As Citibank and Deutsche Bank sue for the billions owed
to them by the CPC, the country's economic fate may well
be decided by international arbitration
By R. Wijewardena
country finds itself staring into the abyss of a major
financial catastrophe after the government's
negotiations with the international banks who originally
organised the Petroleum Corporation's controversial oil
hedging deal broke down last week.
Citibank and Deutsche Bank filed for international
arbitration on the matter of outstanding payments due to
them from the CPC, turning their backs on the high level
government committee that had been tasked with
negotiating a compromise on the hedging issue.
Deutsche and Standard Chartered banks all sold billions
of rupees worth of oil derivatives to the CPC, at the
height of last year's commodity boom as the government
decided to hedge against further increases in the price
of oil. The CPC agreed to purchase 2.5 million barrels
of oil at $100 per barrel. However following the
intensification of the global economic crisisthe price
of oil collapsed, and the CPC was left purchasing oil
atmore than double the market price.
Mounting criticism of the hedging deal and legal action
by the opposition led the Supreme Court to abrogate the
hedging agreement and order the CPC to halt its payments
on oil derivates. However, the major international banks
who had purchased the derivates on behalf of the
government found themselves facing billions of rupees
worth of losses.
banks threatened legal action to recover the money owed
to them by the CPC. However the President appointed a
high level committee comprising several prominent
ministers, to negotiate with the banks and reach a
compromise on the total amount payable.After four rounds
of talks between the banks and the cabinet sub committee
negotiations have collapsed and the government is
currently facing the prospect of paying as much as US$
1 billion to the banks in question, should the
International Centre for Settlement of Investment
Disputes (ICSID) rule against it.
international arbitration is yet to commence, the cost
of mounting a defence is expected to be several million
dollars. The banks involved are some of the most
powerful financial organisations in the world and can be
expected to employ the best possible legal teams to
present their case.
banks are likely to sue for the full amount owed to them
which at a minimum is calculatedto be 800 million
decision against the government at the ICSID therefore
will leave the country facing the prospect of a billion
dollar payment and given that the country's total
foreign reserves at present stand at not far above one
billion dollars,the consequences of an unfavorable
decision to the country's economy could be catastrophic.
fate of this country's economy is therefore no longer in
the hands of the government, the President or even the
IMF, but rests on the outcome of a legal battle against
some of the wealthiest organisations on Earth.