Mar
28
2011
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Foreign Investment in Venezuela: Mission Almost Impossible

By Francisco Toro of CaracasChronicles

With the largest oil reserves in the Western Hemisphere, Venezuela might appear like a natural candidate to attract major Direct Foreign Investment funds. But, as a direct result of Mr. Chávez’s policy of marginalizing private sector capital, Foreign Direct Investment flows actually slammed into reverse in 2009 – the latest for which ECLAC figures are available. United Nations 2009 Report ECLAC). Venezuela continues to experience a net outflow of foreign direct investment to the tune of $3.1 billion a year (page 53 of the report). Investors thinking of doing business in Venezuela should be aware that they are likely to lose money in the process.

Such startling figures are driven largely by the Chávez government’s nationalization drive, since compensation for expropriated businesses is counted as “negative” Foreign Direct Investment. What does this tell us? Rather than seek out new foreign investors, the Venezuelan government is busily buying out those who stopped by in the past.

The dearth of foreign investment not only slows economic growth now, it will also undermine the medium-to-long-term competitiveness of the Venezuelan economy. New businesses tend to “flock together” for a reason: each new foreign investor needs the plant equipment, technology and business services – from data-banks to accounting – other foreign companies offer. With investments flowing out of Venezuela at a record pace, new foreign investors find themselves between a rock and a hard place in Chávezland. In addition, with next to none or few new investments coming into Venezuela outside the extractive sector, domestic firms aren’t enjoying any of the positive spillover effects from foreign investments – whether it is the most advanced technology, added dynamism, or cutting-edge management practices.

Seek advice on becoming a foreign investor in Venezuela these days and your enquiries are likely to be met with blank stares. The disincentives now facing potential foreign investors is formidable. Venezuela has one of the world’s most hostile environments for business as well as the tightest foreign exchange control regimes. Its labor market is exceptionally rigid.  Last but not least, Venezuela’s notoriously byzantine red-tape that characterizes any routine business operations is bewildering enough to confirm that it is intentional.

Remarkably, Venezuela has never officially rescinded the “National Treatment” provisions adopted during its short-lived economic reform experiment during the early 1990s. The provisions stipulate that foreign investors are not to be discriminated against vis-à-vis domestic investors. One can argue that it is a principle that the government has largely respected, but only in the sense that domestic investors face much of the same hardships as their international counterparts. It is, arguably, not foreign investment the government is concerned with short-circuiting, but rather private investment in general, regardless of its source.

The one type of investment that is still flowing into the country in any significant quantity is investment in oil projects in Venezuela’s rich – but expensive to exploit – Orinoco Tar Belt. There, state-owned oil companies from ally countries often receive – though not always – most favored treatment. China has signed a $20 billion financing facility – tied to a major investment by Sinopec Corp. – in the region. Likewise, Russia’s Lukoil and Gazprom as well as Iran’s Petropars gas contractor have received lucrative development contracts there, as has PetroVietnam.

To the extent that major Western companies are able to find investment opportunities in Venezuela, it’s almost always in the oil sector. That said, such investments are usually as minority partners in projects led by the state-owned Petróleos de Venezuela, SA or PDVSA. Italy’s ENI, Japan’s Mitsubishi, Spain’s Repsol, and Chevron have managed to land such contracts in the Orinoco Tar Belt.

However big the potential of the Orinoco Tar Belt might be, however, it’s nonetheless an enclave of this extractive industry, accounting for relatively few jobs and largely disconnected from much of the rest of Venezuela’s economy. For the vast majority of Venezuelans, the companies they work for, buy from and contract are simply bereft of significant investment from abroad.

And if this is a lost opportunity for international investors, in the long term, it will be an even bigger handicap to Venezuela’s existing businesses and those interested in ever doing business there. In sectors like construction, light manufacturing, retail and services, Venezuelan firms are now cut off from not just foreign investment, but also from the technology foreign investment brings, and the cutting edge management techniques that come with it. Little by little, Venezuela’s ability to host genuinely competitive, world-class firms is being eroded.

The U.S. firms that remain in Venezuela – mostly legacy multinationals that came decades ago – are locked in a constant struggle to repatriate their local currency profits. As the government’s approval is required to turn local profits into greenbacks and delays for approval often run years, a number of firms find themselves in the surreal position of being profitable in bolivars but not in U.S. dollars. Pressuring the Venezuelan authorities to expedite profit-repatriation is just as likely to lead to expropriation as it is to lead to dollar approvals. Under those circumstances, incumbent firms can hardly be faulted for refusing to invest anything beyond the absolute minimum needed to keep plant and equipment running.

In this upside down world of Chávez’s war on those who would invest in Venezuela’s future, the expropriated firms are not the only unlucky ones. It is telling, for instance, that Ohio-based Owens-Illinois’ stock actually rose slightly last October, following news that the Chávez government would expropriate the firm’s local operations. For some, the Venezuelan government’s vague, non-committal promise of fair compensation may be worth more than the chance to stay in a country that won’t let you take your earnings home.

 
Mar
25
2011
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In Case You Missed It…Articles Roundup Week of 3/25/11

In this week’s roundup…a new round of paranoid and delusional assertions from Venezuelan President Hugo Chávez coincide with proof of his dwindling popularity and a new scandal regarding state-owned PDVSA.

Venezuela’s Chavez Claims US Plans To Thwart His Reelection, The Wall Street Journal

Venezuelan President Hugo Chavez said Sunday that the U.S. and its allies have plans to sabotage his bid for re-election in 2012 as part of an “imperial” doctrine to control the world’s oil supply. “I know of the plans that they have for Venezuela, infiltrate the country, create [unstable] conditions for 2012,” Chavez said. “They should not even think about it!” Speaking during his weekly program, “Hello! President,” Chavez also denounced the “indiscriminate bombing” of the UN-sanctioned military intervention in Libya as motivated by the oil-rich country’s resources.

Poll suggests Venezuelans split between pro- and anti-Chavez camps; one-third undecided, The Canadian Press

A poll suggests Venezuelans with a preference are split between President Hugo Chavez and the opposition, although a sizable one-third are undecided about whom they would vote for if elections were held soon. Leon said the opposition politicians with the most support in the latest poll were Henrique Capriles, governor of Miranda state, 17 percent; former presidential candidate Manuel Rosales, 9 percent; Pablo Perez, governor of Zulia state, 7 percent; and Leopoldo Lopez, a former Caracas District mayor, 7 percent.

Venezuela Opposition Blocked From Discussing PDVSA Pension, The Wall Street Journal

Opposition legislators in Venezuela have been blocked in the national parliament from discussing the apparent use of the state oil company’s pension fund in a Ponzi scheme run by a former financial adviser to Petroleos de Venezuela, or PDVSA. A proposal to bring the matter before the National Assembly was rejected last week by the ruling-party majority.

Chavez enacts decree allowing pro-government militias to receive weapons from military, The Washington Post

New rules authorizing Venezuela’s military to distribute weapons to pro-government militias took effect Tuesday, raising concern among critics who say the armed groups could be used by President Hugo Chavez to cement his hold on power.

Hugo Chavez Decries Capitalism….On Mars, The Wall Street Journal

Venezuelan President Hugo Chavez, who routinely blames Capitalism for many of the world’s troubles, pointed elsewhere in the galaxy for his latest critique, saying Tuesday that the economic system may have destroyed life on Mars. “I have always said, have heard, that it would not be strange that there had been civilization on Mars,” the firebrand socialist said on Venezuela’s state television.

 
Mar
18
2011
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In Case You Missed It…Articles Roundup Week of 3/18/11

In this week’s roundup…President Hugo Chávez’s legacy of corruption, expropriations, and ties to terrorist groups and rogue leaders, the newest addition to his list of “enemies” of his socialist revolution, President Barack Obama’s first trip to Latin America and what it means to regional leaders like the Venezuelan strongman, and one of Venezuela’s symbols of corporate productivity and responsibility turns 70.

Gustavo Coronel: The Four Hotbeds of Corruption in Venezuela, Latin American Herald Tribune

Hugo Chávez became president of Venezuela in 1998 on the strength of his promises to stamp out corruption. Venezuela had been a democratic showcase for the hemisphere from 1958 to the early 1970’s but after receiving a huge oil income in the mid-1970 the quality of government deteriorated and waste and corruption set in. By 1998 most Venezuelans were deeply disappointed and wanted a radical change. They got it with Hugo Chávez.

Pollster: Private sector is vital to supplying the market, El Universal

The supply of products in the domestic market should not be left in State hands only, said Luis Vicente León, the director of polling firm Datanálisis.

Leftist leaders in Latin America should be ashamed of embracing Moammar Gadhafi, Rome News Tribune

Hugo Chávez is trying to come to the rescue of his friend and fellow “colonel,” Moammar Gadhafi. The Venezuelan president has offered to mediate Libya’s civil war, and warned against any foreign intervention in support of Libya’s opposition, which now controls much of the east of the country, including the port of Benghazi, home of the Hugo Chavez soccer stadium.

What Obama Must Do On His First Official Trip to Latin America, Fox News

The perceived lack of interest by the United States also sends a message to Chávez and like-minded leaders that they can abet corruption, illicit drug trafficking, Iranian adventurism and terrorism with impunity.

Chávez Tries to Rally Venezuela Against a New Enemy: Breast Lifts, The New York Times

President Hugo Chávez is known to have expressed little patience for imported leisure pursuits like golf or Scotch whisky tippling. Now he has reserved some ire for another practice that is beloved in Venezuela: breast augmentation surgery.

VenEconomy: Polar, One of Venezuela’s Assets, Latin American Herald Tribune

On Monday, March 14, Empresas Polar celebrated its 70th anniversary and a long history of productivity, innovation, and successes. It is not in vain that Empresas Polar has become the standard-bearer of transparent management and corporate and social responsibility in Venezuela. Since March 1941, Empresas Polar has been innovative in the brewing of beer, establishing international quality standards.