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Venezuela nears World Bank arbitration court exit

Venezuela to exit World Bank’s international court in latest blow to investors

Venezuela will exit the World Bank’s international arbitration court next week in the latest blow to international investors in the country.

The decision to leave the court – known as the International Centre for the Settlement of Investment Disputes (ICSID) – was announced in January, when president Hugo Chavez denounced the court as unfair and biased against Venezuela. A six-month notice period means that Venezuela will officially leave the court on 25 July.

ICSID had long been a favourite target for Chavez, who had threatened to leave the Washington-based court since at least 2007. He finally followed through on the threat this year, just weeks after US supermajor ExxonMobil was awarded $907 million in a separate international arbitration forum – the International Chamber of Commerce (ICC) – for its nationalised stake in the Cerro Negro heavy oil project.

The judgment was seen as a victory for Venezuela and state-run oil company PdV after ExxonMobil had reportedly claimed damages of as much as $12 billion in the case.

But with international arbitration claims mounting against Venezuela, the government decided to pull out of ICSID. Venezuela has the second-most pending cases at ICSID, behind Argentina, with 21 cases before the court, mostly resulting from nationalisations.

The largest of those cases were filed by oil companies following the wave of industry nationalisations in 2006. ExxonMobil has a claim before the court over the Cerro Negro project, which some have said could result in a larger award than the ICC ruling. And ConocoPhillips is reportedly seeking more than $20bn for its nationalised heavy-oil projects.

Crucially, Venezuela’s decision to leave ICSID will not affect those pending cases, and new suits filed before 25 July will not be affected, but the decision represents a further challenge for companies challenging the country at the ICSID court and will make it more difficult to resolve future conflicts.

“Beyond 25 July, companies will likely face additional jurisdictional challenges in arbitrations commenced against Venezuela through ICSID, the argument being that ICSID is not the proper forum to resolve the dispute. It would be wise to consider alternative processes,” said Ben Holland, a partner in the energy disputes group at CMS Cameron McKenna in London.

“It is significant for any company considering investing in Venezuela, as the withdrawal from ICSID could make arbitration of any dispute more complicated and the outcomes less certain,” he said.

Even though many cases will still go ahead, enforcing any decision may prove challenging. “We won’t recognize any decisions from the ICSID,” Chavez said in January.

The ICSID court provides mechanisms to collect damages in third-party countries, but Venezuela has taken steps that many have said are aimed at protecting assets from international arbitration rulings.

Days after Venezuela announced it was leaving ICSID, for instance, the country’s central bank said that it had finished moving around 160 tonnes of gold reserves from European and US banks back into Venezuela.

The country has also reportedly considered moving cash reserves from European and US banks to banks in China and Russia, two major investors in Venezuela that the government might think would be less willing to comply with an ICSID claim.

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