Oily Abyss

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

The 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.

City, 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.

The 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.

While 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.

The banks are likely to sue for the full amount owed to them which at a minimum is calculatedto be 800 million dollars.

A 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.

The 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.