Spanish and European leaders directed fresh threats towards Argentina yesterday over the nationalization of Spanish-controlled oil producer YPF. But in a clear sign of Spain’s withering might in South America, their threats increasingly sound like pleas. Years of economic decline have diminished Spain’s regional sway and there seems little Spain can do.
Last week the Argentina's President Cristina Fernández de Kirchner moved to nationalize YPF, expropriating 51 percent of the company controlled by Spanish company Repsol. YPF is Argentina’s biggest oil company and Ms. Kirchner accused Repsol of failing to invest properly in increasing oil production, which contributed to Argentina becoming a net oil importer in 2008. Repsol, like other foreign companies, has said regulations limit profits, and by extension how much it can investment.
“We have to avoid a train collision, but that depends on the Argentinean government,” Spain’s Foreign Minister José Manuel Margallo said yesterday after a meeting of European foreign ministers. He said that if negotiations fail that all legal means will be considered “to make Argentina reconsider.”
“We don’t dispute Argentina’s right to chose energy sovereignty, although in my opinion that is a mistake," Mr. Margallo said.
The priority, he said, is making sure Repsol is paid fair value for the YPF stake. Repsol valued its 57.4 percent stake in YPF at $10.5 billion, implying a $9.3 billion sale price for 51 percent of YPF. An Argentinean tribunal will determine the fair value. Repsol is seeking international arbitration and has threatened to sue any company that helps the Argentina develop its expropriated oil reserves. A 25 percent stake owned by Argentina’s Eskenazi family and the remaining share in hands of small shareholder will not be expropriated.
But his European counterparts offered little more than moral support, partly because much broader economic ties are at stake.
Spain’s Prime Minister Mariano Rajoy said last week the expropriation “severs” the historic good relations between the two countries. “After what happened, you could think this could happen to anybody," he said.
But Spain stands to lose a lot more than Argentina. Many of Spain’s biggest companies and banks are strongly rooted in Argentina, and they have privately warned Spain against a diplomatic fight that could endanger the remaining significant Spanish investment in the country.
The Spanish government didn't see it coming and then dithered over whether to negotiate or take a strong stance, says José Ignacio Torreblanca, a senior policy fellow with the European Council on Foreign Relations. In the end, it overreacted.
“If your job is to defend Spanish interests, and companies are asking for restraint, than you can’t push much harder. Spain needs more of Latin America now than the other way around,” Dr. Torreblanca says.
The end of the Reconquista
Repsol's $16 billion purchase of YPF from national and regional governments and private shareholders in 1999 was one of the biggest symbols of the Reconquista, the nickname given to Spain's massive foreign investment drive during the 1990s and 2000s. Spanish companies bought up controlling stakes in the region’s banking, energy, and telecom industries. As the second biggest investor in Latin America during that period, only the United States had more economic clout in the region than Spain.
Between 2006-2009, its share of foreign investment in Latin America was 10 percent, but in 2010 it decreased to 4 percent. The decline was partly due to Spain’s economic troubles, but it was accelerateD by countries such as Venezuela, Brazil, Ecuador, and Bolivia moving to increase foreign ownership of their raw materials.
Spain has historically been very influential in Latin America, but it should “be happy that it now has partners it can treat as equals,” Dr. Torreblanca said. “Yes, there used to be a polarization between populists and pragmatists in Latin America, but we are seeing the end of that. This is a Latin America of middle classes.
Spain realizes its declining clout. “When you want to be taken seriously, you have to talk like a big country and you have to act like a big country,” Foreign Minister Margallo said. On April 20, Spain announced it would revise regulations to make Argentina's biodiesel imports more expensive. These imports are equivalent to Spain’s bilateral trade deficit with Argentina of nearly $1 billion in 2011. Argentina rebuffed the measure and said Spaniards would just pay more.
The European Parliament also overwhelmingly approved a motion condemning the expropriation of YPF, and asked the European Union Commission, the EU executive, to review Argentina’s preferential import duty terms using “all the available settlement tools within the World Trade Organization and G20," but the measures lack teeth.
A broader free trade deal with South American countries that also involves powerhouse Brazil could also be delayed by Europe at Spain's request.
Chinese investment fills the gap
This is not the first time Argentina has defied international investors, but it is significant enough to trigger warnings that Argentina’s credibility in international markets and with lenders will suffer, possibly leading to a decline in private foreign investment.
“We expect this to curtail foreign direct investment (FDI) in key sectors such as energy, utilities, and telecom,” Fitch ratings agency wrote this week. “Many foreign companies with long-standing investments in Argentina have navigated an often-challenging regulatory environment in recent years, particularly in resource sectors where government pressure to boost investment and production has been most direct. Still, this week's move to nationalize YPF, formerly majority-owned by Repsol of Spain, introduces another layer of uncertainty for foreign companies contemplating investment in Argentina. Foreign firms already face big hurdles related to foreign exchange controls and restrictions on dividend payments.”
But that doesn’t scare away national oil companies flush with cash, namely from China, willing to accept long-term profitability and energy security, even if it means accepting capped economic benefit in the short term, as is Argentina’s case. Kirchner’s government subsidizes fuel costs and controls prices, meaning the return on investment for private companies like Repsol is limited.
But the chance of potential exports in the future seems to be enough to convince China. In 2010 Chinese companies were the third biggest investors in Latin America, behind the US and the Netherlands – much of which went to Argentina – and in 2011 they are believed to have replaced the Netherlands as the second biggest investors, according to United Nations statistics.
But the chance of potential exports in the future seems to be enough to convince China. In 2010 Chinese companies were the third biggest investors in Latin America, behind the US and the Netherlands – much of which went to Argentina – and in 2011 they are believed to have replaced the Netherlands as the second biggest investors.
In fact, Spanish and Argentine media reports are flush with speculation that Sinopec, one of China’s biggest oil companies and investors in Latin America, has secured a deal to finance Argentina’s promised oil production recovery, although it’s not clear how.
At this point, it seems as if Spain's best option is working to win a fair settlement for the expropriation of YPF – a far cry from it's short-lived Reconquista.