Argentina’s Totalitarian Economy

A Fascistic 'Zwangswirtschaft' is Implemented

Argentina's central bank president Mercedes Marco del Pont:
 'money printing does not cause inflation'
(that's actually true, in a sense: money printing is inflation)

By Pater Tenebrarum

The government of Christina Kirchner is well-known for its interventionism, protectionism and disregard of property rights and freedom of expression. Anyone doing business in Argentina today or contemplating an investment in its stock market must realize that their property and assets could end up confiscated at anytime. Moreover, the high dividend yields of Argentine stocks are clearly no longer safe.

Even the many businesses that remain nominally the property of their owners are often subjected to some form of fascistic 'Zwangswirtschaft' in Argentina, with the bureaucratic interventions ranging from mild to extremely aggressive. This is to say, while business owners may still 'own' their businesses on paper, the government bureaus decide who may do what and when. Among the restrictions imposed by government are decrees that all export earnings must be repatriated, that numerous companies from oil producers to banks may not pay dividends but have to reinvest their profits in Argentina instead, and that farmers may only sell a certain percentage of their output abroad. On top of these decrees there are numerous additional restriction on foreign trade, in the form of often ludicrous taxes on exports (for example, crude oil exports are subject to a 100% tax for every barrel that is sold above a price of $45/bbl.; agricultural exports are also subjected to high export taxes).

The well known Argentine oil company YPF Respol has knuckled under and stopped paying dividends for two years after the government suddenly revoked several of its licenses, seemingly out of the blue. However, this kow-towing by YPF Repsol was not enough: the government has apparently decided that it must nationalize the company (read: steal it from its shareholders), for the 'common good'.

This was at first denied, only to be reconfirmed a few weeks later, while the extortionist pressure on the company was increased by means of provincial governments threatening more license revocations.

„YPF, which is controlled by Spain's Repsol, is under intense pressure from the administration of President Cristina Fernandez to boost output to reduce surging fuel imports that are eroding the country's trade surplus.

Pagina 12 newspaper, which is seen as reflecting government thinking, said Cristina Fernandez had made up her mind on the need for state control and that internal debate was now focused on how to go about it.

It gave the possible options as expropriation or state intervention including the purchase of company shares. [you have one guess as to which it will be! ed.]

To reduce the risk of legal challenges, any such move would be preceded by the passing of a law declaring oil and natural gas production as matters of public interest, the newspaper said.“

This is the typical modus operandi of this government. If its seizures and decrees are deemed to be legally dubious, it simply makes up new laws to fend off potential legal challenges. Naturally this is the exact opposite of the rule of law. It is in effect a lawless dictatorship.

“There's no going backward on this” it quoted unnamed government sources as saying. “Repsol has an extractive model for YPF that doesn't work for us. Company rationale doesn't contemplate the reinvestment of profits and putting capital into exploration and production based on what the country needs”.

YPF stock has been battered by weeks of speculation about a possible re-nationalization and a series of sanctions by national and provincial authorities, such as the withdrawal of operating licenses.

YPF officials have defended the company's investment record and criticized provinces for revoking its concessions.  The company argues investment in Argentina rose 50% in 2011, with most of the cash channelled into upstream including exploration projects like those that led to the huge Vaca Muerta shale find, which could potentially double Argentina's energy output.

Meantime and following with the strategy of having oil provinces suspend concessions, Chubut governor Martin Buzzi announced that his administration is considering terminating oil concession in four wells, including Manantiales Behr, one of the most important in the country.

Buzzi stated the measure was based on accurate information regarding YPF failure to comply its contract. “Investments in Manantiales Behr decreased 70% in comparison to 2011 and wells they planned to drill during 2012 are 59% lower than the previous year,” he said

Chubut Government is also considering the possibility of revoking YPF concessions in Los Monos, Río Mayo and Restringa Alí areas, “where investment is practically zero” according to governor Buzzi.

This in short describes a fascistic 'Zwangswirtschaft' (this could be loosely translated as 'controlled economy', but the term doesn't quite have the ring of the German original, which Mises used to describe the economy of Nazi Germany. The German word 'Zwang' means 'coercion'. So perhaps one could call it a 'totalitarian economy').

Note that it is the provincial government that thinks it is in charge of how much YPF should invest and in what – it is not up to the company or its shareholders to make that determination. The threat of revoking even more concessions is simply blackmail and as we now know,  is merely the first step in what is likely to become the complete theft of the company by the State. The only hope YPF Repsol shareholders have at this point is that Spain will intervene on their behalf, as Spain's Repsol is a large shareholder in YPF.

Similarly to YPF Repsol, other companies like Argentina Telecom have also bowed to the government's pressure and decided to withhold dividend payments. This is tantamount to an expropriation of shareholders, since they can no longer freely decide how the company's resources and income are to be disposed of. The government didn't need to issue a decree or make up a new law in this case: it was enough that it threatened to do so.

The Dispute over the Falklands and Rising Authoritarianism 

Argentina's government has now also put the thumbscrews to other oil companies. Recently it decided that it somehow still has a say over the Falkland Islands, which belong to the UK. Their geographical proximity to Argentina should not detract from this fact – as it were, the population of the islands does not wish to be annexed by Argentina, quite understandably. Argentina's government naturally has no intention whatsoever to defer to the wishes of the Falkland's population and to accept that it has no claim to the islands. It seemingly still regrets that the junta was unsuccessful in it attempt to annex the islands by force 30 years ago. Luckily Argentina is militarily so weak nowadays that a repeat of the invasion is definitely off the table. Its claim to the islands is supported by many other governments in the region, all of which reflexively reject remnants of colonialism. However, who cares what othergovernments think? It is the people of the Falklands who should be the ones who have the decisive voice on the issue – and they want to remain British, so that's that.

As the BBC reports:

„It is true that Brazil, Uruguay, Chile and other Latin American countries have openly supported Argentina's claim to the islands.

There is an instinctive disapproval in the continent of the remnants of colonialism, and a feeling that a European power has no real business operating from territory in the South Atlantic.  Argentina interprets this support as a growing sign that Britain is feeling the heat. The British government disagrees.

Foreign Secretary William Hague told me in London: "People in Argentina would be very much mistaken if they thought Britain was retreating from the scene, or is not interested in the region, or is weakening in any way in our commitment to the people of the Falkland Islands."

Argentina's hope is that Britain will become so embarrassed by the disapproval of other countries that it will eventually agree to negotiate with Argentina over the sovereignty of the islands.

If Cristina Fernandez was an ordinary president, that might be a possibility. But she is not. Under her rule, Argentina is starting to worry many of the countries whose support she most needs.

Her government seems to be slipping away from its traditional pro-Western position, and growing closer to Venezuela, Bolivia, Cuba and even Iran. Countries in the region as different as Brazil, Chile, Colombia and Peru find this increasingly worrying.

Brazil has also been annoyed by President Fernandez's proposals for a non-nuclear South Atlantic, as part of its campaign against the British presence in the Falklands. The problem is, Brazil is building seven nuclear-powered submarines of its own.

There are plenty of other irritants. Last year, when Argentina's trade surplus dropped by 11%, the government introduced a complicated system of import restrictions. On Friday, 40 countries – including the US, the European Union nations and Japan – attacked Argentina angrily at the World Trade Organisation.“

In short, Argentina is close to becoming a typical 'pariah state', aligned mainly with other nations of deservedly dubious reputation. Mind, we do not think that every country should be required to knuckle under to every demand made of it by the West. However, these pariah states are all ruled by authoritarian and repressive governments – and Argentina's government is no longer much different from them. Consider a further snippet from the BBC report quoted above:

„Supporters of President Fernandez's policy, like Mr Escude, defend these things by saying that former great powers like the US and Britain no longer matter as much as they once did, and that countries like Brazil are taking over.

Yet Brazil is anxious to keep its good relationships with the US and Britain, and does not want to have to side with Argentina against them – over the Falkland Islands or anything else.

Leading Argentine constitutional lawyer Daniel Sabsay is one of several thousand signatories to an open letter which calls for Argentina to consider the rights and opinions of the Falkland Islanders.

He believes the government's sudden interest in the Falklands is a deliberate distraction from Argentina's increasing problems at home. "This conflict is a mask, something that is useful to hide other problems we have."

Argentina's problems are certainly worsening. After 10 years of growth, the official inflation rate is 7%, but private economists currently put it at 22%. Wage demands are mounting, and low and middle-income families are starting to struggle.

Five years ago, in 2007, when President Fernandez's late husband Nestor Kirchner was president, Argentina broke off discussions with Britain about the development of the Falkland Islands' resources, on grounds no progress was being made on the question of sovereignty. But there was little sign of any other interest in the islands. It was only in June last year, in an interview with the editor of the English-language Buenos Aires Herald, that the defence minister, Arturo Puricelli, launched the government's attack on the issue.

The Herald, edited by Carolina Barros, is a small newspaper with a famous history. During the so-called Dirty War, carried out by the country's military in the 1970s and early 1980s, it was the only newspaper which had the courage to raise the issue of the people who were disappearing – 20,000 or more of them.

Ms Barros maintains that the Fernandez government is nowadays trying to control the media – only parts of which are anyway independent of government influence. Not long ago, she says, every newspaper received a letter from the official statistics agency, which the opposition maintains is heavily influenced by the government, warning that they should not quote figures from independent economists – for instance the inflation estimate of 22%. "We are becoming like Venezuela, where you aren't allowed to print the genuine exchange rate for the dollar," Ms Barros said.

President Fernandez runs a strange kind of government. She never gives interviews or press conferences; instead, she regularly broadcasts her views direct to the country on television. Her critics believe she is becoming more and more isolated. The similarities with Hugo Chavez of Venezuela, they say, are growing.

"The trouble is, she is isolating Argentina too," says Ms Barros. "We will soon be almost on our own in the world."

Regarding the Falklands, we would point to what the writers of the open letter highlighted above say: once again, the opinion of the inhabitants of the islands  on the matter should be what ultimately counts.

We have previously written about the government's increasingly aggressive attempts to silence independent economists. At first it threatened them with a $100,000 fine for every time they dared to publicize independent data on the decline in the Argentine peso's purchasing power. Then it threatened to sue them for treason, implying that one would likely end up imprisoned for daring to question the government's lies about the inflation rate. The funny thing about this is that everybody knows that the official data are a sham – people certainly don't need private economists telling them that. Still, the government can not abide to see the true situation in print. More on the inflation question follows further below.

With regards to the Falklands, a spat has recently erupted as Argentina now tries to penalize companies doing business there, especially oil companies. 

The Financial Review writes:

„Britain has accused Argentina of illegally intimidating Falkland Islands residents after its foreign minister vowed legal action against oil companies operating around the territory. Argentinian minister Hector Timerman warned "we will take the required legal, administrative, civil and criminal actions against oil companies currently involved in drilling", speaking in a Buenos Aires press conference Thursday.

Britain's Foreign Office responded by calling the threats "illegal, unbecoming and wholly counter-productive". "These latest attempts to damage the economic livelihoods of the Falkland Islands people regrettably reflect a pattern of behaviour by the Argentine government," said the statement. "From harassing Falklands shipping to threatening the Islanders' air links with Chile, Argentina's efforts to intimidate the Falklands are illegal, unbecoming and wholly counter-productive.”

The ministry stressed that oil exploration around the disputed islands was a legitimate commercial venture, and that islanders were entitled to exploit any natural resources. Britain vowed to work closely with any company potentially affected by Argentina's move. The announcement escalated rising tensions over the South Atlantic islands claimed by Argentina since 1833, but held by Britain.

Timerman noted that in the past Buenos Aires had already "notified these firms that they were acting illegally". "We will also send warnings to companies which might be interested in these activities, serving them notice of the possible administrative, civil and criminal sanctions they might face," he added.

Timerman said the companies involved include Desire Petroleum, Falkland Oil and Gas, Rockhopper Exploration, Borders and Southern Petroleum and Argos. Rockhopper, Desire Petroleum and Falkland Oil and Gas are three small British firms that began prospecting for oil off the Falklands in early 2010. Rockhopper, the only company to strike oil so far, refused to comment. Timerman said the sanctions would also apply to all companies that provide "logistical support" or "financial services" for these activities.“

As the Telegraph reports in a related article, this 'logistical support' apparently extends even to the writing of research reports on oil exploration near the Falklands:

„Argentina warned in March that it could sue oil companies exploring around the disputed islands, and those companies offering explorers "logistical help" or "financial services". It has since written to banks who have advised or published research about the explorers, threatening legal action.“

Argentina seems to be laboring under some bizarre illusion that it has jurisdiction over the Falklands. As one oil executive remarks, any letters he might receive from Argentina's government are likely to end up in the wastepaper bin right away:

“Asked how he would respond if it were threatened, Mr Hudd laughed and said: "If FIH received a letter from the Argentine government it would be ignored. I wouldn't deign to waste a stamp on it. The whole thing is so bizarre and ridiculous that it defies rational comment."

Mr Hudd, a regular visitor to the Falklands, said islanders were "bemused" by the threats. Asked if he thought that there was a real threat to the operations of oil companies working around the islands, he said: "It remains to be seen but I'm very sceptical. The risk of not finding oil far outweighs the risk of political action by Argentina."

In the meantime Argentina has actually begun to initiate legal proceedings against oil companies operating in the Falklands. The companies concerned can of course afford to laugh this nonsense off, but Argentina is trying to put pressure on them by e.g. informing stock exchanges where their shares are listed about the 'risks' that these companies supposedly must now disclose to their shareholders on account of these lawsuits. In short, it is trying to make life hard for them in every way it can.

Oil companies operating in Argentina proper have it more difficult. The latest company subjected to the government's threats and blackmail is Brazil's Petrobras. Once again a provincial government in Argentina has taken the lead. 

As the FT reports:

„No oil company it seems is safe in Argentina these days.

On Wednesday, Brazil’s Petrobras became the latest oil major to be stripped of its operating licence by the Neuquen province in western Argentina.

While Argentina is still not quite in the same league as Venezuela, where expropriations have become a familiar risk for businesses, this latest development should give pause to even the country’s most gung-ho investors.

As was the case with Spanish-controlled YPF – which has lost 12 licenses in five provinces since March 14 – Neuquen’s justification was that the three oil companies failed to invest enough in the fields to boost productions.

From Télam, Argentina’s official news agency:

The provincial Government of Neuquén expired on Tuesday the concession of the hydrocarbon areas Veta Escondida, Covunco Norte y Fortín de Piedras. The expired areas shall be in charge of the provincial State-run company Gas y Petróleo del Neuquén S.A …

With this new resolution, the reverted areas in the province due to the lack of investment are six, of which three were exploited by the oil company YPF.

The move clearly caught Petrobras off the hop. Shares in the company, down nearly 30 per cent over the past year, fell another 2.4 per cent on the news on Wednesday.

As Maria das Graças Foster, the company’s new president, told O Globo:

I was taken by surprise. I did not expect it. We have very positive relations with Argentina and we were assessing future opportunities for our presence in that country.

It wasn’t only so long ago that YPF also thought it had a chummy relationship with the Argentine government. Indeed, the bad boy in the oil sector has always been Royal Dutch/Shell, which has never recovered favour after trying to put up diesel prices in 2005 and incurring the wrath of then president Néstor Kirchner who called a Shell boycott.

Unlike Spain’s Repsol, which derived a fifth of its operating income from its stake in YPF, Petrobras’s exposure to Argentina is less significant. While the Argentine business is its biggest overseas, net income from the division, at 704m pesos ($160m), accounts for only about 4 per cent of the R33.3bn ($18.22b) in net income made by Petrobras in 2011.

Still, the fact that Cristina Fernández has in the space of a few short months turned on – first YPF (the country’s biggest oil producer) and now Petrobras – underscores the pressure that the Argentine economy is facing.“

So why is Argentina's economy 'facing pressures' and why is its oil and gas production in steep decline since 1999? As it were, oil production has fallen by a third since then. Are the evil private companies deliberately 'not investing enough' as is regularly charged in the course of these license revocations? As it turns out, in reality government price controls are at fault. As a lawyer specializing in arbitration in Latin America relates:

Argentina is in an energy crisis because it has been routinely artificially depressing domestic oil and gas prices over the past decade. The suppression of the domestic price of oil and gas and the closure of all possibility to export gas to Chile has caused most Argentine energy producers to dramatically reduce local investment. Decreased investment means decreased production in the medium and long term and now, the provinces are also paying a price as royalty income is also down. Understandably, the provinces are unable to blame the central government. Instead, they are blaming the investors and hoping that if they clear away investors that have failed to invest in certain fields, new investors will emerge.

It remains to be seen, however, whether new investors (in particular, Chinese investors) will be willing to invest in Kirchner’s Argentina.

And here lies Argentina’s problem. Taking away oil fields from YPF and Petrobras won’t solve the country’s energy problem unless they can attract new investors. And who would want to put money into a venture if they know that the asset – and with it the money they have invested into it – could be taken from them any day.

As the arbitration lawyer put it:

I think foreign investors should be very cautious in their dealings with the provinces at this time and expect that every underperforming asset can and will be taken away from them in the short term.

Sadly, Argentina’s heavy-handed intervention could be a death-knell for the very investment in the sector that everyone acknowledges is necessary.

This is what routinely happens when price controls are imposed: demand explodes, while concurrently supply contracts as it no longer pays to produce the controlled items. Since exports of oil are subject to a 100% export tax, there is no longer any possibility for oil producers to earn satisfactory returns. Oil exploration and the development of oil fields are capital-intensive, risky businesses with a very long time horizon. When the legal environment is as unpredictable and government's rule as capricious and mercurial as in Argentina, such risky long range investment projects naturally tend to be put on ice – and this is all the more true when producers are forced to operate under a system of price controls.

The Central Bank's Bizarre Views on Inflation

As Merco Press reports, the 'unofficial' consumer price inflation rate in Argentina has clocked in at nearly 23% over the past twelve months:

“February inflation in Argentina according to an average of private agencies which is released monthly by members of the Congressional opposition was 1.65%, climbing to 22.75% in the last twelve months. The official Indec inflation is scheduled to be released next March 13. [update: the official number has in the meantime been released and was 9.7% - less than half the actual inflation rate, ed.]

Argentine opposition lawmakers every month release an average of private consultants’ consumer prices index estimates, since the Domestic Trade Secretariat has threatened those organizations with fines of up to 150.000 dollars if they make public their reports.

Since the Argentine Stats office Indec five years ago, under former president Nestor Kirchner, had its professional staff removed and replaced by political cronies, the gap between the two indexes has soared: while the official Indec 12-month percentage is below two digits, the so called Congressional index has always been in the twenties.

Lawmaker Ricardo Gil Lavedra said that “inflation exists even when the government tries to erase reality and the legal system”, in reference to the ban on making public private consultants estimates.

Another lawmaker, Paula Maria Bertol underlined that the Indec numbers do not reflect reality “and we will continue making public the index from public consultants because it is a question of freedom of expression and the people’s interest and right to know”. She added that inflation continues to erode the competitive (export) dollar of the first years of the Kirchner couple and this is clearly reflected in the outflow of capital. It also means less investment and less jobs for the Argentines”.

So why does Argentina have such a high 'price inflation' rate which the government is at pains to lie about? It turns out that the Yale-educated central bank president Mercedes Marco del Pont has very curious views about the causes of rising prices:

“Printing money does not lead to inflation, argues Argentine central bank president.

The president of Argentina’s Central Bank (BCRA), Mercedes Marcó del Pont, stressed the importance of the recently approved bank’s charter reform and denied that printing currency leads to the creation of an inflationary state “since inflation is rooted in other causes”.

Say what?

First of all, printing money is what inflation actually is. Admittedly printing money does not always lead to rising prices for final goods. The effects of inflation are manifold, and while all of them are bad, rising CPI is not an inescapable outcome in all cases. Both the demand for money and the rise in economic productivity can sometimes work against rising final goods prices in spite of inflationary policy. It is clear however that prices will be higher than they would otherwise be, even if they fail to rise. Moreover, there will be always some prices in the economy that will rise when the money supply is increased, even if measures like CPI remain tame. As Ludwig von Mises remarked, a 'price revolution' occurs, as relative prices inevitably begin to shift.

Alas, in Argentina consumer goods prices clearly are rising, and they are doing so at a worryingly fast clip. To insist that the vast inflation of money and credit is not the root cause of this phenomenon is simply ludicrous. Obviously, absent an increase in the supply of money, prices in general simply cannot rise. Every price increase in certain items will necessarily be balanced by a price decline in others. It is simply not possible for all prices to rise absent an inflation of the money supply.

So this is what a Yale education gets you? The belief that there is no connection between the money supply and prices? It boggles the mind.

Here is what else Mrs. Marco del Pont had to say:

“The banker added that “it is totally false to say that printing more money generates inflation, price increases are generated by other phenomena like supply and external sector’s behaviour”.

In that sense, the BCRA president explained that “the priority right now is the investment credit, because it is one of the issues in which Argentina is still with insufficient coverage. We look for credits of longer-term investment plans at reasonable rates with the return of these investment projects.”

“We discard that financing the public sector is inflationary because according to that statement the increase in prices are caused by an excess of demand, something we do not see in Argentina. In our country the means of payment are adjusted to the growth of demand and tensions with prices must be looked on the supply side and the external sector”.

Marcó del Pont remarked that criticism of the way the state is funding itself “have a clear ideological condiment, it is that or either the public sector has to make adjustments or go abroad to get credits and/or loans”. She added that the debate is very similar to that referred to “the use of BCRA reserves to pay for sovereign debt”.

Under the new charter of the bank the primary and main task of the BCRA will not be only to preserve the value of the currency but must also include inflation, jobs, economic development with social fairness, financial stability and the need to coordinate with government policies.

“We’re recovering the sovereign capacity to formulate and implement economic policy”, said Marcó del Pont who anticipated some pictures will be coming down from the bank’s hall of fame “beginning with Milton Friedman.”

We are not uncritical admirers of Milton Friedman either, but the fact that his picture will be 'removed from the hall of fame' speaks for itself. Friedman after all did famously and quite correctly assert that inflation is a monetary phenomenon. The rest of her babbling sounds like what a Soviet commissar might say. It is essentially incomprehensible and meaningless gobbledygook.

Admittedly she sounded a bit more coherent in a 2011 speech , which was also designed to divert attention from the central bank's inflationary policies. On that occasion she pointed to the composition of the CPI with its high food price weighting and the fact that the rise in international food prices could not be blamed on Argentina's CB. 

These arguments actually have some merit, but it sounds like just another convenient excuse, very similar to Ben Bernanke blaming rising commodity prices on anything and everyone but the central bank's policies and himself.

Her claim that she sees her main task in 'preserving the value of the currency' is plainly ridiculous in the face of consumer prices rising at an over 20% clip over the past several years (based on the calculations of private economists). If there were no acute inflation problem, the government would hardly find it necessary to hide the effects of the inflationary policy by publishing a doctored price index.