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.

View at sunset of the port next to the gas plant of YPF in Buenos Aires. Photograph: Getty Images

Tony Cole is a senior lecturer at Brunel Law School

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John McDonnell interview: "We’re going to destroy Osborne’s credibility"

The shadow chancellor on the Spending Review, Jeremy Corbyn's leadership and why trade unions will have to break the law. 

When I interviewed John McDonnell in March, before the general election, he predicted that Labour would be the largest party and confessed to a “sneaking feeling that we could win a small majority – because I think the Tory vote is really soft”. As the long-standing chair of the Socialist Campaign Group, McDonnell anticipated leading the resistance inside Labour to any spending cuts made by Ed Miliband. Eight months later, he is indeed campaigning against austerity – but as shadow chancellor against a Conservative majority government.

I meet McDonnell in his new Westminster office in Norman Shaw South, a short walk down the corridor from that of his close friend and greatest ally, Jeremy Corbyn. The day before George Osborne delivers his Spending Review and Autumn Statement, his desk is cluttered with economic papers in preparation for his response.

“The message we’re trying to get across is that this concept of the Tories’ having a ‘long-term economic plan’ is an absolute myth and they’re in chaos, really in chaos on many fronts,” he tells me. McDonnell points to the revolt against cuts to tax credits and policing, and the social care crisis, as evidence that Osborne’s programme is unravelling. On health, he says: “He’s trying to dig out money as best as he can for the NHS, he’s announced the frontloading of some of it, but that simply covers the deficits that there are. Behind that, he’s looking for £22bn of savings, so this winter the NHS is going to be in crisis again.”

Asked what Labour’s equivalent is to the Tories’ undeniably effective “long-term economic plan” message, he said: “I don’t think we’re going to get into one-liners in that way. We’ll be more sophisticated in the way that we communicate. We’re going to have an intelligent and a mature economic debate. If I hear again that they’re going to ‘fix the roof while the sun shines’ I will throw up. It’s nauseating, isn’t it? It reduces debate, intellectual debate, economic debate, to the lowest level of a slogan. That’s why we’re in the mess we are.”

Having abandoned his original support for the Chancellor’s fiscal charter, which mandated a budget surplus by 2020, McDonnell makes an unashamed case for borrowing to invest. “The biggest failure of the last five years under Osborne is the failure to invest,” he says. “Borrowing at the moment is at its cheapest level, but in addition to that I’m not even sure we’ll need to borrow great amounts, because we can get more efficient spending in terms of government spending. If we can address the tax cuts that have gone ahead, particularly around corporation tax, that will give us the resources to actually start paying again in terms of investment.”

He promises a “line-by-line budget review” when I ask whether there are any areas in which he believes spending should be reduced. “My background is hard-nosed bureaucrat . . . we’ll be looking at where we can shift expenditure into more productive areas.”

From 1982 until 1985, John McDonnell, who is 64, was chair of finance at the Greater London Council under Ken Livingstone. After vowing to defy the Thatcher government’s rate-capping policy he was sacked by Livingstone, who accused him of manipulating figures for political purposes. “We’re going to look like the biggest fucking liars since Goebbels,” the future mayor of London told him. McDonnell, who later described Livingstone’s account as “complete fiction”, has since resolved his differences with the man now co-chairing Labour’s defence review.

After his election as the MP for Hayes and Harlington in 1997, McDonnell achieved renown as one of New Labour’s most vociferous opponents, rebelling with a frequency rivalled only by Corbyn. His appointment as shadow chancellor was the most divisive of the Labour leader’s reshuffle. “People like Jeremy even if they don’t agree with him. People don’t like John,” one MP told me at the time. Mindful of this, McDonnell has sought to transform his image. He has apologised for his past praise of the IRA and for joking about assassinating Margaret Thatcher, rebranding himself as a “boring bank manager”. But there are moments when his more radical side surfaces.

He told me that he supports workers breaking the law if the trade union bill, which would limit the right to strike, is passed. “It’s inevitable, I think it’s inevitable. If the bill is introduced in its existing form and is used against any particular trade unionist or trade union, I think it’s inevitable that people will resist. We established our rights by campaigning against unjust laws and taking the risk if necessary. I think that’s inevitable and I’ll support them.”

“Chaos” might be how McDonnell describes Osborne’s position but the same term is now daily applied to Labour. The party is riven over air strikes in Syria and the renewal of Trident and MPs are ever more scornful of Corbyn’s leadership.

While Corbyn has so far refused to offer Labour MPs a free vote on Syria, McDonnell says that he favours one and would oppose military action. “My position on wars has always been that it’s a moral issue and therefore I veer towards free votes . . . We’re waiting for Cameron’s statement; we’ll analyse that, there’ll be a discussion in shadow cabinet and in the PLP [Parliamentary Labour Party] and then we’ll make a decision. I’m still in a situation where I’ve expressed the view that I’m opposed to the bombing campaign or engagement. I think the history of the UK involvement in the Middle East has been a disaster, to say the least . . .This isn’t like the Second World War where you have a military campaign – you defeat the enemy, you sign a peace agreement and that’s it – this is asymmetric warfare. In addition to the risks that are in the battlefield there’s a risk in every community in our land as a result of it.”

Would he want any of the 14 former shadow cabinet members who refused to serve under Corbyn to return? “All of them, we’re trying to get them all back. We’ve got Yvette [Cooper] helping us on a review we’re doing about the economy and women . . . It’s an open door policy, I’m trying to meet them all over these next few weeks.”

Livingstone, a member of Labour’s National Executive Committee, recently called for Simon Danczuk, who revealed details of a private meeting with Corbyn in the Mail on Sunday, and Frank Field, who told me that MPs should run as independents if deselected, to be disciplined. But McDonnell takes a more conciliatory line. “With Simon [Danczuk] in particular and the others, it’s just a matter of saying look at the long-term interests of the party. People don’t vote for a divided party. They’ll accept, though, that within a party you can have democratic debate. As I said time and time again, don’t mistake democracy for division. It’s the way in which you express those different views that are important. All I’m saying is let people express their views, let’s have democratic engagement but please don’t personalise this. I think there’s a reaction within the community, not just the party, against personalised politics. It’s not Jeremy’s style, he never responds in that way. It’s unfortunate but we’ll get through it. It’s just minor elements of it, that’s all.”

McDonnell disavows moves by some in Momentum, the Corbyn-aligned group, to deselect critical MPs. “What we’re not into is deselecting people, what we want to try and do is make sure that everyone’s involved in a democratic engagement process, simple as that.

“So I’ve said time and time again, this isn’t about deselection or whatever. But at the same what we’re trying to say to everybody is even if you disagree, treat each other with respect. At the height of the debates around tuition fees and the Iraq war, even though we had heated disagreements we always treated each other with mutual respect and I think we’ve got to adhere to that. Anyone who’s not doing that just lets themselves down, that’s not the culture of the Labour Party.”

In private, the 90 per cent of MPs who did not support Corbyn’s leadership bid speak often of how and when he could be removed. One point of debate is whether, under the current rules, the Labour leader would automatically make the ballot if challenged or be forced to re-seek nominations. McDonnell is emphatic that the former is the case: “Oh yeah, that’s the rule, yeah.”

McDonnell’s recent media performances have been praised by MPs, and he is spoken of by some on the left as a possible replacement if Corbyn is removed or stands down before 2020. His speech to the PLP on 23 November was described to me by one shadow minister as a “leadership bid”. But McDonnell rules out standing in any future contest. “No, no, I’ve tried twice [in 2007 and 2010], I’m not going to try again, there’s no way I would.”

Despite opinion polls showing Labour as much as 15 points behind the Conservatives, McDonnell insists that the party can win in 2020. “Oh definitely, yeah, you’ll see that. I think this next year’s going to be pivotal for us. We’re going to destroy Osborne’s credibility over the next six months. But more importantly than that, we can’t just be a negative party . . . we’re going to present a positive view of what Labour’s future will be and the future of the economy.

“Over the next 18 months, we’ll be in a situation where we’ve destroyed the Tories’ economic reputation and we’ve built up our own but we’ll do it in a visionary way that presents people with a real alternative.”  

George Eaton is political editor of the New Statesman.