Czech Republic loses first round in Nomura dispute

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An arbitral tribunal in London ruled on Friday that the Czech Republic had "breached its obligation to treat foreign investors fairly and equitably" by failing to protect the investment of the Japanese bank Nomura in the Czech bank IPB. The ruling opens the way for Nomura to seek compensation from the Czech government for the losses it suffered after the bank collapsed in the year 2000. The arbiters have yet to decide how much the Czech state has to pay, but the verdict could be bad news for the ruling Social Democrats ahead of the June general elections.

IPB bank in 2000, photo: CTK
The dispute with Nomura dates back to the year 2000 when, amid rumours of pending collapse, the IPB bank in which Nomura had invested heavily, was placed under forced administration and sold for a symbolic one crown to another bank, CSOB. CSOB then received what Nomura said was "discriminatory state aid" from the government that gave the new owner guarantees for poor assets estimated to be worth 200 billion crowns /approx. 7 billion euro/. Nomura said the government should have provided such assistance to IPB in the first place - and took the matter to court, accusing the Czech Republic of failing to protect its investment in the country, and asking first for 40, then for 70 billion crowns in compensation.

In addition to sending a bad signal to foreign investors, the news of a pending fine could harm the ruling Social Democrats ahead of the June general elections. PM Jiri Paroubek has attempted to play down the importance of this ruling, presenting it as "a draw", since a lot of Nomura's key arguments had been rejected by the court. He said this could influence the future ruling on the actual sum which the CR would have to pay. He also pointed out that the Czech Republic had launched a counter-offensive suing Nomura at an arbitration court in Zurich for the cost of imposing forced administration at IPB. The arbitration began on Monday and the Czech Republic is pushing for over 260 billion crowns in compensation. But this case is not likely to be settled in the next few months - certainly not before the June general elections. So how badly could the Nomura case damage the prime minister's party in the elections? A question for political analyst Jiri Pehe:

"I do not think that this particular case will damage the Social Democratic Party very much. In my opinion the Social Democrats will emphasize that what happened in IPB was necessary, that means the take over by the central bank and then CSOB, since the IPB was on the brink of collapse and could have threatened the entire economy. And they will also emphasize that this is not the last arbitration and that in the end the Czech Republic may not actually have to pay anything or very little. So I do not think that this will have a huge impact on the results of the elections, unlike perhaps some other developments."

To what extent do cases such as this influence voters? We've heard that if Nomura wins the compensation it is pushing for then every Czech will in effect be contributing 4 to 7 thousand crowns to the fine? Do things like that matter to voters?

"Certainly many voters will take this into consideration but I am not sure how much it will affect them as far as their final decision is concerned. We know that several years ago the Czech Republic lost an arbitration involving TV NOVA and had to pay ten billion crowns as a result and only a year later Mr. Zelezny, the stations former general director, won a seat in the Senate. So a great deal depends on how well politicians are able to explain their case and perhaps obfuscate a bit."