Tag Archives: Private Property

Jul
16
2010
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Expropriated Companies in Venezuela Get Little to No Compensation

The latest expropriation of an American company in Venezuela, that of Oklahoma-based contract drilling company Helmerich & Payne, yielded a familiar reaction from the U.S. government. The U.S. State Department said that “We would just call on them, if they did make such a move, to compensate the owners of those wells. This is the latest in such an instance where international investors, their investments are being nationalized by the government of Venezuela. It doesn’t speak or bode well for the investment climate there.”

The statement from the U.S. government was echoed a few months earlier by Assistant Secretary of Commerce, Walter Bastian, who when asked about the increased expropriations in Venezuela, said that “We have no problem with expropriation as long as those affected are paid.”

Therein lies the problem: expropriated companies in Venezuela are NOT being compensated. Moreover, because the Chavez regime has eradicated judicial independence in Venezuela, foreign companies have in practice no legal recourse to challenge the expropriations.

The numbers tell the story. According to a report issued in May 2010 by prominent Caracas based economic consulting firm, Ecoanalítica, the costs of the nationalizations executed by President Chavez (since 2006) add up to $23.3 billion. These costs include that of the major nationalizations but do not include that of the “rescued land or farms, expropriated sugar mills or the expropriations of industrial zones in Barquisimeto and Maracaibo, so the figure could be higher.” It does include the expropriations of U.S. companies such as Hilton, Exxon, Conoco, and Cargill. Ecoanalítica estimates that of this $23.3 billion, $14.65 billion of compensation have yet to be paid by the government. In fact, the Venezuelan government has only paid 37.2% of what it owes to the expropriated companies. According to the Ecoanalítica report, of the $14.65 yet to be paid, nearly half, “$ 7.25 billion are payable to companies in the oil sector, such as ConocoPhillips and ExxonMobil.”

Not only are expropriated companies not being compensated as legally required, but companies impacted by the nationalization policies have little legal recourse to challenge the taking of their property. This is so because Venezuela’s judicial system has been politicized by President Chavez and lack independence, thus in practice denying domestic and foreign companies the right to due process to challenge the government’s taking. The 2009 U.S. State Department Human Rights Report described Venezuela’s “corrupt, inefficient, and politicized judicial system characterized by trial delays and violations of due process.”

In its 2009 report on Venezuela, the OAS’ Inter-American Commission on Human Rights noted “the Executive Branch’s alleged interference in decisions of the judiciary.” To put it lightly, those counting on Venezuelan’s judicial system to overrule an action taken by the government, much less a decree issued by the President himself, are indeed tempting fate.

One need only look at the case of the coffee company, Fama de América. Fama de America, the best known coffee brand in Venezuela, was expropriated last year by the government. As part of negotiations to determine compensation, company representatives and the government agreed to name a three member panel of experts to determine the value of the company. Two of the members of the panel where named by the government.

The panel conducted a study and determined a fair price, yet the government offered to pay only 10% of the value agreed upon by the experts. It was a take it or leave it offer: take the 10% and then we take the company, or refuse the offer and we’ll take the company anyway. That sounds more like extortion than a fair negotiation.

The bottom line for American and other foreign expropriated companies in Venezuela is that compensation for the taking of their property is likely never to come. It may not be surprising then that following the taking of their property, Helmerich & Payne issued a warning to fellow companies in their industry about investing in Venezuela: “Reflecting on last week’s forced exit from Venezuela, it is clear now that PDVSA was not interested in both sides achieving commercial terms to return our rigs to work… That approach only heightens concerns for our oil-field-service peers contemplating their future there, as it should.”

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Jul
14
2010
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Food security “has been harmed” in Venezuela

This article was originally published by El Universal

Public policies implemented in the agriculture and cattle raising sectors have led to disinvestment and have discouraged food production, thus promoting imports to the detriment of the domestic production sector.

Under these circumstances, Venezuela’s food security is increasingly vulnerable, as dependence on imports gives the Venezuelan government decision-making power over the type and quantity of food that Venezuelans can eat, said Carlos Machado Allison, a professor at the Institute of Higher Administration Studies (IESA), during a roundtable organized by the Center for Dissemination of Economic Knowledge (Cedice), a private Venezuelan think-tank.

“(Food) security has been harmed from all points of view. First, the government wants to decide the type of food that Venezuelans can eat, through the allocation of US dollars or the authorization or denial of import permits. Then, the (Venezuelan) cabinet decides the daily availability of food,” Machado Allison stressed.

He added that some food items that cannot be produced in the country due to Venezuela’s weather conditions. Therefore, they must be imported. “Those needs can be met with USD 1.5 billion-2 billion, but now we have USD 7 billion. This means that we are importing goods that can be produced in Venezuela, as is the case of cattle, which has fallen to 50 percent of its value,” he added.

The IESA scholar said that apparent availability of meat dropped 46.2 percent in the first quarter.

 
Jul
12
2010
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Oil issues in Venezuela: has Cuba sent a ’sell’ signal?

This blog entry was originally posted by the Financial Times.

The faceless capitalists of Wall Street have long considered Venezuela a “sell” – the oil producing country’s foreign currency bonds are considered almost twice as risky as Greece’s. But might even Cuba’s revolutionary gerontocracy now believe the same?

For those who like to look at the world through the lens of financial conspiracies, that’s one tentative reading of why Cuba pledged last week to release 52 political prisoners. Yes, the issue was attracting unwelcome international attention. But it is also true that throughout its history, Cuba has been a master at playing its geo-strategic cards. The US and the USSR used to play the role of sugar daddy to the country before. Lately it’s been President Hugo Chávez’s Venezuela. But Venezuela’s economy, like Cuba’s, is now in a mess.

Any move that suggests Cuba wants to improve ties with the US – and freeing political prisoners is one step that could ease the US travel ban and, ultimately, the embargo – therefore represents a hedging of Cuba’s geo-strategic bets. Looked at another way, it is also a tacit recognition by Havana that Caracas, despite its similar ideological outlook and oil wealth, might now be, in traders’ parlance, an “underperform”.

The list of reasons of why Cuba – or Wall Street – might think so is long and growing. Venezuela this year tightened capital controls as it no longer has sufficient reserves to sustain the capital flight of the last year. Oil sector output – according to independent estimates – has fallen considerably over the past decade due to a lack of investment. And the country also faces a large and rising contingent liability in the form of unpaid compensation owed to private business that have been nationalised by Mr Chávez.

There are currently 11 lawsuits and arbitration claims totalling $43.5bn lodged with the World Bank’s International Centre for Settlement on Investment Disputes. The bulk of this relates to a $10bn claim by ExxonMobil and a $30bn claim by ConocoPhillips. Looked at another way, according to local consulting firm Ecoanalitica, Mr Chavez has announced nationalizations of some $23bn since 2006, and of that amount, the authorities have paid almost $9bn, leaving $14bn owing.

Lately, brokers only tend to recommend buying Venezuelan bonds on the basis of how long they need to hold them and not lose money. (About 4 years, assuming current 15 per cent yields and a recovery rate of 30 cents on the dollar.) With the largest oil reserves outside the Middle East, and a relatively comfortable foreign reserves position, Venezuela certainly can pay, should it wish to. The question for investors in a country where the government calls its private brokers a “tumor” is: how long will it? The Castro brothers may have given a clue.