THE IMPORTANCE OF STRUCTURING FOREIGN INVESTMENTS IN TIMES OF POLITICAL TURMOIL IN EMERGING MARKET AND DEVELOPING ECONOMIES
Corporate entities and individuals make significant investments in emerging market and developing countries. These foreign investments occur in a variety of sectors, including projects in oil, gas and mining, electric power and other energy, construction, tourism and finance, and usually involve the transfer of substantial resources to the host country. In 2012 alone, foreign direct investment (FDI) flows to developing and transition economies totaled US$790bn and accounted for nearly two-thirds of all global FDI inflows. (See United Nations Conference on Trade and Development, World Investment Report 2013 Table 1 at xiii (United Nations 2013).)
However, foreign investors currently face significant political turmoil in important emerging market and developing economies, including Russia and Ukraine due to the Crimean Crisis, the Middle East due to the Syrian Civil War, North Africa in the aftermath of the Arab Spring revolutions, Sub-Saharan Africa due to violent terrorist activities in Kenya and Nigeria, and Thailand due to ongoing political protests which most recently resulted in a military coup. Such political turmoil may lead to a variety of potentially devastating problems for foreign investors and their investments, such as expropriation of the investment by the host state’s new government, arrests of key personnel, destruction of the investor’s property by insurgents or government forces, the investor’s inability to exfiltrate invested resources and/or profits from the host state and other measures, which negatively affect or completely destroy the investment’s value (e.g., termination of concession rights, licenses or permits, passage of economic emergency laws, and increased or new taxes levied on certain industry sectors wiping out the investment’s profit margin). The host state’s domestic courts and agencies often are not an adequate forum to resolve ensuing disputes between the foreign investor and the host state due to their lack of resources and training in international law, prolonged case backlog affecting the courts’ dockets, potential bias of or political pressure on judges, or a de facto government shutdown due to a crisis.
Jul-Sep 2014 issue
Dan Tan Law