You have to feel sorry for leaders of banana republics these days – developed world governments have stolen all their best tricks.
Britain, America, Europe and Japan are all printing money; you’ve got capital controls in the form of limits on cash transactions in various parts of Europe; and capital controls by the back door in the US, in the form of draconian legislation that makes it pointlessly risky for overseas financial companies to accept American clients.
How can you top all that?
Argentina’s president, Cristina Fernandez, has just gone with an old classic – a straightforward asset grab. Shareholders in Spanish oil company Repsol look set to have their 57% stake in Argentina’s biggest oil company ripped from them.
That’s bad news for them. And it’s not a good sign overall. It’ll embolden more governments to make similar moves.
But believe it or not, this is a trend that you can profit from.
It Always Boils Down to Politics
Earlier this week, the Argentinian government announced that it was nationalising the country’s largest oil company, YPF.
The trouble is, more than half of YPF was owned by Spanish oil company Repsol – it now looks set to lose almost all of that stake. Repsol is seeking at least $10bn in compensation, but it’s hard to see it having much luck.
The FT quotes RBC Capital Markets analyst Peter Hutton: “Argentina already has more disputes pending against it at the World Bank’s International Centre for Settlement of Investment Disputes than any other country.”
Why has Argentina decided to do this? It’s the usual story – politics. The country is in a pretty lousy economic state: inflation is rampant; oil production has fallen because the state keeps interfering to artificially hold down domestic prices, meaning there’s no incentive to invest.
Rather than accept that its own policies are flawed, the Fernandez government would rather fiddle the inflation figures and try to keep the voters happy with populist rhetoric. Hence all the carping about the Falklands, and now the nationalisation of YPF.
On top of that, there may be an internal political angle, according to John Paul Rathbone in the FT. In short, Fernandez may have fallen out with an Argentinian oligarch family who own a big stake in YPF. The nationalisation could be linked to this too.
So it’s all about politics and corruption as usual. In any case, pundits across the world rightly condemned the move. The general line taken is that this sort of theft can’t be tolerated. That’s fair enough, although unenforceable.
The other argument that is always made when this sort of thing happens is that the country in question is shooting itself in the foot. No one else will work with them.
This is perhaps a bit more idealistic. Investors are a remarkably forgiving bunch when they think there might be a profit to be made. There’s always the temptation to believe that you’re smarter than the next person, and that you’ll be nimble enough to get in and out to snatch the quick buck before it’s pulled off the table.
As Stefan Wagstyl points out in the FT’s beyondbrics column, “oil companies have rarely been slow to trample on each other’s toes… For example, after Russia seized the assets of the Yukos group in the early 2000s, Moscow didn’t find it difficult to find potential partners for the state-controlled Rosneft company which now owns most of the former Yukos oil fields”.
Resource Nationalism
This isn’t the last we’ll see of this sort of thing. Governments across the world are keener than ever to get what they see as their ‘fair share’ of their resource profits. It’s called ‘resource nationalism’, though ‘theft’ might be a better word in some cases.
What does this mean for investors? In effect, if governments are going to grab all the best assets for themselves, then it’s bad news for oil companies. However, they’re still going to need external expertise to develop these oil fields. And that’s potentially good news for oil services companies.
However, as far as I’m concerned, I’d rather not play chicken with unpredictable governments.
Developed countries are more than happy to jack up tax rates on resource companies. Britain is a perfect example of that. But at least you can be pretty sure as a shareholder that a whole company won’t be snatched from under you.
John Stepek
Contributing Editor, MoneyWeek (UK)
Publisher’s Note: This is an edited version of an article that first appeared in MoneyWeek (UK).
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