The Repsol settlement – a path forward for Argentina?

The Repsol settlement – a path forward for Argentina?

Argentina has finally negotiated an end to one of Latin America’s most turbulent investment conflicts, opening the door to further development of the country’s newly-discovered energy resources. But there are many unresolved conflicts, and with populist economic measures in Buenos Aires, investors must remain vigilant, and perhaps, skeptical.

In April 2012, President Cristina Fernandez de Kirchner of Argentina announced a dramatic seizure of the controlling interests of Yacimientos Petrolíferos Fiscales (YPF), a former state-owned energy company at the center of exploration into the country’s newfound and lucrative oil and shale gas fields.

The takeover from Spanish multinational Repsol was not entirely unexpected given the ruling party’s socialist bent in the post-Carlos Menem period. But it was still a massive development and came at a moment of tension between Buenos Aires and its creditors, who were (and are) still reeling from Argentina’s historic $95 billion sovereign default and massive devaluation in 2002.

Two years, several diplomatic squabbles and tens of millions of dollars in litigation fees later, the two parties have finally come to a settlement, one that many hope will turn the page on a tumultuous period of uncertainty in one of Latin America’s economic behemoths.

Repsol, which still controls about 12% of YPF, will receive $5 billion in guaranteed Argentine government bonds as compensation for the 51% of the re-nationalized company that was expropriated.

The sum is far below the $10.5 billion the oil and gas giant was seeking from a World Bank tribunal. However, viewed in light of Argentine Economy Minister Hernán Lorenzino’s 2012 refusal to even “pay one dollar” to groups of bondholder holdouts, in addition to the government’s insisting in the wake of the takeover it would pay Repsol “zero pesos,” the deal does not seem too bad. If approved by Repsol’s shareholders and the Argentine Congress, as expected, both parties would also drop all standing legal claims related to the matter.

Does this mark a turning point between the populist, Peronist politics of old that have held sway in Buenos Aires for more than a decade, ushering in a more investor-friendly environment for the foreseeable future? Hardly.

The Repsol settlement smacks much more of short-term self-interest than a consistent policy front. With related litigation, such as lawsuits filed against Chevron for its oil and shale gas drilling plans in YPF’s expansive Vaca Muerta formation out of the way, Argentina looks set to attract more foreign capital. It may also be ready to develop its vast energy resources while reducing its costly energy imports.

One such willing partner may be Pemex, the Mexican state oil company which owns almost a tenth of Repsol, and whose pro-liberalization government backers may have been a driving force behind the settlement.

Buenos Aires will also end a diplomatic standoff with Madrid that saw, among other things, the Spanish government effectively banning and re-banning Argentine biodiesel imports. Moreover, the settlement should prove valuable in securing Spanish support for Argentine claims on the Falkland Islands. It will also allow Fernandez to concentrate on the country’s myriad of other difficulties, including its legal battles in the U.S. judicial system.

Problems such as these are the main cause for concern for investors. Despite the fact one contentious lawsuit has been resolved, the political and economic structure underlying it and many other investor-state conflicts in Argentina very much remain.

Immediately after the biggest devaluation of the peso since the 2002 financial paralysis, eight months after Fernandez promised it would not take place, South America’s second-largest economy is suffering from continued poor policy as well as countless arbitration cases.

Despite recent steps toward increased currency convertibility, a slew of capital controls remain entrenched across the economy. These include stifling restrictions on imports, constraints on corporate dividend remittance and capital gains,  taxes on online purchases and levies on credit card transactions abroad.

Furthermore, the now-infamous detention of the ARA Libertad is just one example of Argentina’s poor record in investment protection. The nation has over twenty cases pending at the World Bank Group’s International Centre for Settlement of Investment Disputes (ICSID) (including the center’s first class-action proceedings), the premier international arbitration institution dealing with investor-state dispute settlement.

What is perhaps an even bigger concern is the Argentine Republic’s track record of ignoring its international commitments and refusing to pay when an arbitral judgment does not go its way. (A number of recent settlements in November 2013 seem to have been agreed to as the country’s final recourse in securing World Bank/IMF financing to pay down its debt. They were paid in government bonds rather than cash.)

And Argentina is hardly the place foreigners–let alone its citizens–want to park their cash. Most economists estimate inflation stands at over 25%, a testament to the country’s economic mismanagement and profligate, unsustainable social programs under Fernandez and her predecessor and late husband, Nestor Kirchner. Even those in the corridors of power realize this, which explains their recent attempt to devise a new, more accurate consumer price index, one year after the IMF censured Buenos Aires for essentially doctoring its inflation and growth statistics.

All these reasons explain why the World Economic Forum, in a comprehensive global ranking of competitiveness, ranks Argentina an embarrassing 138th in quality of institutions and 140th in both goods and labor market efficiency out of 148 countries surveyed. It also explains why the nation has the ignominious honor of membership in the “Toxic Trio” of emerging markets.

These developments are further evidenced by Argentina’s absolute inability to raise affordable debt on foreign capital markets, a situation it has thus far been unable to reverse. And a situation that investors should probably avoid.

Categories: Economics, Latin America

About Author

Kevin Amirehsani

Kevin is a Denver-based policy and public engagement consultant. He was previously the head of operations for a solar energy startup in Lagos, researcher for the US Commercial Service in Cape Town and the Institute for Democratic Governance in Accra, and Peace Corps volunteer in Cameroon. He holds an MSc. in International Political Economy from LSE along with a B.S. and B.A. in Industrial Engineering and Political Science from UC Berkeley.