Chevron Corporation (NYSE:CVX) knows that it will need to continue reinvesting for a long time, and when the time comes to bring its profits back home, the company believes that it will be able to work out a solution with authorities, or at least find its way out via legal litigation.
This is of course, unless Argentina becomes more like Venezuela, where the Chávez administration seized the assets of US oil corporations like Exxon Mobil Corporation (NYSE:XOM) and ConocoPhillips (NYSE:COP), and the local judiciary system – completely under government control – is of no help at all to U.S. corporations.
The similarities between Argentina and Venezuela have been growing over the last years, both when it comes to economic policy and the institutional environment.
On the economic front, and to name a few examples, both countries have severe capital control systems which have led to “parallel” or illegal foreign currency markets, inflation rates above 20%, restrictions on imports, abundant government intervention in different sectors of the economy, price controls and growing government spending, not only on social welfare but also in many other areas.
On the political and institutional aspect, the Kirchner administration has taken an aggressive turn since it won the elections in 2011; there is a project to implement a judicial reform which would make judges more dependent on the executive branch of the government, and the government is immersed in a harsh political and legal fight against the biggest media group in the country, which opposes its policies.
Considering that YPF SA (ADR) (NYSE:YPF) itself was expropriated form Spanish Repsol in April of 2012, Chevron Corporation (NYSE:CVX) could have reasons to feel concerned about the future of its assets in Argentina, especially if the country continues on the Venezuela way. Fortunately for the company, and especially more for the Argentinean people, I don´t think that’s the most likely scenario.
Economic growth has stagnated over the last years, which combined with rampant inflation paints quite a dire economic picture. The government has been losing support, particularly from the middle class, which is not only asphyxiated by inflation by also deeply concerned about issues like personal security, government corruption and institutional instability.
Middle class votes are still crucial in the Argentinean electoral map, while in Venezuela the lower income sectors – deeply aligned with the government – are more dominant. Some important labor union leaders are now opposing the government in Argentina, and this is another stark contrast with the political situation in Venezuela.
While in Venezuela both the media and the judicial system are strictly aligned with the government, there is big opposition from private media groups in Argentina, and the Supreme Court of Justice is considered prestigious and independent of the political powers.
Like if this weren´t enough, things in Venezuela have been turning from bad to worse lately, and this should provide a good reminder about the perils of going down that road, both to Argentinean voters and to all kinds of political and social leaders in the country.
When Chevron evaluated the risks of investing in Argentina, it must have considered not only the economical but also the political and institutional environment. It looks like the company believes Argentina won´t become Venezuela, and it´s an intelligent assumption.
Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends Chevron.
The article Argentina Will Not Become Venezuela originally appeared on Fool.com.
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