Another Sweeping Wave of Resource Nationalism in Latin America: How to Protect Your Investment

In Short

The Situation: Latin American countries are witnessing a renewed wave of resource nationalism and increased government intervention that has adverse implications for foreign investors.

The Result: This resource nationalism goes hand-in-hand with newer, subtler forms of government intervention—such as regulatory overreach and increased taxation—that pose significant challenges for investors.

Looking Ahead: To mitigate the ill effects of this resource nationalism, foreign investors should systematically monitor government interventions, and develop international and local strategies—including liaising with their own governments, developing links with local communities in host countries, and employing investment treaties to protect their investments.

Latin America is experiencing a new wave of resource nationalism and government intervention, as more populists come to power spurred on by ideological shifts and indigenous movements. This nationalism is further strengthened by the negative economic impact of the COVID-19 pandemic, as governments try to claw back their financial losses, particularly in resource-rich countries with large mining and energy industries. This new resource nationalism is reflected in the rise in a yardstick used to measure governmental activism in the resource sector known as the Resource Nationalism Index ("RNI"). In 2021, 34 countries saw significant increase in RNI, with many Latin American countries leading the rankings. For example, Mexico ranked 101st in the world for RNI in 2018, but rose to 14th place in 2021; Argentina similarly rose from 81st place to 20th place. 

In its most extreme form, the new wave of government intervention could potentially lead to vast expropriations of foreign investments. Thus, for example, a so-called Reform Initiative proposed this past September in Mexico would transfer control of the electricity sector back to the State, thereby reversing parts of the 2013 energy reform that opened the sector to private investment (see our Jones Day Commentaries, "2021 Mexican Constitutional Reform Bill: Proposed Changes for Foreign Investors in the Electricity Sector" and "2021 Mexican Electricity Reform: What Foreign Investors in Mexico Must Know to Protect Their Rights," and our Jones Day Alert, "Mexico's Hydrocarbons Law: What Foreign Investors in Mexico Must Know to Protect Their Rights"). Similarly, on 1 February 2022, a Constitution committee in Chile approved in the first instance a proposal that could lead to the nationalization of copper and lithium mines in that country. Although these more radical proposals are still several stages from being promulgated, less drastic but still damaging measures are already increasingly common, and trend lines suggest that investors should exercise increased precaution and planning. 

Subtler Forms of Government Intervention

The new wave of government intervention in Latin America looks different from those in the past. Instead of blunt measures like direct expropriation, most governments are employing subtler means—regulatory overreach, creeping takeover rules, demands for greater local content (indigenization), and indirect expropriation via higher taxes. Though subtler, these measures are often no less disruptive and potentially financially devastating to foreign investors. 

In Mexico, for example, the López Obrador administration has reversed major energy reforms enacted by the previous administration and restricted the autonomy of regulatory bodies, adversely affecting the energy sector. The Mexican government's intervention seems likely to extend to the mining sector as well. In Argentina, intervention by the Alberto Fernández government has taken many forms, including nationalizing assets, attempting to take over private firms, and introducing price controls, trade restrictions, higher tariffs, increased financial withholdings, and limits on investor repatriation. In Brazil, President Jair Bolsonaro has repeatedly intervened in the country's energy and other industry sectors to the detriment of foreign investors. And in Peru and Chile, Pedro Castillo and newly elected Gabriel Boric, respectively, are demanding greater redistribution of mining-generated wealth to rural communities, and have expressed their intent to revise taxation and mining contracts to effect that redistribution (see our Jones Day Commentary, "June Elections in Peru and Mexico Raise Specter of Further Threats to Foreign Investments").

Protective Steps for Foreign Investors

To mitigate the ill effects of such government intervention, foreign investors should consider taking proactive steps to monitor resource nationalism and protect their investments. In particular, foreign investors should:

  • Create internal monitoring systems to systematically track and evaluate policy and legislative changes in host countries, and—if need be—facilitate negotiations with and/or lobbying of host governments before unwanted changes take place.
  • Build and strengthen their relationships with local communities to bolster their positions vis-à-vis host governments. Adverse government actions against foreign investors often arise from community dissatisfaction with the foreign investor and pressure on local and central governments to take action. Savvy investors therefore work with community leaders, local governments, and NGOs to contribute to community needs. This can be achieved through building housing and infrastructure, supporting healthcare, education and recreation, and providing technical support for environmental initiatives. Local community support can be an invaluable asset for investors in the long run.
  • Involve the investor's own government, international organizations, or the media to manage political risks in host countries. Investors should liaise with their own government about adverse policy changes in host countries, and seek their support to influence host countries. Such support may range from public statements criticizing the host government's interventionism or diplomatic overtures to the imposition of trade measures or sanctions against the host country. Depending on the nature of the potential issue, investors could also engage with international organizations or the media which also can bring pressure to bear on the governments of host countries. Investors should also consider using specialist intelligence firms with local knowledge that can advise on strategies to help clients bring about advantageous solutions.
  • Employ investment treaties as cost-effective tools when necessary (and where available) to take advantage of international legal protections against many forms of government interference (Brazil has not ratified any investment treaty featuring investor-state arbitration). An applicable investment treaty will generally protect investors from a range of governmental measures, including changing investment incentive schemes, breaching contracts, expropriating property, revoking licenses or permits, engaging in wrongful criminal prosecution, assessing unfair taxes or penalties, discriminating against the investor on the basis of nationality, imposing arbitrary measures, or invalidating patents or other IP rights. 

Investment treaties can also help foreign investors avoid unfamiliar and often hostile local legal systems by affording them the right to commence international arbitration directly against host countries in the event of a treaty breach. Given the high-profile and public nature of such investment arbitrations, host governments may choose to settle early. If not, an arbitral award in the investor's favor can require the host country to financially compensate the investor for its losses (including lost profits in appropriate cases). 

To avail themselves of investment treaty protections, foreign investors must take certain steps, including:

  • Engage in treaty planning through a review (and restructuring, if necessary) of their existing company structure to ensure that the foreign investments are protected by an investment treaty. Structuring or restructuring an investment to take advantage of an investment treaty often involves the simple incorporation of an SPV within the company's investment structure, but this must take place before a dispute with the government arises or is reasonably foreseeable.
  • Develop an international legal strategy that maximizes the investor's rights, both in the local courts and before an international tribunal. Many treaties include "fork-in-the-road" or waiver clauses that forbid investors from pursuing international arbitration if they have already commenced local judicial or administrative proceedings with respect to the same claims. Further, submissions in these local court proceedings can be expected to become factual evidence in any future arbitration. To avoid unfavorable outcomes, it is important that local and international counsel coordinate on the handling of such disputes from the outset.
  • Send a notice of intent to arbitrate. Known as a trigger letter, this notification is required under most investment treaties, and may bring host governments to the negotiating table without the need to commence formal proceedings. 
  • Commence arbitration if a host government refuses to negotiate and settle upon receiving the trigger letter. Initiating an arbitration—especially at a public venue such as the International Centre for the Settlement of Investment Disputes—may also spur the host government to negotiate and settle. Approximately 40% of investment treaty arbitrations are settled or discontinued.

Three Key Takeaways

  1. Foreign investors should set up monitoring mechanisms to systematically track subtle forms of government intervention arising from the new wave of resource nationalism in Latin America. 
  2. Investors should develop and deepen relations with local communities in host countries, and with their own governments, to mitigate the ill effects of increased government intervention.
  3. Foreign investors should ensure they are protected by investment treaties which provide broad international law protections against government interference. They are powerful tools in a foreign investor's legal arsenal and a cost-effective way to manage political risk.
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