While Europe forces yet more privatisation on Greece and Spain under the Orwellian name of “liberalisation”, Latin America in 2012 is challenging the orthodox view that private always is better than public. On 1 May Bolivia seized the Spanish company that controlled its electricity grid, just after Argentina, on 14 April, effectively renationalised YPF, its main oil company, expropriating 51% owned by Spanish firm Repsol. Both critics and supporters have understood Cristina Fernández Kirchner’s and Evo Morales’s actions in terms of energy nationalism and populist demagoguery. But we should see both instead as responses to the failures of privatisation and its toxic connection to complex forms of financial speculation.
Bolivia and Argentina have both shown that private firms were investing less, not more, than their public predecessors were. Morales noted that only $81m had been invested in Bolivia’s electricity grid since privatisation in 1997. YPF in the 1990s drilled three times as many exploratory wells in Argentina as it did in the 2000s under Repsol. Argentina’s oil and gas output was falling, and new reserves were not being found to replace exploited deposits.
In both cases Spanish multinationals had prioritised the repatriation of dividends over investment. This indirect form of asset stripping was driven by the priorities of bankers in London and New York. Behind the Repsol-YPF affair, in particular, was something very close to the sick capitalism that caused the 2008 crisis: high-yield, high-risk assets, sliced and diced via complex derivatives.
Repsol, like all oil companies, has a double life. On one hand it makes money through producing, transporting, refining, and marketing oil and gas. On the other, it is a proxy for gambling on oil as a commodity and, through derivatives, for speculating on that speculation. Investment banks are similarly divided in their priorities. Sometimes they invest, though more usually they get rich by carrying money they borrow at low interest to places where they get higher yields.
While high yields almost always mean higher risks, there is a fiction of control over these risks through derivatives – in particular insurance contracts called “swaps”.
In the murky world of derivatives, however, the same bank group may indirectly be guaranteeing its own risks, and the trade in risks becomes bigger than the real investment. The whole pyramid stands so long as there is some real-world thing that pays, in theory, a high and steady yield – whether it is subprime mortgages, or a high rent from an oil asset.
Spain privatised Repsol between 1989 and 1997, just at the time when “deregulation” in the US and Britain turned banks from investors into high-rolling gamblers. Repsol grew from a tiny Spanish refining and marketing “downstream” company into the world’s 15th largest petroleum company, with operations on every continent. It specialised in deals where Anglo-American companies fear to tread, such as Iran, offshore gas in Venezuela under Chávez, and offshore oil in Cuba, enjoying bumps in its share price and valuation as it nominally acquired access to reserves.
In 1999, Repsol bought its most important international asset, YPF. Over the past decade the main value of YPF as far as Repsol was concerned was not the oil or gas it produced and sold, but its value as collateral on the basis of which debt could be contracted.
YPF, under Repsol, paid extraordinarily high dividends to its foreign owners – some 9% in 2011 – which it paid for by borrowing. So while YPF debts soared and Argentina’s oil went undrilled, Repsol both banked profits and “invested” Argentinian capital elsewhere in its corporate structure. As the rating agency Standard & Poor’s commented on 19 April: “Repsol does not guarantee any of the debt at YPF.” Madrid got the juice, but the liabilities all fell on Buenos Aires.
High dividends allowed Repsol also to cash out of 25% of its YPF holding by selling it on to the Eshkenazi family, with the capital coming from Credit Suisse, Goldman Sachs, BNP Paribas, Standard Chartered and Citibank, with banks then making money buying and selling derivative contracts on Repsol and YPF debt.
Spain has threatened Argentina with retaliation, quickly followed by the EU, Britain, and the US. The anger in Madrid and in Brussels is of an old-fashioned kind – Argentina is both refusing to hand over its present and future pocket money to Spain and reducing Europe’s global assets.
But the fury on the pages of the Financial Times and the Wall Street Journal is not ultimately about oil or profits, nor even about the bad precedent it might set for future expropriations elsewhere. Rather, it is provoked by Argentina having interrupted a chain of securitisation anchored in the real world by its oil at one end, but with investment banks in London and New York, the holders of swap and other derivative liabilities on Repsol and YPF debt, at the other.
In nationalising, Argentina showed that a democratic government can stop predatory financiers. And it has not scared away new investors: already Talisman, ConocoPhillips, Chevron, and Chinese companies are seeking access to Argentina’s shale oil reserves, the third largest in the world.
Richard Drayton is Rhodes Professor of Imperial History at King’s College London.