President Hugo Chavez's Legacy: What Future for Investors in Venezuela?

Overnight the Venezuelan government has confirmed the death of President Hugo Chavez after a long battle with cancer.

President Chavez had been a constant force in Latin America since he came to power in 1999, and his impact on foreign investors in Venezuela has been significant, as has been his impact on numerous other countries in the region.

A polemic figure who advocated a revolutionary style of socialism, President Chavez undertook a diverse campaign of expropriation, which affected various industry sectors.  This led to numerous investor-State arbitration claims being commenced against Venezuela, and most recently led to the country denouncing the ICSID Convention in January 2012.  The ICSID Convention establishes a unique multilateral regime which facilitates the protection of foreign investors' international rights – not least by establishing a process for international arbitration.    

Beyond Venezuela's borders, President Chavez was a staunch supporter and pioneer of what have become known as "ALBA" states (notably Venezuela, Bolivia, Ecuador, Nicaragua and certain others).  Together, these countries have adopted a stance which seeks to establish a counter-balance to what is perceived to be the influence of capital exporting countries such as the United States and Europe.  That stance manifested itself most clearly in the denunciation of the ICSID Convention, which was first undertaken by Bolivia in 2007, and followed by Ecuador in 2009.

What next?

President Chavez's death comes as no surprise yet is still shocking, not least given the uncertainty it signifies not only for Venezuelans, but the many foreign investors who still have interests in the country.  Therefore, how should foreign investors react?  What risk remains in doing business in Venezuela?

(1)   The Chavez legacy

Although President Chavez's administration was at the helm of Venezuela's expropriation campaign and its withdrawal from ICSID, it was Venezuela as a sovereign state that withdrew from the ICSID Convention.  Therefore, Venezuela's position vis-a-vis ICSID will remain the same even upon a new Venezuelan President and/or ruling party assuming power. Thus, affirmative state action would be necessary for Venezuela to re-accede to ICSID. The same can also be said of Venezuela's termination of its bilateral investment treaty ("BIT") with the Netherlands.

(2)   Chavez pragmatism

The timing of Venezuela's decision to denounce the ICSID Convention demonstrated considerable political savvy.  Bolivia denounced the ICSID Convention in 2007 at a time when it was nothing more than political rhetoric.  Indeed, Bolivian government officials admitted at the time that it was not the most logical step to take, but instead the denunciation communicated Bolivia's developing approach to foreign investors. 

By contrast, Venezuela waited in the wings, resisting following suit until it had a more precise objective. Venezuela's denunciation of ICSID came in the immediate aftermath of a significant arbitral award rendered against it in a case involving Exxon Mobil Corporation.  Importantly, the denunciation prompted a number of claims to be brought by foreign investors who were nervous that any ICSID claim commenced after the expiry of the six month notice period would not be valid.

By way of background, the effect of Venezuela's denunciation on investment claims is not wholly clear. It is generally agreed that claims filed prior to 24 January 2012 (when the ICSID Convention was denounced) are unaffected by the denunciation. This is because it is said to be clear that mutual consent to arbitration pursuant to Article 72 of the ICSID Convention occurred prior to denunciation. However, the position in respect of claims which were filed on or between 24 January and 25 July 2012 ("interim period claims") or after 25 July 2012 ("post-25 July claims") is less certain. One view is that interim period claims may proceed because Venezuela’s denunciation did not take effect until 25 July 2012 and therefore mutual consent by virtue of the investor initiating proceedings occurred before denunciation. Another, more expansive, view is that post-25 July claims may also proceed as long as the underlying BIT stipulating ICSID arbitration remains effective, i.e. pursuant to the relevant BIT Venezuela has a legal obligation that survives any denunciation.

What Venezuela's denunciation of the ICSID Convention assured was that foreign investors with potential claims (and without recourse to another method of commencing an arbitral claim), had to show themselves or potentially lose their right to bring a claim.  This enabled President Chavez to do some "stock-taking" of arbitral claims.

Such pragmatism and political savvy was also apparent to those foreign investors that had potential or actual claims against Venezuela.  President Chavez's administration would often maintain communications with investors, and it was not uncommon for negotiations to continue during the life of an arbitration, or even after an award was rendered.  Describing this practice as "pragmatism" may be controversial to some, but whether such "pragmatism" continues is a critically important question for foreign investors with pending claims. 

For present purposes, it is imperative that foreign investors with on-going relationships in Venezuela assess quickly what options remain open to them in order to sustain such conversations with any new government.

(3)   Transitional Phase

If President Chavez's death were to prompt a change in the ruling party, how the country manages any transition would be dictated by how peacefully and democratically any power shift is conducted. 

Assuming a peaceful transition, there exist numerous "transitional justice" plans which have been carefully prepared by politicians and professionals alike, to anticipate a new era in Venezuelan leadership.  Some of these plans are designed to contemplate a reconciliation process (both in social, economic and juridical terms) over a period of a number of years.  Therefore, while significant change might follow a change in the ruling party, it is likely that any juridical changes will be carefully orchestrated. 

For example, foreign investors should not necessarily expect a quick change to the laws in force that affect them.  In addition, public institutions are notoriously slow to change and institution-building is time consuming and costly in every sense. 

Similarly, no foreign investor should expect a speedy return by Venezuela to ICSID.  Arbitral claims are unlikely to be settled promptly, and any new government will be concerned to shore up domestic support rather than accessing public funds to settle foreign claims.  Indeed, no new president, no matter what his/her political affiliation, could be blamed for taking time before signing the ICSID Convention again.

Therefore, even if a transitional phase is witnessed, foreign investors should be prepared to engage in a waiting game, before concrete results of any change in administration is apparent.

(4)   The waiting game: next steps

The waiting game in Venezuela largely requires a foreign investor to ensure that all possible protection available is still considered.  In practical terms this means:

(i)             Careful planning to ensure that BIT protection is secured – importantly, this must be done within the context of careful "legal and regulatory planning";

(ii)            Preparation for governmental interference of any kind.  This might come in the form of expropriation or less visible measures of a creeping kind;

(iii)           Preparation for arbitration if arbitral claims are pending.  Where a foreign investor is concerned about protecting its investment, or a pending arbitral claim, rigorous preparation and saving of evidence is required more than ever before;

(iv)          Political risk assessments and maintaining communications, where possible and appropriate, with government officials.  For many reasons, it will be imperative to maintain a close eye on political developments as the country is stress-tested in numerous ways;

(v)           Crisis management measures should be anticipated in the event the fall-out from President Chavez's death is more radical and less peaceful than hoped;

(vi)          Local advice – there is no substitute for local counsel on recent developments, and on the extent to which political statements in the coming days, weeks and months will have a juridical and economic impact on a foreign investor.

(5)   The International Dimension

Finally, the financial support President Chavez offered allies such as Bolivia will be closely watched – in order to see if this support continues. Any reduction in support for ALBA countries will have major implications for the region.

What will also be important to watch is whether Venezuela's institution-building continues.  Having recently made a move to become a member of Mercosur (the legality of which is in some doubt), Venezuela has to date supported the growth of UNASUR (a unique and ambitious multilateral project involving all South American countries).  Venezuela's relationship with the regional powers such as Brazil, Argentina and Colombia will also be critical to its future role in the region and on the broader international stage.