In mid-April, in the largest nationalisation since Russia’s acquisition of Yukos in 2003, Argentina’s President, Cristina Fernández de Kirchner, seized a majority stake in the oil company Yacimientos Petrolíferos Fiscales (YPF).
Sabre-rattling and jingoistic rhetoric has increased dramatically in President Kirchner’s second term. The potential remains for further expropriations, particularly affecting the extractive industries. This possibility is placing developments in the emerging shale oil sector in doubt. While Kirchner may experience short-term political gains from the move, the bill will have significant long-term ramifications for Argentina’s economy, damaging investor confidence and the state’s reputation. As South America booms, Argentina risks becoming a pariah.
On 16 April, following weeks of speculation and after several months of bickering, Argentine President Kirchner announced plans to expropriate 51% of Repsol’s YPF shares. The plans met with immediate condemnation, led by Spain, where the headquarters of Repsol’s global operations are located. Announced in a televised speech, the bill, titled On Argentina’s Hydrocarbon Sovereignty, will split Repsol’s controlling stake, with the Federal government receiving 51 per cent of the shares. The additional 49% will be distributed to ten oil-producing provinces.
Repsol acquired YPF in the early ‘90s. Originally a state entity, the Argentine government controlled YPF from its creation in 1992 until 1993, when economic liberalisation policies saw increasing investment across Argentina.
Privatisation occurred in two stages: in 1993 and 1999. Repsol invested heavily, acquiring a controlling stake in the 1999 stock offer. However, relations quickly deteriorated. After two decades of self-reliance, in 2011 Argentina was forced to import oil worth $9 billion, an embarrassing development for a state with the world’s third-largest shale oil reserves. After the Argentinian government’s expropriation of YSF, Repsol’s valuation decreased by one fifth.
Kirchner has blamed Repsol’s policy of prioritising dividend payments, at the expense of reinvestment in Argentina. Conversely, Repsol contends Kirchner’s market manipulation is to blame, setting domestic prices far below the international average, and artificially inflating demand.
Irrespective of the justifications, the development will undoubtedly have significant economic and political implications for Argentina. According to the Financial Times, the most immediate impact of President Kirchner’s decision was the collapse of a deal by Repsol to sell YSF to Chinese oil company, Sinopec. In the longer-term, the decision is likely to harm investor confidence and deter foreign investment.
Despite claims by Kirchner, production is likely to decrease with state control, as demonstrated in Venezuela. There, in the five years since nationalisation, production has fallen by 7%. This ratio is likely to be even higher for Argentina, which has lower production levels and higher investment requirements.
Most significantly, further interventions by the government cannot be discounted, and would be in line with previous policy. During her second term, Kirchner has become increasingly populist, adopting interventionist measures - including nationalising the state pension system and reforming the central bank charter - allowing the state access to bank reserves.
While wholesale expropriations are unlikely, the government’s increasingly arbitrary nature may lead to recriminations against oil companies charged with investments in Argentina’s nascent shale developments. One senior oil analyst argued: “I worry less about Apache’s operations in Egypt than in Argentina”. In addition to stifling investment, the potential for an exodus of experts in the sector cannot be discounted, further accelerating the decline in domestic supplies.
Spain’s response options are limited. Madrid has withdrawn its ambassador, and will use a pre-planned visit to Latin America by its Prime Minster, to bolster its position. Madrid may also look to the European Union for support. Predictably, Britain, facing its own dispute with Argentina, over oil and fishing rights in the Falkland Islands, has condemned the bill. Yet, Spain must temper its policy response due to other Spanish commercial considerations. A number of Spanish firms have invested heavily in the booming Latin American market, including Argentina, to offset the dire economic circumstances in Spain. Aggressive policy against Argentina may lead to recriminations against these businesses.
Madrid and Respol’s most likely course of action will be to refer the matter to the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). The case, however, could take years to resolve, and prospects of a resolution are weakened by Argentina’s history at the ICSID. A quarter of all cases heard by the ICSID have involved Argentina, with Buenos Aires failing to provide reparations for any of the previous judgements.
Kirchner has succumbed to the historic South American (and particularly Argentinean) notion of resource nationalism, mistaking ownership for productivity. Today, Bolivian President Evo Morales followed Kirchner’s lead, announcing a nationalisation of the country’s power grid.
In a period where other South American countries, including Mexico, Chile and Brazil, have recognised the value of external investment, Argentina is risking economic growth for naive populism. With the long-term health of Venezuelan President Chavez in doubt, regional financial and political support for revolutionary nationalisation policies, such as President Kirchner’s, seem to belong to a by-gone era. Brazil, as a regional power, and additionally boasting successful models, such as oil giant Petrobras and Vale, should highlight the benefit of private companies exploiting natural resources within clearly defined legal frameworks. Failure could see Argentina become a pariah state, failing to capitalise on the current Latin American economic boom.