Is Argentina allowed to seize YPF?
Argentina's expropriation of its former state oil company attracted international condemnation - but
Argentina's expropriation of 51 per cent of the shares of YPF, the formerly state-owned oil company, has generated almost universal criticism. Indeed, Antonio Brufau, Repsol’s executive chairman, has labelled Argentina’s action as “manifestly illegal and gravely discriminatory”, and has emphasised Repsol’s intention to use international arbitration to gain proper compensation if it is not freely offered by Argentina. Such language is undoubtedly useful for Repsol as a means of generating support for its position, but an examination of precisely what international law says about expropriation is illuminating as to the potential losses that Repsol now faces.
Whether or not Argentina’s action violates international law is an important question for Repsol, as the standard of compensation differs for legal and illegal expropriations. Consequently, if Repsol can establish that Argentina has violated international law it potentially stands to gain considerably greater compensation than if the law has been observed.
It is important to note, however, that expropriations are not inherently illegal under international law. The ability to take property from private entities is simply one of the benefits of being a state. The important question, then, is whether Argentina has adhered to the applicable standards in performing the expropriation. Currently available information suggests that it has.
Firstly, an expropriation must be undertaken for a public purpose. Argentina’s expressed goal of regaining national energy self-sufficiency and ensuring the viability of an important industry clearly satisfies this requirement, and there is as yet no indication of any alternative motive.
Secondly, the expropriation must be non-discriminatory. If, for example, the Argentine government had taken Repsol’s shares in YPF and redistributed them to a private Argentine entity, Repsol may have been able to argue discrimination. Such an action would have indicated that Repsol’s foreign nationality was a motivating factor in the expropriation. However, the expropriated shares are being retained in government hands, YPF’s remaining shareholders include other foreign entities, and Argentina has offered plausible arguments as to why YPF’s performance was insufficient for the needs of the country. Absent new evidence, then, Repsol will have difficulty substantiating its allegation that the expropriation is "discriminatory".
Thirdly, the expropriation must be performed in accordance with due process of law. Argentina is undertaking the expropriation through the passage of legislation and there has been no accusation that Repsol will be deprived of any legal rights it has to challenge the expropriation in Argentine courts. Consequently, there is no current evidence that Argentina is violating this requirement.
Finally, an appropriate level of compensation must be paid for any expropriated property. This is the point on which the greatest uncertainty remains, as the Argentine government has not yet stated how much compensation it intends to pay to Repsol. Moreover, there are clear political pressures within Argentina to minimise the amount of compensation that Repsol receives. If Argentina bows to these pressures, and offers Repsol an amount indefensible as an estimate of the market value of the company, it will likely be found to have acted illegally. However, the efforts that have so far been made by Argentina’s representatives to link lowered compensation payments to such things as potential hidden debts and environmental liabilities indicates that Argentina is well aware of this issue, and is unlikely to propose an amount of compensation that is not at least facially plausible as a market valuation of the expropriated shares.
Of course, while it is important for Argentina that its actions be found to be legal, simple legality will not protect it from all the potential negative consequences of such a prominent expropriation. Perceptions matter in attracting foreign investment, and Argentina will need significant foreign investment if it is to achieve its goal of a return to energy self-sufficiency. For this reason, as attractive as it may be to the Argentine government to minimise the compensation it offers to Repsol, this is unlikely to be in Argentina’s long-term best interest. A single act of expropriation is unlikely to deter foreign investors, even when it is as large as Argentina’s expropriation of YPF. However, a perception that the Argentine government will not treat foreign investors fairly will deter them, and any indication that the government is more interested in minimizing the compensation it pays to Repsol than in fixing a fair price for Repsol’s shares in YPF will have precisely that effect. In the long term, such a valuation may well cost Argentina more money than it saves.
The second part of this post can now be found here.