The List

How to Seize an Oil Company

Argentina's fiery president, Cristina Fernández de Kirchner, summarily took control of the country's biggest oil company. Here's a five-step guide for would-be dictators and leftists.

The global energy industry is in an uproar today after Argentine President Cristina Fernández de Kirchner's announcement that her government plans to seize a majority stake in YPF, the country's largest oil company. The Spanish government has threatened retaliatory action -- Spanish energy giant Repsol is currently YPF's largest shareholder -- for what's being called the largest oil nationalization since the Russian government's takeover of Mikhail Khodorkovsky's Yukos in 2003. Repsol shares are down 7.2 percent today.

While the hostile state takeover of a $7.7 billion company is making waves, such nationalizations are hardly unprecedented, particularly in Latin America. Today, government-controlled oil companies, many of which acquired their holdings through takeovers like Argentina's, control 85 percent of the world's oil reserves and 55 percent of production. Here's a quick look at the anatomy of a government takeover:

Step 1: Choose your moment

Research has shown that oil nationalizations happen most typically while oil prices are high and political institutions are weak. Nationalizations in countries -- from Iraq to Libya -- relatively common during the 1970s, then nearly unheard of during the 1980s and 1990s. They then returned with a vengeance in the last decade, with major seizures in Bolivia, Ecuador, Venezuela, and Russia.

Oil has never just been a commodity; it's a strategic asset as well, and forced nationalizations are as old as the oil industry itself. In 1938, the Mexican government expropriated half a billion dollars worth of foreign oil assets after the companies failed to come to an agreement with labor unions over working conditions. The seizure set off a war of words with Standard Oil and many countries chose to boycott Mexican petroleum products, but the government stuck to its guns, creating what is now known as the state oil monopoly Pemex, the world's second-largest non-public company after Saudi Aramco, as of 2006.

Many recent post-Soviet and Latin American oil seizures have actually been "re-nationalizations," state takeovers of energy resources that had been privatized during the free-market reforms of the 1990s. This includes YPF, which was originally a state monopoly privatized in 1993.

Step 2: Build your case

It's usually wise to set up some kind of legal framework before you start seizing private property. In 2001, two years after he took power, Venezuelan President Hugo Chávez passed a new hydrocarbon law increasing the amount of royalties paid by foreign oil companies and increasing direct state control over the national oil company PdVSA, which had operated as relatively independent entity under previous administrations.

Over the next several years, Chavez built up his rhetorical case against the foreign oil companies until he finally began seizing their assets in 2007. As he put it at the time, "To God what is God's, and to Caesar what is Caesar's.... Today we also say: to the people what is the people's!"

Fernandez presented the YPF takeover in similar terms. "We are the only country in Latin America, and I would say in practically the entire world, that doesn't manage its own natural resources," she said.

Step 3: Make them an offer they can't refuse

Most oil company nationalizations aren't outright seizures -- governments at least go through the motions of compensating the former owners for their lost assets. Surprisingly, the United Nations has even weighed in on the reimbursement issue: A General Assembly Resolution passed in 1962 decrees that in cases of nationalization carried out "on grounds or reasons of public utility, security or the national interest ... the owner shall be paid appropriate compensation, in accordance with the rules in force in the State taking such measures in the exercise of its sovereignty and in accordance with international law."

Of course, no one really listens to the United Nations and there's generally disagreement as to exactly how much the previous owner's stake is worth. Repsol estimates the value of what was its 57 percent share in YPF at around $18 billion. The Argentinean government is required by law to compensate them, but the exact amount will be determined by a government tribunal, which could take years to decide, and will likely be substantially less than the company feels it is owed.  

Beyond the legal ramifications of just booting out the old owners, it can sometimes be useful to allow them to continue to play some role in your country's oil industry -- after all, they probably know what they are doing. After Venezuela's state-owned PdVSA took over several multi-billion dollar projects in the oil-rich Orinoco belt in 2007, Chevron, BP, Total, and Statoil signed agreements that allowed them to continue operating in the region as minority stakeholders. Conocco Phillips and Exxon Mobil refused.

Oil productivity fell by nearly a quarter following Chávez's nationalization.

Step 4: Put the boot down

It's always preferable to handle these sorts of things with a boardroom handshake, but sometimes a firmer hand is needed. In 2009, Chávez mobilized troops to assist in the seizure of 60 oil service companies as part of his gradual takeover of the oil industry.

In 2006, Bolivian President Evo Morales ordered foreign oil companies -- including Repsol -- to renegotiate their contracts with the government within six months or leave the country. Just to make his point clear, he sent troops to occupy 56 oil and gas sites throughout the country.

Argentina has wasted no time. The government representative on YPF's board reportedly arrived at work early today with a list of Spanish executives who had been banned from the company's headquarters. 

Step 4a: The Putin method

Another, often cheaper, method of nationalization is to build a criminal case against the management team of an oil company and take it apart, bit by bit. In the case of the Kremlin's prosecution of former Yukos CEO Mikhail Khodorkovsky, this had the added benefit of removing a troublesome political rival.

Yukos had been the first fully privatized Russian oil company of the post-Soviet era. But following a number of disputes between Khodorkovsky and the Kremlin -- over state control of the pipeline industry, the planned sale of big shares to American oil companies, as well as his own political ambitions -- he was arrested and charged with tax evasion in 2003. Over the next two years, Yukos was ordered to pay billions of dollars in back taxes and forced into bankruptcy.

The last of its assets were seized in 2005 and eventually acquired indirectly by state energy monopoly Gazprom. 

Step 5: Don't get overthrown

Seizing international companies may score populist points with voters, but it can also make some powerful enemies in a hurry. Two years after Iran nationalized the Anglo-Iranian Oil Company, Prime Minister Mohammed Mossadegh was overthrown in a CIA-backed coup, returning the Shah Mohammed Reza Palavi to power. The Shah's government paid $70,000,000 in compensation to Anglo-Iranian in 1954.

Chávez survived a coup attempt just months after the passage of his controversial hydrocarbons law.

Fernández's nationalization of YPF seems like the latest in a series of provocative international gestures, including efforts to reassert control over the Falkland Islands. While she's clearly counting on the political benefits of these bold movements making up for the international backlash, she's entering very dangerous waters.


The List

Artful Dodgers

The 6 countries where everyone runs the other way when the tax man comes knocking.

On April 17, U.S. taxpayers will grudgingly send off their checks to the dreaded Internal Revenue Service. Whatever your political persuasion, it's hard to think of a ritual more despised than the annual filling of the government's coffers. And it's not just in the United States where people complain. While the level of taxation is a topic of major political debate in nearly every country, the level of taxes that go unpaid gets far less attention.

The World Bank estimates the size of the global "shadow economy" -- money intentionally hidden from view for the purposes of avoiding tax, including out and out tax fraud -- amounts to more than 18 percent of global gross domestic product (GDP). A report by the British NGO Tax Justice Network (TJN) calculated that this amounts to more than $3 trillion in lost tax revenue per year. "It's a crime against the people," argues Richard Murphy, the accountant and economist who prepared the report, noting that tax evasion by wealthy individuals and corporations often shifts the burden of paying for public services or debt repayments to the poorest members of society.

Here's a look at some of the most striking examples of tax evasion around the world. Unless otherwise indicated, all statistics are from TJN's 2011 report, "The Cost of Tax Abuse":


Size of shadow economy: 8.6 percent of GDP

Estimated money annually lost to tax evasion: $337,349,000,000

Though the size of its shadow economy is small by global standards (by way of comparison, rising power Brazil's is a whopping 39 percent of GDP) in absolute terms the world's largest economy is also the world's biggest loser to tax evasion. At over $300 billion, the lost tax revenue from the U.S. shadow economy exceeds the total funding allocated for Medicaid in 2010. According to Murphy, lax regulation of corporations is the main culprit in the United States.

"How the U.S. regulates corporations is a massive problem. You [the United States] are creating so many corporations, you have no idea who owns them so you have no idea who should be taxed on them," he says. "They come and go [from the country] for almost no expense. That is probably the biggest single opportunity for tax evasion in your economy but a blind eye is turned to it."

The revelation that presidential candidate Mitt Romney has as much as $8 million invested in funds based in the Cayman Islands -- a popular tax haven -- has generated some publicity for the issue of offshore financial shelters, which are legal under U.S. law but often used to facilitate illegal tax evasion.


Size of shadow economy: 66.1 percent of GDP

Money lost to tax evasion: $3,727,000,000

Bolivia is hardly a major player in the world economy, but the Andean nation has the unfortunate distinction of having the world's largest shadow economy, by percentage of the total economy. According to TJN's calculations, the shadow economy is 419 percent of total healthcare spending in South America's poorest country.

President Evo Morales's left-wing government has attempted to crack down on the rampant tax evasion by corporations in Bolivia. As tax revenues account for only 13.3 percent of the country's GDP, Bolivia remains heavily dependent on loans from other countries and international agencies. It is working to pay down an external debt of more than $7 billion. Tax evasion is so rampant that even some government-run companies have been cited for cheating.


Size of shadow economy: 43.8 percent of GDP

Money lost to tax evasion: $221,023,000,000

Tax evasion is serious business in Russia. According to one study, as many as 60 percent of Russian firms use so-called "spacemen" -- short-term firms set up for the purposes of concealing assets -- in order to avoid paying taxes. On average, the amount of taxes that Russian firms pay is equal to 40 percent of the taxes they do pay. These even include state-owned firms like the energy export monopoly Gazprom, which is estimated to have transferred more than $2 billion to "spacemen" in 2003-2004.

Unfortunately, on the occasions that the Russian government does try to crack down on tax evasion, it's usually to make an example out of an oligarch who has fallen out of favor with the Kremlin, such as former Yukos Oil CEO Mikhail Khodorkovsky. In 2012, the Russian police took the unusual step of filing posthumous tax evasion charges against attorney Sergei Magnitsky, who died under suspicious circumstances in police custody in 2009 after testifying about official corruption in a massive government tax refund scheme.


Size of shadow economy: 27 percent of GDP

Money lost to tax evasion: $238,723,000,000

Italy's official numbers estimate the size of the shadow economy as much smaller than the World Bank does -- about 17.5 percent of GDP -- but even by that standard, the country has a major problem, losing an estimated $150 billion per year in undeclared revenues. The evasion can often by startlingly blatant -- more than half of the boats over 35 feet in the country are registered to people with declared incomes of less than $26,000. In one town, 42 Ferrari owners were found to have declared incomes of less than $30,000. And with over 113,000 registered tax accountants in the country, cooking the books is [big business.

With the country facing an unprecedented debt crisis, the government is taking steps to increase the stigma surrounding tax evasion. These have included raids on yacht clubs, ski resorts, and luxury car owners. Even Argentinean soccer legend Diego Maradona isn't safe -- he's facing charges that he owes more than $50 million in taxes from his time as a professional player in Italy. 


Size of shadow economy: 27.5 percent of GDP

Money lost to tax evasion: $30,791,000,000

Greek tax enforcement has traditionally been extremely lax and officials notoriously easy to bribe with fakelaki -- small envelopes of cash. Since the onset of the country's crippling debt crisis, however, officials have been cracking down. The government has published a list of 4,152 major tax dodgers, high-profile figures of the Greek business world have been arrested in public raids, and helicopters have even taken to the sky to spot swimming pools behind the houses of the allegedly poor. 

TJN's Murphy, however, has been unimpressed with the Greek government's approach so far. "So far I think that what they're doing is finding new ways to tax rather than tackling tax evasion," he says. "We've seen Greece trying to tax electricity bills. It's a bit like a poll tax. This is crude. It is perhaps essential at this precise moment, but it doesn't really address the underlying cultural issue."


Size of shadow economy: 15.8 percent of GDP

Money lost to tax evasion: $9,922,000,000

Ireland's shadow economy is relatively minor. But the recent public uproar over a new household tax may be a harbinger of things to come, as European nations and creditors attempt to impose harsh austerity measures upon formerly profligate countries. The Irish government this year levied a new tax of $130 per household intended to raise at least $212 million to help pay down the country's debt burden. The tax provoked a major public uproar, including public demonstrations, and as of the March 31 deadline, the government acknowledged that around 50 percent of households had simply refused to pay the tax. (The leaders of the tax-dodge movement have been called "Tea Party socialists" for their left-wing opposition to taxation on individuals rather than corporations.) Murphy calls this development "absolutely unsurprising."

"Ordinarily people are expected to bear the burden of debt repayment, a burden that in Ireland is just beyond imagination," he says. He predicts more tax-boycotts like those in Ireland, and riots, like those in Greece, in the months to come. "I believe we're coming to a tipping point," he says.

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