Yesterday evening, the Argentinian president, Cristina Fernández de Kirchner, introduced into Argentina's congress a bill to renationalise the former state oil company, YPF. The move is likely to have servere ramifications, both for Argentina diplomatically and for investors in the oil sector, because the company is currently majority owned by the Spanish petrochemical group Repsol.

If passed – and given Kirchner's popularity and control of the legislature, there is little reason to believe it won't – the bill would put 51 per cent of YPF in state hands. The company was a nationalised business from its creation in 1922 all the way until its privatisation in the 1990s, during Argentina's economic distaster. Repsol took control of the firm in 1999, when it also bought the state's last remaining stake, a 5 per cent holding.

The move is not entirely unexpected; there had been indications that Argentina was planning to take a large stake in YPF. But the fact that Repsol's total holdings in the company are now down to just 6 per cent has taken everyone by surprise.

The government's stated reason for the renationalisation is that YPF has been failing to invest in its wells, forcing the state to import more than $9bn of oil in the last year, an embarrasment for a nation with 22bn barrels of shale oil and gas in undeveloped fields. Nonetheless, as the Financial Times' Lex points out, last year YPF accounted for a third of Repsol's investment but a quarter of its profit. Argentina needs someone to pay for this development – it can't afford the $25bn a year price tag alone – but what foreign company will risk putting assets in the nation now?

The diplomatic fallout from the incident is large. Last week, Spain warned Argentina that any meddling with its national interests would be considered an attack on the country, with the Spanish industry minister saying:

If in some part of the world there are hostile gestures against the interests of Spanish companies, the government interprets it as hostility against Spain and the Spanish government. If there are gestures of hostility, there will be consequences.

Spain has withdrawn an ambassador from Argentina, and the country's prime minister will use a pre-planned tour of Latin America next week to try and gain allies in the region. The EU is trying to achieve a negotiated settlement between the countries, with its trade spokesman saying:

A forced takeover by the Argentinian government would give a very negative signal to investors, national and international, and could seriously harm the business environment in Argentina.

Ultimately, the issues at stake can be traced back to market manipulation by the Argentine government. By setting domestic energy prices well below international levels, Kirchner's regime drank their supply dry. The price fixing just one of a number of measures aimed at reducing the nation's reported inflation rate, which is offically 9 per cent but thought to be closer to 18. Some of the interference borders on the ridiculous; the New York Times reported last year on the widely held belief that the nation is forcing McDonalds to limit the price of Big Macs in order to bias the Economist's famous "Big Mac Index".

This latest move looks unlikely to go down as smoothly as the government's more low profile actions, however, and the long term effects are not likely to come out well for Argentina.