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Daniel Wagner

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Argentina's Expropriation and the Lessons of History

Posted: 04/17/2012 10:49 am

Created in 1922, Argentine oil producer YPF became the first entirely state-run oil company in the world, and came to symbolize the politicization of oil well before today's Middle Eastern oil producers became omnipotent. The nationalization of oil has been a consistent theme in Argentina since the state first established a monopoly on oil exploration in 1928. President Kirchner's recently announced expropriation of YPF continues a long tradition of gyration between pro and anti-foreign investment sentiment in the country's oil sector.

Given that the president consolidated her power by being reelected in a landslide vote last year, she has a mandate to continue the 'Argentina first' policies she pursued during her first term. YPF's expropriation is the largest of its kind in the natural resource sector since the Russian government expropriated Yukos a decade ago, and a reminder -- as if any were needed -- that acts of expropriation can occur without notice, even to the largest of multinational corporations.

Surely, Repsol would have been aware of Argentina's history of expropriating foreign investment in YPF over the course of the past century. Given how entrenched oil politics have become in Argentine political culture -- and given how deftly both the current president and her husband played the nationalism card -- only a naïve investor would agree to invest in YPF believing that expropriation was impossible. And yet, Repsol can be excused for wanting to believe that Argentina's propensity to expropriate was a thing of the past.

Since 2002, expropriations in the natural resource sector have increased considerably globally. According to the International Center for the Settlement of Investment Disputes, of the 143 pending cases of investment disputes awaiting an outcome, an astonishing 49 percent (70 cases) are in Central and South America. And the country with the most number of cases lodged against it is (you guessed it) Argentina -- even more than Venezuela. The 'bad boys' of Latin America -- Bolivia, Ecuador, and Venezuela -- have all either said they will no longer resolve disputes through international forums of arbitration, or have already pulled out of them. Other Latin American countries may now be expected to follow their lead.

Argentina has enjoyed an impressive period of growth since resolution of the Argentine Crisis a decade ago. The country's more than tripling of GDP since 2002 has given it confidence to take this bold action. But history has shown that those countries that go down the path of expropriation end up paying the price in terms of reduced foreign direct investment. That has certainly been true of Bolivia, Ecuador, Nicaragua and Venezuela. It would be a mistake for Argentina to believe that the same will not be true in its case.

But there is a lesson for Repsol -- and indeed all international investors -- as well, which is that history cannot be erased, or ignored, for it is an important teacher. Given history, it was just a question of time until the Argentine government would turn against Repsol. In the end, it didn't matter how supportive Spain had been of Argentina through its difficult times, or how good the company's relations had been with the government. When the time is right, history will raise its head and reassert its influence in the present-day political and economic dynamics of a country. Given Argentina's example, foreign investors would be wise to remember this -- particularly given how fragile the global economic recovery is proving to be.

Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk consulting firm based in Connecticut (USA), Director of Global Strategy with the PRS Group, and author of the new book Managing Country Risk (www.managingcountryrisk.com).

 

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