Spain has few ways to pressure Argentina over YPF

MADRID Wed Apr 18, 2012 5:12pm EDT

1 of 4. Spanish Crown Prince Felipe talks to Repsol workers as he visits the new extension of Repsol's oil refinery in Cartagena, southeastern Spain, April 18, 2012. An incensed Spain threatened swift economic retaliation against Argentina on Tuesday after it seized control of YPF, the South American nation's biggest oil company, in a move which pushed down shares in Spanish energy giant Repsol, the major shareholder.

Credit: Reuters/Susana Vera

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MADRID (Reuters) - Spain has threatened to retaliate against Argentina for nationalizing a Spanish energy firm, but Madrid will find it hard to put real pressure on a maverick nation that has been shut out of world debt markets and has ignored international fines in previous disputes.

Argentine President Cristina Fernandez said this week she would fulfill a life-long dream and solve her country's energy shortage by seizing control of its biggest oil company, YPF, a subsidiary of Spain's Repsol.

Madrid immediately threatened economic and diplomatic "consequences". But given Argentina's record with international investment and the restrictions on what sort of retaliation Spain can take, the threat may well be hollow.

"The threat really has very little credibility. What measures can they take?" said Jose Ignacio Torreblanca, head of the Madrid office of the European Council on Foreign Relations.

He said Argentina has little investment in Spain, while Spanish companies with investments in Argentina's highly regulated telecommunications and utilities sectors could suffer if tensions escalate between the two countries.

Spain will ask the European Union to file a complaint with the World Trade Organization against Argentina, a high-ranking government source said on Wednesday, though it may find difficulty winning support from all 27 EU member nations.

Even if it did receive EU backing, such a complaint may not succeed with the WTO, which would want proof that Argentina was acting against public interest by taking control of YPF as laid out in a Spanish-Argentine bilateral investment treaty.

"Unfortunately, there's no real WTO angle to this. This is a matter of investment and expropriation which is dealt with by the bilateral treaty," an EU source in Geneva said.

The EU, US and others are already chasing Argentina at the WTO because of its new protectionist import licensing rules.

The European Parliament is due to discuss the new dispute with Spain next week

ARGENTINA HASN'T PAID SETTLEMENTS

Under Fernandez and her husband and predecessor, the late Nestor Kirchner, Argentina has antagonized investors but still enjoyed strong economic growth and growing employment on the back of high prices for soy beans, its biggest export.

However, persistent investor jitters mean foreign investment in Argentina has fallen behind more business-friendly countries such as Brazil, Chile and Peru.

Given the business environment in Argentina, Repsol had already been working on scaling back its exposure to the country, so the effect of the nationalization will be limited.

There is little leverage outsiders can put on Argentina except, perhaps, China, which buys 75 percent of Argentine soy beans and much of its processed soy as well.

Under the rules of the World Trade Organisation and the European Union, Spain cannot take unilateral trade action against Argentina, say by restricting imports of Argentine biodiesel or soymeal.

Its main recourse would be to take the Repsol-YPF case to the World Bank's International Centre for Settlement of Investment Disputes, known as the ICSID, to demand fair compensation for Repsol over the expropriation.

But Argentina could argue that it is in its public interest to expropriate YPF and a fight over the valuation of the firm is already on, as Argentina has said it does not intend to pay the $9.3 billion that Repsol is demanding for its 51 percent of YPF.

Argentina also has a very bad record at the ICSID. Fully one quarter of all global cases handled by the body have been brought against Argentina.

"Argentina is among the worst in terms of compliance with ICSID judgments, if not the very worst," said Ana Palacio, a former secretary general of the ICSID and former Spanish foreign minister.

In March, U.S. President Barack Obama said he would suspend trade benefits for Argentina because it has failed to pay more than $300 million in compensation awards in two disputes.

European Union officials have publicly lamented Argentina's move against Repsol but Torreblanca of the European Council on Foreign Relations said the EU would give little more than moral support to Spain.

An EU trade official said Spain cannot limit any imports from Argentina without winning a dispute at the WTO. The EU's 27 members would also have to agree on the limitations.

"We don't do tit for tat. Just because there is a knee-jerk action by Argentina does not necessarily mean that there should be a knee-jerk reaction from the European Union," said another EU official, who asked not to be named.

GLOBAL RULE-BREAKER

Despite years of warnings that Argentina risks isolation, Fernandez has reinforced the country's reputation as a global rule-breaker, which began when it staged the biggest sovereign debt default in history in 2002.

And with the YPF move Fernandez has only cemented policies rooted in an ideology that has aligned Argentina with Venezuela's leftist President Hugo Chavez.

Argentina has repeatedly flouted world trade rules - drawing criticism from 40 countries earlier this year - by restricting all kinds of imports as it tries to reduce its trade deficit in order to increase foreign currency reserves to use to pay down debt, since it cannot access global credit markets.

Private companies, both domestic and foreign, have long been cowed by Fernandez and Kirchner, who have publicly called for boycotts or launched tax investigations against companies that got on the wrong side of their government.

The Argentinian government even has an enforcer, Domestic Commerce Secretary Guillermo Moreno, who personally calls company executives to warn them to keep down prices of products and to limit purchases of foreign currency.

(Additional reporting by Andres Gonzalez, Eric Holmberg in Brussels, Tom Miles in Geneva and Helen Popper in Buenos Aires; Editing by Julien Toyer, Giles Elgood and Peter Graff)

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Comments (3)
until you hit the tipping point these leftist politicians hail as heroes but when you start to not control inflation by limiting imports and imposing price controls… army generals take the control and give this feisty woman to soldiers as an afternoon dessert… this is what will happen… these countries will come to IMF in 5 yrs for begging money…

Apr 18, 2012 3:58pm EDT  --  Report as abuse
AlkalineState wrote:
That’s part of doing business in foreign countries. Risk. Repsol knew the risk and chose to continue operating in Argentina anyway. Sometimes that means you get rich, sometimes it means your billion dollar investment is now government property. I think it’s kind of funny because I don’t work for Repsol. They are the competition. Argentina can keep them.

Apr 18, 2012 6:01pm EDT  --  Report as abuse
carleke wrote:
This article doesn’t mention that Repsol bought YPF from Menem way below its worth, it only took dividends and failed to invest, as agreed, in order to maintain Argentina’s oil needs which were always satisfied before but last year the country had to spend 3 B on oil imports and there is shortage with big lineups at the pumps with no chances to improve soon. To Ocala, Argentina’s current government doesn’t want anything to do with the IMF because it was one of the guilty parties although by all means not the worst one, giving loans without control to corrupt argentinean governments (both military and civilian) in the past and stopping suddenly causing the collapse of the economy in 2001 (imagine if all your credit cards companies cancel your credit at once), much like it did to Greece. It doesn’t say either that Argentina has achieved historic grow since it was left out of the credit markets, it paid off the IMF to get it off its back and was somehow shielded from the 2009 crisis thanks to its isolation. It doesn’t say that the corporate media has constantly bombarded this government with lies but was an accomplice to the Menem’s neoliberal style economy that landed it in the above mention 2001 collapse. Argentina has reactivated local industry to make its own goods and by doing that it has protected argentineans’ jobs, unlike US that outsources them. It brought down the foreign debt to GDP ratio from 164% in 2002 to 40% 2011.
Not everything you read about a country it’s true, there’s 2 sides for every situation, I thought it was a little unfair to hear only one. This one by the way it’s just my opinion.

Apr 18, 2012 9:11pm EDT  --  Report as abuse
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