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How a Russian mining company used a Canadian investment treaty to sue Venezuela for $1.5 billion

August 24, 2016

3-minute read

Rusoro Mining declared victory yesterday in its four-year legal battle with the government of Venezuela over the nationalization of the gold industry in 2011. The company was awarded US$1.2 billion ($1.5B) by the World Bank’s International Centre for Settlement of Investment Disputes (ICSID).

The dispute began in 2011, when then-president Hugo Chavez nationalized the Venezuelan gold industry. Despite initially cooperating with the government, Rusoro later claimed that its right to mine was expropriated without compensation. In 2012, the company launched an investor-state dispute settlement (ISDS) case against Venezuela under the terms of the Canada-Venezuela Foreign Investment Protection Agreement, demanding $3 billion from the government for ending its mining concessions.

Although it didn’t get everything it asked for, yesterday’s result is a massive windfall for Rusoro. To quote one of the company’s backers, the ICSID decision is “an excellent result for Rusoro's shareholders and creditors.” Less so for Venezuela. The beleaguered country is already on the brink of social, economic and political collapse. Whether it can and will pay Rusoro is an open question.

But the real story here isn’t about Venezuela or Rusoro or even ICSID. It’s about Canadian trade policy. And it’s a big reason why many people are so concerned about proposed deals like the Canada-EU trade agreement and the U.S.-led Trans-Pacific Partnership.

Investor-state arbitration

Rusoro sued the Venezuelan government not through the domestic legal system, but through the investor-state dispute settlement (ISDS) mechanism included in the Canada-Venezuela investment treaty.

ISDS is a quasi-judicial process for foreign investors (it is not available to regular citizens or domestic investors) to challenge government measures they claim violate the state’s obligations under an international trade or investment agreement. Using ISDS, foreign investors can sue governments for a wide variety of actions, even democratic decisions made in the public interest, and have the ruling enforced through international law.

Furthermore, ISDS cases are adjudicated not by a public court, but by a private, for-profit panel of international trade lawyers with a pro-investor bias. Sometimes these tribunals make documentation available to the public, but that was not the case in the Rusoro challenge.

Treaty Shopping 101

ISDS in Canadian trade agreements is problematic in itself, but the Rusoro case goes one step further. Even though the company is listed on the Toronto Stock Exchange and has its official headquarters in Vancouver, Rusoro is actually owned and operated by Russian oligarch Andre Agipov and his father, Vladimir. For all intents and purposes, Rusoro is a Russian mining company with operations in Venezuela. Canada is simply the legal shell.

This tactic of incorporating a business where it can access the strongest available treaty protections—even if it doesn’t actually add any social or economic value to the host country—is known as treaty shopping. Canada is a popular place to register mining companies precisely because Canada has signed so many trade and investment agreements with resource-rich developing countries.

Because it is incorporated in Canada, Rusoro was able to sue Venezuela under the terms of a Canadian investment treaty. The majority of the profits from the award, however, will likely flow back to the company’s Russian shareholders.

Canada on the offensive

The Rusoro case is hardly unique. A study we published last year investigated every known ISDS claim made by Canadian investors abroad. It found that 62% of cases involved a resource company and 58% of cases challenged government measures related to resource management. Moreover, 56% of claims were made against developing countries like Venezuela. And perhaps most remarkably, fully one in five “Canadian” investors were actually treaty shopping in one way or another.

Yesterday’s Rusoro award is the latest affirmation of a deeply troubling system. If nothing else, ICSID’s decision in this case will encourage more multinational corporations to exploit loopholes in international treaties to launch massive claims for compensation against struggling governments.

Unfortunately, despite the overwhelming evidence of the social costs of ISDS, Canada continues to stoke the fire. Proposed treaties like CETA and the TPP threaten to dramatically expand the scope of ISDS at home and abroad. Not only would more developing countries be put at risk from militant “Canadian” resource companies, but Canadian governments would be exposed to even more threats from foreign investors.

Canada is already one of the most-sued countries in the world under ISDS. It’s time for Canadian trade negotiators to rethink this problematic and regressive system.

Hadrian Mertins-Kirkwood is a CCPA trade and energy researcher. Follow Hadrian on Twitter @hadrianmk.

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