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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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation