China and Venezuela enter into new Bilateral Investment Treaty

On the 13th of November, 2024, the Bolivarian Republic of Venezuela ("Venezuela”) published the Bilateral Investment Treaty (“BIT”) executed with the People’s Republic of China (“China”) in its official Gazette. This treaty marks a significant step in Venezuela's recent trend of executing BITs, particularly following its withdrawal from the ICSID Convention in 2012. Until 2023, Venezuela had refrained from signing any BITs, but it has since executed agreements with Colombia and Turkey in 2023, signaling a renewed interest in attracting foreign investment.

The BIT is particularly noteworthy as it underscores the “all-weather strategic partnership” between the two nations, which was reaffirmed in September 2023, when Nicolás Maduro made his third visit to China. This partnership is not merely diplomatic; it reflects a mutual commitment to economic collaboration. During the visit, both countries welcomed the signing of Memorandums of Understanding on further strengthening exchanges and cooperation in economic development, and promotion of industrial investment.

Analysts estimate that China has financed more than $60 billion worth of projects in Venezuela. The parties signed the BIT in May 2024 and the following month, China expressed its intention to deepen cooperation with Venezuela to support the South American nation’s industrialization and economic diversification efforts.  

Having taken the necessary steps to ratify the BIT, this partnership is crucial for Venezuela, which has faced significant financial challenges recently, including hyperinflation and a decline in oil revenues. China has not yet ratified the treaty.

Key Features of the China-Venezuela BIT

Broad Definition of Investment: One of the most significant aspects of this BIT is its broad definition of what constitutes an investment. Unlike the BITs signed with Colombia and Turkey, this treaty does not require an investment to contribute to the economic development of the host state to qualify for protection.

Regular Investment Protection Standards: The BIT establishes protection standards for investors, including Fair and Equal Treatment, Full Security and Protection, Most Favored Nation, and National Treatment.  

Right to Expropriate: The treaty explicitly acknowledges the state's right to expropriate investments for reasons of necessity or public interest upon payment of compensation at market value, calculated immediately before the expropriating measures are implemented. Further, the BIT clarifies that non-discriminatory measures to protect public welfare–such as health, security, and environmental regulations–do not constitute indirect expropriation.

Dispute Resolution Mechanisms: The BIT outlines several avenues for dispute resolution. Investors who encounter disputes with the host state can choose to submit their cases to the competent domestic courts, engage in ad hoc arbitration under UNCITRAL Rules, or utilize any other agreed-upon arbitral institution and set of rules. Due to Venezuela's prior denunciation of the ICSID Convention, disputes cannot be referred to ICSID arbitration. The parties can agree on the seat of the arbitration, and, failing such agreement, the tribunal can determine it provided that it is within the territory of a Contracting State to the New York Convention. Notably, the treaty mandates a six-month cooling-off period before parties can escalate disputes to domestic courts or arbitration. In this connection, an investor seeking to submit a dispute to arbitration proceedings against a Contracting Party must waive its right to initiate or continue any other proceeding related to the measure that allegedly constitutes a breach of the treaty before the courts of the Contracting Party or in any other type of dispute resolution. The treaty further states that once an investor has submitted the dispute to one of the forums provided under the treaty, that forum selection is final.

Origin of Funds Requirements: To qualify as a protected investment, the treaty expressly states that assets or funds must not originate from the host State. Dual nationals are expressly excluded from benefiting from the treaty’s protections.

Environmental and Labor Measures: The BIT also reflects the parties' right to regulate investment to achieve legitimate public welfare objectives, such as protecting public health, safety, the environment, and labor rights. Further, the treaty also prohibits either party from relaxing labor or environmental regulations to attract investments.

Comment

The BIT represents a significant development in the landscape of foreign investment in Venezuela, especially in the current geopolitical context following Venezuela’s 2023 elections. China is among the countries that recognized Nicolas Maduro’s victory on July 29, 2024. In contrast, the US, EU and several Latin American countries have rejected the recent Venezuelan Supreme Court’s decision confirming the election results.  

By establishing a framework that balances investor protections with the state’s regulatory rights, this treaty could be crucial in attracting foreign capital from China once both parties ratify the treaty, and it enters into force. The BIT aims to enhance economic ties and reflects a broader geopolitical strategy, positioning Venezuela as a critical partner in China’s Belt and Road Initiative.