Paul Brodsky On The State of Play: Statists At Play
On April 16, Argentine president Cristina Fernandez de Kirchner announced that her Argentine government would expropriate and re-nationalize YPF, an energy company operating mostly in Argentina founded by its government in the 1920s and de-nationalized in the 1990s. Repsol, a Spanish company that owns (owned) 57% of YPF called the act “illegal and unjustified” and vowed to sue. Repsol’s president implied he had higher bids for its share of YPF, notably from China (Sinopac), and further asserted that prior to the announcement the Argentine government had deliberately depressed the stock price ahead of expropriation. Spain and its allies in the EU immediately renounced YPF’s re-nationalization and threatened retaliation. Too late: the deal is done and Argentina’s political calculus seems to pass economic scrutiny in a commercial age dictated by political economics. By the time this matter is likely resolved in an international tribunal YPF’s existing energy reserves should be mostly depleted.
Fernandez de Kirchner’s timing was brilliant, reminiscent of Robert Rubin currency interventions when he was running the US Treasury who would strike when FX positions were vulnerable. To re-nationalize the Spanish-controlled energy company when Spain’s economy and funding are teetering means the Spanish government and businesses domiciled there lack the clout to make demands of Euro confederates. FdeK’s declaration that the action is a “recovery of sovereignty and control” should further remind observers and investors that those in power ultimately rely on maintaining and obtaining access to natural resources.
In times past such expropriation would surely be an act of war. Recall Argentine scrap metal merchants raising an Argentine flag over the Falkland Islands in 1982 was enough to prompt Margaret Thatcher to launch the Royal Navy. (Five British firms are currently looking for oil around the Falklands.) The Spanish armada is unlikely to set sail this time. This particular act of state piracy performed by an independent sovereign nation is notable in that its victims are not members of another society but shareholders neither sovereign serves directly. The Spanish government is busy trying to appease foreign creditors and Repsol’s energy production served shareholders first, not necessarily Spanish energy demands.
The Bigger Implication
The political calculus among leaders of sovereign governments reduces to short-term domestic political benefits vs. threats of economic or military retaliation. When it comes to natural resources the points of tension are not sovereign governments vs. private domestic interests but sovereign government vs. sovereign government. It would seem China joined global trade in 1978 because its mandarins realized domestic production could not satisfy the Chinese people’s insatiable appetite for basic resources. Perhaps Russian Glasnost and Perestroika sprung in the latter half of the eighties so that Russia could profit by feeding emerging markets like China its bountiful natural resources? And it would seem reasonable that the formation of US free trade agreements and the EU, (in spite of political partisans who would otherwise killed such measures because they threatened domestic employment), were forced by Western mandarins looking to aggregate global natural resources and control its channel of distribution? And the really difficult question: could the unprovoked invasions of Iraq and Libya (and Iran?) have something to do with increasing control over global energy?
The paper bets representing global production and resources that we call “capital markets” is in jeopardy of becoming a sideshow. Baseless paper money, fractional banking, revenue shuffling, financial returns, ever-increasing debts, unwarranted confidence building, nominal output growth and politicians posing as policy makers cannot sustain the most basic needs of societies. The G7 remains strong economically not only because we have established infrastructures and markets, we are law-abiding and because Apple is innovative. We remain powerful because ultimately our militaries ensure access to resources. Thankfully, our soldiers remain willing to take fiat with unknown future purchasing power in exchange for their labor and the shareholders of defense contractors remain willing to have their investments denominated in such paper. (Of course, the same was true of shareholders in Repsol YPF.)
The governments of G7 economies have been able to control global resource pricing because they have been able to control the perception of global currencies in which resources are priced. Few in the private sector have seemed to mind government control over pricing because resources in developed economies have remained affordable. Policy management over the general price level (GPL) has been generally considered to be successful and in the public good. GPL management starts with the manner in which we arrive at prices. Central bank-issued paper currencies and electronic credits used to exchange global value among goods, services, labor and assets is, for lack of a better way to phrase it, generally agreed upon. This has been possible because the spigot through which the exchange of value and wealth flow and may be quantified is fairly narrow, coordinated among global treasury ministries and central banks. Legal tender laws and compulsory government tax obligations in specific currencies further ensure that only acceptable currencies are used as media of exchange in the private sector.
From time to time, official currency boards of major exporting nations intervene or threaten to intervene into foreign exchange markets so they may devalue their currency vis-à-vis another, with the economic impact of helping their nations’ exporting businesses. They do this by notionally selling their currencies and buying the other, driving the exchange rate to a level that makes it cheaper for importers to buy their nations goods and services. Currency boards that abuse this privilege or do not play ball at all are labeled “currency manipulators”. (A “currency manipulator” is ironically a currency board that does not manipulate its currency in line with the currency manipulations of the broader group.) Nevertheless, laborers and businesses have not minded official currency management because it has tended to be pro-cyclical -- supported by the best overall interests of domestic commercial trade, employment and consumer affordability.
As President Fernandez de Kirchner just demonstrated, currency is not property and intervening to confiscate privately-held property does not require “acceptable currency”. Intellectual property may also be easily copied without exchanging “acceptable currencies”, same for factories, goods and manufacturing processes. At the end of the day, if China and India need food, energy and materials, and if Russia, South America and Africa have too much to consume domestically, then nothing is prohibiting them from agreeing to barter or to use a currency that developed countries might deem “unacceptable”. Very few economies have all the natural resources needed to support their populations. Access to abundant resources can only be accomplished by exchanging them for other resources or for credible markers/money/stores of purchasing power. Do the $3 trillion-plus in US dollar reserves that China holds qualify as a credible marker for future purchasing power when everyone knows dollars and all other currencies priced relative to them are being diluted?