Facing political turmoil and a growing sentiment of nationalism, President Evo Morales shocked the energy world in May 2006 by announcing that the Bolivian government was seizing control of the nation’s massive natural gas reserves. Bolivia’s natural gas reserves rival Venezuela’s immense natural gas fields and represent one of country’s primary sources of revenue. By nationalizing the energy industry, President Morales forced private energy interests in the country to renegotiate their energy concessions with the government or forfeit their holdings.

Although private investors could have appealed the seizures of their assets through arbitration proceedings as a breach of contract and an unwarranted nationalization of private assets, they instead opted to salvage their investments by acquiescing to the government’s demand and executing new agreements that greatly diminished their role. By doing so, they at least maintained their involvement in one of Latin America’s largest energy markets. In the event that the private investors had challenged the Bolivian government through formal arbitration proceedings, such proceedings would have likely resulted in an award in their favor. An arbitration award would not have guaranteed the investors a return of their investment because they would still need to search for Bolivian government funds held in foreign bank accounts in order to enforce a judgment. By amicably renegotiating their commercial agreements with the government, the energy companies have avoided challenging the Bolivian government directly and will remain, to a more limited extent, involved in the development of the country’s gas fields.

Although President Morales’ gamble has paid off in the short term, Bolivia may have compromised its ability to attract future foreign investments over the long term. Additionally, the private investors who have decided to remain active in the Bolivian energy sector as a method of salvaging their assets may likely not be inclined to increase their investment (exposure) in the country. The country’s short-term gains in the energy sector may also be offset by decreased foreign investment in other critical sectors given that the global investment community may view Bolivia as a risky investment environment. Another unintended result may be an increase in the cost of capital for the country. In order to attract private investors to the country, the Bolivian government may need to agree to payment security instruments exercisable outside of the country, such as letters of credit, offshore reserve accounts or foreign trust arrangements.

Aside from investors, Bolivia’s actions have also shaken the confidence of Bolivia’s natural gas customers such as Brazil. Although the revised commercial agreements have reestablished Bolivia’s ability to produce adequate natural gas supplies to deliver to its customers, the international natural gas market’s confidence in the long-term reliability of the supply as been jeopardized by the government’s unilateral actions. Bolivia’s natural gas customers, although currently dependent on Bolivian gas, will likely try to quietly secure alternate natural gas supplies in order to avoid being held hostage to changes in the Bolivian political climate.

Aside from the effects on Bolivia, the activities in Bolivia may also have a negative effect on the region as a whole. While sophisticated investors such as investment banks and equity funds are able to differentiate among the various investment climates in each country within the region, the common investor does not have the resources or the detailed information to make an educated investment decision about opportunities in the region and may avoid the region altogether, sensing that there may be a downturn in the Latin American market as a whole. Even in the case of larger corporations looking to expand in the global marketplace, corporate officers making investment decisions may mistakenly avoid the region thinking that actions of individual countries or the economic fortunes of certain countries will doom the region as a whole.

The last chapter in the Bolivian saga has yet to be written, but it will be important to see if President Morales looks to nationalize other sectors as part of his social agenda. Given the rise of nationalistic sentiments in neighboring countries such as Venezuela, Bolivia’s apparent success in gaining greater control over its natural resources may embolden political leaders in other countries to consider similar actions as a method of greater political appeal with the general public at the expense of foreign public investors.