STATES AS FOREIGN INVESTORS
CO-AUTHORS:
SVITLANA PETRUSHKO
PETAR PIVAC
INTRODUCTION
 Colonial era - politics and economic interests were closely aligned in
the development of international investment law
 Key players in imperial politics – european trading companies
o they invested big efforts in establishing legal standards to protect their international activities
o Dutch East India Company (a Dutch trading company founded in 1602 to protect Dutch trading
interests in the Indian Ocean) hired Hugo Grotius (famous Dutch jurist) as a legal advisor to help
them legitimize activities of the Company
INTRODUCTION
 Legal doctrines on international commerce, territory and property
were partly developed by sovereign or quasisovereign investors from
the West
 Today - Western countries are increasingly hosting sovereign investors
from the developing world (who enjoy protections from treaties initially
meant to serve Western interests in Africa, Latin America and Asia)
 Investment treaty arbitration is supposed to ‘depoliticize’ investment
disputes by reducing the role of home governments / home
governments are making the investments?
THE GLOBALIZATION OF STATE
CAPITALISM
 States remain key sources of foreign investment:
◦ State-owned enterprises (SOEs),
◦ Sovereign wealth funds (SWFs),
◦ State-owned financial institutions (SOFIs),
◦ State-influenced enterprises (SIEs)
THE GLOBALIZATION OF STATE
CAPITALISM
 SOEs – most important; owning or controlling more than 15,000
foreign affiliates and controlling more than $2 trillion worth of foreign
assets around the world
 SWFs – more than $100 billion of foreign investment stock (mostly in
developed countries)
 SOFIs – account for a quarter of total assets in global banking systems
 SIEs – government involvement through direct influence on
investment activities
THE GLOBALIZATION OF STATE
CAPITALISM
 Examples of SIEs:
◦ Russian State guiding activities of conglomerates owned by
Russian oligarchs,
◦ In Iran, the Revolutionary Guards influencing on a wide range
of companies,
◦ in Pakistan, the army is deeply embedded in the country’s
major companies and banks
THE GLOBALIZATION OF STATE
CAPITALISM
 Questions – the motives of sovereign investors and their funding
 Politically highly controversial topics:
◦ Dubai Ports debacle – American politicians were concerned
about a State-owned Arab company seeking to acquire six
major US seaports
◦ US security agencies and the House Intelligence Committee
have been suspicious that telecom giant Huawei may be
engaging in cyber-espionage on behalf of the Chinese
government
THE GLOBALIZATION OF STATE
CAPITALISM
 Western governments do not want to keep all sovereign investors out:
◦ important source of financing
◦ European governments have large SOEs with significant
assets abroad
 Defensive and offensive State interests need to be balanced –
regulation through international codes of conduct, domestic reforms
and reforms of investment treaties
SOVEREIGN INVESTORS AS
PRIVATE INVESTORS
 OECD survey of more than 1800 treaties – only 16 percent explicitly
mentioned sovereign investors in otherwise broad investor definitions
 Significant variations across countries:
◦ United States, Australia, Canada, Japan and the United
Arab Emirates have routinely mentioned SOEs in their
investor definitions
◦ most European countries do not mention sovereign
investors in their treaties (also, China very rarely)
 Share of investment treaties that explicitly cover sovereign investors, by
country
SOVEREIGN INVESTORS AS
PRIVATE INVESTORS
 Arbitrators have repeatedly decided that the investment treaty
regime covers sovereign investors (even without explicit text on them)
 They often operate in highly capital-intensive industries with large
sunk costs (natural resources, infrastructure industries and public
utilities) - more likely to experience investment disputes with host
States
SOVEREIGN INVESTORS AS
PRIVATE INVESTORS
 Two of the most controversial investment treaty claims – Vatenfall
(Swedish power company, wholly owned by the Swedish state) v.
Germany
 Energy Charter Treaty did not explicitly mention sovereign investors
(but did not excluded them either)
 Vattenfall took both disputes to ICSID – an organization for the
resolution of disputes arising from private foreign investments, but
which cover sovereign investors if their function and nature can be
considered commercial
SOVEREIGN INVESTORS AS
PRIVATE INVESTORS
 Investors with closer relationship to the government than Vattenfall
have also filed ICSID claims
 Large number of sovereign investors are likely to have recourse to
treaty-based arbitration when running into disputes with host States
 Arbitrators are given considerable power in determining what host
governments can, and cannot do, when seeking to regulate sovereign
investment
LEAVE IT TO THE
ARBITRATORS?
 Assistance with ‘de-politicizing’ investment disputes
 The state of investor’s nationality is relieved of the
pressure that relations with the host state wouldn’t be
disturbed because of controversy between its national
(investor) and the host state
THE PARADIGM IN INVESTORSTATE
DISPUTES
first party
as plaintiff
second party
as respondent
NO THIRD PARTIES
THE EXTENT TO WHICH THIS
JUSTIFICATION FOR INVESTMENT
ARBITRATION IS ACCURATE IS UNCLEAR
 Conceptually
is it meaningful to distinguish politics from law in
this way?
 Empirically
is there actual evidence for the proposition?
TRUE COMPLAINANT AND
TRUE DEFENDANT
 When it comes to sovereign investors
operating in low transparency
environments it can be more than difficult
to identify who the true complainant
actually is
HOW ARBITRATOR SHOULD
ANSWER THESE QUESTIONS?
 The investment chapter in TPP, for instance, follows
standard US practice by allowing sovereign investors to file
claims against host States but includes no clarification on
how arbitrators should draw the public–private distinction
in practice
 The investment chapter leaves it up to determine the
core question of whether sovereign investors should
be considered private or public for the purpose of
investment disputes
RISKY POLITICAL CHOICE
 “An increasing perception that courts and
tribunals are not at all well equipped for dealing
with certain kinds of international disputes”
 A single incident of an adventurist arbitrator
going beyond the proper scope of his jurisdiction
in a sensitive case may be sufficient to generate a
backlash
OPTIONS
 Sovereign entities should only be allowed to
adjudicate investment treaty claims through
diplomatic espousal— and thus outside of ICSID
 Sovereign investors would have access to
investor–State arbitration if neither home or host
State vetoes the claim in which case disputes
would have to be settled in domestic courts or
between the treaty parties themselves
 Substantive treaty protection
SUBSTANTIVE TREATY
PROTECTIONS
 Security
• disclosure requirements for
sovereign investors
 Corporate governance
• self-judging ‘safetyvalve’
provisions
• exceptionally
sensitive cases
• anxieties about non-commercial
motives
WHAT IF…
 If lawmakers are not clearer in their treaty
language, national laws and regulations, targeting
sovereign investors could come under serious
scrutiny by investment arbitral tribunals for being
arbitrary and/or discriminatory
 Should investment tribunals be allowed to
question these often-sensitive political decisions?
WHAT CAN MAKE TREATY
LANGUAGE MORE CLEAR?
 References to the OECD Guidelines for Multinational
Corporations, where section III refers to the obligation of all
companies to disclose information on matters such as
ownership and voting rights, intra-group relations,
governance policies and enterprise objectives
 Explicitly target sovereign investors by making reference
to the OECD’s Guidelines for Corporate Governance of SOEs
 References to the Santiago Principles on the structure and
management of SWFs
WHAT TO DO ABOUT THE
THOUSANDS OF EXISTING
TREATIES IN PLACE?
 Re-negotiation is often costly, so past treaties would probably have to be
addressed with binding interpretative statements
 This could be done
• Jointly
among two or more treaty
partners
(NAFTA)
• Plurilaterally
United Nations Conference on Trade
and Development or United Nations
Commission on International Trade
Law
QUESTION OF TRUST
 Policy-makers and other stakeholders in the
investment regime would be well advised to
query whether arbitrators should be given such
considerable leeway in resolving what could be
highly politically charged disputes surrounding
sovereign investment