Cross-border investments in emerging markets often engage political risk. This is particularly true in the case of natural resource assets, which cannot be spirited away in the event of political instability. 

Potential losses arising from government interference include: 

  • the direct loss of assets upon expropriation;
  • arbitrary cancellation of government licenses or concessions;
  • exchange controls preventing extraction of profits or proceeds on sale;
  • the costs and distractions of litigation; and
  • losses arising from the inability to manage sequestered assets during dispute resolution procedures.

Tools for managing governmental risk can be incorporated into acquisition and management plans for exposed assets. This paper reviews the use of investment protection agreements which are emerging as the key asset protection strategy for international investment in emerging markets.

Investment protection agreements

Investment protection agreements are mechanically similar to tax treaties. They are negotiated and concluded on a government-to-government basis, and are designed to protect private-sector parties from one contracting state who invest in the other contracting state. Unlike tax treaties, investment protection agreements do not generally contain "limitation of benefits" provisions. Accordingly, although Canada does not have an investment protection treaty with Zimbabwe (see list below) a Canadian investor could still secure protection in Zimbabwe under the investor protection agreement between the Netherlands and Zimbabwe by investing through a company established in the Netherlands. Put another way, the Netherlands company would not generally be disentitled under an applicable investment protection agreement with another country simply because the company has controlling Canadian shareholders.

The use of investment protection agreements has taken off in the last decade and there are now approximately 1800 such agreements in existence worldwide, with nearly 155 countries participating. Emerging-market countries in Latin America, Asia and Africa are active participants in such agreements, as they see it as an inexpensive means to mitigate risk and so attract foreign investors.

Available protections

The terms of individual investment protection agreements vary from treaty to treaty, though the following elements normally appear: 

  • protection from discriminatory expropriation of property;
  • protection from arbitrary or capricious cancellation of licenses or concessions;
  • guarantees against foreign exchange controls;
  • compensation in the event of seizure which must be prompt, adequate and effective;
  • "most favoured nation" protections requiring a contracting state to accord to nationals and companies of the other contracting state treatment no less favourable than it accords to investors from another state;
  • subrogation rights for government insurance agencies;
  • reference for disputes to an independent arbitral tribunal; and
  • enforcement rights for any award made against the commercial assets of the host jurisdiction in more than 165 countries.

In recent years the treaties have been widely (and successfully) used by foreign investors seeking compensation from Argentina, Venezuelan and Eastern European governments.

Dispute resolution

Investment protection agreements generally contain provisions for arbitration of disputes between signing parties (i.e., the governments) and, more importantly, disputes between the host state and the foreign investor. Such agreements confer rights on private investors to pursue claims directly against the sovereign signatory.

The majority of investment protection agreements provide for resolution of disputes under the auspices of the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States. The Convention is administered by the International Centre for Settlement of Investment Disputes (ICSID), which is part of the World Bank Group.

Signature of the Convention by a contracting state suspends any right of that state to assert diplomatic protection or bring an international claim in respect of a dispute. Arbitral awards rendered under the Convention are not subject to appeal beyond those remedies specified in the Convention. Courts in the contracting state (and 165 other states) are obliged, on simple presentation of a certified copy of an award, to enforce obligations under it as if it were a final judgement of the courts concerned.

ICSID procedures encourage settlement, so the cases that have proceeded to formal arbitration represent only a fraction of the instances where investment protection agreements have proved useful. An investor who is properly structured to take advantage of a investment protection agreement will often find that the improved position prevents the initial imposition of foreign exchange controls or other interference with protected assets. In such a case there is no formal record of the actual protection afforded by investment protection agreements since no arbitration results from the complaint.


Effective structuring with investment treaties will (i) increase the appeal of investments in markets that are profitable but risky; (ii) discourage government interference with assets; and (iii) facilitate the assertion and enforcement of claims against a government which interferes with assets of a protected foreign investor. Significant uncontrolled political risk is no longer a necessary component of the commercial decision to invest. Risks arising from government interference can often be mitigated by effective use of investment protection treaties, leaving investors free to concentrate on the commercial attractions of the investment.