Francisco Toro

Apr
6
2011
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In Anti-Business Venezuela, U.S. Companies Carry an Added Burden

By Francisco Toro of CaracasChronicles

Does Venezuela single out U.S. companies seeking to do business there for worse-than-usual treatment?

At first glance, it might seem like a churlish question. After all, Venezuela ranks 172nd out of 183 countries – and dead last in Latin America – in the World Bank’s Ease of Doing Business Report. Even Haiti, Zimbabwe and Uzbekistan ranked better than Venezuela in the Bank’s report. In terms of investor protection and easing access to credit, Chávez’s Venezuela does even worse, ranking 179th and 181st respectively. The same study finds that, in 2010, Venezuela boasted the most rapidly deteriorating business environment in the world.

Where standard treatment of businesses in general has fallen to such abysmal levels, it takes some doing to treat those from a given country even worse than the rest. Yet, that’s arguably what Venezuela has managed to do to U.S. investors.

In a political climate where the government blames most problems – real or imagined – on the evils of capitalism, no one’s property is safe. But, even among the prevailing hostility towards the private sector, U.S. firms are repeatedly singled out.

American businesses in Venezuela carry the burden of association with the government’s favorite bogeyman: U.S. capitalism. Stable brands, such as McDonald’s and Coca-Cola, are continuous targets of harassment and government intervention. In 2008, both U.S. companies faced 48-hour punitive shut-downs over alleged accounting irregularities that neither was given a chance to refute in a formal setting.

A State Department imposed ban on exports to Venezuela of U.S. weapons – in place since 2006, – has led Venezuela to seek weapons elsewhere. The measure eliminates a potential leverage point for U.S. diplomacy, which may come in handy in advocating for U.S. companies.

Venezuelan businessmen seeking protection from Mr. Chávez’s nationalization binge have been hurriedly exploring ways to register their companies as Spanish. Like Brazil, Canada, Peru and several other countries, Spain signed a bilateral investment protection treaty with Venezuela over a decade ago. The treaty gives Spanish firms a measure of diplomatic representation if and when they become targets of the Venezuelan government. Beyond that, Venezuela’s increasing reliance on Spanish firms for, among other things, naval procurement and electric plants has created a deep bond of interdependence that, at times, serves as somewhat of a “break” on the Venezuelan government’s excesses.

The tangible results of such cooperation are plain to see. For example, when the ownership stake of Spain’s Banco Santander in Banco de Venezuela was a target for forceful acquisition by the State, the Spanish owners were generously compensated, by about $1.05 billion. Moreover, this compensation figure was agreed to quickly, within a year of the takeover announcement, sparing Santander the uncertainty that has plagued similar negotiations with enterprises from other countries.

No sane Venezuelan businessman would consider registering in the United States for diplomatic advantage. Because there is no bilateral investment protection treaty between Caracas and Washington, American firms slated for a State takeover in Venezuela are left to fight their own battles against a deeply hostile government. In those cases, compensation is seldom generous and never agreed to quickly.

In the most well-known case – the government’s takeover of ExxonMobil and ConocoPhillips operations in the Orinoco Belt in 2006 are to this date under negotiation, dragging on for the better part of half a decade. The arbitrators from the World Bank’s International Center for the Settlement of Investment Disputes (ICSID) are not expected to hand down a final settlement agreement any time soon.

That said, a bilateral investment protection treaty does not entirely shield foreign investors in Venezuela, as Swiss cement maker Holcim found out in 2008 when its Venezuelan operations were taken over by the Chávez government despite a 1994 bilateral investment protection treaty. Unable to settle matters with Caracas, Holcim was forced to go to the ICSID. The Swiss company eventually settled its claim privately in 2010 for a relatively modest $650 million. Plenty of other firms from countries allegedly protected by investment protection deals – from Britain’s Vestey Group to Argentina’s Ternium – have faced long, uncertain compensation processes after rushed, unilaterally-decided State takeovers.

In final analysis, the Chávez government has gone out of its way to make Venezuela uncommonly hostile to foreign investors. From exceptionally cumbersome labor regulations to major hurdles in the foreign exchange of currency, Chávez’s policies have resulted in the near total collapse of foreign investment in Venezuela. Under such circumstances, businesses can hardly afford one more competitive disadvantage, but no enterprise is worse off than that with a “Made in USA” label.

 
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
7
2011
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PDVSA Iran Sanction Busting

By Francisco Toro of CaracasChronicles

In January 2011, the oil tanker Aspasis – flying a Barbados flag – shipped 271,000 barrels of gasoline from the Curaçao refinery of PDVSA (Venezuela’s oil company) to Iran in contravention of both U.S. and international sanctions. That is the allegation that U.S. Energy Department officials have officially informed Venezuela that they are now investigating.

PDVSA’s head, Rafael Ramírez, has consistently denied the allegation, but documents purporting to substantiate the charge have begun to emerge. If confirmed, the implications of such sanction-busting could be wide-ranging. Although a major oil producer, Iran lacks the refining capacity to supply its own domestic market. Hence, gasoline import restrictions are a key pressure point in U.S. efforts to pressure Tehran to give up its nuclear weapons program. The Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA) is designed to automatically trigger serious commercial sanctions against firms that supply Iran with fuel. The Act has so far been successful; some estimates place the decline in gasoline shipments to Iran at 75% after the introduction of sanctions. In response, the Islamic Republic was forced to quadruple domestic gasoline prices to stem rising demand, and may soon be facing outright shortages, making securing gas supplies a key priority for Tehran.

For years, Venezuela has pushed the boundaries of international acceptance of its alliances with rogue and terrorist governments and entities. In Colombia, for example, the Chávez regime’s ties with Marxist guerrillas often stress bilateral relations. Many media reports, most recently by award winning Spanish investigative reporter Antonio Salas, have documented the use of Venezuelan territory by Hezbollah and other Islamic extremists groups for weapons training, as well as Venezuelan banks for financing. Venezuela has gone as far as to imperil its key bilateral relations with Spain – paradoxically, a key source of weapons, investment and technology – by continuing to shield suspected ETA terrorists from Spanish justice. Consider this: Arturo Cubillas, the man Spain believes heads ETA’s Latin American operations, holds an important security job at Venezuela’s Agriculture Ministry.

In the United States, various influential legislators, from both political parties, have publicly condemned Chávez’s ties to terrorism. Florida Congressman Connie Mack recently urged the Obama Administration to impose a wide-ranging embargo against the Chávez regime. Nevada Senator John Ensign has long been an advocate of adding Venezuela to the State Department’s list of states that sponsor terrorism. “It is Hugo Chávez who has allowed Iran and its extremists allies to have a foothold in South America,” has said New York Congressman Eliot Engel. So far, U.S. dependence on oil imports from Venezuela has forestalled any decisive action. In a tight oil market, with prices spiraling up, it’s hard to imagine the United States cutting off its Venezuelan nose to spite its energy face.

Iran’s sanction-busting action, however, is a different matter. Unlike the “State Sponsor of Terrorist” designation – where U.S. legislation leaves room for political judgment, the Iran Sanctions Act calls for far more specific action points in response to violations. The Act – the central policy instrument in what many believe to be America’s premier security challenge in the world today, includes a series of “triggers”: actions that, once certified, leave the White House little choice but to enforce sanctions.

Considering that the sale of gasoline and other refined products to Iran feature prominently in the list of violations, and that documentary evidence in the public sphere strongly suggests Venezuelan complicity in that matter, the U.S. Energy Department may not have much choice but to impose at least some sort of punitive measure on PDVSA. The Obama Administration would, however, retain some discretion over which types of sanctions to apply,  and these could range from crippling moves that would hamper PDVSA’s day-to-day operations to something far less severe.

At a time of heightened instability in the Middle East and a possible full-blown civil war in Libya, and as oil prices continue to rise, there will be close to no room for oil inventories to absorb yet another supply shock. Faced with that reality and the strict parameters of the Iran Sanctions Act, the Obama Administration finds itself between a rock and a very, very hard place.