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Venezuela: A financial madhouse or a good investment opportunity?

By Gustavo Coronel

04.10.05 | In the meeting among some Latin American presidents that took place in Brazil a few days ago, Hugo Chávez told his colleagues that he had "moved" Venezuelan financial resources, deposited in the U.S. in the form of treasury bonds, to Europe. This move sounded like just one more step in the increasingly hostile stance Chávez is taking against the U.S. This statement made by Chávez was false. Chávez was lying to his colleagues in an effort to impress them. The truth is that such a move, if it comes about, has to be decided by the Venezuelan Central Bank, a theoretically autonomous institution. One of the directors of the bank, Dr. Maza Zavala, made a public statement in this regard, putting Chávez's lie in evidence. Furthermore, the reasons for such a move have to be based on financial, not political considerations. If the money earns more interest in the U.S. than in Europe, moving it would constitute a mismanagement of public resources, a crime according to Venezuelan laws. In spite of this, I think Chávez will order such a move and that the compliant Board of the Central Bank will follow orders . . . or else. The move would be one more case of abuse of power, to be added to the long list of arbitrary moves that have rendered the presidency of Hugo Chávez illegitimate.

In his weekly TV show of last Sunday Chávez repeated his assertion about moving the Venezuelan deposits away from the U.S. and also took some airtime to insult the international companies which evaluate Venezuelan bonds. He said, to the applause of the audience, that they should go and "wash their dirty coats," a vulgar expression that all Venezuelans understand very well in its real, scatological, meaning.

No wonder foreign investment in Venezuela has been essentially stagnant or negative during the last few years. CONAPRI, one of the organizations that measure foreign investment in the country, claims that net foreign direct investment in Venezuela during the first half of 2005 was minus 700 million dollars. The Economic Commission for Latin America, ECLAC, reports that foreign investment in Venezuela decreased during 2004. The Index of Economic Freedom, prepared by the Heritage Foundation, also reports a drop in the foreign investment in Venezuela during 2004.

Foreign oil companies acting as contractors to the Venezuelan state-owned oil company, Petróleos de Venezuela, are having a difficult time because they have already put billions of dollars into the country, in facilities to improve heavy oils, in exploration and production, activities which take time to yield financial returns. They had hoped that the rules of the game, during the 10 years or so that most of these investments require to yield benefits, would remain stable. But they have not. Taxes are increasing and are being demanded by the government in a retroactive manner. Contractual conditions have been drastically revised and, as Chávez also said last Sunday: "These companies have only two alternatives. They either comply with our demands or they pack their 'corotos' (stuff) and leave." And he added: "So far, they are all complying, except a European company." They are complying because they have no choice. It is that or losing it all: investments and the right to produce the oil and to export it.

Paradoxically, the new contracts Chávez is ramming down the foreign company throats, might give these companies something they did not have before: property of the oil being produced. Up to now the foreign companies had been producing oil on behalf of the state-owned company but, under the new contracts, they would be owners of 49% of the oil they produce since the Venezuelan petroleum company would own the other 51%. This could be very good for the foreign oil companies except for two details: one, the regime of Chávez wants to have 51% of the shares but is looking for ways not to put 51% of the money. This is why they have resorted to retroactive tax claims that, properly negotiated, would oblige the foreign companies to put up most of the capital that the Venezuelan oil company would have to put in the new associations. The other detail is that, by having 51% of the shares, the Venezuelan oil company would pretend to have the managerial control of the venture, something that no foreign company would like to accept in good grace. There is no doubt that foreign companies going into association with Chávez under these conditions are running a gigantic risk. They figure that they have staying power and that, when Chávez is no longer in control, they will be able to keep the access to Venezuelan oil. Good luck to them!

In spite of these ominous signs there are important international financial institutions recommending the buying of Venezuelan bonds. They do it in good faith and on the basis of short term considerations such as the high oil prices (which, I agree, will stay up for some time), the high level of Venezuelan foreign reserves and the fact that the foreign oil operators have been able to compensate, so far, for the decline in oil production of the Venezuelan oil company. In doing so, however, they forget that: (a), although Venezuela is experiencing a significant oil income windfall, the official budget for 2005 still shows a deficit of some 3.5% of the GDP; (b), that the Venezuelan national debt has doubled during the last five years; (c) that Chávez is putting his hands into the pot of international reserves, to use the money in his political manipulations at home and abroad; (d) that the relationship of Venezuela with foreign oil operators is becoming increasingly stressful and that it could still develop into an international legal battle.

When we add to these components the increasing corruption and ineptness of the Chávez regime and the fact that Chávez is somehow managing to spend more money in his wild schemes than he receives, the recommendations I have seen recently published to buy Venezuelan bonds do not look sensible.

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