Argentina and YPF: Here We Go Again

Like much in Argentina, YPF has a long and convoluted history. It was created as a state-owned monopoly oil company shortly after the end of World War I. Designed to keep out foreign interests, YPF controlled exploration, production, refining and sale of petroleum products (and later natural gas) within Argentina. From time to time the Argentine government entered into agreements to supplement YPF’s production with foreign oil imports, or to allow foreign companies to drill for oil for YPF, but as the centerpiece of the nation’s economic independence, there was often fierce political opposition to allowing “foreigners” to touch the oil business.

Political winners, most markedly the Peronists, were not above using YPF jobs to reward their faithful stalwarts. In 1973, for example, Juan Peron added nearly 20,000 employees to the YPF roles, virtually bankrupting the company. Paradoxically, the next Peronist to hold the presidency, Carlos Menem, initiated the privatization of YPF’s refineries, pipeline and oil fields in 1991, and then sold a large share of the remaining company to Repsol, the Spanish multinational, for $ 13 billion while retaining a 25% share for the national and provincial governments.

Shortly after taking power in 2003, Néstor Kirchner, a Peronist much enamored of the political ideas and policies of Venezuela’s Hugo Chavez, sped up the reinsertion of the state into the Argentine petroleum industry by creating Enarsa, a company empowered to oversee petroleum exploitation and owned 53% by the state. His widow, Cristina Fernández de Kirchner, re-elected by a landslide last year to her second term as President, has now decided to take the final step by declaring that 51% of YPF now belongs to the state and blaming foreign companies for Argentina’s energy shortages.

Cristina, a mercurial popularist who portrays herself as the new Evita Peron, seems to enjoy stirring up the political waters. While politically astute in appealing to resentful voters, she is treading on dangerous economic grounds. In 2008, she seized $24 billion in private pension funds, thus funneling funds that could have gone into investments into the government coffers. Last February she accused Great Britain of militarizing the South Atlantic because Prince William was briefly deployed in the region. Two months later, she declared “colonial enclaves” (i.e., the Falkland Islands) to be an “injustice.” And now she has expropriated the holding of a major multinational firm. Cristina seems blithely unaware that these actions will dissuade investors, both foreign and national, from future investments in Argentina. Moreover, Argentina, a nation that is sliding into a second or third tier position vis-à-vis the Brazilian economic powerhouse, already has the highest borrowing costs in the region. No doubt, YPF, back in the hands of the Peronists, will again be staffed with political cronies and rampant corruption, a throwback to the good old days of Juan and Eva Peron.