An UNCITRAL arbitration that
we have been following here is heating up between Gramercy
Funds Management LLC (Gramercy) and the Republic of Peru. Much like
Elliot Management's fight against Argentina, the case against
Peru pits a distressed debt fund against a sovereign state.
But Gramercy's case is fundamentally different from the open
market bonds bought by Elliot in Argentina. Gramercy bought
Peruvian Land Reform Bonds issued to local citizens when the
country instituted a land reform program in the 1960s. After the
world financial market's hyperinflation in the 1980s,
Peru's currency – like those of much of the developing
world – was devalued. Since then, Peru's economy has
become robust and thriving, one of the fastest-growing in South
In 2001, Peru's Constitutional Tribunal required repayment
of the Land Bonds at an updated value pegged to a consumer price
index measure. But in 2013-2014, the same Tribunal and Supreme
Decrees from the Government changed the payout methodology, pegging
it to the U.S. dollar. So Gramercy now seeks more than US$1 billion
from what it contends is an expropriation caused by this valuation
change, basing its claim on a bilateral investment treaty (BIT)
between Peru and the United States that came into force in 2009
(after Gramercy acquired the Land Bonds).
Peru, understandably, has many problems with Gramercy's
arbitration. Unlike the Argentinian debt purchased on the open
market by Elliot, Gramercy sits in a sui generis position.
Because it is a U.S. entity, Gramercy argues that it can exploit
the Peru-U.S. BIT to bring an action no domestic (i.e., Peruvian)
bondholder can bring – basically allowing three international
arbitrators to decide an entirely domestic dispute over the
valuation of Peruvian Land Bonds issued locally for Peruvian
property well before the BIT's effective date, almost 50 years
As we have said, Gramercy's use of ISDS is "a new form
of investing, which is 'Let's make them poorer, and
we'll get rich.'" The strategy, if successful, would
be economically inefficient, antidemocratic and geopolitically
dangerous. (Full disclosure: BakerHostetler previously represented
Peru, including in a bond dispute brought by Elliot seeking payment
for distressed bonds, and Mark Cymrot's wife's family holds
Land Bonds issued in 1969.)
Gramercy's appointed arbitrator is Stephen L. Drymer, and
Peru's appointed arbitrator is Professor Brigitte Stern. The
president of the panel has not yet been selected. We're
only at the opening stages of this dispute, so we will continue to
monitor the arbitration as it progresses.
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