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Argentina’s renationalization of YPF: A push to manage oil on its own terms

Kirchner’s approval rating in Argentina has jumped from 42 percent to 60 percent since the controversial renationalization April 16.

As glitter rained down over 100,000 screaming fans in a Buenos Aires soccer stadium late last month, President Cristina Fernández de Kirchner trumpeted her government’s takeover of Argentina‘s biggest oil company, YPF.

“We have recovered one of the most emblematic companies in Argentina,” said President Kirchner, who expropriated the majority shares held by Spanish energy giant Repsol. “This government is looking for new forms of intervention: The state cannot turn away from its economic and social responsibilities.”

Amid the largely youthful crowd waving pro-government banners and singing in vociferous support was Marcos Huenchullán, who traveled 1,000 miles from Bariloche to attend the rally. “In time, we will all reap the rewards of state control of YPF,” said Mr. Huenchullán, calling the renationalization “historic.”

Kirchner’s approval rating in Argentina has jumped from 42 percent to 60 percent since the controversial renationalization April 16. Many in the United States and Europe have criticized Kirchner’s move as a populist bid that is likely to isolate Argentina from the global economy — and perhaps a sign that she is moving toward a Hugo Chávez-style model of nationalization on a broad scale. But the takeover is in line with changing power dynamics in the region, where countries with lucrative natural resources want to — and can — take control of their own resources, despite what outside players might prefer.

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In a sign of strong national support, the bill to expropriate Repsol’s shares received expedited approval in both the Argentine Senate and Congress, where it was even backed by opposition parties.

“What you’re really seeing is a renationalization that reflects, I think, very important power changes,” says Terry Karl, professor of Latin American Studies at Stanford University in Palo Alto, Calif.

That may not mean a devastating drop-off in foreign investment in Argentina, as many are predicting, however. The country recently discovered new shale and gas oil reserves, and has more than once defied dire predictions about its economy.

After a severe economic recession in the late 1990s, Argentina defaulted on nearly $93 billion in foreign debt, winning the country a reputation as a pariah. But it recovered using its own approach — against the advice of the international community.

Alienation and isolation

Kirchner insists that YPF needs to be controlled by the state so that Argentina can stop importing energy — $9.4 billion last year — and become self-sufficient. But as part of a broader protectionist policy, which includes foreign-exchange controls and restrictions on imports, the renationalization could drive away even more investors.

“This is a decisive moment for Argentina: With the expropriation of YPF, it is confirming its isolation,” says Jorge Castro, a political analyst in Buenos Aires. “The arbitrary confiscation of YPF from Repsol, which broke international law, will alienate Argentina from the world.”

The move to renationalize YPF, which was privatized in 1992, spurred the European Union to announce it would limit imports of Argentine biodiesel. The US and other countries condemned the expropriation: Even neighboring Brazil expressed concern.

Dr. Castro says Argentina needs to attract capital, not push it away, if it wants to maintain the economic growth of the past decade. Currently, only about 10 percent of all foreign investment in South America goes to Argentina, far less than to countries such as Brazil, Colombia, and Chile. Argentina is facing a fiscal deficit and a reported inflation rate of more than 20 percent. Critics say the expropriation of YPF is a short-term move designed to placate the masses and deflect attention away from domestic economic problems.

The YPF takeover sends a chilling message, says Boris Segura, a Latin America analyst at New York investment bank Nomura. “The hostile business environment in Argentina has kept investors away for a while,” Mr. Segura says. “Even if YPF does not represent the beginning of a politics of expropriation, the damage is done: Argentina is perceived as a risk.”

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On their own terms

Despite Kirchner’s less than diplomatic approach to nationalizing YPF — directors were forced to leave their Buenos Aires offices after government officials moved in via an emergency decree to take control — she has recognized the need for foreign investment. Just days before her Buenos Aires rally, the economy vice minister and minister of planning met with international oil companies, including Chevron and ExxonMobil, to discuss joint exploitation of the huge Vaca Muerta shale and gas oil reserves discovered late last year in southwest Argentina. Some point to this as a signal that the government is encouraging foreign investment in the sector, but on its own terms.

Investment in the oil sector is a risk some companies will be willing to take, despite the hostility of the Kirchner regime, Segura says.

Oil is a limited resource. Oil company executives have “recognized that economic energy nationalism is the new reality in town,” says Miguel Tinker Salas, professor of Latin American history at Pomona College in Claremont, Calif. “Unless you can find dramatic reserves elsewhere, you just know you are dealing with state-owned energy.”