Thursday, April 19, 2012

The YPF nationalization and Argentina

Marcelo Justo reports on Repsol's claim that the Chinese state-owned oil company Sinopec had offered to buy Reposol's 57% stake in YPF for $15 billion in Operación china Página 12 19.04.2012. Miles Johnson and Jude Webber reported on the claim in Argentina swoop scuppers China oil deal Financial Times 04/17/2012.

Basically, there are good reasons to doubt the claim. Yes, it's shocking, just shocking to think that respectable oil companies like Repsol or Sinopec might just lie about such a thing in hopes of squeezing more compensation out of the Argentine government than they might otherwise get. But it could be possible!

One issue is that Sinopec bought 40% of Repsol's operations in Brazil in 2010 for $7 billion. So there could be some mutual back-scratching going on between the Sinopec and Repsol business partners in making a claim. With investments already in the region, why would they make a lucrative offer to buy Repsol's stake in Argentina? Especially when YPF has been under intense criticism from Cristina Fernández' government for failing to making decent exploration and operational investments in Argentina. Justo's article suggests that Sinopec has been maneuvering in some way to cut a deal with the Argentine government to gain access to shale gas reserves recently discovered (not by YPF) known as the Vaca Muerta formation.

Spain is trying to rally international criticism against the proposed nationalization of YPF. Victor Mallet writes that Argentina strikes at bad time for Rajoy Financial Times 04/17/2012:

The seizure of what was once the largest investment abroad by a Spanish company could hardly have come at a worse time for Mariano Rajoy, Spain's current prime minister and successor to Mr [José María] Aznar as leader of the centre-right Popular party.

Politicians and business leaders accuse Ms Fernández of kicking Spain while it is down. She is taking advantage, they say, of a Spanish economic recession and a eurozone sovereign debt crisis so grave that some analysts predict Madrid will follow Athens, Dublin and Lisbon in seeking an international financial bailout.

Worse, almost the only bright patch for the Spanish economy over the past four years of crisis has been the performance of its investments in emerging markets - especially Latin America.
Although it's not clear to me what role the multinational Repsol actually plays in the Spanish national economy. When they lose most of their stake in YPF, YPF will no longer be available to Repsol as the kind of cash cow it is now. But if the official Argentine claims are correct, Repsol has been mostly investing those profits in other countries outside of Spain and Argentina, like Libya. So Mariano Rajoy's conservative government, whose first priority is to cater to the Spanish One Percent while following Germany's orders on austerity economics, is obviously upset that Repsol is being inconvenienced. But how much it may hurt their national economy, if at all, is not clear.

The Financial Times has been doing some sloppy reporting on the YPF takeover. For instance, Jude Webber in Argentine deputy economy minister holds sway 04/17/2012 uncritically echoes the charges against Cristina's economic advisor Axel Kicillof made in the frivolous and barely-disguised anti-Semitic column by Carlos Pagni in the dogmatically anti-Peronist, anti-Cristina paper La Nación I discussed previously. Webber at least omits the more obvious anti-Semitic inuendo and does not credit Pagni directly. He follows it up on 04/18/2012 with another hit piece of the same tone, Baby-faced Marxist's rhetoric is music to the ear of the president (link is to Newsbank Access World News version).

A less sleazy but apparently purely speculative take on it comes from John Paul Rathbone, Fernández takes her revenge Financial Times 04/17/2012.

But another line of reasoning leads to Argentine domestic politics and cronyism. Indeed, YPF may not be a Venezuelan-style nationalisation, as many have compared it to. Instead it may be closer to the kinds of power battles that Russia is known for. Argentina has oligarchs too and Repsol, much like western oil groups in Russia, may have got caught in the crossfire of an internal battle.

The Argentine oligarchs here are the Eskenazi family. Four years ago, they were encouraged to take a 26 per cent stake in YPF by former president Néstor Kirchner, Ms Fernández's late husband. The Eskenazis did this via their Melbourne-incorporated Petersen Group. The $3.5bn deal was a highly leveraged transaction, with the debt entirely financed by YPF's unusually high dividend payout - an arrangement that necessarily had Mr Kirchner's blessing.
Rathbone, however, does not offer any reason Cristina might have had to do anything against the Eskenazi family. Instead, he resorts to FOX-style "some say ..." speculation: "How and why is the subject of much speculation. Some say the Eskenazis may have reneged on whatever arrangement they had with Mr Kirchner after the former president's death."

And, oh, by the way, the Petersen Group's shares in YSP are not being compulsorily bought out in the nationalization Cristina has proposed. Only shares held by Repsol are targeted, and Repsol could still retain a 6% stake after the buyout is finalized. At the end of his column after spinning his speculations, Rathbone does at least allude to what the democratically elected Argentine government actually says its reasons for the action are:

The extraordinary thing is that the roots of this controversy lie in YPF's dividend policy. It financed the Eskenazis' entry. It meant Repsol, as majority owner, "raped the country" by repatriating huge dividends, or so official rhetoric goes. And it caused YPF to scrimp supposedly on investment - ostensibly the reason for the nationalisation - even though Mr Kirchner endorsed the policy.
None of this criticism should be terribly surprising. Oil companies know they have to make skillful propaganda. (See BP, Gulf Oil Spill, 2010)

Miles Johnson in another FT article from the same day offers a different picture of the Eskenazi family's position in the YPF deal (Repsol reeling from Argentinian body blow):

Away from the issue of compensation, Repsol also faces losses on $1.9bn of loans made to the Petersen Group, controlled by the Argentine Ezkenazi family, which bought a 25.5 per cent stake of YPF from the Spanish company between 2008 and 2011.

The Ezkenazi family had been funding the loans with dividends from YPF, with the clauses of the loan agreements showing that if the Argentinian company's dividend payout ratio falls below 90 per cent of profit, then they can give the shares back, and the debt, to Repsol. A similar clause is activated if Repsol's control over YPF drops below 50.01 per cent, a situation now seemingly certain.

Fitch, the credit rating agency, had already cut Repsol's rating in March as speculation about nationalisation increased, noting the impact a loss of the subsidiary would have on the Spanish group's reserves and leverage, and the possible loss of the loans made to the Ezkenazi family. [my emphasis]
Cristian Carrillo looks at the Eskenazi family's YSP investment in El laberinto Eskenazi Página 12 19.04.2012

In yet another hostile piece in FT on 04/18/2012, Radical policies risk ending in tears (link is to Newsbank Access World News version),
Jude Webber quotes the Mayor of Buenos Aires, Mauricio Macri, criticizing the YPF takeover move. Macri is the highest profile opposition leader against Cristina right now. Macri heads the Propuesta Republicana (PRO) party, which is largely his personal electoral vehicle. Like the main opposition party, the Unión Cívica Radical (UCR), Macri initially opposed the YPF nationalization. The day after the announcement, he told a cheesy and strange story about getting up in the middle of the night and looking at his young daughter and thinking about the insecurity so many people in Argentina feel. Yes, the oil multinational Repsol is like a defenseless little girl. (?!?)

The more I hear about Macri, the more of a flake he comes off to me. By Thursday, he was saying that if he were elected President in 2015, he would keep YPF nationalized. (Las volteretas de Mauricio Página 12 19.04.2012) Go figure.

Carnegie Endowment associate Moisés Naím is described at the Carnegie website as having served as the Venezuelan "Minister of Trade and Industry in the early 1990s, director of Venezuela's Central Bank, and executive director of the World Bank". He also grumps in The Siren Call of Populism Seduces Again about the nationalization proposal:

Repsol "pursued a policy of pillage, not of production, not of exploration", the Argentine president thundered on Monday. "They practically made the country unviable with their business policies, not resource policies." Such was Cristina Fernández's sulphurous stance as she announced her government was renationalising YPF, the country’s largest oil group.

There are of course many convoluted reasons behind the Argentine government’s contentious decision to reverse the privatisation of a few years ago. But objective observers will agree that this was not part of an overarching development strategy, nor a manifestation of resource nationalism – nor indeed any other carefully crafted initiative forming part of a broader design. Rather, cronyism, rifts between rival oligarchs, political expediency, populism and the wish to please a public resentful of the privatisations of the 1990s all played into the decision. [my emphasis]
Those "objective observers" being, of course, safely conventional Very Serious People like Moisés Naím.

There will no doubt be more weeping and gnashing of teeth over the nationalization of YPF from the One Percenters and their loyal spokespeople.

And, gosh, I just head on the news that World Bank head Robert Zoellick thinks it's a bad idea! Who could have predicted?

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