Cablegate: Ecuador's Plans to Terminate All Bilateral Investment

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E.O. 12958: DECL: 2034/10/27
TAGS: ECON EFIN EC PREL ETRD EINV
SUBJECT: Ecuador's Plans to Terminate All Bilateral Investment
Treaties

CLASSIFIED BY: Heather M. Hodges, ...

id: 231669
date: 10/27/2009 22:20
refid: 09QUITO905
origin: Embassy Quito
classification: CONFIDENTIAL//NOFORN
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C O N F I D E N T I A L QUITO 000905

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E.O. 12958: DECL: 2034/10/27
TAGS: ECON EFIN EC PREL ETRD EINV
SUBJECT: Ecuador's Plans to Terminate All Bilateral Investment
Treaties

CLASSIFIED BY: Heather M. Hodges, Ambassador, U.S. Department of
State, Executive Office; REASON: 1.4(B), (D)

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Summary

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1. (C) The Government of Ecuador is preparing to terminate existing
Bilateral Investment Treaties (BITs) with seventeen countries,
including the United States, with the goal of replacing them with
investment agreements that do not/not include national treatment,
allow only local or regional dispute arbitration, and align foreign
investment with Ecuador's national development plan. Acting
Foreign Minister Lautaro Pozo informed the Ambassador of this
decision October 26 and will notify other Ambassadors over the next
week. Pozo explained that Ecuador's new constitution requires this
action, and the GoE must begin negotiating substitute investment
agreements to avoid legal challenges from "extreme left" groups.
The GoE has already sent a proposal to the National Assembly, but
Pozo noted this would be a lengthy process. Nevertheless, the GoE
hopes to be able to present a proposed replacement agreement to the
U.S. during the upcoming Bilateral Dialogue. The Ambassador noted
the bad timing of this move, given the imminent Bilateral Dialogue
and Trade and Investment Council meetings, pending renewal of
ATPDEA, and other actions complicating bilateral relations
recently. She predicted the GoE would have a difficult time
explaining this to Washington. End Summary.

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Constitution Requires Renegotiation of Existing BITs

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2. (C) Acting FM Pozo called in the Ambassador on October 26 to
inform her of the GoE's decision to replace all its existing BITs
with a less formal "model" investment agreement that complies with
Ecuador's new constitution (which entered into force October 2008).
The awkward title of this new agreement is roughly "Framework
Agreement for the Promotion of Investment Complementary to
Development." Pozo said Ecuador has 17 BITs in force and he would
be delivering the same message to the other countries' ambassadors
over the next week, but wanted to deliver it to the U.S. first. He
added that the GoE did not want the U.S. to hear it first from the
press. The MFA plans to meet with the EU ambassadors as a group
October 27, then Canada, and then will notify its UNASUR and ALBA
compatriots and China next week. The Ambassador noted that
Ecuadoran Ambassador Gallegos had given us a heads-up late last
week without providing details. The Ministry's legal advisor Marco
Albuja Martinez and Director General for North America Juan Salazar
participated in the meeting. (Salazar later admitted privately to
the Ambassador that this meeting was the first he had heard of this
initiative.)

3. (C) Pozo and Albuja explained that the 2008 constitution imposed
new limits on the types of agreements that the GoE may enter into,
and also provided a timeline under which the GoE must begin to
revise all outstanding agreements that do not comply with the new
constitutional standards. Albuja noted that the GoE has four years
to make the necessary legal changes, but that the GoE was required
to begin amending or changing agreements or treaties within 12
months of entry into force of the constitution. Given that the
constitution was now one year old, the GoE must begin the process
or face potential legal challenges. He explained that Ecuador's
constitution was the only one in the world that considered the
concept of "judicial security" as a "human right," which exposed
the GoE to legal action. He confided, furthermore, that the GoE
was aware of "extreme left" groups preparing to launch just such
challenges. In response to the Ambassador's question as to whether

the constitution recognized or grandfathered existing treaties and
agreements, Albuja said that it did recognize them, but also
obliged the GoE to revise clauses that were not in compliance. The
Ambassador retorted that if that was the case then, in effect, the
new constitution did not recognize existing agreements. (Pozo and
Albuja both conceded thatQe protections afforded under the U.S.
BIT would continue in place for current investors for Q years
after termination of the agreement.)

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Political Objective: Favor Locals

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4. (C) Albuja explained that the GoE has three objectives in
replacing the current BITs with a substitute agreement: 1)
eliminate the concept of "national treatment;" 2) allow only local
and regional arbitration for the settlement of disputes; and 3)
align foreign direct investment so that it "complements" the GoE's
national development plan. Albuja noted that national treatment
"discriminates against local investors," but did not explain the
logic of this assertion.

5. (C) Regarding arbitration, he said that the Constitution
"recognizes alternative methods of dispute settlement," but only
via national and regional institutions or fora. He said the GoE
was in discussions with ALBA, UNASUR, and ALADI regarding the
establishment of dispute settlement systems, and he was also aware
that UNCITRAL was considering setting up an arbitral center in
Buenos Aires (which would presumably qualify). These new
arbitration mechanisms would welcome the inclusion of international
experts and judges, he promised, but the key was that it be a
"Latin American process." (Comment: we were aware that the new
constitution prohibited Ecuador from entering into treaties or
international agreements ceding jurisdiction to non-regional
arbitration tribunals, but understood that this provision would not
be applied to existing BITs.)

6. (C) Albuja explained that the GoE also wanted to ensure that FDI
complemented the country's national investment objectives and was
consistent with the National Development Plan. As an example, he
noted that the constitution declared that Ecuador should aim to
become a major center for tourism by 2015. So, if a foreign
investor expressed interest in investing in a sector that did not
correlate well to the GoE's "vision," the GoE would work with the
country of the prospective investor to get them to invest instead
in a sector such as tourism that the GoE deemed acceptable. He
provided a convoluted explanation of how this would work, but the
concept was basically that the GoE would coordinate with other
governments to make sure the investment was appropriate.

7. (C) Albuja said that this was how Ecuador had been managing
investment decisions with Brazil and Colombia, and asserted that it
had worked well and allowed all parties to address issues early on
and avoid future disputes. Referring to a 2008 bilateral spat
where Brazil pulled its Ambassador to Ecuador over a dispute
involving one of its companies (Odebrecht), the Ambassador
pointedly noted that Ecuador and Brazil's commercial relations over
the last year have not been so rosy, so this mechanism was not
flawless. She also pointed out that the U.S. does not instruct its
companies how to invest, so that strategy might work with China,
but would not work with us.

8. As evidence of how serious the GoE was in making sure that the
BITs were appropriately focused and effective, Albuja pointed out
that the GoE had terminated nine BITs during 2008, all with other
LatAm countries, on the basis that they had failed to attract
sufficient investment. The Ambassador commented that annulling
BITs does not seem the best way to attract investment, and said it
was ironic that other GoE officials were pressing her and the USG
to increase U.S. investment in Ecuador, while at the same time the
GoE was pursuing a policy that would likely deter it. She added
that it was precisely because of the uncertainty created by just
this type of initiative that we were not seeing much new U.S.
investment. With a reckless disregard for the importance of
foreign investment, Albuja responded with the assertion that FDI
was not really that important to Ecuador anyway, having increased
in recent years from only 1.8% to 2.6% of GDP. (Comment: Both we
and our Canadian Embassy friends believe this number to be well
short of the true mark, but, regardless, the perspective is
troubling.)

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GoE Initiative Submitted to the National Assembly

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9. (C) Pozo said the GoE had sent a proposal to "renounce" all
existing BITs to the National Assembly's Committee on Sovereignty,
Integration, International Relations, and Integral Security for
review. This committee, headed by Fernando Bustamante, would
review the proposal and then send it to the full Assembly for a
vote, after which the Assembly would send it back to the Executive
for approval and signature. He speculated that this would be a
lengthy process. However, the GoE hoped to be able to present a
draft of the new agreement during the November 10 Bilateral
Dialogue meeting in Washington.

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Initial Embassy Response: Bad Timing, Bad Idea

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10. (C) The Ambassador promised to consult with Washington on this
news, and clarified that she did not have explicit Washington
guidance. However, she noted that this initiative was poorly
timed, given that our two countries were about to hold high-level
meetings in Washington, given that Congress would soon be reviewing
whether to renew or extend both ATPDEA and GSP trade preference
programs, and given all the difficult issues our countries had been
dealing with directly. (Comment: Our MFA interlocutors are well
aware of our concerns over the President's recent decree for
compulsory licenses of patented pharmaceutical products, our
concerns about GoE interaction with the U.S.-designated Export
Development Bank of Iran, the precarious renegotiation of the
airport construction project, problematic negotiations over USAID
assistance programs, Chevron's allegations of corruption in their
local court case, and the GoE's decision not to renew the Manta FOL
lease, among others.)

11. (C) The Ambassador also commented that, to our knowledge, few
if any countries had canceled BITs with the U.S., adding that U.S.
BITs actually served as a "seal of approval," encouraging other
countries to negotiate their own BITs and also reassuring other
countries' investors of the operating environment. She added that
it was a shame that the GoE had decided to move forward with this
initiative, and speculated that the MFA would find it difficult to

explain the decision to Washington.

12. (C) Albuja noted that the GoE had been considering this action
for quite a while, and he even asserted that Foreign Minister
Falconi had mentioned it during his meeting with the Secretary.
When the Ambassador said the U.S. side thought Falconi had been
referring to the GoE's proposal for a Trade for Development
Agreement, Albuja admitted this and explained that the investment
agreement was linked to (or part of) the Trade for Development
Agreement. In response to the Ambassador's push back on this
initiative, Pozo, looking sheepish, admitted that this was a
"complicated period" that the GoE would need to work through, and
also speculated that they would likely need to lobby the U.S.
Congress to explain the GoE's point of view.

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Comment: They Want it Their Way

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13. (C) This decision is entirely consistent with the Correa
government's desire to have increasing control over all resource
flows and over the economy writ large. On the trade side, the GoE
is pushing bilateral agreements with the U.S. and Canada - two of
its major commercial/investment partners -- that give it one-sided
preferential access with few, if any, conditions (i.e., delinked
from counter-narcotics efforts). Similarly, the GoE is pushing
donors, including USAID, to funnel all official assistance through
the national development agency (AGECI), instead of through NGOs.
The GoE is also increasingly favoring investments from large
foreign state-owned companies, such as from Venezuela and China,
which also ensure the GoE is able to wield control over their
investment decisions. This latest move takes government
involvement in private sector decisions to a new level. The
Embassy will be reaching out to other affected Embassies to gauge
their reaction, but we fully expect the private sector reaction to
be strongly negative when this issue hits the press, especially as
it comes right on the heels of the President's decree on compulsory
licensing. End Comment.
HODGES

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