Argentina sparks trade war by nationalizing YPF

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The Argentine government led by Cristina Fernández sparked a fierce controversy and a potential trade war this week by re-nationalizing the country's largest oil company, YPF. The action came as a sharp blow to one of Spain's industrial giants, Repsol, which prompted widespread condemnation and the promise of a major economic conflict between Spain and Argentina, several sources reported.

Repsol owns 57.43 percent of the Argentinian energy firm. The plan put forth by Fernández will see the government take control of 51 percent of the company, including nearly all of Repsol's stake.

According to the Financial Times , the re-nationalization represents the largest action of its kind in an extractive industry since Russian President Vladimir Putin's takeover of Yukos.

The Argentine government cited mismanagement of YPF by Repsol and claimed the Spanish firm had effectively been extracting the profits and bringing them back to the battered European economy. Rising energy costs and slumping domestic production have forced Argentina to import billions of dollars worth of fuel every year.

Repsol YPF recently discovered massive deposits of shale gas and oil in the Vaca Muerta fields of western Argentina.

In a Madrid conference, Repsol's executive chairman Antonia Brufau lashed out at the Fernández government, claiming that the act was an attempt by Argentina to hide the country's economic crisis and social malaise and that "these acts will not go unpunished." Repsol shares slipped about 7 percent in European trading in response to news of the re-nationalization. ? ?

The Spanish response

? ?The FT reports that Madrid has summoned the Argentine ambassador and vowed "clear and decisive action," which could take the form of international arbitration, the collapse of trade agreements or other decisions. 

"With this attitude and hostility there will be consequences that we will see over the next few days," stated Spanish Minister of Industry Jose Manuel Soria.

There's a lot at stake in this conflict - Repsol is demanding $8 billion in recompense for the loss of its stake in YPF, and the plan will also dramatically impact a loan made by Repsol to the Petersen Group, an investment owned by the powerful Eskenazi family of Argentina. The Spanish firm loaned them $1.9 billion, which Petersen used to buy up 25.5 percent of YPF. Because the loan's collateral is in the form of YPF shares, the exact process of re-nationalization and the eventual share value will be extremely important.

An aggressive trend

The South American nation has shown a certain tendency towards relatively aggressive and muscular foreign policy lately.

The status of the Falkland Islands (Las Malvinas, as they're known in Argentina) continues to generate tension and saber-rattling with the United Kingdom, where the Conservative-Liberal Democrat government has plenty of motivation to engage in a bit of overseas political theater with a past military adversary.

In the Falklands, oil comes into play as well - the reported discovery of significant petrochemical deposits in the waters surrounding the islands ups the stakes for both Argentina and the U.K. British military leaders and their Argentine counterparts will surely be examining the strategic ramifications of the YPF expropriation. In any case, it certainly won't reduce tensions over the windblown South Atlantic isles.

On the market

The news slammed YPF ( YPF ) shares traded via ADRs in New York, which dropped 11 percent yesterday before trading halted. The iShares MSCI Spain Index ETF ( EWP ), which holds Repsol shares as about 5 percent of its total holdings, was up about 1 percent at 9:45 a.m. EST today. 

Repsol values YPF in total at $18.3 billion, with its own portion worth over $10 billion.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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