Argentine Kleptomania Strikes Again

The line between buying something and stealing it isn’t all that fine, yet Argentina and its president, Cristina Fernández de Kirchner, seem to have a hard time staying on the right side of it.

Faced with flagging oil and gas production, Kirchner announced that her government will seize a majority stake in YPF, the country’s main oil producer, from Spain’s Repsol.

After unsuccessfully opposing the planned seizure, Repsol President Antonio Brufau now seeks compensation of $10.5 billion, which he says is the market price for the seized shares. He isn’t likely to get it any time soon. Argentina’s deputy economy minister, Axel Kicillof, has promised politicians in Buenos Aires, “We’re not going to pay what they say.” Kicillof, who has been named to help lead the newly nationalized company, called Repsol officials “morons” for thinking the Argentinean government is “stupid enough to buy everything.”

Repsol acquired its stake in YPF, which was state-owned until 1993, for $15 billion in 1999. Before the newly announced nationalization, it owned 57 percent of the company. The move culminates a long dispute between Kirchner’s government and the company.

The two parties do agree that Argentina’s oil production has dropped precipitously in recent years. Production declined 22 percent from 2000 to 2010, according to information compiled by former energy secretary Emilio Apud, based on data from the Argentine Oil and Gas Institute and the Energy Ministry, and reported by The Washington Post.

Kirchner says this is because the oil company has refused to reinvest profits, instead treating investors to oversized dividends. In a speech announcing the nationalization, she said the use of profits to pay dividends, rather than to reinvest, was the reason Argentina had been forced to begin importing fuel.

Repsol, on the other hand, says Argentine policies are responsible. Since Kirchner’s late husband, former President Néstor Kirchner, came to power in 2003, an array of subsidies, price caps and export taxes has made investment in Argentina impractical, the company contends. The price of oil in Argentina is now capped at $55 a barrel, compared to the world market price of over $100 a barrel.

Things heated up shortly before Kirchner’s announcement, when Repsol increased an earlier estimate of how much shale oil and gas it has discovered in Argentina to nearly 23 billion barrels, which would be enough to double the country’s output in a decade. In order to attract the $25 billion a year in investments necessary to develop those resources, however, Argentina would need to make major changes to its energy policies, Repsol said. That is something Kirchner, who has built political support on cheap energy, is not willing to do.

YPF’s nationalization would be worrisome even in isolation, but it is only the most recent in a string of troublesome moves in Argentina. In composite, these create a picture of a government that is prepared to take whatever it wants – and does so with the support of a large share of its citizens, at least when the property being taken belongs to someone else.

In the summer of 2008, the government took control of Aerolineas Argentinas, which, like YPF, had been privatized in the 1990s and was owned by a Spanish company, in this case Grupo Marsans. The amount of compensation for the former owners was likewise disputed, and Marsans took its case before an arm of the World Bank. Later that year, the Buenos Aires government seized nearly $30 billion in private pension funds, allegedly to protect retirees from the weak market. That decision came, conveniently, as the government was struggling to pay $22.4 billion in debt obligations and other payments that were coming due – and as Kirchner was looking for ways to rebuild political support after a four-month strike by farmers over export taxes.

Argentina is not content just to pursue businesses that control resources. It wants more of the resources themselves. As I wrote in January, Argentina’s suddenly renewed demands for control of the British-ruled Falkland Islands appear to be motivated largely by the potential development of wells that could produce about 8.3 billion barrels of oil.

Argentina’s recent streak of deadbeat behavior stretches back to the closing weeks of 2001, when the country defaulted on a then-record $95 billion in debt. In 2005, two years into his term, then-President Néstor Kirchner offered to exchange defaulted bonds for new ones worth 70 percent less. His widow renewed that offer in 2010. As a result of the two offers, only about $4 billion of defaulted debt is still held by litigating creditors, but the country has yet to sell any new bonds overseas. Bond buyers, at least, seem to have learned their lesson about the hazards of dealing with Argentina.

Now the country faces a dilemma. With Repsol out of its way, it is free to develop its shale oil and gas reserves as it chooses, but it still needs to attract the necessary $25 billion a year in investments.

Target number one is the Brazilian oil giant Petrobras. In exchange for a pinky-swear from Argentinean Planning Minister Julio de Vido that Argentina won’t expropriate any of Petrobras’ assets, the Brazilian company has agreed to increase its Argentine market share from 8 percent to 15 percent this year. In Brazil, however, de Vido’s promise rings hollow. “Argentina’s capacity to err seems unlimited,” Míriam Leitão, one of Brazil’s most influential columnists on economic issues, wrote.

De Vido is also pursuing possible investments from Chevron, Exxon, French-owned Total Austral and China’s Sinopec.

Repsol has said it “reserves the right to take legal action against companies’ investment in YPF.” But these companies shouldn’t need any added threats from Repsol to find Argentina unappealing. There is no reason to believe that Argentina will treat any future partners better than it treated Repsol.

Argentina’s trading partners in the Mercosur trading bloc – Brazil, Paraguay and Uruguay – face a clear choice between aligning themselves with reputable members of the global market and yoking themselves to a country that is prepared to take whatever it can grab. By barring Falkland Islands vessels from their ports, they have shown a tendency so far to side with their neighbor, rather than with the rest of the international community. Maybe the YPF expropriation will prompt them to reconsider, though I have my doubts.

Argentine resources might seem tempting to multinational oil companies that are always on the prowl for the next big play. Don’t spare too much sympathy, however, for any foreign enterprise that is foolish enough to disregard Respol’s experience and put significant new capital to work in Argentina. When you hop into bed with a thief, you are apt to find your own wallet missing in the morning.

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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