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C O N F I D E N T I A L QUITO 000905 
 
SENSITIVE 
SIPDIS 
NOFORN 
 
E.O. 12958: DECL: 2034/10/27 
TAGS: ECON EFIN EC PREL ETRD EINV
SUBJECT: Ecuador's Plans to Terminate All Bilateral Investment 
Treaties 
 
CLASSIFIED BY: Heather M. Hodges, ...




id: 231669
date: 10/27/2009 22:20
refid: 09QUITO905
origin: Embassy Quito
classification: CONFIDENTIAL//NOFORN
destination: 
header:
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OO RUEHWEB

DE RUEHQT #0905/01 3002220
ZNY CCCCC ZZH
O R 272220Z OCT 09
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0261
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHBO/AMEMBASSY BOGOTA
RUEHBR/AMEMBASSY BRASILIA 0061
RUEHCV/AMEMBASSY CARACAS 0085
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C O N F I D E N T I A L QUITO 000905 
 
SENSITIVE 
SIPDIS 
NOFORN 
 
E.O. 12958: DECL: 2034/10/27 
TAGS: ECON EFIN EC PREL ETRD EINV
SUBJECT: Ecuador's Plans to Terminate All Bilateral Investment 
Treaties 
 
CLASSIFIED BY: Heather M. Hodges, Ambassador, U.S. Department of 
State, Executive Office; REASON: 1.4(B), (D) 
 
------------ 
 
Summary 
 
------------ 
 
 
 
¶1. (C) The Government of Ecuador is preparing to terminate existing 
Bilateral Investment Treaties (BITs) with seventeen countries, 
including the United States, with the goal of replacing them with 
investment agreements that do not/not include national treatment, 
allow only local or regional dispute arbitration, and align foreign 
investment with Ecuador's national development plan.  Acting 
Foreign Minister Lautaro Pozo informed the Ambassador of this 
decision October 26 and will notify other Ambassadors over the next 
week.  Pozo explained that Ecuador's new constitution requires this 
action, and the GoE must begin negotiating substitute investment 
agreements to avoid legal challenges from "extreme left" groups. 
The GoE has already sent a proposal to the National Assembly, but 
Pozo noted this would be a lengthy process.  Nevertheless, the GoE 
hopes to be able to present a proposed replacement agreement to the 
U.S. during the upcoming Bilateral Dialogue.  The Ambassador noted 
the bad timing of this move, given the imminent Bilateral Dialogue 
and Trade and Investment Council meetings, pending renewal of 
ATPDEA, and other actions complicating bilateral relations 
recently.  She predicted the GoE would have a difficult time 
explaining this to Washington.  End Summary. 
 
 
 
--------------------------------------------- ------------------- 
 
Constitution Requires Renegotiation of Existing BITs 
 
--------------------------------------------- ------------------- 
 
 
 
¶2. (C) Acting FM Pozo called in the Ambassador on October 26 to 
inform her of the GoE's decision to replace all its existing BITs 
with a less formal "model" investment agreement that complies with 
Ecuador's new constitution (which entered into force October 2008). 
The awkward title of this new agreement is roughly "Framework 
Agreement for the Promotion of Investment Complementary to 
Development."  Pozo said Ecuador has 17 BITs in force and he would 
be delivering the same message to the other countries' ambassadors 
over the next week, but wanted to deliver it to the U.S. first.  He 
added that the GoE did not want the U.S. to hear it first from the 
press.  The MFA plans to meet with the EU ambassadors as a group 
October 27, then Canada, and then will notify its UNASUR and ALBA 
compatriots and China next week.  The Ambassador noted that 
Ecuadoran Ambassador Gallegos had given us a heads-up late last 
week without providing details.  The Ministry's legal advisor Marco 
Albuja Martinez and Director General for North America Juan Salazar 
participated in the meeting.  (Salazar later admitted privately to 
the Ambassador that this meeting was the first he had heard of this 
initiative.) 
 
 
 
¶3. (C) Pozo and Albuja explained that the 2008 constitution imposed 
new limits on the types of agreements that the GoE may enter into, 
and also provided a timeline under which the GoE must begin to 
revise all outstanding agreements that do not comply with the new 
constitutional standards.  Albuja noted that the GoE has four years 
to make the necessary legal changes, but that the GoE was required 
to begin amending or changing agreements or treaties within 12 
months of entry into force of the constitution.  Given that the 
constitution was now one year old, the GoE must begin the process 
or face potential legal challenges.  He explained that Ecuador's 
constitution was the only one in the world that considered the 
concept of "judicial security" as a "human right," which exposed 
the GoE to legal action.  He confided, furthermore, that the GoE 
was aware of "extreme left" groups preparing to launch just such 
challenges.  In response to the Ambassador's question as to whether 
 
 
the constitution recognized or grandfathered existing treaties and 
agreements, Albuja said that it did recognize them, but also 
obliged the GoE to revise clauses that were not in compliance.  The 
Ambassador retorted that if that was the case then, in effect, the 
new constitution did not recognize existing agreements.  (Pozo and 
Albuja both conceded thatQe protections afforded under the U.S. 
BIT would continue in place for current investors for Q years 
after termination of the agreement.) 
 
 
 
--------------------------------------- 
 
Political Objective: Favor Locals 
 
--------------------------------------- 
 
 
 
¶4. (C) Albuja explained that the GoE has three objectives in 
replacing the current BITs with a substitute agreement: 1) 
eliminate the concept of "national treatment;" 2) allow only local 
and regional arbitration for the settlement of disputes; and 3) 
align foreign direct investment so that it "complements" the GoE's 
national development plan.  Albuja noted that national treatment 
"discriminates against local investors," but did not explain the 
logic of this assertion. 
 
 
 
¶5. (C) Regarding arbitration, he said that the Constitution 
"recognizes alternative methods of dispute settlement," but only 
via national and regional institutions or fora.  He said the GoE 
was in discussions with ALBA, UNASUR, and ALADI regarding the 
establishment of dispute settlement systems, and he was also aware 
that UNCITRAL was considering setting up an arbitral center in 
Buenos Aires (which would presumably qualify).  These new 
arbitration mechanisms would welcome the inclusion of international 
experts and judges, he promised, but the key was that it be a 
"Latin American process."  (Comment: we were aware that the new 
constitution prohibited Ecuador from entering into treaties or 
international agreements ceding jurisdiction to non-regional 
arbitration tribunals, but understood that this provision would not 
be applied to existing BITs.) 
 
 
 
¶6. (C) Albuja explained that the GoE also wanted to ensure that FDI 
complemented the country's national investment objectives and was 
consistent with the National Development Plan.  As an example, he 
noted that the constitution declared that Ecuador should aim to 
become a major center for tourism by 2015.  So, if a foreign 
investor expressed interest in investing in a sector that did not 
correlate well to the GoE's "vision," the GoE would work with the 
country of the prospective investor to get them to invest instead 
in a sector such as tourism that the GoE deemed acceptable.  He 
provided a convoluted explanation of how this would work, but the 
concept was basically that the GoE would coordinate with other 
governments to make sure the investment was appropriate. 
 
 
 
¶7. (C) Albuja said that this was how Ecuador had been managing 
investment decisions with Brazil and Colombia, and asserted that it 
had worked well and allowed all parties to address issues early on 
and avoid future disputes.  Referring to a 2008 bilateral spat 
where Brazil pulled its Ambassador to Ecuador over a dispute 
involving one of its companies (Odebrecht), the Ambassador 
pointedly noted that Ecuador and Brazil's commercial relations over 
the last year have not been so rosy, so this mechanism was not 
flawless.  She also pointed out that the U.S. does not instruct its 
companies how to invest, so that strategy might work with China, 
but would not work with us. 
 
 
¶8.  As evidence of how serious the GoE was in making sure that the 
BITs were appropriately focused and effective, Albuja pointed out 
that the GoE had terminated nine BITs during 2008, all with other 
LatAm countries, on the basis that they had failed to attract 
sufficient investment.  The Ambassador commented that annulling 
BITs does not seem the best way to attract investment, and said it 
was ironic that other GoE officials were pressing her and the USG 
to increase U.S. investment in Ecuador, while at the same time the 
GoE was pursuing a policy that would likely deter it.  She added 
that it was precisely because of the uncertainty created by just 
this type of initiative that we were not seeing much new U.S. 
investment.  With a reckless disregard for the importance of 
foreign investment, Albuja responded with the assertion that FDI 
was not really that important to Ecuador anyway, having increased 
in recent years from only 1.8% to 2.6% of GDP.  (Comment: Both we 
and our Canadian Embassy friends believe this number to be well 
short of the true mark, but, regardless, the perspective is 
troubling.) 
 
 
 
--------------------------------------------- ----------------- 
 
GoE Initiative Submitted to the National Assembly 
 
--------------------------------------------- ----------------- 
 
 
 
¶9. (C) Pozo said the GoE had sent a proposal to "renounce" all 
existing BITs to the National Assembly's Committee on Sovereignty, 
Integration, International Relations, and Integral Security for 
review.  This committee, headed by Fernando Bustamante, would 
review the proposal and then send it to the full Assembly for a 
vote, after which the Assembly would send it back to the Executive 
for approval and signature.  He speculated that this would be a 
lengthy process.  However, the GoE hoped to be able to present a 
draft of the new agreement during the November 10 Bilateral 
Dialogue meeting in Washington. 
 
 
 
--------------------------------------------- -------------- 
 
Initial Embassy Response:  Bad Timing, Bad Idea 
 
--------------------------------------------- -------------- 
 
 
 
¶10. (C) The Ambassador promised to consult with Washington on this 
news, and clarified that she did not have explicit Washington 
guidance.  However, she noted that this initiative was poorly 
timed, given that our two countries were about to hold high-level 
meetings in Washington, given that Congress would soon be reviewing 
whether to renew or extend both ATPDEA and GSP trade preference 
programs, and given all the difficult issues our countries had been 
dealing with directly.  (Comment:  Our MFA interlocutors are well 
aware of our concerns over the President's recent decree for 
compulsory licenses of patented pharmaceutical products, our 
concerns about GoE interaction with the U.S.-designated Export 
Development Bank of Iran, the precarious renegotiation of the 
airport construction project, problematic negotiations over USAID 
assistance programs, Chevron's allegations of corruption in their 
local court case, and the GoE's decision not to renew the Manta FOL 
lease, among others.) 
 
 
 
¶11. (C) The Ambassador also commented that, to our knowledge, few 
if any countries had canceled BITs with the U.S., adding that U.S. 
BITs actually served as a "seal of approval," encouraging other 
countries to negotiate their own BITs and also reassuring other 
countries' investors of the operating environment.  She added that 
it was a shame that the GoE had decided to move forward with this 
initiative, and speculated that the MFA would find it difficult to 
 
 
explain the decision to Washington. 
 
 
 
¶12. (C) Albuja noted that the GoE had been considering this action 
for quite a while, and he even asserted that Foreign Minister 
Falconi had mentioned it during his meeting with the Secretary. 
When the Ambassador said the U.S. side thought Falconi had been 
referring to the GoE's proposal for a Trade for Development 
Agreement, Albuja admitted this and explained that the investment 
agreement was linked to (or part of) the Trade for Development 
Agreement.  In response to the Ambassador's push back on this 
initiative, Pozo, looking sheepish, admitted that this was a 
"complicated period" that the GoE would need to work through, and 
also speculated that they would likely need to lobby the U.S. 
Congress to explain the GoE's point of view. 
 
 
 
------------------------------------------ 
 
Comment: They Want it Their Way 
 
------------------------------------------ 
 
 
 
¶13. (C) This decision is entirely consistent with the Correa 
government's desire to have increasing control over all resource 
flows and over the economy writ large.  On the trade side, the GoE 
is pushing bilateral agreements with the U.S. and Canada - two of 
its major commercial/investment partners -- that give it one-sided 
preferential access with few, if any, conditions (i.e., delinked 
from counter-narcotics efforts).  Similarly, the GoE is pushing 
donors, including USAID, to funnel all official assistance through 
the national development agency (AGECI), instead of through NGOs. 
The GoE is also increasingly favoring investments from large 
foreign state-owned companies, such as from Venezuela and China, 
which also ensure the GoE is able to wield control over their 
investment decisions.  This latest move takes government 
involvement in private sector decisions to a new level.  The 
Embassy will be reaching out to other affected Embassies to gauge 
their reaction, but we fully expect the private sector reaction to 
be strongly negative when this issue hits the press, especially as 
it comes right on the heels of the President's decree on compulsory 
licensing.  End Comment. 
HODGES 

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