Venezuela’s Currency Regulations May Violate Investment Treaty Protections

February 25, 2015

Earlier this month, Venezuela announced a new free-floating exchange rate mechanism, which had the effect of massively devaluing Venezuela’s bolivar currency.  According to a Reuters report, the new market-set exchange rate will have the effect of wiping out over $7 billion of Venezuelan monetary assets held by 10 multinational corporations alone.  The airline industry is said to have an additional $3.5 billion in the country which they are not able to repatriate.

Venezuela’s currency regulations over the past few years, including its latest adjustments to the exchange rate system, may give rise to investment treaty claims by foreign investors.  In particular, depending on the circumstances applicable to a particular investor, Venezuela’s actions may violate the right to: (1) the free transfer of capital into and out of Venezuela and; (2) the fair and equitable treatment due to protected foreign investors.  The violation of investment treaty rights is directly enforceable by foreign investors against Venezuela through international arbitration.

Venezuela’s new exchange rate system caused the value of foreign investments to plummet

For more than a decade, the Venezuelan government has imposed strict exchange rate controls in an effort to regulate access to its dwindling supply of US dollars.  Venezuela’s most recent foreign-exchange system consisted of three tiers: a fixed official rate of 6.3 bolivars to the dollar for "essential goods" such as food or medicine; a second rate of approximately 12 bolivars to the dollar depending on "auctions"; and a third exchange rate (which was as close to a free market as Venezuela would permit) of approximately 50 bolivars to the dollar.  Despite these regulation efforts, in recent weeks, the bolivar continued to trade on the black market for approximately 190 per dollar.

The creation of the new currency platform announced earlier this month, known as SIMADI, replaced the third exchange rate with a system that now allows individuals and companies to exchange bolivars for dollars at the price set by the market.  As a result, the exchange rate for US dollars jumped from approximately 50 bolivars to more than 170 bolivars–close to the rate at which the bolivar had been trading on Venezuela’s black market.

Virtually overnight, this new exchange rate consequently caused the assets of foreign investors to plummet by more than 70 percent.  To compound the issue, prior to implementing the new rate, the Venezuelan government had severely limited the number of currency exchange transactions that were permitted at the relevant official rate, effectively preventing many investors from doing anything but watch the value of their monetary assets plunge.

Venezuela’s currency regulations may violate investment treaty protections

Venezuela’s recent policies with respect to its currency may violate investment treaty protections owed to certain foreign investors, namely the right to freely transfer capital and the right to fair and equitable treatment.  A foreign investor is entitled to such protection when it is based in a jurisdiction that has an investment treaty with Venezuela.  There are over two dozen such treaties, including with Canada, France, Germany, Luxemburg, Spain, Switzerland, and the United Kingdom.

The right to free transfer of capital

Investment treaties commonly contain provisions protecting the free transfer of capital related to an investment, at the going exchange rate, into and out of the host state.[1]  These provisions are designed to prohibit "currency control restrictions or other measures taken by the host State which effectively imprison the investors’ funds, typically in the host State of the investment."[2]

International arbitration tribunals have upheld the sanctity of these provisions, stating that "the guarantee that a foreign investor shall be able to remit from the investment country the income produced . . . and the value of the investment made . . . is fundamental to the freedom to make foreign investment."[3] 

To the extent that Venezuela restricted foreign investors from repatriating their capital at the prevailing legal exchange rate, it may have violated its legal obligations under various investment treaties to which it is a party. 

The right to fair and equitable treatment

Under certain circumstances, Venezuela’s decision to launch an overhaul of the exchange rate system within which it had been operating for more than a decade may also have violated foreign investors’ right to fair and equitable treatment.  Pursuant to this protection, states are prohibited from taking any action "which entirely transforms or alters the legal or business environment" in which the investment was made.[4]  Instead, the state is required to act in a transparent manner with respect to foreign investments,[5] so as not to undermine the legitimate investment-backed expectations of a foreign investor.[6]

Venezuela ensures the right to fair and equitable treatment in a number of its investment treaties,[7] and international arbitration tribunals have often relied on this standard to hold states accountable for their wrongful acts.  For example, in Achmea v. Slovak, the Tribunal found that the removal of a "right to generate profits, coupled with a ban on the transfer of the portfolio, effectively deprived Claimant of access to the commercial value of its investment" and therefore violated the principal of fair and equitable treatment.[8]    

Similarly here, to the extent that the Venezuelan government prohibited foreign investors from freely converting and/or transferring their capital, and then implemented a new economic regime that devalued those investments by more than 70%, Venezuela has deprived investors of the commercial value of their investments.  The confluence of these factors may give rise to a breach of Venezuela’s obligation to ensure foreign investors fair and equitable treatment under its various investment treaties.

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Venezuela’s recent currency regulations demonstrate just one example of where investment treaty protections might be invoked.  Investment treaties can offer important protections to foreign investors operating in markets that present significant political and legal risks.  Should you have any questions about how your company can take advantage of such protections, or if you think your company has an investment treaty claim based on Venezuela’s currency regulations, we would be pleased to assist you.

[1]               For example, the investment treaty between Venezuela and Spain contains a provision protecting transfers of capital made by foreign investors in convertible currency "at the exchange rate applicable the day of the transfer."  Venezuela / Spain Bilateral Investment Treaty, 1995, Article VII.3.  See also Venezuela / Canada Bilateral Investment Treaty, 1996, Article X.2 ("Unless otherwise agreed by the investor, transfers shall be made at the rate of exchange applicable on the date of transfer.").

[2]               Biwater Gauff (Tanzania) Limited v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Award, July 24, 2008. 

[3]               Continental Casualty Company v. Argentine Republic, ICSID Case No. ARB/03/9, Award, September 5, 2008, at ¶ 239.

[4]               Metalclad Corporation v. Mexico, ICSID Case No. RB(AF)/97/1, Award, August 30, 2000, at ¶ 99.

[5]               L.E.S.I. S.p.A. and ASTALDI S.p.A. v. Algeria, ICISD Case No. ARB/05/3, Award, November 12, 2008, at ¶ 151 (defining the fair and equitable treatment standard as requiring the state to "act consistently, unambiguously, [and] transparently" and "maintain a stable enough environment to allow a reasonably diligent investor to adopt a business strategy and implement it over time . . . .").

[6]               Total S.A. v. Argentine Republic, ICSID Case No. ARB/04/1, Decision on Liability, December 27, 2010, at ¶ 122 (noting that while an investor cannot always expect that the legislative and regulatory regime will not change, certain general regulatory regimes can form the basis of an investor’s legitimate expectations.  Specifically, "a claim to stability can be based on the inherently prospective nature of the regulation at issue aimed at providing a defined framework for future operations . . . .").

[7]               See, e.g., Venezuela / Spain Bilateral Investment Treaty, 1995, Article IV.1 ("Each Contracting Party shall ensure in its territory fair and equal treatment under the law of international investments made by investors of the other Contracting Party.").

[8]               Achmea v. Slovak, UNCITRAL, PCA Case No. 2008-13, Final Award, December 7, 2012, at ¶ 279.

Gibson, Dunn & Crutcher LLP   

Should you have any questions related to the issues discussed above, please feel free to contact the Gibson Dunn lawyer with whom you usually work, or one of the following lawyers in the firm’s International Arbitration Practice Group

Cyrus Benson – London (+44 (0) 20 7071 4239,
Penny Madden – London (+44 (0) 20 7071 4226,
Rahim Moloo – New York (+1 212-351-2413,
Lindsey D. Schmidt – New York (+1 212-351-5395,

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