--Clyde Russell is a Reuters columnist. The views expressed
are his own.--
By Clyde Russell
LAUNCESTON, Australia, April 23 Indonesia's
decision to start cancelling investment treaties with 62
countries has passed with little comment, but the move may have
a greater impact than the recent banning of mineral ore exports.
Indonesia last month kick-started the process of terminating
all of its bilateral treaties by notifying the Netherlands that
its agreement to protect and promote investment would end in
2015, and signalling that the others would end as soon as
The agreements, which are common between states, protect the
rights of investors in each other's country, and typically
include clauses about fair treatment, no expropriation and
guarantees that profits can be repatriated.
Most importantly for many investors in countries like
Indonesia, with its patchy record on legal certainty, is the
right of appeal to the Washington-based International Centre for
Settlement of Investment Disputes (ICSID).
Among the countries that have treaties with Indonesia are
major foreign investors including China, India, Australia,
Britain, Singapore and Russia. However, the United States and
Japan are among nations that don't have agreements.
Why would the Indonesian government seek to end agreements
that were designed to foster foreign investment and economic
development, as well as protect Indonesian investments abroad?
The main argument seems to be that their time has passed and
they belong to an earlier era when foreigners feared assets
would be nationalised.
The treaties are seen favouring foreigners over domestic
investors, something at odds with the government's drive to
ensure greater control of Indonesia's mineral resources.
This can be seen against the backdrop of a raft of changes
to Indonesian law and regulations, which among others enforced a
ban on exporting unprocessed ores, mandated the building of
smelters and introduced laws to force the sale of stakes to
locals of foreign-owned mines.
Indonesia is the world's biggest exporter of nickel ore and
supplies about two-thirds of top buyer China's imported bauxite,
the raw ingredient for making aluminium.
London-traded nickel has gained almost 32 percent
so far this year after the export ban came into force in
January, with China's imports of nickel ore from Indonesia
plunging 79 percent in March from a year earlier and bauxite
slumping 86 percent.
Indonesia is also the world's biggest exporter of thermal
coal used in power-stations, but the impact on coal has been
muted so far as it isn't subject to a ban, but foreign owners
will be caught by the need to divest.
The problem for many foreign investors is that they will
doubt whether the need for investment protection has passed.
I doubt that any investor in the Southeast Asian nation
would privately agree that his company would get a fair hearing
in the legislative and court processes, especially if the
opponent was the government or a well-connected local.
It seems that the decision to end investment treaties is
part of the ongoing process to ensure that Indonesia's resources
are controlled by the government, and/or domestic investors.
CHURCHILL DISPUTE A TRIGGER?
The dispute between the government and London-listed
Churchill Mining provides a short-term impetus for the
end of investment treaties.
The miner won the first round of its dispute over coal
assets with the Indonesian government in February at an ICSID
The Jakarta Globe reported on Feb. 28 that the government
will appeal the decision and it doesn't want to face the risk of
paying compensation to Churchill, which the newspaper said could
be as much as $1.05 billion.
The risk for the Indonesian government is that it could be
hit with dozens of cases in the ICSID from disgruntled foreign
It's not hard to imagine Indian or Australian coal miners
challenging the rule that they have to sell half of their stake
in a mine once it has been producing for 10 years.
Ending the investment agreements will mean foreign companies
having to take their chances in Indonesian courts, a far better
prospect for the government.
However, cancelling the treaties will take time, as some run
for extended periods and have additional protection clauses once
notice of termination is served.
This means the Indonesian government may well have to deal
with foreigners in an international tribunal, but it's a safe
bet they will play for time if this is the case.
The trend still appears clear, Indonesia is doing all it can
to get control of its natural resources from foreign investors.
(Editing by Joseph Radford)