Obama pressures Argentina to pay millions of dollars to foreign investors

October 31, 2011

By Aldo Orellana López, for the Network for Justice in Global Investment

On December 19, 2001, thousands of families took to the streets and plazas of Buenos Aires with their pots in hand. They were protesting against the economic policy of Fernando de la Rua’s government and his predecessor Carlos Menem, which over the previous decade had left millions of Argentines in poverty. This demonstration, popularly known as ‘el cacerolazo,’ formed part of the popular uprising that in December of 2001 forced La Rua from office.

After the break out of the crisis, the government took steps to stabilize the economy. Many of those measures angered foreign corporations that later sued the country for millions of dollars in international tribunals. Although many of those lawsuits have already had rulings in favor of these corporations, Argentina has not complied with those decisions. Now the Obama administration, despite its statements against excessive rights for investors in free trade agreements, is pressuring the country to comply with those rulings and pay investors.

The Explosion of the Crisis: Protests and Repression

At the end of the 1990s, Argentina entered into a deep economic recession. The country’s unemployment rate and debt levels reached unsustainable levels and the nation’s economy collapsed.

The government action that contributed to reviving the protests was a measure that put limits on the amount of money that savers could withdraw from their accounts.  The government’s objective was to keep resources in a financial system that had already experienced a massive capital flight of approximately 20 billion dollars.

On December 19th, there was looting in several supermarkets and stores in Buenos Aires. The people were frantic and shouted “away with them all,” referring to the politicians directing national policy. Given this situation, the government decreed a state of siege and the police moved into the streets to suppress the demonstrators. By the night of December 20th, more than 30 people had been killed around the country and President Rua had no choice but to resign.

The 1990s

At the beginning of the 1990s the Menem administration, following in the footsteps established by the Washington Consensus, implemented a program that Jorge Carpio of the Argentine organization FOCO[i] described as “a savage fiscal adjustment and socially regressive [program] to the benefit of more concentrated capital. All this from the privatization and indiscriminant opening of the economy.” This program was established by the ‘Convertibility Law’ that maintained parity between the dollar and Argentine peso and resulted in bankruptcy of dozens of companies and businesses that could not compete with cheap imports from other countries.

According to Julio Gambina of the organization ATTAC Argentina[ii], “all of the institutions were modified to favor the entrance of capital and the legal security of foreign investors.”

By recommendation of the IMF, the oil and gas industry, telecommunications, railroads, airlines, as well as basic services such as electric energy and water were all privatized. In this way, the economy was opened up to foreign investment and strengthened the arrival of transnational capital with the rules of the game written in the more than fifty Bilateral Investment Treaties (BITs) that the country signed with European countries, the United States, Canada, and others exporting Capital[iii].

Consequently, the companies of these countries had arrived in Argentina protected by the many guarantees implicit in BITs[iv] and the signing of the International Centre for Settlement of Investment Disputes (ICSID) convention in 1991. This World Bank tribunal is where companies can sue states directly for compensation worth millions of dollars without first having to seek recourse through local authorities.  Jorge Carpio of FOCO and other analysts have denounced ICSID as “the most advanced initiative to privatize justice pushed by the biggest international corporations.”

Economic Stabilization Measures and ICSID Lawsuits

After having survived the December 2001 crisis, the new government of Eduardo Duhalde declared an “economic emergency” (Law 25.561 passed by Congress) thereby eliminating the fixing of rates for the provision of public services in dollars and its updating of the US index of consumer prices (pesification of rates). It also authorized the executive to adopt the necessary measures to confront the economic collapse and avoid greater harm to the population.

One of these measures was the devaluation of the Argentine peso, which reduced imports and favored exports thereby stimulating domestic production.

This measure angered foreign companies due to the fact that by March 2002, the value of the dollar as determined by the market was 3 Argentine pesos. Considering the situation, companies started to demand an increase rates that were previously dollarized. Their argument was that fees charged in pesos should maintain their value in relation to the dollar. The government refused and Argentina subsequently became the most sued country in ICSID for this reason.

Luciana Ghiotto of ATTAC, told us that “the foreign companies saw their investments were directly affected because if there wasn’t an increase in fees to balance this devaluation, it meant that they were losing 2/3 of their profit…the companies had 2/3 less money in their head offices. That’s why after that moment, Argentina had the largest quantity of cases in ICSID where the companies argued that the devaluation had violated contract terms and therefore Argentina had assumed those [contract] obligations.”

Julio Gambina believes similarly that, “…the privatized companies in the public services [sector] saw themselves as the injured party, since their net revenue [in pesos] could buy less foreign currency to transfer to their head offices. The privatized public services that made huge sums in the time of convertibility and from the privatizations of the previous decade [the ‘90s] were registering less profits and that’s why they lodged a complaint against the devaluation policy before ICSID.”

According the the ICSID’s website, Argentina has a total of 56 Bilateral Investment Treaties, almost all of them signed during the Carlos Menem administration. To date, the country has 25 lawsuits pending in ICSID, and still has more lawsuits than any other in the tribunal, which between concluded and pending cases comes to 49. The majority of these lawsuits come from the energy sector and public services.

Although ICSID has already ruled against the country, the Argentine government has still not complied with these decisions. Occasionally, it has requested the annulment of the verdict, presenting a series of arguments like the greater strength of the “economic emergency”framework that forced the government to take steps to ameliorate the economic crisis.

The US government: ICSID police

As an institution belonging to the World Bank, ICSID doesn’t have coercive power, nor police to enforce its judgments.  Nevertheless, other forces exist that can oblige countries to comply. In this case, these forces come in the form of the United States government, which for a number of months has been declaring its concern with the rebellious attitude of Argentina.

The Obama administration has already taken actions, for example voting against the country for credits applied for in the Inter-American Development Bank and the World Bank. Some local Argentine newspapers like Clarín have noted that the United States already voted in the IDB against a credit of $230 million aimed to finance agricultural projects. This source also confirmed that the United States planned to vote against other credits in the World Bank where, as in the IDB, it has a major percentage of votes although lacks veto power. Moreover, it has announced that it will be lobbying for other countries to take the same attitude given the failure of Argentina to comply with these rulings.

One these is ICSID’s judgment in favor of the company Azurix Corp., which was part of the Enron group.  This company was responsible for managing the provision of water and sewer services in the province of Buenos Aires for 30 years, but withdrew in 2002, arguing that authorities had violated the terms of its BIT with the United States when it didn’t readjust the water rates after the devaluation of the currency.

In 2006, ICSID ordered the Argentine government to pay $165 million, a payment that until now was not made due to the government’s questioning of this, and many other decisions of the tribunal.

To date, the administration of Cristina Fernandez has not made a public statement about these threats. Julio Gambia de ATTAC, says that “there does not appear to be substantive reactions” on the part of the government.

The Argentines lose regardless

On one hand, companies demanded that post-crisis administrations raise fees on public services that if implemented, would have brought many problems to Argentines who had already suffered through many economic and social difficulties.

On the other hand, the money to pay ICSID’s million dollar verdicts would come from these same citizens along with the thousands of dollars in lawyer fees that Argentina had hired to defend itself in these tribunals.

Although for now US sanctions are still just threats, Argentina is lacking options.  The only discernable paths would be to pay investors or receive international sanctions. These can come in the form of not being able to access credit from multi-lateral lending institutions that many times are managing the completion of projects and social programs. The US government can also impose bilateral sanctions of a commercial or cooperative type.

What can they do?

Luciana Ghiotto suggests that another path exists that would include a renegotiation of the rules of the game. Luciana states that “what we propose is that the government renegotiate all of its Bilateral Investment Treaties….and leave the ICSID convention.”

But much doubt still exists about the decisions the government can take in this respect and it seems that refusing to recognize ICSID or renegotiate their BITs are not in their planes for now. As Julio Gambia says, “the Argentine government doesn’t think to condemn BITs, since they would receive punishments immediately….like to leave the G20 for example.”

With this outlook, the governments of the Union of South American Nations (UNASUR) actually has a working group of controversy solutions in its interior that can serve as an alternative to ICSID, an organism which Bolivia and Ecuador have withdrawn from.

While that happens, consequences exist that Argentina is going to have to accept. That is, the cost that the international system of investment rules imposes on the most vulnerable Argentines and many other people around the world.


This article was translated by Shawn Arquinego