Fernandez Mimics Chavez as YPF Move May Isolate Argentina

April 17 (Bloomberg) -- In today's "Latin American Report" Bloomberg's Ben Sills reports that Argentine President Cristina Fernandez de Kirchner has seized control of Spanish oil producer YPF SA, blaming foreign companies for the country’s energy shortages. He speaks on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)

Argentine President Cristina Fernandez de Kirchner is taking a page from Hugo Chavez’s playbook by seizing control of oil producer YPF SA and blaming foreign companies for the country’s energy shortages.

Fernandez, 59, shut out of global credit markets following her country’s 2001 debt default and facing slowing growth at a time of 23 percent inflation, turned to tactics used by Venezuela’s socialist leader when she ordered yesterday the expropriation of 51 percent of the nation’s biggest oil producer owned by Spain’s Repsol YPF SA. (REP)

The move follows Fernandez’s 2008 seizure of $24 billion in private pension funds and her tapping of central bank reserves to make debt payments. Investors already distrustful of Fernandez’s policies will see in this latest grab the start of a Chavez-like drive to expand the state’s control of the economy, further isolating Argentina, said Claudio Loser, a former International Monetary Fund official.

“It’s another sign that Argentina is moving away from the international economic community,” Loser, who oversaw Latin America at the IMF from 1994 to 2002, said in a telephone interview from Miami. “If Argentina already had trouble to get financing, this is going to make it even harder and hurt foreign investments.”

Imports Doubled

Fernandez is pressuring energy companies to boost output after fuel imports doubled to $9.4 billion in 2011 from a year earlier, helping the country’s trade surplus narrow to a one- year low of $280 million in December.

Since Fernandez’s landslide re-election in October, her country’s borrowing costs have overtaken those of Venezuela to become the highest in the region. Yesterday, yields on Argentina’s dollar debt rose 26 basis points to 11.93 while Venezuela’s fell six basis points to 11.84 percent, according to JPMorgan Chase & Co. indexes. In October, Venezuela’s bonds yielded 354 basis points more than Argentina’s.

Similarities with Chavez’s policies have increased since Fernandez’s re-election, when she tightened controls over the exchange market in a bid to slow record capital outflows. She also boosted import restrictions to protect local industry and changed the central bank charter to increase the amount of reserves the government can use to fund spending.

Socialism Drive

Chavez, 57, deepened his drive to install socialism in Venezuela after his re-election in 2006 by nationalizing oil, steel, cement and banking assets while tightening currency controls he introduced in 2003. Chavez also used reserves for spending and has jailed brokers to fight capital flight.

“Right up until the elections, Argentina went to great lengths to distance itself from the Chavista economic model but since then all the moves have been in that direction,” said Boris Segura, Latin America strategist at Nomura Securities. “The business environment is becoming more challenging for the private sector. In that sense, there is convergence in terms of economic policy.”

Argentina’s regulated gas and electricity tariffs and subsidies for domestic users have reduced investment and production incentives, contributing to a rise in oil and gas imports that has turned an energy trade surplus into a deficit. With the YPF nationalization, the government aims to reverse the downward trend in oil and gas production.

European Commission President Jose Barroso said he is “seriously disappointed” by Argentina’s decision to seize YPF.

Repsol Response

Repsol Chief Executive Officer Antonio Brufau said today that Argentina aimed to take over YPF cheaply and that the company demands compensation.

“The expropriation isn’t anything more than a way to cover up the social and economic crisis Argentina is suffering at the moment,” Brufau told journalists in Madrid.

The decision on YPF “adds to Argentina’s policy uncertainty and could prove to be harmful for long-term private investment,” according to Fitch Ratings. “This action also underscores the unfavorable business environment, as characterized by increased government intervention and regulatory uncertainty in the country.”

In the first half of 2011, foreign direct investment in Argentina dropped 30 percent from a year earlier, the biggest decline among the region’s major economies, according to the United Nations’ Economic Commission for Latin America and the Caribbean. Through June 2011, Argentina received $2.4 billion in foreign investment, compared with Brazil’s $44.1 billion, Mexico’s $10.6 billion and Colombia’s $7 billion.

‘Decisive’ Measures

In response to the YPF takeover, Spain will react with “clear” and “decisive” measures, Spanish Industry Minister Jose Manuel Soria told reporters yesterday.

Venezuelan Foreign Minister Nicolas Maduro said Chavez supports Fernandez’s decision.

Maduro, reading a statement on state television yesterday, said Venezuela supports state control of natural resources, especially energy, and rejects “European” threats to Argentina.

Fernandez yesterday also replaced Chief Executive Officer Sebastian Eskenazi with Planning Minister Julio De Vido and plans to send a bill to take the majority stake in YPF to Argentina’s Congress where it’s likely to receive swift approval by Peronist party lawmakers, joined by some of the opposition.

“Argentina is getting closer to a sovereign management of its strategic resources, as it was with the case of the pension funds,” said Carlos Heller, a lawmaker whose party is allied with the ruling Victory Front coalition, in a phone interview. “The only country in Latin America that didn’t have a state management of the oil sector was Argentina. So we are now in line with the rest of the region.”

State Assets

In 1993, President Carlos Menem sold most of Argentina’s largest oil company to private investors as part of his drive to sell state assets. In 1999, Repsol SA, then Spain’s largest oil company, acquired control of YPF SA. (YPFD)

Fernandez’s late husband and predecessor Nestor Kirchner, at the time governor of the oil-producing province of Santa Cruz, supported the 1993 sale.

Heller said he expects the bill will pass.

“We want a company that is committed to a model of a sustainable country that has growth and development,” Fernandez said yesterday.

Still, differences between the Argentine and Venezuelan economies mean Fernandez wouldn’t be able to expand her government’s role as much as Chavez has in Venezuela, where 90 percent of exports are oil and energy, said Igor Arsenin, head of Latin America strategy at Credit Suisse Group AG in New York.

Agricultural Economy

“Argentina is a much more diversified economy,” Arsenin said. “Much of their foreign exchange revenues are coming from the agricultural sector and clearly you can’t nationalize that.”

In Venezuela, “they’re able to run the state based on purely oil revenues and let the rest of the economy stagnate,” Arsenin said.

Due to nationalizations, Venezuela faces more than 15 pending arbitration cases in the World Bank’s International Centre for Settlement of Disputes.

Both countries are struggling to slow the fastest inflation rates in the region.

Venezuela reported that consumer prices rose 24.2 percent in March from a year earlier, while Argentina’s prices rose 23.2 percent, according to the average estimate by economists reported by opposition lawmakers on April 12.

Prices, Growth

Argentine private researchers have released their own inflation reports since early 2007, when Fernandez’s husband and predecessor, Nestor Kirchner, made personnel changes at the statistics agency. According to the agency, consumer prices rose 9.8 percent in March from a year earlier.

Argentina’s economic growth, among the fastest in Latin America for the past decade, will slow to 3 percent from 8.9 percent in 2011, according to the median estimate of seven economists surveyed by Bloomberg.

Venezuela’s economy will grow 4.0 percent in 2012, according to the median estimate of five economists.

While the accuracy of Venezuela’s official statistics hasn’t been questioned, Chavez has used his powers to limit free speech and the flow of information and also undermine the country’s democratic institutions.

As well as imprisoning and barring political opponents from running for office, the former tank commander’s control of the judicial system has allowed him to bypass Congress and rule by decree.

In yesterday’s speech, Fernandez said that state control of YPF was in the interest of both the country and consumers. At the same time, she urged leaders of the country’s other industries to avoid raising prices and instead increase production to meet higher demand.

“We need you to understand the need of commitment to the country,” said Fernandez. “I’m going to continue to protect local industry and our consumers.”

To contact the reporters on this story: Eliana Raszewski in Buenos Aires at eraszewski@bloomberg.net; Charlie Devereux in Caracas at cdevereux3@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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