The Ecuadorean government has sent in troops to take over the assets of Brazils giant construction firm Odebrecht and prevented senior executives from leaving the country.
The government accused the firm of poor construction in the giant San Francisco hydro-electric dam project, which showed cracks and had to be shut down soon after its recent completion.
The action on Tuesday marks the governments second major spat with a Brazilian firm. Brazilian oil giant Petrobras was recently obliged to return an oilfield in the Amazon region to Ecuadorean control after investing more than $250m in the project.
Petrobras had planned to start producing 30,000 barrels of oil a day from block 31 in 2009, but a decision by President Rafael Correas administration to raise windfall taxes from 50 per cent to 99 per cent in October last year and environmental issues persuaded the company to hand the assts back to the Ecuadorean government. Petrobras also produces about 32,000 barrels of oil a day from another block, but had to transfer 51 per cent of that to the government too.
The Odebrecht move comes at a time when the president is campaigning for a referendum to increase his powers over the economy, points out Ramiro Crespo, president of Analytica Securities in Quito. A key issue has been greater government control over the economy and high electricity prices became a totemic issue making the closure of the dam a hot potato.
This second dispute is likely to put some strain on what have up to now been good economic relations between the two countries, particularly as Brazils national development bank, the BNDES, was responsible for a large chunk of the dam financing, providing a $302 million loan.
Difficulties with the dam had already been highlighted, but negotiations were under way and it is not clear why they were abandoned so abruptly. Odebrecht had agreed to put $43m in a guarantee account and invite international bodies to determine responsibility for the problems as well as extend the length of guarantees for the project