Don't cry for Argentina...

It seems that the Argentinian President Cristina Fernandez needs a summer crash course in history and economics, particularly as they relate to capital-intensive energy sectors. It is still to a large extent beyond me how Ms Fernandez was the deemed the most qualified individual in a country of approximately 40 million (at the time), but, then again, we haven't made the wisest decisions here at home either over the past decade or so. But enough of past history. The other week, Ms Fernandez decided that the best way to keep Argentina financially afloat would be to nationalize the 51% stake of Yacimientos Petrolíferos Fiscales (YPF), the country's largest energy company. YPF was formerly Argentina's national oil firm, having been privatized just in the past decade. It seems that popular support in the country's senate makes this move likely to actually occur. (EDIT: Approved by the senate!)

Many outside observers consider this an unwise decision, and rightly so. To start, the entire 51% share being nationalized is owned by Respol, a Spanish company (minority owners, largely Argentine, would be less affected). Spain is one of Argentina's largest trading partners, so that doesn't seem like a good way to spur economic development or any growth. Part of Ms Fernandez's claims include the lack of reinvestment by YPF/Respol. Problematically, nationalization scares away investment. This is particularly noticeable in the energy sector where significant amounts of capital are needed just to take chances of finding and producing energy at a profitable rate. Examples just over the past twelve or so years include Russia and Venezuela, while going further back one can look at Libya. All in all, a country such as Argentina needs the expertise, capital, and sheer willpower of large energy firms just to explore, take chances, and invest in developing new energy opportunities. Nationalization is not going to make the multinational companies who lead the international energy sector eager to invest; the risks of energy investment are high enough without the political risk of expropriation.

Respol is asking for upwards of $10 billion for its stake, a sizable chunk for a country that has repeatedly found creative ways to manage its economy over the past few years, including raiding central bank coffers and pension funds. Compounding this situation is that Argentina still has not fully agreed to pay out for its default a decade ago. Respol may not get any compensation (or may get it decades down the line). In turn, this will lead other industries, beyond energy, to toe carefully before entering Argentina. After all, who wants to risk developing products, markets, and infrastructure in a country that may take it all away without any real compensation?

The repercussions of this move, following a number of other, similarly concerning government decisions (noted briefly above), can have ramifications for Argentina's economy for years to come. Perhaps it is time to move beyond populism and revisit economics and history in Argentina, or is it too late? Regardless of the terminal station this road leads Argentina to, don't cry for Argentina; it chose the road itself.