreign investor, the renationalised YPF will find it difficult to find a new partner in international markets.

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 this than by switching on the legal machinery. Repsol’s announcement that it will seek international arbitration before the International Centre for Settlement of Investment Disputes (ICSID) is a useful first step.

The ICSID was established in 1965 as a part of the World Bank. 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 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 case load.

Argentina is, by far, the leading cause of the regional surge in investment disputes, accounting for roughly 25 per cent of all ICSID cases, 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 ten.

Of course, it would be best if the dispute between Repsol and Argentina could be resolved by negotiation. But if precedent means anything, 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.

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Argentine leaders’ addiction to demagogic and populist behaviour is one reason for the country’s exceptionalism in this regard. So, once again, that behaviour must be censured, not only by other leaders, but also in legal proceedings.

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, a former Spanish foreign minister and a former senior vice president of the World Bank, is a senior fellow and lecturer at Yale University.

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