Argentina's president, Christina Fernandez de Kirchner, plans to nationalize the oil company, YPF, supposedly to defend national interests, but the takeover could have disastrous political and economic consequences.
Argentina's president loves appearances like these: Dressed in black, she is standing between the nation's blue-and-white flag and a portrait of the country's national heroine, Eva Peron. Selected members of her government and representatives of her party's youth organization are cheering wildly before she even says anything. Then, Christina Kirchner raises her hand and speaks the words that her cheerleading squad has been waiting for: YPF, the largest oil producer in the country will be nationalized for reasons of "national and public interest;" the assets of the major shareholder, the Spanish energy company, Repsol, are to be seized.
Officially, the Argentine government has defended this bombshell with the argument that Repsol, which until now has held 57 percent of YPF, has spent more time attending to the interests of its shareholders, while the amount of oil it produces has steadily declined.
It is correct that the oil fields operated by YPF are slowly but surely drying up, while the thirst for oil in Argentina continues to climb. As a result, for the first time in 17 years, Argentina had to import crude in 2011 at a cost of more than nine billion dollars (6.9 billion euros).
No talks with Spain
Kirchner's accusations, however, begin to crumble when looking at the subject of investments. She rebuffed a comprehensive investment plan from Repsol as "insufficient" and for weeks has refused to meet Repsol's CEO Antonio Brufau. Furthermore, Kirchner was already president when YPF was pressured to accept more Argentine shareholders. These people were not just coincidently friends of the Kirchner family. The new partners also financed their new stock package, which amounted to a quarter of YPF shares, with proceeds from company profits. The debt incurred is still outstanding.
The real reasons for Kirchner's coup lie elsewhere. Argentina needs money. Exports in Latin America's third largest economy are shrinking; growth is expected to drop by half - to four percent - this year. Officially, the government claims that the inflation rate is less than one percent. The International Monetary Fund (IMF), however, sees inflation closer to 20 percent. To reduce outflows of foreign exchange, the government has imposed import bans with the result that more and more everyday products are no longer available.
Tapping private funding
In its search for financial resources, the Kirchner government decided that nationalization was a suitable measure. It has already seized the assets of private retirement funds, the foreign currency reserves of its own central bank and the television revenues of the Argentine soccer league. All of these moves, of course, have been cloaked as a patriotic act for the good of the country. Or, as the Argentine political scientist, Rosendo Fraga, describes it: "Kirchner is swapping capitalism among friends for capitalism for the state."
The consequences could be disastrous. Potential investors are running scared. The influential trade union boss, Oscar Lesano, who is close to the government, even said in a recent radio interview that the signals he sees coming from the Kirchner camp suggest further nationalizations are in the offing. Comments like these set off the alarm bells at the headquarters of foreign companies.
The nationalization of YPF, however, is also an attempt to divert attention away from the government's own mistakes on the energy policy front. Consumer prices, for years, have been kept artificially low with government subsidies. At the same time, the prices from producers have been capped. "In order to compensate for this deficit, the rules in the energy market need to be improved," says the Argentine economist Daniel Montamat, who was energy minister in the late 1990s. However, a realistic price policy would be a snub to Kirchner's constituency – and she does not want to risk losing her voters.
An eye on the neighbors
Instead, Kirchner points out that all Latin American countries control their own energy reserves, an argument that does not really hold water when looking next door to Brazil. The oil company, Petrobras, is controlled by the state, but has a free hand in setting prices.
Petrobras has the confidence of investors, says Rafael Schechtmann from the Brazilian Institute for Infrastructure in Rio de Janeiro. "Contracts have simply never been broken in the Brazilian model. The rules have always been respected," he emphasized.
In the next few years, YPF is going to need investments worth 25 billion dollars. The funding will now be hard to find, in which case, the current enthusiasm for President Kirchner will fade rapidly.
Author: Marc Koch, Buenos Aires / gb
Editor: Neil King