Latin America is no stranger to the nationalization of private industries. Nonetheless, President Kirchner’s recent decision to re-nationalize the oil company YPF has drawn considerable condemnation around the world. Against the backdrop of a large energy trade deficit and a domestic energy crisis, Kirchner and her supporters believe that YPF will bring energy securityA complex concept meaning many things, energy security is most often used in a narrow sense to indicate the stability of a country’s supply of energy. to Argentina. Many worry that the nationalization is the first step of a larger government take-over of the private sector since Kirchner has already nationalized an airline and private pensions.
Balancing domestic priorities and economic growth is a challenge faced by leaders everywhere. Within Latin America there has been a trend to support socialist policies and eschew trade liberalization as many countries are mired in significant long-term debt problems with the World Bank. Interest payments on this debt have been debilitating and the public has become quite wary of the neo-liberal policies.
To address long-term debt problems and raise government revenue, nationalization of energy companies (and other sectors) has been a common solution across Latin America. This trend began in 1938 when Mexico expropriated foreign oil assets worth half a billion dollars after foreign companies were unable to agree upon working conditions. Despite boycotts of Mexican petroleum products, Mexico founded Pemex, which is now the second-largest non-public company worldwide (behind Saudi Arabia’s AramcoThe joint venture established by several U.S. oil companies and the government of Saudi Arabia to develop Saudi Arabia’s oil reserves. Over time, the Saudi government purchased shares of Aramco until it achieved full ownership in the 1970s, renaming the company Saudi Aramco.).1
While the 1990s saw a trend toward privatization, renationalization has recently emerged across the continent. From 2006 onward, Chavez nationalized oil companies that had joint ventures in Venezuela, as well as steel, cement and telecommunications companies. In the same period, Bolivian President Evo Morales nationalized the country’s natural-gas reserves. Brazil’s Petrobras remains a national energy company, though it did sell a minority stake in 2010.2 Latin America is experiencing a shift toward resource nationalismA strategy associated with the renationalization of energy companies that seeks to hoard the benefits of energy production for the state instead of allowing foreign companies to retain and expatriate profits., taking advantage of high oil prices and newly found discoveries of hydrocarbon deposits.
This news analysis will examine the evolution of resource nationalismA strategy associated with the renationalization of energy companies that seeks to hoard the benefits of energy production for the state instead of allowing foreign companies to retain and expatriate profits. in Argentina leading to the take-over of YPF as well as the potential fall-out from that decision.
Historical Overview of Argentina
Argentina had similar beginnings to the U.S. It became an independent republic in 1816, adopted a constitution in 1853 with the central government sharing tax revenue with the provinces, and settled the West, not through parceling out land to individuals and families like the U.S., but by giving land to a few elite landowners.3 Until World War I, Argentina was a major player in international trade, exporting beef and grain. During this period, the U.S. followed Europe’s path of industrialization, while Argentina followed this path as well, it was limited.
While the Great Depression hurt both countries, the U.S. tried to address the needs of those left behind, while Argentina did not. Nationalism and self-sufficiency became attractive. In a military coup, Juan Domingo Perón became President in 1946. He felt that their problems were due to exporting low value manufactured good and importing high values one.4 So, to grow his economy, Perón nationalized many sectors of the economy and protected state industries with high trade barriers.5
Over the next 30 years, Argentina focused inward. It did not export many products and heavily taxed imported goods. Peron was eventually forced out, though Peronism continued on. A military coup in 1976 was followed by a “lost decade.”6 In the 1990s Carlos Menem came to power and linked Argentina’s currency to the U.S. dollar, ending hyperinflation and chronic devaluations that harmed the development of the country’s economy. The government also liberalized the economy, including privatizing YPF in1993. The country gained low interest rates, which led to a domestic borrowing and spending binge. Unemployment and poverty rose again and the country took credit from the International Monetary Fund. Leaders clung to an overvalued exchange rate, the deficit rose and capital flight increased. In 2001, the country declared a unilateral debt default, the largest in modern history.7
The devaluation and default eliminated the savings of middle-class and retired Argentines, but the super-wealthy were able to hide their money in foreign banks. The default stopped structural reforms and the country is still shunned today by many foreign investors. Long-term investment cannot be financed and productivity is maintained with periodic devaluations.8
Since 2003, the country has been ruled by the Kirchner family, first by the late Néstor and now by his widow Cristina. Both Peronists, they view creditors, such as the IMF and the World Bank, as illegitimate. The country’s economy has grown under their leadership mainly because of a soy-driven commodities boom, trade links with Brazil, and because of structural and technical investments in the 1990s. A momentum for nationalization of YPF has slowly been building.9
Cristina Kirchner requires that all imports are approved and has instituted “company-specific trade balancing” to reach quotasQuotas are quantitative restrictions on the import of certain goods and services. She appropriated the country’s central bank reserves,10 took a controlling stake of its largest water company, and took over its flagship airline and pension system.11 Several electricity companies were renationalized as well. The government-run water company, airline and electric companies have accumulated huge losses and are propped up by subsidies.12
Moises Naim notes: “Argentina suffers from high inflation, slowing economic growth, ballooning subsidies, price controls, capital flight, decaying infrastructure and a less than welcoming environment for foreign investors. It has had limited access to the international financial system since defaulting on its debts in 2001.”13 He characterizes the nationalization as a delaying tactic as Kirchner and the population do not want to enact painful reforms.
Argentina’s Energy Problems
In Argentina there is a growing energy consumption and languishing production. Despite having the world’s third largest recoverable shale gas reserves, behind only the U.S. and China, Argentina will need to import $10 billion of gas in 2012.14 From 2003 to 2010, oil and gas consumption grew by 13 percent, while oil production fell 12 percent and gas production fell 2.5 percent. Argentina went from an energy trade surplus of $2 billion in 2010 to a deficit of $3 billion in 2011.15
Instead of focusing on investment and production, Kirchner further stimulated consumption. Oil exports are taxed and energy prices are fixed. Compared to its neighbors, gas is 75-80 percent cheaper and electricity is 70 percent cheaper.16 The imbalance between consumption and production is further magnified by Argentina’s troubled distribution network. In the past decade, one-third of Argentina’s gas stations closed. Many large and small companies left the country. YPF actually closed 49 stations. National gas and petroleum shortages have become common.17
Underinvestment, mismanagement, and limited access to new technologies in oil companies are major problems in Argentina.18 Argentina’s government blames YPF for failing to invest in the country. To address lack of investment funds, Kirchner has demanded that all oil and gas companies operating in Argentina, including foreign ones, repatriate all future export earnings to Argentina. Argentinian companies cannot pay dividends and must reinvest those funds in Argentina. Also, she has increased the amount of capital banks must hold before being able to pay dividends.19
Kirchner’s decision to nationalize builds upon provincial withdrawals of 15 oil leases, about 18 percent of YPF’s crude production in the country. Provincial leaders said the company has not kept its promises to develop these properties though YPF noted that it had planned to invest millions in those areas and increase production.20 YPF is not the only company being pressured by the government, Petrobras and Canadian oil companies have been forced to hand over concessions to provincial governments as well.21
Some believe though that the moves by the provincial leaders were encouraged by Kirchner to decrease YPF’s stock price, thus lowering the cost Argentina would have to pay Repsol, owner of 57 percent of YPF’s shares.22 By buying 51 percent of YPF, Kirchner can divert $1.3 billion from the take-over and force the minority YPF stakeholders (Repsol and other foreign investors) to shoulder the losses associated with the costly energy imports.23
Many wonder how Argentina is going to dig itself out of this hole. To buy YPF at $13.6 billion, its current value, Argentina would deplete half of its treasury of funds, which would not allow the country to continue to provide subsidies that currently keep the economy running.24 Some speculate the Argentina will use the state controlled pension funds to cover the costs of buying the controlling interests, but even those might not be enough.25
Even if the government finds the money to cover the costs of YPF, it will need partners to develop the newly found shale gas resources. Major capital and technological skills are necessary to glean oil from the shale deposits and Argentina will need partners to do this. Analysts estimate that $25 billion is needed to develop these resources.26 But, who is going to invest in Argentina after YPF?
One American investing site notes:
…what is of greater concern is the increasingly punitive actions the government is taking against foreign owned or controlled companies operating in other industries. Eventually this can only end in disaster for the Argentine economy as foreign investors and companies withdraw from Argentina, starving the country of much needed foreign direct investmentThis category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment.. It is also quite foreboding for the many investors holding shares in Argentine companies or those foreign companies that derive a large portion of their revenues from Argentina.27
The nationalization not only isolates Argentina’s largest investor, Spain, but the European Union as well. Banks, utilities and telecoms firms may start looking to leave the country as well. The country still owes money to World Bank’s International Centre for the Settlement of Investment Disputes that it demanded the country pay to foreign investors.28 Besides flouting the World Bank, Argentina is protected by the World Trade Organizationan international body dealing with the rules of trade between participating nations. WTOan international body dealing with the rules of trade between participating nations rules do not allow Spain to enact unilateral trade sanctions, so there is little recourse to force Argentina to play fairly.29
Unfortunately history is repeating itself. The underlying problems have not been resolved and Argentina’s leaders are taking the easy way out. A return to isolationism will not help Argentina’s economy though Kirchner is doing everything she can to make the country inhospitable to outside investors. While much of the blame falls on Kirchner’s shoulders, she was democratically elected by her people, many of whom agree with her actions. Unfortunately the current dispute mechanisms do not provide enough of a deterrent for future action. Thus YPF’s nationalization will probably be the first of many as Argentina tries to find ways for other countries to finance their unsustainable path, until eventually they do not.
1 Keating, Joshua. “How to Seize an Oil Company.” Foreign Policy. April 17, 2012.
2 “Takeover Artists.” The Wall Street Journal. April 17, 2012.
3 Beattie, Alan. “Argentina: The superpower that never was.” Financial Times. May 23, 2009.
5 Barbieri, Pierpaolo. “The Tragedy of Argentina.” The Wall Street Journal. April 18, 2012.
6 Beattie, Alan. “Argentina: The superpower that never was.” Financial Times. May 23, 2009.
7 Barbieri, Pierpaolo. “The Tragedy of Argentina.” The Wall Street Journal. April 18, 2012.
11 “Takeover Artists.” The Wall Street Journal. April 17, 2012.
12 Naím, Moisés. “YPF will soon be the least of Argentina’s problems.” Financial Times. April 18, 2012.
14 Patel, Simit. “Argentina Nationalizes An Oil Producer, Are Gold Miners Next?” Seeking Alpha. April 19, 2012.
15 Turner, Taos and Moffett, Matt. “Behind the Battle for Argentina’s Oil.” The Wall Street Journal. April 10, 2012.
16 “Fill ’er up.” The Economist. April 21, 2012.
17 Bosworth, James. “Challenges facing Argentina after oil firm nationalization.” Christian Science Monitor. April 18, 2012.
18 Naím, Moisés. “YPF will soon be the least of Argentina’s problems.” Financial Times. April 18, 2012.
19 “The Impending Nationalization Of Argentina’s Oil And Gas Industry.” Seeking Alpha. April 9, 2012.
20 “Spain slams Argentina amid escalating oil dispute, warns country against becoming pariah.” Washington Post. April 12, 2012.
21 “The Impending Nationalization Of Argentina’s Oil And Gas Industry.” Seeking Alpha. April 9, 2012.
22 Turner, Taos and Moffett, Matt. “Behind the Battle for Argentina’s Oil.” The Wall Street Journal. April 10, 2012.
23 “Fill ’er up.” The Economist. April 21, 2012.
24 “Spain slams Argentina amid escalating oil dispute, warns country against becoming pariah.” Washington Post. April 12, 2012.
25 “The Impending Nationalization Of Argentina’s Oil And Gas Industry.” Seeking Alpha. April 9, 2012.
26 “YPF nationalization: poor Repsol, poor Argentina.” The Globe and Mail. April 17, 2012.
27 “The Impending Nationalization of Argentina’s Oil and Gas Industry.” Seeking Alpha. April 9, 2012.
28 “Cristina scrapes the barrel.” The Economist. April 21, 2012.
29 “Fill ’er up.” The Economist. April 21, 2012.
* Cristina Kirchner http://www.flickr.com/photos/expectativaonline/3604529867/
* Argentina cattle http://www.flickr.com/photos/mywayaround/3243443737/
* Gas station http://www.flickr.com/photos/proimos/5463456911/sizes/z/in/photostream/
* Argentina flag http://www.flickr.com/photos/germeister/544905282/