Cry for me Argentina

In the art of bullfighting there lies no bolder manoeuvre than the _mariposa_. Cape ensconced behind back with torso exposed; the matador eschews his charging adversary, dallying with injury, all for the reverence of the white handkerchief-waving aficionados. Cristina Fernandez, President of Argentina, navigates a similar such course. Her nationalisation of former state oil firm, YPF, underscores a growing recourse to populism fixated on national virility. International investors watch on cautiously.

April 16th’s announcement to expropriate 51 per cent of YPF, owned by Spanish oil giant Repsol, shocked all. Bought six years after the industry’s privatisation in 1993, Fernandez has accused the firm of siphoning off profits, instead of their reinvestment in new exploration. “We are the only country in Latin America, and I would say in the world, that doesn’t control its natural resources”, she professed. Such a knee-jerk act has quickly escalated tensions between Madrid and Buenos Aires ahead of November’s important Iberoamerican summit.

Indeed YPF concedes it has prioritised restoration rather than new drilling expeditions. It has however fallen foul of both a legal entanglement with businessman and Fernandez supporter, Enrique Eskenazi – consuming profits in dividends to repay his initial 15 per cent stake in the firm – and the country’s energy predicament, rooted in its 1990s debt crisis.

Argentina nonetheless is running on borrowed time. Holding hallowed trade and fiscal surplus – the ‘anchors’ of its economic policy 15 years ago – it is now a net energy importer. Following economic slump in the late 90s, energy prices were fixed through price ceilings.

After a set of severe currency devaluations pegging the peso to the dollar, prices couldn’t equilibrate. Gas in turn thus remains 75 per cent cheaper than in other Latin American countries. Electricity is 70 per cent. A culture of overconsumption ensued, leading to chronic shortages and a fallout in investment. Papering over the cracks through expensive oil imports, it saw its currency reserves depleted, peso weakened and public finances dented.

YPF’s acquisition therefore bestows serious benefits to the government, regardless of the veneer of national symbolism. Redistributing its €1.3bn annual profits to public coffers, Fernandez can appoint allies to key board positions and renegotiate supplier contracts. In its tradition of cronyism, Axel Kicillof, a member of La Cámpora, a political wing led by Fernandez’s son, has been instructed to run the firm. It provides 45 per cent of Argentina’s hydrocarbons. YPF views charges of underinvestment ludicrous, though looks unlikely to receive the $10.5bn compensation to be settled through the WTO channels.

Fernandez’s arbitrary, _Chavista-lite_ hand in the private sector is no new phenomenon in Argentina. To contain its debt crisis two decades ago, currency controls were enforced to make dollar conversion difficult, and lucrative exports were taxed, such as soya. But the swiftness of YPF’s nationalisation will unsteady foreign business, and force considerations of an exit strategy.

Spain has reason to worry. Its largest international investor, it possesses considerable holdings ranging from telecommunications, banks and utilities companies. Telefonica has already been issued with an elliptical warning about ‘underinvestment’ in Argentina. With 21.9 million customers and €3bn revenues, it has been reiterated that its licence may be cancelled by the Communications Secretariat if its terms are infringed.

Also operating is Santander, Argentina’s largest private bank with 2.5 million customers, 358 offices and a net profit of €472 million last year. Electricity provider Endesa also enjoyed gross profits of €118 million last year including a €127 million windfall from running its key energy line to Brazil. And the supermarket DIA furthermore recorded €888 million in revenue last year from its 495 nationwide stores.

Fernandez’s aggression will not see an immediate exodus of investment. Push the nationalistic pretensions too far, however, and risk a fatal goring to Argentina’s body politic.