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Venezuela Errata: Airline Deposits and Administration Posts

posted by Mark Weidemaier

By Mitu Gulati and Mark Weidemaier

The new semester has begun, and we are excited about the International Debt class we teach together, with students from both UNC and Duke thinking about the Venezuelan debt crisis. Their first task—and ours—is figuring out how much Venezuela owes, to whom, and under what contract terms. This year, we have been especially unreasonable, asking students, in just a few weeks, to find, read, and code all relevant contract terms for the entire unmatured bond debt of Venezuela and PDVSA. And the bond debt is only part of the story. For instance, another category of debt, which we haven’t encountered before, consists of local currency (bolivar) bank deposits of international airlines that fly routes to and from Venezuela, which the airlines are not-so-patiently waiting to convert into other currencies.

As we understand the story, capital controls instituted by the government years ago have prevented airlines from freely converting bolivars into foreign currency. Instead, airlines have had to wait for permission to sell at the official exchange rate. From 2009 to 2012, according to this New Yorker article, the process took about six months. But delays increased, and no repatriations have been approved since October 2013, except at rates the airlines view as confiscatory. As of June 2014, more than $4 billion in deposits were reportedly trapped in Venezuela. These deposits were generated at a time when the official exchange rate was 6.3 bolivars to the dollar. Today, Venezuela somewhat bizarrely has a system with multiple exchange rates, but the black market rate is probably thousands of bolivars to the dollar.

Venezuela reportedly has acknowledged the debt. But the government has lots of debts, so we wonder how this one will be treated in a restructuring. Is it akin to bond debt, or akin to an unprotected domestic currency obligation? And do the airlines have any contractual leverage, or simply the leverage associated with being major players in a relatively small market of international airlines? We haven’t been able to find out much about these debts, but it’s yet another multi-billion dollar obligation the government must confront.

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On another note: We’re wondering what’s going on with appointments to senior administration positions relevant to the sovereign debt world. The two most noteworthy are Assistant Secretary of the Treasury for International Finance and Deputy Director of the IMF. The seats are either empty or still occupied by Obama-era lame ducks.

The nominee at Treasury is Adam Lerrick, an economist presently at the American Enterprise Institute and a well-known figure in the sovereign debt world. Of particular relevance to Venezuela, Lerrick has put out a noteworthy proposal for restructuring the government’s debts. If his nomination goes through, and if U.S. sanctions are lifted (most likely if there is a new administration in Venezuela), then Treasury will be a key player.

We have seen few U.S. press reports on the Lerrick nomination. Curiously, though, the Irish Times reports on a special purpose vehicle registered in Dublin, which reportedly was advised by Lerrick and held Argentine debt using a children’s charity as trustee. Sounds juicy, although we suspect the real story is less interesting, perhaps having something to do with lower taxes, fees, or reporting obligation in Dublin. In any event, there is an empty chair in D.C. in one of the most important positions in international finance. Of course, with the government closed, there are a lot of empty chairs in D.C. these days. To be frank, we’re kind of okay with that. Eventually, however, it will be important to have someone knowledgeable in this role at Treasury.

Comments

On the issue of airlines blocked funds (i.e. unremitted dividends, earnings, etc), their nature does not seem to match with the 'bond debt', as it is most definitely not a product of a financing operation (and, for instance, is not regarded as any form of 'Indebtedness' under the terms & conditions set forth in Vene bonds). Instead, perhaps it could be suggested a legal nature resembling some form of [indirect] expropriation / indemnification, deriving from the breach of foreign investment guarantees & rights.

I find it difficult to compare the airlines' debt to bonds. Having said that, I think it'll be interesting to see what approach the airlines use to try and recover the funds. If successful, I wonder how damages will be calculated, as it seems the Bolivar's hyperinflation and the Venezuela's delays in granting permission to sell stripped the airlines of a lot of the currencies' value. In all likelihood, the airlines will try to relate the value of the Bolivar back to a time when it was worth more, and justify relating it back because of Venezuela's delays.

Maybe it is time the Airlines start buying properties...

I imagine the problem is not a 'privilege' of airline companies. Any international company brave enough to operate in Venezuela is probably facing the same issue. The post reminded me of an interesting article (2015) about how MasterCard's operations in Venezuela thrived despite the turbulent economic scenario. The explanation was somewhat interesting: As inflation skyrocketed, the high cost of goods made it difficult for people to carry the amount of cash required for ordinary purchases, forcing them to use credit cards more often. However, MasterCard still had to deal with the trapped-money issue. To do so, it took a loan in local currency and used it to buy real estate in Venezuela. Because real estate prices in Venezuela are usually (according to this article) referenced in US Dollars, MasterCard was thereby hedging its exposure until it finds a way to cash out the profits. Maybe it is time the Airlines start buying properties...

(Surprisingly, I was even able to recover the article for those interested: Venezuela's Inflation Rate Is 200% and Credit Card Companies Are Cashing. In Florida Business Review (Online). May 18, 2015 Monday).

The Government's debt to Int-Airlines does not seem particularly similar to Bond debt as others have observed, it seems more like some sort of expropriation. It is also difficult to think what sort of leverage these airlines might have, short of ceasing to fly routes into and out of Venezuela, which would pose a host of problems on its own. Were I in their position I would be investigating creative ways to spend the Bolivars now to get as much capital out of the country while they can, as this does not seem like a type of debt that will be particularly cared for in the event of a default. To that effect, as Evaristo suggested, real estate could be a wise investment, or maybe the bolivars could be converted into the Petro-Crypto token at launch and then quickly into another foreign currency (although I understand there may be sanctions involved).

The New Yorker article stated that from 2009 to 20012, every 15 days, the airlines that operated in Venezuela asked the government to convert their revenue from bolivar to dollars, and that the repayment took about six months. I would be curious to know what date the government used to convert the currency within those six months, that might help predict what exchange rates will be assigned to the rest of the transactions. One might argue that companies that knowingly do business in a country that employs exchange controls has assumed the foreign exchange risk that is present until funds are repatriated.

It is unclear what is at risk for airline companies that decide to cease business in Venezuela. President Maduro has threatened to take “severe measures” against airlines that withdraw from the country, perhaps he will refuse to release any of the $4 billion in airline tickets that Venezuela is currently holding. Airlines operate international services through bilateral agreements between governments, however I have not yet found the terms of any agreements with Venezuela.

Other options for airlines besides leaving the country: There were proposals for airlines to be reimbursed with Venezuelan fuel that failed to gain traction, but free fuel may not be so desirable given recent reports of fuel contamination. Lastly, perhaps a solution that would allow airlines to continue services to Venezuela would be for airline passengers to purchase tickets outside of Venezuela in order to avoid buying the tickets in bolivar, so that airlines stop losing so much money to inflation (there may be regulations restricting this).

As Stephanie pointed out, Maduro has threatened to take “severe measures” against airlines that withdraw from the country; this could be related both to a worry about the airlines further depleting Venezuela's funds but also to a worry that a reduction in overall airline business in the country would have a negative impact on Venezuela's struggling economy. It is the latter worry that may give the airlines some leverage in whatever negotiations happen going forward. There are only a handful of major international airlines and these airlines facilitate a wide array of business for countries, often most importantly tourism. However, United, LATAM, Lufthansa, Aeromexico and Air Canada are just a few of the airlines that have recently ceased commercial flights to Venezuela, which could have a large impact overtime. Venezuela may be more incentivized to negotiate with the airlines because of the potential problems caused by their absence.

As mentioned above, the government's airline debt does not seem like bonds, but seems more like expropriation. If that is the proper characterization, the airlines would likely be paying close attention to the Crystallex legal saga to see if the company has any success in recovering on the judgment it has secured. Airlines, as opposed to other companies, may be seen as necessary to any future economic turnaround, for several reasons listed by commenters above, which may improve their chances of a settlement were they to go the litigation route.

The Venezuelan government's continued unwillingness to cooperate with its creditors exacerbate the already difficult issue. As the post points out, the airline industry is no exception, and the airlines are increasingly more susceptible to losing more money by continuing to operate. Although the VZ government has recognized the debt, the airlines would be wise to cease operations in VZ. No reparations have been approved since October 2013, and when it was approved, it was only done at rates the airlines view as confiscatory. Although President Maduro warned to take severe measures if the airlines cease to operate, I am not sure if the airlines should take heed to this warning. They had no leverage before, and it doesn't seem like their leverage over the government will strengthen as they continue to operate. The VZ government continues to hold its creditors hostage, and the airlines seem to be in no better situation than others.

As others have said, I believe this is an unprotected domestic currency obligation. However, it would be bad news for Venezuela if airlines refuse to run flights to Venezuela. They are certainly going to need to deal with this problem. It might be best if Venezuela offered a “decent” exchange rate for the airlines before starting their restructuring. The rate would have to be lower than is strictly fair to the airlines but it should be better than the black market rate. Venezuela should make it clear to the airlines that this is a better deal than they will receive in the restructuring and urge them to take it. They likely do not have the funds to make this worth the airlines’ while without using other means; so to “sweeten the pot” Venezuela should offer to lift the ban on currency exchange post-restructuring, or agree to pay the airlines in foreign currency moving forward.

Of course, this is looking at one part of the problem independent of the other pieces. It’s likely Venezuela cannot afford even this much of a concession if it needs to be made to a large number of varied creditors.

I somewhat doubt that the airlines will have contractual leverage, because it seems they have been paid (in Bolivars) and were aware of the restrictions on currency exchange before agreeing. However, I also believe that it is important for Venezuela to not alienate the airlines. A few good-faith efforts early on might help soothe the problem.

As others have noted, the airlines were taking on risk when doing business in a country with knowledge that the government is hostile to private enterprise. Nonetheless, they might have expropriation claims pursuant to the BITs between Venezuela and their home countries. But even so, they would have little chance of foreclosing pursuant to an arbitral award because the asset here is in Venezuela. They might try to assert the debt claim (assuming the government has recognized it) or an arbitral award during a restructuring. But, without an international bankruptcy mechanism, priority of claims will probably not be decided on a technical, legal basis. The political will during a restructuring will be geared towards reworking the major foreign law debt precluding access to funding needed to restart the country's oil sector. Any attempt to assert a pari passu claim in a Venezuelan court will likely be denied. The airlines seemingly have no good options. If they hope to recoup the debt, they will probably have to continue operations in the country with the expectation of a change of government and a post-bond restructuring rebound of the economy. If they cease operations, they are risking not only loss of the currency deposits, but long-term loss of the Venezuelan market, as it may be difficult for many reasons to resume operations once the economy rebounds.

It seems as though the airlines are in a tough spot, as what they are owed is not owed to them under any bond or legal instrument, but rather through Venezuela's manipulation of the exchange rate and currency exchange policies. I would believe this means that the airlines do not have many of the legal remedies available to the bond holders that are provided by the bonds themselves, and I don't believe the airlines posses the sovereign immunity waivers that the bond holders have either. However, as others have noted, the airlines do have other potential leverage, by choosing to stop flying to Venezuela they could hurt the government, but other than this practical business based leverage, I'm not sure what legal remedies any airlines would have against the government without the protection of the bond contracts. They likely have to go through any legal battle facing the full weight of sovereign immunity.

While the airline debt seems to be distinct from the bond debt, the issue from a restructuring perspective would be determining the priority of these debts. Most of the bonds are identified as senior unsecured debt whereas the nature of the airline debt is unclear, though given that they are also direct sovereign debt obligations they may rank equal to the bond debt in terms of priority.

Additionally, the New Yorker article mentions that "the Venezuelan government floated the idea of offering cheap jet fuel to the Airlines in lieu of dollars." This plan was floated 3-4 years ago, and since then more Airlines have stopped commercial flights to Venezuela and considering that a lack of operating airlines may pose a serious hindrance to any economic turnaround in Venezuela, the Airlines may now have more leverage in obtaining a deal for cheap jet fuel, which would make it make it viable for them to operate.

You wrote "As we understand the story, capital controls instituted by the government years ago have prevented airlines from freely converting bolivars into foreign currency." The moneys in question are local currency revenues for sales by foreign aircarriers; they are not dividends or distributions, other returns on or of equity or payments of principal on long-term debt.

Although Venezuela does not borrow from the IMF, it remains an IMF member that is party to the IMF Articles of Agreement. To the extent the IMF definitions are applicable (and, in addition to the IMF world, they are incorporated by reference into the GATS/WTO world and into many BITs, so those definitions are very important indeed), the controls imposed by Venezuela on convertibility and transferability of local revenues held by foreign aircarriers appear to be restrictions on "payments and transfers for current international transactions," not controls on "capital movements."

Under the IMF Articles of Agreement, countries are free to impose capital controls. However, under Article VIII.2(a) of the IMF Articles of Agreement, a member cannot impose restrictions on “payments and transfers for current international transactions” without IMF approval.

"Current payments" are defined in IMF Article XXX(d). Based on that definition, pursuant to Articles VIII.2(a) and XXX(d), a member of the IMF cannot, without IMF approval, lawfully impose exchange restrictions on the following financial flows.

• All payments (whether principal or interest) due in connection with foreign trade, other current business, including services, and normal short-term banking and credit facilities. Thus, IMF approval is required for exchange control restrictions on any international trade-related payments and credit facilities to finance current international payments. As "payments due in connection with foreign trade" and/or "current business, including services," this category seems likley to encompass the Bolivar-denominated sales by foreign carriers in Venezuela of air fares, whether to Venezuelan or foreign nationals.

• All payments due as interest on loans (regardless of whether they are for foreign trade or current business or short- or long-term credit facilities).

• Payments of moderate amount for amortization of loans (in effect, most scheduled principal payments on foreign indebtedness, but not a lump sum payment of principal by acceleration or otherwise).

• All payments due as net income from other investments (i.e., ordinary dividends on equity investments for a return on invested capital and royalty payments on licenses). Thus, ordinary dividends and royalty payments are treated as payments for current transactions under the IMF Articles of Agreement.

• Payments of moderate amount for depreciation of direct investments (i.e., in effect, moderate amounts of ordinary dividends on equity investments for return of invested capital, but not proceeds from the sale or liquidation of the investment). Consequently, periodic dividends and similar distributions constituting recovery by a foreign investor of invested capital are also treated as payments for current transactions under the IMF Articles of Agreement.

The IMF does occasionally grant approvals under IMF Article VIII.2(a) for temporary restrictions on current payments. However, according to IMF officers, such approvals are granted only if at least three conditions are met: (i) the restriction is imposed for balance of payments reasons, (ii) the restriction is applied in a manner that does not discriminate between Fund members, and (iii) the restriction is temporary in the sense that there is a clear timetable for the measure's removal (generally one year). Moreover, the IMF only grants such temporary approvals if the host State accepts IMF economic policy recommendations – the famous IMF “conditionality.”

Controls on capital transactions (often called “capital movements”) are, as noted above, generally permitted under the IMF Articles of Agreement without the need for IMF approval. Based on the definition of "current payments," the scope of "capital movements" seems to cover (x) the proceeds of sales or other dispositions of investments and (y)large principal payments on long-term debt (such as accelerated sums and lump sum payments of outstanding long-term debt).

I hope this is useful.

MK

Even if this issue features in whatever restructuring proposal is eventually accepted by Venezuela's creditors, it is probable that some airlines based in countries that have bilateral investment treaties with Venezuela will push for international arbitration on the basis that the Venezuelan government has expropriated their investments.

For example, Article 6 of the Venezuela-UK BIT obligates Venezuela to permit the unrestricted repatriation of investment returns "in the convertible currency in which the capital was originally invested." Article 4 further provides for compensation for losses due to a state of national emergency. Both of these provisions, if not the actual provision on expropriation in the treaty, which has a carve-out for non-discriminatory measures undertaken for a "public purpose related to the internal needs of [a] Party," might be possible hooks for a UK airline to seek compensation from the government for losses due to these policies. While British Airways seems to have suspended its service to Caracas in 2005, Spanish and Portuguese airlines seem to still be flying to Venezuela. Both countries have BITs with Venezuela that are currently in force, and these treaties may very well contain analogous provisions.

The currency issue makes this even more difficult for Venezuela. With such low foreign exchange reserves and the significant amount owed to the airlines, i do not see how the payments would be effected anytime soon.

Air travel is such an important part of socio-economic life that i wonder if there is not a human right component here. This is assuming in a worse case scenario that all international airlines end services to Venezuela.

Also, a country which is hoping to work its way out of the economic down turn cannot afford to have airlines not coming in. These debts are not bonds and may at face value seem lower down the line to other senior creditors. However i wonder if the significance of air travel industry will give them constructive seniority over certain other creditors.

The airlines are definitely in a tough spot. As noted by others above, I doubt the airlines have any sort of legal remedy; they are likely to face the problem of sovereign immunity, and it is uncertain where their priority stands with other creditors. Because of this, it seems there only two options for the airlines. One is to stop flights to Venezuela. This would be very bad for Venezuela because of the economic implications. The airlines have strong leverage in this scenario--they can force the government to act if they stop flights to Venezuela. In order to prevent this from happening, Venezuela needs to either lift the exchange rate restrictions or provide the airlines a commodity, such as jet fuel, to incentive the airlines to stay in operations. I doubt Venezuela would be able to provide any commodity because of their dire economic situation, so I think their best option is to lift the exchange rate restrictions.

The second option for the airlines is for the airlines to hedge their exposure with another investment. This would at least allow the airlines to try to mitigate their losses while they maintain operations in Venezuela.

Others have noted that the airlines are faced with seemingly impossible choice: either continue operations (and continue bleeding money because of unfilled flights, uncertain future repayment, etc.), or end operations and hope for a favorable arbitration decision. Although the efficacy of each course of action will be determined by a variety of factors outside of the carriers’ control, the situation isn’t as dire as some may think (and, as Steven noted, the airlines knew that they who they were working with and thus could have sensed the way the wind was blowing and suspended operations immediately after Venezuela started trapping cash, so the airlines shouldn’t expect a perfect payout because they voluntarily opened themselves up to the risk of reduced payment). The two most notable factors are whether the Maduro regime stays in power, and if (when) a restructuring occurs, and the interplay with these two factors will impact the efficacy of an airlines’ decision. I’ll highlight the situations which I believe would lead to the most favorable outcomes for the airlines.

CONTINUING OPERATIONS - MADURO REGIME; PRE-RESTRUCTURING: I agree with Cramer in that the situation doesn’t seem like bond debt, that it will likely have less priority in a future restructuring, and that thus the airlines desiring to continue operations in Venezuela need to creatively use the bolivars owed to them. Foreign carriers are currently required to purchase fuel in USD rather than in bolivars, adding to the indignity that carriers “sticking it out” likely feel. However, since the articles linked above were published, airlines that are still operating have more leverage than they did when the situation first arose - international air travel is down 61% from 2013, and major international players such as Lufthansa, United, and Air Canada have pulled out entirely. Carriers with a strong regional presence (including Aeromexico, LATAM) have also pulled out, impacting Caracas’ ability to be a regional hub. The inability to travel freely exacerbates the unrest simmering in Venezuela and further isolates the country. With these considerations, the Maduro regime will likely have to sweeten the deal a bit to incentivize the carriers to continue operating. The easiest step towards this could be to allow the airlines to purchase fuel in bolivars instead of USD - thus keeping the airlines’ money within Venezuela, but allowing them to feel as if they didn’t have to write their money currently tied up in bolivars off as a total loss.

END OPERATIONS - POST-MADURO; PRE-RESTRUCTURING: The current state of recovery under an arbitration proceeding is unclear; Air Canada filed a dispute with the ICSID more than a year ago which is pending. Because of Maduro’s aggressive position towards airlines that stop their flights to Venezuela, airlines would be greatly helped by government turnover whether they stopped flights before or after a regime change for a few reasons. First, if the Maduro regime was overthrown, the airlines that had pulled out would be able to resume flights. These flights would hopefully be profitable enough to entice the airlines back to Venezuela. Because a post-Maduro government would like to distance itself from the policies of the Maduro regime and would like to rev up the Venezuelan economy (a goal which would be well-served by reversing Venezuela’s trend toward isolation), it would likely be willing to provide favorable terms to airlines. However, a hiccup to recovery - which would be exacerbated by a restructuring - could be if the new governing body disclaimed responsibility for the actions taken (and debts incurred) by the Maduro regime because of the illegitimacy of the election proceedings. As I noted above, a restructuring would hurt the airlines’ chances of recovery, so airlines should act as quickly as possible to recover what they can following a fall of the Maduro regime before a restructuring.

Another issue that merits more exploration is the bilateral obligations (both trade and air carrier) that Venezuela likely has with other countries, and how Venezuela could be pressured into action by pushback from other actors.

I think there is likely not much that the airlines can do here in a legal sense. It's not clear that they have a legal right in the same way as bondholders, and sovereign immunity would likely prevent them from bringing a suit against Venezuela. However, practically the airlines may be in a better position than bondholders as Venezuela will want to maintain its access to these airlines, which will give the airlines a major advantage in negotiating with the country and may cause Venezuela to give priority to the airlines over other creditors. If Venezuela still refuses to allow the airlines to convert their currency, it is unclear what else the airlines may do other than try to invest bolivars in assets like property as others have suggested.

It is more likely that the legal nature of the airlines blocked fund could be considered as an expropriation under BITs. Even though Venezuela may drop out from the ICSID, many of its BITs are still valid. These treaties protect investors from expropriation without compensation. In addition, many treaties also establish free convertible currency conditions. These treaties can open a door for airlines to pursue an arbitral award based on expropriation.

The UNCTAD has released a list of all of Venezuela’s BITs in force. (30 treaties) http://investmentpolicyhub.unctad.org/IIA/CountryBits/228

If the airlines go to arbitration and obtain an arbitral award, it is likely that this would complicate the foreign debts restructuring, considering that the airlines could try to seize assets.

As addressed ad nauseum by my colleagues and others above, the similarity between these airline currency exchange funds and bond debt would appear to end at the fact Venezuela is not paying. Numerous international carriers have already discontinued service, and the remaining ones requiring that tickets be purchased in dollars (or other non-Bolivar currencies). American has already written down a $592 million-dollar loss on the estimated $750 million that they have exposed in Venezuela. These international airlines account for a massive percentage of the capacity into Venezuela—in fact American Airlines had a greater monthly capacity than the Caracas-headquartered Santa Barbara Airlines. This paired with last year’s request by American & Delta to the U.S. Dept of Treasury for antitrust immunity for joint negotiations regarding capacity and debt collection with regards to Venezuela, may further indicate that a day of reckoning for air travel to Venezuela is in the very near future.

Furthermore, it would seem likely based on the definition and authority provided above, that the airline funds in question would be classified as current “payments and transfers for current international transactions.” Based on such a determination, it would seem that Venezuela would be facing some additional pressure from the international trade and financial bodies. Considering that they have more or less been holding funds belonging to the airlines for years, perhaps these bodies see those funds or the restrictions differently. The actions by the airlines seem to indicate that they are not counting on these funds soon—if at all. Regardless of issues of expropriation, and devaluation, the enforcement issue looms large.

As many others have commented, it is hard to characterize the money owed to the airlines as something akin to bond debt. First off, it does not have the normal economic characteristics of what we usually associate with bond debt. Instead, here, it is literally "either accept our terms that we will pay you later (via the IATA), or don't come here at all." But overall, the airlines are suffering from the same type of issue that the bondholders are having: being owed billions of dollars (here, $4B), without any obvious mechanisms to get their money since the country is in economic crisis with no apparent way to fix their problem.

I am not quite sure how the airlines could obtain the money owed to them via simple leverage - it seems like the same type issue of getting property that is in the foreign country - such that the most the airlines could do is not fly into the country, which it is questionable whether the government has that as their upmost concern considering the wide-scale hunger and lack of medicine in the country. Similarly, even if the airlines had a contractual leverage over the country, sure they could get a judgment, but it is unlikely that they will be able to obtain the judgment.

Although several commenters above have noted that the airlines assumed the risk by continuing to operate in Venezuela, Professor Weidemaier’s article on Nov. 24 is responsive to those arguments. Legally, the airlines’ subjecting themselves to “shenanigans” is immaterial. That said, practically, it puts them in a difficult position. To echo what some have said, although there are semblances of similarity between Venezuela’s debt to bondholders and international airlines—for example, the poker-esque manner in which conversations regarding the airline debt have transpired, not least of which was Maduro’s threat to the airlines—the debt seems to be more akin to an expropriation. Although the airlines could make—and have made—various threats (like refusing to fly in Venezuela or seeking arbitral awards), it is doubtful that they are serious enough players to vie for recovery ahead of any other creditors in the event of a default. This is yet another instance of the Venezuelan government making enemies of private investors; yet even though the airlines are important for facilitating business for countries (although I disagree with the comment noting its importance for tourism), it is difficult for me to imagine that this would be a sufficient bargaining chip. That said, the exodus of airlines from Venezuela could represent yet another kick to one of the many legs of the toppling stool that is Venezuela’s economy. So I agree with Heater that it would be best for Venezuela to offer a “reasonable” exchange rate better than that of the black market. But under current circumstances, it is difficult to associate with Venezuela according to principles of “reasonableness.”

As mentioned above, sovereign immunity will likely be a problem for the airlines. It is entirely possible that they stop providing service in the country to apply pressure, but my intuition is that doing so would hurt the airline more than the Venezuelan government. restrictions.

For those of you interested in whether a BIT claim may exist, in order for a foreign air carrier to bring a claim under an investment treaty, whether an Expropriation claim, a claim for breach of Fair and Equitable Treatment/International Minimum Standard or a claim for breach of an express treaty obligation to permit convertibility and transferability under those treaties having such an express obligation, it will still be necessary for the foreign air carrier to demonstrate as a jurisdictional matter that it is an "investor" and the object of the dispute is an "investment."

The extent to which these blocked sums are an "investment" will depend upon the structuring of the foreign air carrier's local business activities in Venezuela and/or what has been done with the blocked funds. Trade debts are generally considered to be excluded from the scope of "investments" for BIT purposes, whether denominated in local or international currencies. I can, and I am sure investors' counsel can, think of several ways to argue that the business activity constitutes an "investment" for investment treaty purposes, depending on the structure of the local activity and what has been done with the blocked funds. I also expect that a BIT claimant investor will make several alternative arguments to seek to place that business activity within the context of an "investment."

I offer no view as to whether those arguments would be successful, especially since I do not know the underlying facts. But for jurisdictional purposes, it will definitely be necessary for the foreign air carrier claimant to persuade a BIT arbitral tribunal that the object of the dispute is an "investment" and that the claimant is an "investor."

I hope this is useful.

Regards,

MK

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