Economy, Globe, Latin America

The costs of expropriating foreign companies

The nationalization of YPF by the Argentinian government and of the Transportadora de Electricidad, owned by the REI group in Bolivia, has opened a debate. It is about sovereignty over natural resources faced with economic interests of transnational corporations.


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Javier E. Núñez Calderón


Whenever a government nationalizes a foreign company, it alarms private investors with interests in the country; to them it means that legal certainty has been put in danger.

This is precisely what happened in both Argentina and Bolivia when the government announced that it would control the exploitation of hydrocarbons (in the case of the former) and the transport of energy (in the case of the latter), which have been in the hands of foreign capital.

Argentina is going to expropriate 51% of the shares of the oil company YPF, belonging to Repsol, a Spanish company. Through the privatization of the state-owned YPF during the government of Carlos Menem in 1992,  Repsol became one of the most powerful oil companies in the world.

Similarly, Bolivia has taken control of the company Transportadora de Electricidad, owned by the group Red Eléctrica de España (REI), which used to control 74% of the domestic energy transportation market.

These decisions are not welcome in the business sector nor in countries where large companies are based, which have the support of multilateral, international bodies dealing with political and economic integration, such as the European Union. This is because it is ultimately these bodies who end up undertaking economic and political sanctions. These affect investment, imports and exports of any country that risks nationalizing a company.

For example, Spain’s Secretary of State for Trade Jaime García-Legaz has said in an interview with the Spanish newspaper Hoy that, by nationalizing YPF-Repsol, Cristina Fernández’s government has taken a wrong decision that will affect it financially.

“To expropriate, as the Argentinian government has done, is a sign that drives away investment. And Argentina is going to pay very dearly for that, ” he said.

Meanwhile, the European Parliament has asked the European Union (EU) to suspend part of the tariff advantages for Argentina. They also considered the possibility of excluding it from the Group of 20 (G20).

Governments that choose to nationalize companies are, in most cases, of nationalist or socialist ideologies, and the reasons for undertaking such actions will often vary. Usually behind expropriation is the idea of controlling the practice of price gouging, ending private monopolies, and ensuring access to goods and services for members of their society.

The president Evo Morales has said that the expropriation of the company REI was a “just tribute to the workers and the Bolivian people who fought for the recovery of natural resources and basic services”.

Regarding the Argentinian case, the Deputy Economy Minister Axel Kicillof has said – according to the portal América Economía – that the measure seeks to “put the country’s oil resources in the service of economic growth”, and stressed that the mission of Repsol was only to extract the hydrocarbons in the country and deliver high returns to shareholders, without bringing any benefit to the people of Argentina.

State control over the means of production, however, does not always guarantee the welfare of the nation, nor does it keep the economy stable, especially now that most countries are opening their markets to foreign capital and are participating in international treaties of free trade.

The current system suggests that countries which do not support economic liberalization

are exposed to commercial isolation and exclusion from any benefits related to imports and exports.

This is what the Secretary of State Hillary Clinton meant, a few days ago, when she referred to the Argentinian case: “having an open market is the preferable model […] Models that include competition and access to markets have had more success around the world […] An open market for energy and basic commodities is the best model of competition and market access.”

But the current system also means that those countries that fail to fulfil their acquired financial obligations will be subject to sanctions, restrictions or commercial embargoes.

In this sense, the Spanish government could be one of the first to press for immediate sanctions against Argentina and Bolivia, since the two companies affected by the nationalization are of Iberian origin, and since, in the case of the company taken over by the Bolivian President Evo Morales, the Spanish state owns 20 per cent of the shares.

Meanwhile, the companies concerned are preparing proceedings before the International Centre for Settlement of Investment Disputes (ICSID) to claim their respective compensation for their capital loss resulting from expropriation, as they could not demand the repeal of the measure, as nationalization of companies is permitted under international law.

Argentina may refuse to abide by the rulings of ICSID as to the amount it has to pay. It has done similarly in the past with a number of other unfulfilled commitments, which resulted in banning the country from any credit application with the World Bank. Bolivia may do the same, especially now that it is not a member of ICSID.

By no means does this, however, free the two countries from any negative effects on their economies over the next ten years. The one thing that can happen in the medium term is a decrease in foreign investment.

Moreover, what has been seen in recent days are all kinds of threats and warnings by spokesmen and representatives of multilateral trade and credit; however, words and actions are two different things.

Argentina, for example, is somewhat protected by being a member of the Southern Common Market (Mercosur), a subregional economic unit also composed of Brazil, Uruguay and Paraguay, which facilitates business within block countries and international organizations such as the European Union.

This sends a warning that no country or international organization will suspend its business relations with the largest food producer in the world, such as Mercosur, simply because one of its members has nationalized a company.

According to the Uruguayan Foreign Minister Luis Almagro, any decision on commercial negotiation matters is taken in block rather than with each of its members separately:

“I think the European Union cannot and should not say ‘we will negotiate with three Mercosur countries’, just as we cannot say ’we want to negotiate with Spain, France and Germany, we are not interested in other countries’ “, said the official in an interview with the Spanish journal El País.

(Translated by Sylvia Hoffmann – Email: sylviahoffmann.spanish@gmail.com)

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