Argentina’s move to seize the local energy assets from Spanish oil and gas giant Repsol has spurred condemnation from the European Union's parliament and has led to worries about more anti-free market policies in Latin America.
In condemning Buenos Aires' nationalization bid, the parliament on Friday demanded that the EU take action against Argentina at the World Trade Organization.
Western fears could be stoked by the rapid movement away from the U.S. and Europe toward China as the region’s main trading partner — and the endorsement of Argentina’s expropriation by Venezuela, Cuba and Bolivia.
China’s influence in the region has grown exponentially in the last decade, as it bought Brazilian soy, Ecuadorean copper and Venezuelan oil.
China's investment in Latin America jumped from $15 billion in 2010 to $23 billion last year, according to the United Nations Economic Commission for Latin America and the Caribbean.
The Argentine government, led by President Cristina Fernandez, is planning to bring in another investor, possibly China’s Sinopec, which had been talking to Repsol about buying a stake in YPF, or CNOOC, China’s biggest offshore energy producer, according to local newspaper Expansion.
The seizure of the energy assets of Argentine-based YPF could frighten off many other investors.
“China loves to move in where other people fear to tread. There might also be some associated deals involving trade and investment in the rest of the economy. Nearly all Chinese energy companies have got involved in deals where there have been other associated benefits in terms of investment for the host countries,” Peter Kiernan, lead energy analyst at the Economist Intelligence Unit, told CNBC.com.
Venezuela, led by Hugh Chavez, has borrowed $30 billion from China in total in return for feeding China’s demand for energy with its oil reserves.
There could be plenty of returns for foreign companies prepared to take risks in Argentina. The discovery of shale gas is potentially even more lucrative than its dwindling oil revenues, according to Kiernan.
“The most interesting thing is what could happen with the unconventional oil and gas assets. These assets are very expensive to extract and require a lot of expertise,” he said.
Fracking, a controversial process used to extract shale oil and gas, is unpopular in some quarters because of its potential environmental impact as well as its cost. It requires a high level of specialist knowledge and expensive equipment to carry out properly.
“China is very interested in energy security and interested in Latin America — but isn’t necessarily doing it with great expertise,” said Jill Hedges, senior Latin America analyst at Oxford Analytica.
Venezuela and Cuba have spoken in support of Fernandez’s actions, while Spain’s protests have been supported by the European Commission and by Robert Zoellick, the outgoing president of the World Bank. Yet Spain now accounts for only around 3 percent of Argentina’s exports, so has limited power to sway its economy.
Brazil, the largest economy in Latin America, has stayed silent in the dispute.
“The Brazilians would prefer Argentina not to explode politically,” Hedges said.
There are also plenty who say that Fernandez’s administration isn’t traditionally left-wing.
Her husband and predecessor as president, the late Nestor Kirchner, came to power following the economic crisis with a political movement known as Kirchnerismo, nominally left-wing but focused on populism and strong leadership.
“Cristina may be many things — e.g. out of her depth, weak on economics, temperamental and under increasing pressure with an economy which is in serious trouble — but she is not left wing,” said Alistair Newton, senior political analyst at Nomura.
“The Repsol issue is arguably classic Peronism as practiced under Nestornomics — even though it was Nestor Kirchner who put the deal she just torpedoed together in the first place — not socialist doctrinaire.”
“The Kirchners see themselves as left-wing, but they don’t have a coherent agenda,” Hedges added.
And if the economic situation worsens in Argentina as a result of its growing inflation and capital flight, Kirchnerismo could be on its way out.
“Argentina has been running macroeconomic policy which is excessively stimulative relative to the supply side,” Jan Dehn, strategist at Ashmore Investment Management Limited, told CNBC.com.
“That creates excess demand, inflation and capital flight. I expect these inflationary and dollar-shortage issues to continue, which does not look good for the medium to long term in Argentina.”
The country is approaching another low point in the boom and bust roller coaster which has characterized much of the last few decades for Argentina, Hedges says. While the strength of soy imports to China could help insulate Argentina’s economy against the spectacular busts of previous crises, the move away from industrials toward agriculture will not help the country’s jobs market in the long term, she warned.
“Support for the Kirchner government will fall quite rapidly when the economy starts going badly,” she said. We are now looking at a very bumpy couple of years as people get more and more worried about the fact that policymaking is down to a few people who don’t listen or have much expertise.”