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Same-Day Analysis

Bolivia Exits International Arbitration Body, Shakes Investor Confidence

Published: 09 May 2007
Bolivia has ended its membership of the International Centre for Settlement of Investment Disputes (ICSID), an arm of the World Bank, while its leftist Evo Morales government has announced plans to renegotiate investment protection treaties in place with 24 countries, including the United States.

Global Insight Perspective

 

Significance

The future resolution of two complaints pending against the Bolivian state is unlikely following its refusal to recognise the World Bank body.

Implications

Investor confidence was hit harder by the Bolivian government’s plan to amend terms of investment protection treaties with two dozen nations. President Morales’s leftist project, combined with policy inconsistency, has made the crisis-prone Andean country into an even less attractive investment destination.

Outlook

The removal or amendment of internationally accepted regulatory frameworks adds to juridical uncertainty in Bolivia, which is classified as a high-risk investment destination by Global Insight.

Bolivia’s Emboldened President

Bolivian President Morales appears to be following the example of leftist regional allies, Venezuela’s Hugo Chávez and Ecuador’s Rafael Correa, in radicalising his nationalistic programme for government. Bolivia’s Movement Towards Socialism (MAS) leader has withdrawn his country from a highly recognised international organisation less than a week after his Venezuelan counterpart announced plans to bid farewell to the International Monetary Fund and the World Bank (see Venezuela: 3 May 2007: U.S. Criticisms Flare over Venezuela's Intent to Exit IMF and WB). Concurrently, Ecuador’s radical head of state has ousted the World Bank representative from the Andean country. Bolivia’s decision to exit the ICSID is in line with a sub-regional policy announced at the last meeting of the Bolivarian Alternative for the Americas (ALBA) (see Latin America: 1 May 2007: Possible Withdrawal from International Arbitration Mechanism Concerns Energy Investors in Latin America).

Other members of the ALBA, which consists of Cuba, Venezuela, Bolivia, and Nicaragua, can be expected to follow suit, with the possible exception of the Central American partner. Investors in the energy industry have already expressed their concern, but the move will create aftershocks across the private sector. Bolivia’s departure from the ICSID brings fresh uncertainty to ongoing disputes being considered by the international arbitrator. Telecom Italia recently fulfilled its threat to appeal to the ICSID over Bolivia’s decision to seize a 47% stake from the consortium in a step towards renationalising the telecommunications company (see Bolivia: 24 April 2007: Leftist Bolivian Government Retakes Telecoms Shares). A separate appeal launched in 2005 by agrochemical manufacturer Quiborax de Chile against Bolivia is still in the process of arbitration. Bolivia’s planned renegotiation of more than a score of investment protection treaties occurs just hours after Ecuador confirmed that it would not be renewing its bilateral investment treaty with the United States as it stands (see Ecuador: 8 May 2007: Ecuador’s Relations with U.S. Take Downturn). Meanwhile, Bolivian relations with Brazil are strained after the former issued a decree nationalising two refineries owned by the latter’s state-run oil company Petrobras. Brazil has issued a final offer for the sale of its 100% stake in the operations to the Bolivian state.

Outlook and Implications

There is a strong sense of radicalisation erupting within Andean governments belonging to the ALBA, but Nicaragua’s left-leaning Daniel Ortega administration has yet to paint itself red, currently preferring to construct close ties both with its socialist allies and the United States.

Bolivia and its Andean allies suffer from fragile regulatory frameworks. The existence of international and bilateral regimes previously helped to strengthen imperfect national legal systems and subsequently reduce risks for investors. Such supplementary juridical security is now being unravelled. Bolivia is the poorest nation in South America, arguably with the greatest need of foreign investment inflows. The full list of affected nations has yet to be revealed, but local reports suggest that they include the Netherlands. Plans for an alternative arbitration service provided by the ALBA will not reassure investors given its radical focus and propensity towards nationalisation.

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