Expropriation and nationalization

Direct expropriation, or nationalization, is the act by which a government formally transfers the ownership of private assets to the state, with or without adequate compensation. It is governed by customary international law and bilateral investment treaties, which recognize the sovereign right to expropriate but impose a triple condition of legality, non-discrimination and prompt, adequate and effective compensation, according to the Hull formula codified in 1938. Creeping expropriation is a variant that is far more difficult to qualify legally: a series of regulatory, fiscal or administrative measures progressively taken by a state, none of which is individually a formal expropriation, but whose cumulative effect is to strip the investor of the economic substance of their investment. ICSID arbitral tribunals have developed abundant jurisprudence to distinguish the legitimate exercise of regulatory power from compensable creeping expropriation. For the political risk insurer, this distinction is central: investment insurance policies, offered by public bodies such as Bpifrance Assurance Export, MIGA or the DFC, or by specialized private insurers, contractually define the thresholds at which a governmental act constitutes a covered loss. The rise in geopolitical risks, nationalizations in the natural resources sector in Latin America and Africa, and mutual economic sanctions between major powers have renewed interest in these covers since the mid-2010s.

A French mining company holds a gold extraction license in West Africa. Over five years, the host government successively imposes an extraordinary extraction tax, a cap on dividend repatriation, a 51% local partnership obligation and finally a refusal to renew the license. No single measure constitutes a nationalization, but the political risk insurer is invoked under the creeping expropriation guarantee.

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