Thursday, 17 May 2012

Hostile takeovers and sabre-rattling - Argentina’s aggressive nationalism takes the fight to Europe.

Radio Nacional, Spain’s main public radio station, is rarely a platform of anger or controversy. Like a political version of Gardener's Question Time, newsreaders deliver the headlines with subdued obedience and guests use political correctness as the first rule of thumb. But on the morning slot of 16th April, just  as Spain was waking up to its cereal and cafe con leche, the situation was a little different.

Trouble along the road for Repsol
Antonio Brufau, CEO of Spain’s main oil company Repsol, was in the studio after his company suffered a major shock from Argentina. The Buenos Aires government had seized control of  Argentina’s largest oil company YPF back from Repsol, taking the lion’s share of Repsol’s 57% stake in YPF. Brufau’s tone as he catalogued Argentina's “unjustifiable illegal act” belied a distilled rage towards Argentina’s government, particularly its president Cristina Fernandez de Kirschner. It was a welcome break from the monotony of Spanish morning radio, but epitomised the shock waves felt in Madrid after the news.

Repsol acquired YPF in 1999 and for the next 12 years poured money into the Argentinian operation, increasing its investment year-on-year. From its original 1999 investment of $1bn by 2011 this had almost tripled to $2.99bn (inflation-adjusted still well over a two-fold increase), with $3.5bn promised in 2012. In addition, the number of YPF employees almost doubled under Repsol's tenure.

For twelve years, the partnership seemed rosy enough, with Brufau and Argentinian minister in charge of energy policy Julio de Vido keeping strong relations. According to Spanish newspaper ElPais: “The Repsol president got on well with everyone he needed to: the businessmen, the influential journalists, the governers of the petrol-producing provinces”.

But suddenly, in December 2011, this all changed.

De Vido changed his tone, demanding that Brufau's company invest more in exploring and producing petrol, despite YPF finding shale oil deposits worth around $25bn in Argentina's Neuquén province last year. 2011 marked the first time in history that Argentina had to import energy from abroad, and the first port of call for criticism was Repsol, despite the company accounting for only 33% of Argentina's energy production. Brufau countered, citing that the existing oil deposits were nearing exhaustion and that it was impossible to install the infrastructure required for extracting the new finds so soon after their discovery.

But his responses fell on deaf ears. From the placid relations of a few months previous, the Argentinian government turned into Repsol-YPF's main antagonist, criticising the company wherever possible, before finally announcing the expropriation on April 16th

The sudden sea-change in relations, backed up by what Brufau termed Argentina's “campaign of harrassment, coercion and leaking of information”, pointed to a premeditated strike at Repsol's core. Argentina was doing everything in its power to devalue YPF's shares, allowing it to take control through expropriation when the share prices were at rock-bottom.  
Between January and early April it fell by over 40% on the NYSE, from $42 to $25.

Suddenly, as de Kirschner announced the takeover, Repsol's representatives were given minutes to pack their bags and clear their Buenos Aires offices. Thirty years after the Falklands invasion, Argentina was perpetrating another act of defiance against a former colonialist power. 

Naturally it was unrepentant. De Kirschner spoke of “taking back what is ours” and justifying the act as for the good of Argentina.

Legally, the grounds for expropriation are shaky at best. International law would only authorise the expropriation if it were in the public interest and if the shareholders (Repsol) received fair compensation. 

Neither of these seem likely at this stage. Even with control of YPF it is still unlikely whether Argentina can once more become energy self-reliant and eliminate the need for foreign energy imports. After all, Repsol-YPF only accounted for a third of its energy production and the infrastructure for new shale oil energy deposits is still years away from being installed.

More worryingly for Repsol is the problem of “fair” compensation. Argentina has sent mixed messages, saying that remuneration of the $9bn debt would be discussed in a government tribunal. But then de Kirchner deployed her populist tone declaring that her government would pay Repsol “zero pesos”. Spain and the EU responded, imposing sanctions on Argenina, boycotts and trade blocs, but It seems Argentina is determined to defy Europe once again.

YPF: part of Argentina's national conscience 
Kirchner's motives are not hard to fathom. YPF is a company engrained in Argentina's national psyche. When it was formed in 1922 it was the world's first state-run oil company. Its original logo – in the blue and white of the national flag – is testament to the patriotic pride it represents. Putting it back into the hands of the taxpayer – symbolically defying Repsol's supposed neo-colonialism – would always be hugely popular.

So it proved. Cheers of support in Argentina's national congress. Demonstrations on the streets of Buenos Aires. The wave of public approval recalled the celebrations after the 1982 Falklands invasion, albeit on a smaller scale. Defying former colonial powers – enflaming the residual bitterness towards them – is clearly a popular move amongst ordinary Argentinians, and one which Kirchner is apt to exploit.

The Falklands question is even more emotionally-charged and again Kirchner's jingoism has generated massive popular support. To mark the thirtieth anniversary of the conflict the Argentine government was once again in provocative mood, with Kirchner attacking Britain's “absurd” stance towards the islands and unveiling a statue of the islands with the Argentinian flag emblazoned across them.

De Kirchner in verbal combat
The latest furore came from an advert filmed secretly in Port Stanley, which showed an Argentinian athlete training for London 2012, accompanied by the tagline “to compete on English soil, we train on Argentinian soil”.

But Argentina's spurious sense of entitlement over the Falklands is just one of many flashpoints. This and the YPF affair tie in with a muscular anti-european sentiment appearing throughout Latin America. In Bolivia, Evo Morales seized control of the country's main power supplier, Transportadora de Electricidad, from Spanish company Red Electrica, even ordering his military to seize the local assets of the Spanish company. Brazil, the world's fifth-largest economy, refused to allow British warship HMS Clyde to dock in Rio de Janeiro, forcing it to divert to Chile.

Undoubtedly there is a sense of pride when the former colony – the traditional underdog – takes the fight back to its former oppressors.

But the South American Viceroyalties splintered into independent nations almost two hundred years ago. Like the rest of the world, Argentina and Latin America must move on from their obsession with the remnants of colonialism.
Clearly, the issue is still a source of emotionally-charged popular discord. For Latin American leaders, exploiting it is a way to score cheap political points. But even if this attitude stymies trade with European partners, its political gains mean it is unlikely to disappear overnight.