Disputes between investors and sovereign states are growing at a rapid rate; the pace and size of these awards is increasing. In 2020, almost 60 cases were registered under the ICSID Convention and additional facility rules – the highest number ever recorded and almost a 50% increase on 2019’s case load. While some argue this rise can be in part attributed to a new wave of claims brought about by the COVID-19 pandemic, it nonetheless demonstrates a notable trend in the overall increase in investor-state disputes. Bilateral Investment Treaty (BIT) claims still represent over 60% of all investor-state disputes, with an additional 15% of claims representing investment contracts between investor and state.
In addition, data from the International Court of Arbitration (ICC) reports that in 2019, 20% of new cases involved a state or state entity, which represents a 67% increase in the number of states and state-owned parties in ICC Arbitrations over the past five years, and sets a new all-time ICC record. With this growth has come an increased demand and need for specialist firms which are able to help investors with the one of the biggest hurdles they face when it comes to investor-state arbitration claims – the ability to make the state pay.
Indeed, investors also need sophisticated insight to establish with certainty exactly how indebted nation states are. Alongside investor-state disputes, the threat of sovereign bond defaults has also been on the rise since the pandemic hit, particularly in emerging and frontier markets. While Argentina suffered a record ninth default in May 2020, Zambia defaulted in November 2020 (in part due to its obligations to China), and countries like Angola, the Republic of Congo, Ghana, and Mauritania could very well be next. The fragility of many of these economies was exposed over the course of the pandemic but, more interestingly, reports from restructuring talks and creditor committees have shown that the perceived debt position of certain states was wildly inaccurate. For example, the Republic of Congo’s debt level was estimated by the IMF to be around USD 9.5 billion but on closer inspection it was revealed to be in excess of USD 12.5 billion.
A contrast must be made between two distinct groups of creditors. While historical examples of bondholders going after states are known to many in the sector, the investor-state enforcement landscape allows award holders to be more agile than bondholders or other sovereign debt holders. This is in part due to awards being globally enforceable, in addition to award holders not being tied down by creditor groups and having the added benefit of operating somewhat ‘under the radar’ in most cases. A clear example of this was seen with the fight for Venezuelan assets that has intensified in recent months. While bondholders have achieved little to recoup assets and initiate enforcement proceedings, there is one specific exception. American oil major ConocoPhillips – which secured an USD 8 billion award against Venezuela in 2019 – was given the green light in November 2020 by the World Bank to pursue Venezuelan assets outside of the US (and thus not protected by the US treasury ban), giving the company a major advantage over other creditors.
Another trend worth noting is the increasing size of awards rendered against states. Historically, investor-state awards got little attention from the big players in the sovereign debt space, largely because their value (and any returns) tended to be dwarfed by the bond-related opportunities. This is rapidly changing.
We have observed a significant increase in the quantum, and the emergence of the so-called “mega awards”. P&ID’s nearly USD 10 billion award against Nigeria, Tethyan Copper Company’s USD 6 billion award against Pakistan, and the USD 50 billion Yukos award against Russia, are probably the most well-known “mega awards” currently in play, but there are many more in the pipeline. These billion-dollar awards are too big to be ignored by traditional sovereign bond and distressed debt investors. On the one hand they need to be considered by bondholders specifically if default and restructuring talks are anticipated, as award holders are not bound by the same restrictions as bondholders. On the other hand, these “mega” – and even “ultra-mega” – awards represent an exciting new asset class. We are seeing more and more of our clients move from bonds to awards. Although the secondary market is illiquid, in its infancy, and risky (if you do not know what you are doing), it continues to attract a variety of investors and we anticipate this market will continue to grow.
Recovery is always challenging – whether our client is trying to collect on an award rendered following a commercial dispute or is pursuing an aggressive campaign to seize sovereign assets following a sovereign debt default (as seen with the highly publicised Elliott v. Argentina).
Attaching assets and forcing a sovereign to pay up is no easy task. It is paramount from the get-go to establish a clear and holistic strategy, drawing on the expertise of asset tracing and recovery specialists, jurisdiction-specific lawyers, political risk experts and strategic communications firms – to name but a few. Engaging professionals at an early stage to conduct a thorough assessment of a state’s commercial profile (i.e. the mechanisms through which they operate internationally or the political sensitivity of any cross-border trade) is just as important as taking steps towards enforcement and recognition down the line. While engaging lawyers across multiple jurisdictions and initiating recognition proceedings at the start can be tempting, we advise our clients to take the time from day one to fully profile the state.
It is paramount to have a clear understanding of any debtor’s asset position early on so as to be able to answer essential questions on jurisdiction, available enforcement tactics, plausibility of using interim measures, potential leverage points and even assist with obtaining third-party funding. That said, a sovereign debtor inherently has a different asset profile then a corporate debtor or individual debtor and therefore warrants the need for a tailored expert approach from a firm that understands these key differences and the additional challenges they bring.
What are the key challenges? Determining which assets (and in which jurisdiction) should be pursued requires detailed research and subsequent careful legal analysis. Some assets may be protected under sovereign/state immunity provisions, some may be held in structures that do not directly relate to the respondent state, or some may even be vulnerable to prior claims and/or subject to other protective statutes.
Given the inherit challenges one faces when enforcing against a state, it is critical to identify “pressure points” that can help with negotiation and settlement. Some states outright refuse to recognise or pay awards, as was seen recently with The Republic of Djibouti’s response to the several awards rendered in favour of the Emirati logistics business DP World, which was stripped of its rights to operate the Doraleh Container Terminal in 2018 (the presidency publicly stated this matter was “settled” and refused to acknowledge rulings on several occasions). On the other hand, Tanzania recently decided to pay up on a USD 22 million UNCITRAL award after its creditors successfully identified and attempted to seize three aircrafts purchased by the country in Canada. This showed that not only were these aircraft recognised as being effectively owned by the state, regardless of which entity purchased them, the relevant courts did not recognize Tanzania’s
argument for sovereign immunity, ruling that by agreeing to the UNCITRAL rules in the relevant Bilateral Investment Treaty, Tanzania also agreed to the possibility of interim or interlocutory awards being made against it. Clearly the “embarrassment” factor could have played a role here for Tanzania, but in general, identifying and targeting particular assets or even trading relationships can be vital tactical moves when working on sovereign recovery. In addition, this example showcased Canada’s status as a “favourable” jurisdiction, which ties into the importance of the suitability of jurisdiction as a high-value asset is only valuable to the creditor when situated in a favourable jurisdiction with good recovery prospects.
Another good example of an aggressive tactical manoeuvre was the seizure by a creditor of a Presidential jet belonging to the Republic of Congo. The plane, which had attempted to fly covertly for months (if not years), was seen landing in the south of France for routine maintenance work. It is believed the plane’s transponder was mistakenly activated, allowing the creditor to sweep in and order the USD 30 million jet to be grounded indefinitely.
As a common first line of defence, the Republic of Congo attempted to argue sovereign immunity, claiming the jet was used for diplomatic purposes. However, flying without passengers to the south of France for maintenance work could not possibly fall under “diplomatic use” according to French courts, which repeatedly dismissed Congo’s arguments. A rather unfortunate turn of events for Congo, but a great example of how prior identification and tracking of the asset enabled a lucrative recovery. The jet itself is reported to be up for auction soon.
While conventional assets such as aircraft, real estate and vessels can be the primary targets of an investigation, alternative asset classes also need to be carefully considered. These can include commercial properties (non-diplomatic real estate), foreign reserves, shares and direct investments abroad (such as overseas subsidiaries of SOEs), receivables owed by third parties, shipments/goods in transit to or from SOEs, state funds that had been embezzled by previous regimes or former corrupt government officials, and sovereign debt repayments, to name a few.
The emerging trend is clear, with more investor-state disputes set to emerge in the near future and well capitalised investors turning to the sovereign award market, creditors will need to be agile and prepared ahead of time to maximise their chances of successful recovery. While a state is indeed a hard target, with the right team and strategy there are numerous tactics investors can use to apply pressure and ensure a successful outcome.
GPW Sovereign Debt Advisors has significant experience tracing assets and working on sovereign recovery matters. Whether through a robust enforcement strategy or finding points of leverage, we have successfully helped our clients recover sovereign debt in some of the most challenging jurisdictions around the world.