THE AUTHOR:
Guillermina Huber, Associate at LALIVE
Latin American Arbitration Practitioners EU (LATAP EU) is an association aimed at building a network of practitioners focused on international arbitration and with strong ties to, or experience in, Latin America and based in Europe. On September 2023, LATAP EU organized its first Annual Conference in Paris, France, hosted by Mayer Brown.
Introducing the Panel
On 6 September 2023, the Latin American Arbitration Practitioners EU (“LATAP EU”) organized its first Annual Conference in Paris, France, which was hosted by Mayer Brown. The conference program included discussions on five different topics related to the LATAM region with the fifth panel considering the challenges and opportunities for the international arbitration community within the current political trend towards left-wing governments in Latin American democracies (the “Pink Tide”).
The panel featured Karthik Balisagar (FTI Consulting), Manuel Casas (Twenty Essex), Timothy L. Foden (Boies Schiller Flexner), Alejandro I. García (Stewarts), Luciana Ricart (Curtis, Mallet-Prevost, Colt & Mosle LLP) as the panelists, while the discussion was moderated by Andreas Schregenberger (Gabriel Arbitration).
Mr. Schregenberger opened the discussion by introducing each of the speakers and providing a brief overview of the topic. The panel discussion was based on specific questions in a Q&A format, as reflected in the following overview.
Navigating Pink Tide
Mr. Balisagar first outlined how the Pink Tide phenomenon in LATAM results from economic and geopolitical cycles which ultimately influence foreign investment policy. Mr. Balisagar asserted that the global credit situation represents a challenge to both developed and developing economies. He recalled Ray Dalio’s ominous warning regarding threats to the existing world order: (i) the ballooning debt and deficit of the West; (ii) the rise of left and right populism and the increasing wealth gap; and (iii) the rise of superpowers in the global South. This has resulted in nationalistic tendencies and sharply reduced free trade as we have known in the last few decades.
Mr. Balisagar stated that certain LATAM countries have been recipients of significant foreign debt that has resulted in financial distress given the increasing trend in the interest rate cycle. This cyclical phenomenon of attracting foreign capital has not been exclusive to LATAM, as it has also been occurring in other resource-rich but capital-constrained countries (i.e., Africa and parts of Asia).
He also analysed how the economic and political cycles tend to be deeply intertwined, with the rise of prices and inflation driving political change (i.e., populist and leftist governments). For example, when commodity prices rise, there have been instances of governments tending to intervene by renegotiating contracts, increasing royalties, nationalizing (in full or partially) private companies and sometimes even expropriating assets. Conversely, when prices have declined, some States have sought to attract and incentivise foreign investment.
Building up on LATAM economic cycles, Mr. García referred to the constant swaying of political trends going from liberal to interventionist approaches in the region. By way of example, Mr. García mentioned the foreign investment protection consequences that stemmed from the “first” Pink Tide, which encompassed, amongst others, the presidencies of Evo Morales (Bolivia), Hugo Chavez (Venezuela) and Rafael Correa (Ecuador). Amongst these, Mr. García referred to the initiation of numerous international arbitrations, withdrawals from the ICSID Convention and the termination of several BITs.
However, according to Mr. García, at the time of the current “second” Pink Tide, the lines have been blurred between the traditional “left” and “right” approaches and the electorate, increasingly dissatisfied with the status quo has leaned towards candidates that do not purely fall into one or the other category (e.g., US, Brazil and potentially Argentina). Against this backdrop, foreign investment policy plays a key part. For instance, the government of Chilean President Gabriel Boric—an exponent of the “second” Pink Tide”—has shown circumspection in respect of ISDS during the TPP-11 negotiations by trying to exclude ISDS mechanisms through the signing of side letters.
In addition, Mr. García explained that some voices consider that the Chilean government is taking measures that may affect the inflow of foreign investment under pressure from its voter base, often based on environmental concerns. Such voices add that this is apparent, for example, from the current delays in the granting of mining permits.
He affirmed that while environmental concerns are legitimate, Latin American governments should reconcile them with the need for foreign investment especially when the region can greatly benefit from the current commodities boom, fuelled to a great extent by the transition to green economies.
Opposed to the Chilean experience, Ms. Ricart described how Argentina may be on the verge of turning away from its left-leaning governments with the potential presidency of the new libertarian candidate Javier Milei. Ms. Ricart explained how the unexpected outcome of the August 2023 primary election reflects a similar phenomenon to that in Chile, with the candidate Milei campaigning against the traditional political status quo (i.e., “an outsider” to the traditional party division). Milei’s government proposal includes measures that aim to attain a considerable downsizing and de-regulation of State bodies through public spending cuts and State companies’ privatizations. In terms of foreign investment policy, Milei champions its promotion particularly in the renewables, mining, and forestry sectors.
There is much uncertainty as to whether the outcome of the August preliminary elections will be replicated in the October presidential elections and, if so, whether Milei’s party will obtain a majority in Congress to fully implement its policy agenda. Nonetheless, Ms. Ricart agreed with Mr. Garcia that it remains to be seen whether the incoming administration will strike the right balance between encouraging foreign investment and the State’s right to regulate and protect its own natural resources.
In this same vein, Mr. Casas pointed out that there’s a general perception that left-wing governments are more committed to regulation, including environmental regulation. For example, in the extractive industry we may see an increase in environmental standards which may lead to permitting restrictions or even cancellations, while in large infrastructure projects we may see cases of permitting or impact assessment delays, or even more stringent environmental controls.
The implementation and enforcement of environmental protection measures however may present LATAM countries with some opportunities, according to Mr. Casas. First, these measures may effectively protect the environment (e.g., lower rates of Amazonian deforestation in Brazil). Second, these measures may create incentives and investment opportunities in the renewables sector (e.g., the solar industry and biofuels should be well-placed to reap such benefits). Third, these measures may welcome investments originating from ideologically aligned countries. This was one of the main takeaways from the “first” Pink Tide where, for example, President Chavez rejected foreign investment originating from western countries but welcomed investment from ideologically aligned States (e.g., Rosneft or CNPC). Illustratively, Mr. Casas remarked the Venezuelan government’s inaction before the current environmental disaster caused by ideologically friendly investors and local miners within the same geographical area where Crystallex used to operate.
Nonetheless, all these opportunities risk being overshadowed should the measures not be in compliance with the rule of law (i.e., “if properly done”). Mr. Casas emphasized that the main issue resides in the way the State applies its environmental protection measures rather than the measures themselves. The measures should thus be applied in a reasonable and non-arbitrary manner and avoid targeting specific investors from certain nationalities and/or from specific sectors. Sadly, this may not always be the case.
In light of the previous discussions, Mr. Foden delved into the weaponization of the “ESG” narrative against investors and, in particular, into the nebulous concept of “social licence”, which is found at the core of such narrative when it comes to extractive industries. He underscored the importance of distinguishing between the State’s bona fide environmental defences –those meritoriously deployed against investment treaty claims– from post hoc rationalizations, which utilize ESG-related concepts to excuse conduct that could otherwise lead to liability under an investment treaty. Admittedly, there are cases where investors failed to comply with necessary environmental thresholds, but these generally revolve around non-compliance with a specific regulatory requirement and, hence, States tend to resort to more tangible and legitimate defences rather than hazy ESG claims.
Mr. Foden warned that today we are witnessing the State’s strategic bastardization of the ESG narrative (and its “social licence” sub-component) as a way to “win over” the tribunal. The “social license” concept remains largely undefined and so States make use of it as a sword to defeat legitimate claims brought by investors (rather than a shield to protect themselves in the first place). Its blade is further sharpened as the defence reverses the burden of proof against the investor who will ultimately need to extensively prove compliance with the blurred standard.
In their last remarks, Mr. García and Mr. Casas both agreed the Pink Tide phenomenon may present States with opportunities should they take a more proactive stance, namely, by negotiating individual agreements or new BITs with tailored and/or narrower dispute resolution provisions (e.g., Ecuador) or international protections (e.g., the Colombia–Spain BIT including a strict FET provision).
Conclusion
In sum, the speakers agreed that Pink Tide governments are being put to the test: their success in attracting the much-needed foreign capital –while adequately addressing legitimate domestic concerns in compliance with the rule of law– will depend on their understanding of the central role they play at this time and their political will to capitalise on it.
ABOUT THE AUTHOR
Guillermina Huber is an Associate at LALIVE. Her main areas of practice are public international law and international arbitration, with particular focus in commercial and investment treaty arbitration across the energy, construction, banking and mining sectors in the Latin-American, African and Middle East regions. She has experience in international disputes conducted under the major arbitral institutional rules, including ICSID, ICC and UNCITRAL.
* This report has been approved by all the conference speakers.
