Obama, Chavez And The American Shareholder

Richard Miniter, 01.12.11

You never know what Venezuelan President Hugo Chávez will say, one American investor told me recently, but whatever it is, it will cost you money.

This investor and other traders have learned to carefully scrutinize Chávez’s rambling televised speeches. The one he gave on Oct. 26, 2010, was no exception.

“The expropriation is already ready of this glass company,” Chávez said during the speech, momentarily forgetting his target’s name. “What’s it called? Owens-Illinois. Expropriate it.”

Just like that, Owens-Illinois’ Venezuelan unit was seized by soldiers. Share prices of the Ohio-based maker of glass bottles and baby-food jars fell 5% to $28.14 that day.

The Owens-Illinois seizure is part of a larger assault on private property at the hands of Chávez. Almost two dozen American companies–including Cargill, Coca-Cola , ConocoPhillips , ExxonMobil , Helmerich & Payne Hilton, McDonald’s , PepsiCo and Wendy’s –have either had their holdings confiscated or been threatened with government takeover in the past 20 months.

The value of these seizures is vast. The costs of the major nationalizations since 2006–aside from seized land, farms, sugar mills or industrial facilities–total at least $23.3 billion, according to Ecoanalitica, a Caracas-based economic-research outfit. If one counts the value of deposits seized in banks, Ecoanalitica estimates, costs rise to more than $27 billion.

Usually compensation is offered, but rarely is it paid. In a handful of cases, companies (such as Verizon Communications and AES Corp., an electric-power producer) have been paid a pittance for the forced sale of their assets. Venezuela has only paid 37% of what it promised to pay to expropriated companies, according to a May 2010 report by Ecoanalitica.

In the face of these enormous losses to American companies and their domestic shareholders, the Obama administration has been strangely mute.

Prompted by a reporter’s comment that Chávez had a list of other companies to seize after Owens-Illinois, State Department spokesman Philip Crowley said: “Well, you know–statements are one thing. We’ll see what actual actions, you know, take place. But, you know, we would expect Venezuela to provide prompt, adequate and effective compensation for any expropriation of the investments of Owens-Illinois in accordance with international law or any other, you know, private business doing–present in–in Venezuela.”

The only other significant public statement on the takeovers comes from Assistant Secretary of Commerce Walter Bastian: “We have no problem with expropriation, as long as those affected are paid.”

Why is the Obama administration seemingly so acquiescent?

The official reason, offered in private meetings with executives, is that the administration hopes that its good behavior will induce Chávez to keep his promises to pay American companies. So far, this hope has not been rewarded.

Of course, the Obama administration has engaged in some nationalizations of its own, with little or no compensation paid. Just ask the Chrysler bondholders or the shareholders in what is now officially called “old GM.” So perhaps the administration has little sympathy for the small investor.

Whatever the cause, private requests for help from the administration have yielded little action. As a result, some companies have tried pressing their cases in Venezuelan courts, citing Article 115 of the country’s 1999 constitution that requires that compensation be paid when property is taken, with no success.

Other companies, such as ExxonMobil and ConocoPhillips, have sought tens of billions of dollars of relief at the World Bank’s Center for Settlements of Investment Disputes. Their cases are pending and may take years to resolve.

Venezuela shows no signs of backing down. Between 2005 and 2009 Chávez has nationalized more than 760 companies, most of them Venezuelan.

The pace of nationalizations is quickening. In 2010 another 200 companies have been nationalized–more than double the number in the previous year.

Opposition leaders predicted that Chávez’s nationalizations would make Venezuela poorer, hungrier and less democratic. Sadly, they were right. Venezuela has the highest inflation-rate in South America, food shortages haunt even middle-class families and the rule of law is disappearing as the government increasingly rules by televised diktat.

Invoking bygone communist rhetoric in Castro-length broadcasts, Chávez talks about taking the “commanding heights” of the economy and becoming “independent” in food production.

Before Chávez Venezuela was a food exporter. Today, after a wave of farm seizures and nationalizations, Venezuela imports more than 70% of its food. Government cronies, with little management experience, now run vast food production and distribution conglomerates.

These Chavista managers allowed between 70,000 and 130,000 tons (depending on whose figures you believe) of imported food to rot on the country’s docks. Eventually the scandal of rotting surplus food in a starving country became too big to ignore, and local independent media covered the story. The head of the new state-run food conglomerate was arrested on suspicion of stockpiling food to sell into the country’s lucrative black market.

Before Chávez, Venezuela had no black market in food.

While ideologically in line with his earlier takeovers, Chávez’s capture of American assets may be simply collateral damage in his ongoing war with Empresas Polar S.A., Venezuela’s largest private company by sales volume and its largest private-sector employer.

Many of the American companies taken over by the Chávez regime since 2008 (including Coca-Cola, Pepsi, Wendy’s, McDonald’s and Owens-Illinois) were either customers or suppliers to Empresas Polar.

For now Empresas Polar is too popular for Chávez to attack directly. Even union leaders support Venezuela’s most successful company. And so does the public. A May 2010 survey by Caracas-based Keller & Associates showed 74% of Venezuelans oppose Chávez’s expropriations.

Who’s next? American packaging maker Smurfit and Australian packaging maker Amcor Pet are among Empresas Polar’s suppliers still untouched by Chávez’s nationalizations. They could be next.

Meanwhile every internal attempt to reverse Venezuela’s downward spiral has been foiled by Chávez. In the September parliamentary elections, voters overwhelming supported the opposition Coalition for Democratic Unity.

The coalition won half of the popular vote, and when they were sworn in on Jan. 5 the coalition controlled 40% of National Assembly seats, up from just 4% the year before. The larger opposition bloc could slow or even stop Chávez’s nationalizations–but the Venezuelan strongman wasn’t about to give them a chance.

Shortly before Christmas Chávez asked the lame-duck Parliament–where his United Socialist Party controls 83% of the votes–to give him the dictatorial right to rule by decree until the 2012 presidential elections. The maximum leader was quick to gloat about gelding the opposition that the voters had just empowered: “Let’s see how they are going to make laws now.”

Chávez’s new powers will almost certainly be used to seize the few foreign enterprises he doesn’t already control. Indeed, Alan Woods, who The Economist describes as “a Welsh Trotskyist who has become an informal adviser” to Chávez, openly urged “accelerating the revolutionary process.” Translation: Seize as much as you can, while you can.

Despite this Obama administration officials offer only tepid opposition. After Chávez effectively neutered the power of the newly elected Parliament by ruling by decree, State Department spokesman Philip Crowley responded: “What he is doing here, we believe, is, you know, subverting the will of the Venezuela people.” And that’s it. Search the transcripts of the State Department press briefings and read its public statements–you will find nothing more critical that Crowley’s solitary, offhand remark.

The Obama administration’s inaction has moral costs too. “Choosing to take no side in the battle between tyranny and democracy in Venezuela only helps the tyrannical side, ” said Rep. Ileana Ros-Lehtinen, new chairwoman of the House Foreign Affairs committee, in a press release.

The Obama administration should vigorously demand that Chávez either return the property of American shareholders or pay fair compensation. If not, Obama should expect more expropriations in Venezuela, growing anger from Americans who see their retirement assets stolen and a new Republican leadership that wonders: Why do shareholders count for so little in America’s foreign policy?

Richard Miniter, an award-winning investigative journalist, has written two New York Times bestsellers about the War on Terror: Losing Bin Laden and Shadow War. He was an editorial writer for The Wall Street Journal in Brussels and a member of the famed investigative team of The Sunday Times in London. He has written for many publications including The New York Times, The Washington Post, The Wall Street Journal, The Atlantic Monthly, Reader’s Digest, Forbes, Newsweek, New Republic and National Review.