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Thursday, May 17, 2012
Argentina's old-school economics
Resource nationalism was supposed to be a throwback, a discredited school of economics that failed the governments that embraced it. Apparently, Argentine President Christina Fernandez de Kirchner never got the memo.
Instead, she decided in mid-April to seize a majority stake in one of her country's leading energy producers Yacimientos Petroliferos Fiscales (YPF), a move that threatens not only to trigger an economic war with some of her country's biggest trade partners, but also could well undermine the primary objective of the move itself: the revitalization of Argentina's fraying energy infrastructure.
Founded in 1922 by the Argentine government, YPF was the world's first vertically integrated oil company and Argentina's leading oil and gas concern. The company was privatized in 1993 as part of the privatization orthodoxy that spread after the end of the Cold War and the triumph of market-oriented liberalism. In 1999, the Spanish firm Repsol bought a majority share.
On April 16, however, Ms. Kirchner announced that her government would expropriate a 51 percent share of YPF, giving it control of the company and reducing Repsol's stake from a little over 57 percent to just 6 percent. The government justified the move on several counts. First, it argued that the state should have more control of Argentina's natural resources. Last year, Argentina, for the first time since 1994, became a net importer of oil and natural gas; this year, that bill is set to reach $12 billion, three times the 2010 bill. Second, it insisted that high energy prices were stifling the economy and lowering them would boost international competitiveness. Third, it complained that YPF was paying a high dividend, which meant that it was giving funds to stockholders rather than reinvesting in critical infrastructure.
That last charge is the only one that makes much sense. But the first two contradict each other. State efforts to reduce energy bills will encourage reckless consumption of resources rather than careful stewardship. Ms. Kirchner forgets a critical fact — that YPF pays high dividends because that was part of the deal struck by her husband, the late Nestor Kirchner, her predecessor as president, with the Eskenazi family, prominent Argentine business people.
The Eskenazis were brought in as a strategic partner at the request of the late Mr. Kirchner, but they had to borrow money to purchase their shares and were reportedly promised that they could pay off those loans with the dividends from the investment. It is not clear how the new deal will impact the Eskenazi holdings.
The decision has outraged Spain, where Repsol is based, and other European governments. Repsol has demanded $10.5 billion for its shares, a demand that has been flatly refused. It started legal action this week. The Spanish government has criticized the move as "arbitrary"; the foreign minister charges that it "breaks the climate of cordiality and friendship that traditionally have marked relations between Argentina and Spain." Madrid has already retaliated by imposing limits on imports of Argentine biofuel, a €700 million market for Argentina. The Spanish government is said to be exploring other diplomatic and economic options.
The European Union has also fired warning shots: threatening that the move could block talks with Mercosur, the South American trade group, over a trade agreement. The EU is the largest source of direct foreign investment in Argentina, as well as its largest source of imports. But EU options for retaliation are limited since trade between Argentina and Spain is governed by a bilateral treaty.
The real harm to Argentina is not likely to come from state behavior, however. The challenge for Buenos Aires is convincing investors that it is not hostile to foreign capital.
The YPF expropriation, approved by congress earlier this month, follows state takeovers of an airline and pension funds. A union official has suggested that the electric power industry is next. And while creeping nationalization may sound fanciful, there is a small but powerful coterie of young officials with nationalist inclinations making economic policy in Ms. Kirchner's government.
This is a very real concern in the energy sector. YPF may well have scrimped on reinvestment in infrastructure. And Argentina needs those investments: The U.S. Energy Information Administration estimates Argentina has the world's third largest natural gas reserves (after the United States and China). YPF reckons it needs $25 billion annually to develop those reserves, but few companies are willing to provide such capital if there is no guarantee that they will reap the rewards from that investment.
Pressure could also come from Argentina's neighbors. The nationalization is out of touch with the prevailing mood in South America; it was condemned by Mexico and Chile, where officials warned that it could reinforce the image of Latin America as a "less trustworthy region" than Asia.
It did win support from Venezuelan President Hugo Chavez, a dubious honor. Venezuela is hemorrhaging money as it extends the state's grip over the economy, using its own energy resources to pay for the bill. This should warn Ms. Kirchner that she has embraced a discredited economic paradigm. The bills will continue to mount.