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Does Uruguay merit its pro-investor reputation? – Robert Jackman
Does Uruguay merit its pro-investor reputation?
by Robert Jackman (Robert Jackman writes on investments, stock-markets and finance for the Daily Mail and UK Investor Magazine, as well as contributing to The Spectator and Daily Telegraph.)
In a region where political risk weighs heavily, Uruguay has long styled itself as a pro-business outlier – earning the nickname of ‘the Switzerland of Latin America’. A decades-long diplomatic blitz has seen the 3-million strong country tout its commitment to the rule of law as central to its investment case.
Does Uruguay merit its pro-investor reputation? This October a French commercial court will consider that very question, when it hears an appeal from an investor seeking compensation for the failure of what would have been the country’s biggest ever foreign direct investment.
The case harks back to 2006, when Indian mining tycoon Pramod Agarwal began talks with Uruguay’s left-wing government to mine a deposit estimated to contain some 2.5 billion tonnes of high-grade iron ore. Agarwal committed his privately-owned mining company (Zamin Ferrous) to investing some $3 billion into the project (via a subsidiary).
Agarwal claims the investment was derailed by political interference, as the Uruguayan government’s changing demands (including on the port location) rendered the work unfeasible – but only after he had spent some $300m on the project. Agarwal’s lawyers have taken particular aim at a 2013 law that required mining projects to pay 38 percent tax on profits, as well as raising environmental standards. They claim that – since Agarwal’s project was the sole mining endeavour in Uruguay – the law amounted to a targeted attack on his business.
After an unsuccessful attempt to launch a dispute under a bilateral investment treaty in London, Agarwal is now hoping a Parisian appeal court will grant him jurisdiction to seek more than $3 billion in compensation for the project’s failure.
The dispute has surprised many Uruguay experts, who point to the country’s track record for cultivating foreign investment. Likewise, the country scores higher than most of its neighbours in World Economic Forum’s Global Competitiveness Report – finishing behind only Chile and Mexico in the Latin America region.
Still, its scores aren’t entirely unblemished. Uruguay ranks 112th for shareholder governance, for example – and 97th for trade tariffs. The country also has higher trade union membership than its neighbours, with 30 percent of its workforce belonging to a union (almost twice the regional average). Collective bargaining is common in both the private and public sectors.
Meanwhile, a dependence on neighbouring Argentina to provide electricity has also caused occasional bottlenecks for industry. A major outage in 2019 – caused by a failure in the Argentine grid – left both countries entirely without power for much of the day. Argentina’s energy ministry insisted the situation was ‘unprecedented’ – although smaller blackouts are frequently observed.
Overall foreign direct investment in Uruguay has faltered in recent years – albeit against a turbulent economic backdrop. Data from the country’s central bank shows FDI falling from a high of $33.4 billion in 2014 to $29.6 billion in 2020. Though next round of figures may well be boosted by the country’s strong performance during the pandemic (thanks to a speedy vaccine take-up Uruguay largely avoided the punishing lockdowns seen in neighbouring Argentina).
From time to time, Uruguay’s government has found itself at odds with multinational investors. In 2010, it was the subject of a legal complaint from Phillip Morris – as the tobacco major took aim at strict new packaging laws which, it claimed, left its brands unfairly disadvantaged against its competitors. The claim was dismissed in 2016.
After the case was thrown out, Uruguay’s then president Tabaré Vázquez blasted Phillip Morris for attempting to subvert ‘the fundamental right to health and life’ of Uruguayans. A former oncologist who continued to practice medicine part-time during his time in office, Vázquez had long styled himself as an anti-smoking president – even as his government oversaw the legalisation of recreational marijuana.
After 15 years holding the presidency, Vázquez’s party – the left-wing Broad Front – lost favour in March 2020, as Uruguay elected the centre-right politician Luis Pacalle Pou. Having campaigned on the promise of tax and fiscal reforms, Pacalle Pou has set out his ambition to make his country an even more appealing destination for foreign investors – winning plaudits in the Western press.
Can his administration make good on this bold promise? Initial signs show cause for optimism – as voters narrowly approved a package of pro-business reforms that had been put to a plebiscite this March. As the president himself has acknowledged, though, there is still more to do. At least one big investor will agree with him on that front.
Is Uruguay’s safe investment destination reputation tarnished forever? – Jill Baker
By Jill Baker
A privileged position in Latin America?
Uruguay has a privileged strategic position among the Southern Cone nations on the American Continent. The nation stands out for being an egalitarian society and for its high income per capita, low level of inequality and poverty and the almost complete absence of extreme poverty. In relative terms, its middle class is the largest in America and represents more than 60% of its population.
Its location between Brazil and Argentina substantially favours its policy of regional integration as a gateway to and out of the MERCOSUR (Southern Common Market) countries.
The nation enjoys an advanced communications network, that along with a competitive financial services and support infrastructure for corporates, provides excellent access to the central business axis of the MERCOSUR and to other regions and countries around the world. A predominantly agricultural country, Uruguay is the biggest consumer of beef in the world.
Uruguay is the gateway to MERCOSUR with an internal market of more than 276 million people, with a GDP per capita that peaked in 2018 at $16,037. Although this fell sharply in 2020 (COVID), the pandemic also highlighted the strengths of the country as one of the best prepared in the region to make the transition to distance education, along with a broad social protection network and strong health system. A post-COVID recovery to $15,066 per capita in 2021 saw it comfortably outperform other Latin American countries and arguably retain its ‘Switzerland of South America’ reputation.
A raft of laws provides guarantees for equitable treatment for foreign and national investors, with few restrictions on free movement of capital and profits. The government have made it easier for foreigners to settle in the country by reducing the value of property a person must buy to qualify for residency from $1.7m to $380,000. As such Uruguay is the second greatest recipient of external investments, in terms of GDP in South America.
Moving Goalposts or plain expropriation?
All however is not as it seems. Although on the face of it there would seem to be little the way of corruption at government level, in recent years, Uruguay’s enviable international reputation has begun to tarnish as details have emerged of a number of unsavoury business dealings and asset expropriations by previous incumbent administrations.
Much of the unsavoury dealings occurred under the watch of former leftwing president and former guerrilla José Mujica, who, despite a humble and modest lifestyle in office seemed to care little for his nation’s reputation in corporate matters.
In 2013, Chilian asset management group Linzor Capital Partners acquired a chain of 92 pharmacy stores, only to fall victim to a decree signed by Mujica that same November preventing an individual or company from owning more than 15 pharmacies in the country. According to Linzor, the decree “almost completely destroyed” the value of its ‘Farmashop’ investment, and it took a full seven years before Linzor finally won a US$120m litigation against the Uruguayan government, after an appeals court deciding the restrictions impeded free trade.
This however pales in comparison to the case of mining giant Zamin Ferrous, backed by Indian businessman Pramod Agarwal, which invested $365m, the largest ever external investment into Uruguay, into the Valentines Iron Ore project. Encouraged by President Mujica, through Zamin’s Uruguayan subsidiary Aratiri, Agarwal and his team planned and developed an infrastructure, with ore taken through an underground pipeline to a specially built port. Scheduled to start production in 2015, Valentines would have produced more than Anglo American’s giant Minas-Rio mine in Brazil and generated billions of dollars in royalties.
At this point, hopes were high that Uruguay could shift its perception as an historically agricultural country to become a meaningful contributor to global commodity markets. But the Mujica administration and the subsequent government headed by Tabaré Vázquez in 2015, kept changing requirements for the Valentines project, and the consequential feasibility studies required by the changes made it logistically impossible for Aratiri to meet the deadline. At this juncture, the Uruguay government used new mining laws to revoke the Aratiri’s mining titles, effectively ruining Agarwal. An appeal court in Paris is set to rule on whether the decision by the original arbitration tribunal can be overturned, leaving Agarwal free to pursue compensation.
Most recently, and this time at the heart of Uruguayan’s infrastructure, stockbrokers Custodia de Valores Mobiliarios (CVM) and United Brokers were suspended from carrying out transactions or financial activities on 5 July 2022 after Uruguay’s Central Bank (UCB) found some of their clients had suffered “significant” losses without the broker notifying them “in a timely manner”.
The UCB claimed that the losses, which mainly resulted from trading losses on the Nasdaq, totalled around $100m and came from an “aggressive” risk profile portfolio. This claim however is hotly refuted by Sara Goldring, president and majority shareholder of CVM and United Brokers, who founded both CVM and United Brokers back in the late 1990s.
Many have taken the view that while the UCB have acted, their actions are little more than closing the proverbial stable door with horses long gone, and which stand starkly in contrast to the international image that Uruguay wishes to portray to attarct would-be international investors. Goldring has also hit back at the UCB, saying she will not tolerate “defamatory campaigns of manipulation of public opinion.”
There have of course many successful investments, and hugely successful commercial ventures that have in turn contributed to the growth of Uruguay, and it may also be that these are largely isolated cases. Nonetheless, there are clearly questions to be asked about the competence of the UCB and Uruguay’s financial infrastructure, not to mention the redressing the failure and seeming lack of commercial acumen of previous administrations to ensure the nation can continue to attract external investment. For now, the jury are certainly “out” over whether Uruguay can reclaim the title “Switzerland of South America.”
References:
Trading Economics: https://tradingeconomics.com/uruguay/gdp-per-capita
FT: https://www.ft.com/content/7b045146-a314-4bd4-85f9-bc28ca0871fa
Ferrere: https://www.ferrere.com/en/news/uruguay-faces-new-icsid-claim-over-health-measures/
Latin Lawyer: https://latinlawyer.com/article/ferrere-steers-uruguayan-pharma-litigation-victory
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