Lessons from the Expropriation of YPF-Repsol

Argentine president Cristina Kirchner recently caused an international uproar with her decision to expropriate 51 percent of YPF, Argentina´s main oil and gas producer, and a major affiliate of Spain´s Repsol, one of the world´s great energy concerns. As has so often been the case with Latin American nationalizations, the move was accompanied by a torrent of nationalistic demagoguery, theatrics and thuggery—YPF´s headquarters were stormed by government envoys even before the bill sent by the government was approved in Congress, the Spanish executives were kicked out ignominiously, and officials immediately began to threaten with not paying Repsol anything. They argued that YPF, a company that the president had praised only months before, has caused environmental damages (an accusation not made by the government before.)

The expropriation teaches us important lessons about how markets work.

The government claims that, because YPF was not investing sufficient money in oil and gas production in Argentina, and was content with distributing dividends, the supply of energy has dropped so dramatically in recent years that the country, now strapped for foreign currency, is having to devote precious resources to import it from abroad.

But here is the truth. Several years ago, then President Néstor Kirchner and his wife (who succeeded him and is the current chief of State) decided to control the price of energy and of pretty much everything. The measure, part of the classical Peronista script, was aimed at subsidizing urban consumption on a big scale. Who would pay for this? Why, the countryside, of course—Argentina being an agricultural powerhouse. The consequence of this policy was what could be expected: the demand for energy increased exponentially between 2003 and 2008 (by 38 percent in the case of oil and 25 percent in the case of gas), while the supply gradually diminished since the business of producing energy became much less profitable for the several foreign companies involved. Oil production dropped by about 12 percent. Recently, after almost two decades, Argentina became a net importer of energy.

Meanwhile, the government realized that the money it was squeezing out of farmers in order to subsidize the millions of urban voters it was intent on turning into a permanent political constituency was not enough to sustain this socioeconomic model. Therefore several companies owned by foreigners, although none as important as YPF, were nationalized. But that was not enough either. The private pension system and the central bank´s reserves were subsequently taken over by the government. Then came draconian capital controls in order to slow what was becoming a massive capital flight (some $75 billion left the country in four years.)

But, of course, even that was not enough to sustain what was left of the Kirchner model. The takeover of YPF was the natural step to take. The president needed three things. One: a new foreign scapegoat (the campaign to regain control of the Falklands had worked as a temporary distraction but had run out of steam.) Two: fresh money, since the only alternative at that point was to spend the already dwindling foreign currency reserves. And three: direct control of the giant Vaca Muerta shale formation recently discovered by YPF in the Neuquén Basin, which in the eyes of the government could be the key to the perpetual funding of the populist model for years to come. The president´s supporters are already preparing the ground for a constitutional change that would lift the impediment to her reelection and ensure her perpetuation in the Hugo Chavez way.

We have seen this movie a thousand times in Latin America and elsewhere. The Latin American version of populism is as old as the Mexican revolution and as recent as the Venezuelan tragedy. In fact, Argentina, once the most educated country in the region, built on the back of a middle class that was much stronger than that of the neighboring countries, became decadent precisely because of Peronista populism. That is why, incidentally, the privatization of YPF in 1999 had the support of most Argentines, including, ironically, Néstor Kirchner and his wife.

According to the polls, three in every four Argentines now support the government takeover of YPF. How long before we see those same millions of people, desperate to turn the clock on the devastation brought about by the new version of Peronista populism, backing the re-privatization of the oil and gas company?