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<DIV><!--StartFragment --><FONT face=Arial size=2><SPAN class=bigHeadline><SPAN
class=953444121-05072005>An informative, cold, hard, capitalist view of
Venezuela which just leaves out one thing - the
people</SPAN></SPAN></FONT></DIV>
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<DIV><FONT><SPAN class=bigHeadline>The US and the Chavez
question</SPAN><BR></FONT><SPAN class=all>By Patrick Esteruelas<BR><SPAN
class=953444121-05072005>FT</SPAN>: July 1 2005 </SPAN></DIV>
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<DIV><FONT face=Arial size=2><FONT size=3><SPAN class=all></SPAN></FONT><!--startclickprintexclude--><!--endclickprintexclude-->President
Hugo Chavez’s forays outside of Venezuela’s borders and his policies at home
have incited a great deal of interest among the readers of the Financial Times,
both as a matter of regional curiosity and as a means to determine what
political direction will Venezuela and Latin America be heading towards in the
medium to long term. The large majority of the contributions to the debate dealt
with both Chavez’s influence abroad and the domestic underpinnings of his
political agenda. Given that Chavez’s regional integration platform is a direct
offspring of his domestic social revolution, my answers will specifically
address both.</DIV><!--startclickprintexclude-->
<DIV id=artAd style="DISPLAY: block; VISIBILITY: visible">* * *</DIV>
<P><B><I>M. Alvarez</I></B> suggested that we run the risk of minimizing the
effects of Chavez’s foreign policy outside of Latin America. Venezuela’s budding
partnerships with China and Russia provide, in Mr. Alvarez’s view, a clear
indication of Chavez’s far-reaching influence.</P>
<P>Chavez’s influence however is as limited outside of Latin America as it is
within the region, confined to specific commercial deals that have little hope
of making much diplomatic headway. Chavez’s attempt to diversify exports away
from the US and turn to China as the future primary destination of Venezuela’s
crude exports perfectly illustrates this point. Venezuela has so far only just
begun to export a mere 30,000 barrels per day of its cheaper trademark
Orimulsion boiler fuel to China a full six months after a first memorandum of
understanding was signed by both President Chavez and Chinese Premier Hu Jintao
in January of this year. </P>
<P>Venezuela’s lack of direct access to the Pacific will make it extremely
difficult for Venezuela to ramp up crude or derivative exports to China in a
cost effective manner, forcing Chavez into selling crude at a heavy discount for
China to later trade to any interested third parties at a profit. More
importantly, China does not have the refining capabilities in place to process
Venezuela’s sulphur-rich heavy crude, forcing Venezuela into a dependent
relationship with the US until China or Venezuela build an adequate refining
infrastructure. China is more likely using the possibility of establishing a
long term trading arrangement as a means to gain preferential bidding access in
Venezuela, capitalizing on Chavez’s desire to bring in friendly state national
oil companies to help ramp up Venezuelan crude production in the future. </P>
<P>China’s presence in Venezuela is however limited so far, and informed purely
by commercial interests. The chances that an imperfect commercial partnership
could turn into a full-fledged diplomatic alliance are for the moment quite
remote.</P>
<P>* * *</P>
<P><B><I>Alexander Harper</I></B> asked if Chavez could be looking to profit
from Bolivia’s power vacuum and gain access to Bolivia’s vast natural gas
reserves for further leverage in the region. If so, should foreign gas dependent
nations like Argentina and Chile be concerned?</P>
<P>While much has been made of President Chavez’s efforts to support and counsel
radical Bolivian leader Evo Morales and his Socialist Movement (MAS), Venezuela
has little or no incentive to tap and exploit Bolivia’s natural gas reserves.
Venezuela’s proven natural gas reserves, estimated at 148.9 trillion cubic feet,
far outweigh Bolivia’s at 31.4 trillion cubic feet. Instead of looking abroad
for natural gas, Venezuela has offered added incentives for oil companies to
develop Venezuela’s own offshore natural gas fields in Plataforma Deltana and
Rafael Urdaneta for the best part of last year. Furthermore, state oil company
PDVSA has very few funds with which to invest abroad after diverting the large
majority of its revenue base to sustain flagging production and finance Chavez’s
infrastructure and social projects.</P>
<P>As Mr. Harper accurately indicated in his question, many of Bolivia’s
erstwhile partners have already begun to look elsewhere for natural gas. Brazil,
which traditionally imports up to 20 million cubic meters a day from Bolivia to
satisfy internal demand, is looking to develop its shallow-water gas fields in
the Santos Basin as an alternative supply source. Chile, which has recently been
denied gas from Bolivia and Argentina, is looking to the Pacific for much needed
liquefied natural gas (LNG). Despite its struggle to attract further investment
and a general reluctance to raise gas tariffs, Argentina has been making every
effort to ramp up domestic gas production. Several oil companies in Bolivia have
also begun to look to Peru’s Camisea natural gas fields as a potential
alternative investment destination, raising the possibility of partnering with
Hunt Oil in a consortium to develop existing gas reserves and supply the
regional and US LNG markets. Bolivia therefore risks losing relevance in the
natural gas sector as pressures build to nationalize the hydrocarbons sector and
drive out foreign investment.</P>
<P>* * *</P>
<P>Moving on to Chavez’s domestic political agenda, <B><I>Alberto Mejia</I></B>
questioned my decision to describe Chavez’s recent practices at home as
“increasingly anti-democratic.” According to Mr. Mejia, Chavez is a legitimately
elected leader confirmed in his post by former US President Jimmy Carter and the
Organization of American States, who were invited to Caracas in August 2004 to
monitor a controversial recall vote.</P>
<P>Chavez’s government is indeed a democratically elected government, with very
little evidence to support that fraud was committed to win the recall referendum
in August 2004.</P>
<P>However, his government has since the beginning of the year introduced
measures that put into question President Chavez’s current democratic
credentials. First among these is an ongoing judicial purge that has seen
several dozen lower court judges disbarred all over the country with the help of
the secret police (Disip). Venezuela’s judicial workers have been complaining
again and again that no evaluation has been carried out to enforce these
dismissals, which are set to continue until -- in the words of Supreme Court
President Omar Mora Diez -- 80 percent of Venezuela’s provisional judges are
disbarred.</P>
<P>Most recently, with the help of a new media law that bans any violent content
or government slander from being disseminated in all media outlets, the
government has effectively cut all coverage of anti-government demonstrations
that could be considered violent and dramatically reduced the number of
political shows that used to dominate TV programming in the morning. Several
media commentators have been sentenced to time in prison for criticizing the
government, and program sponsors face hefty bans for supporting these programs,
effectively starving these programs of any funding. The only relative survivor
has been Radio Caracas Television, which will reportedly risk a media ban thanks
to the revenues its soap opera productions generate outside Venezuela. While the
opposition-controlled media giants showed a strong bias against the government
before the referendum, the government has corrected this bias by pushing the
envelope of a free and democratic media.</P>
<P>* * *</P>
<P><B><I>M</I></B><B><I>anuel Wally</I></B> suggested that many of President
Hugo Chavez’s social programs set positive benchmarks and expectations for Latin
America’s more “modest” governments and therefore should not be negatively
branded.</P>
<P>While an effective, responsible social platform is more than welcome in a
region plagued by chronic poverty and inequality, Chavez has gone about it in a
very irresponsible way. Fiscal spending has increased by 39% over the last four
years, and currently accounts for an estimated 30% of GDP. While record oil
prices have permitted Venezuela to accumulate over $28bn in international
reserves (equivalent to Venezuela’s external debt) and debt servicing costs are
currently 20% of exports, fiscal spending growth has exceeded oil revenues and
threatens to make the current situation unsustainable. Given that many of
Venezuela’s present social spending commitments are locked in and bound to grow
further as the government begins to tackle high-cost infrastructure projects,
Venezuela’s negative fiscal balance is set to grow further as state oil company
PDVSA struggles to ramp up oil production and foreign oil companies question
their commitments in a scenario of creeping fiscal expropriation down the road.
Given Venezuela’s new baseline level of social expectations, Chavez’s struggle
to finance an aggressive social platform in the future could generate further
instability in Venezuela. </P>
<P>Secondly, many of these programs have been financed through parastatal
organizations known as “missions,” bypassing the government’s ministerial
structure and producing no fiscal accounts to speak of. As a result, we don’t
know the true value of these missions nor do we know where or how these
resources have been allocated. Bar the announcement of symbolically strong
literacy programs and rural mobile health care units, their overall impact has
been questionable. Venezuela’s latest poverty indices in fact show a 10 percent
increase in Venezuela’s poverty rate over the last 6 years. </P>
<P>Social programs can bring much needed benefits provided they are well
structured, transparent and responsible.</P>
<P>* * *</P>
<P><B><I>Kevin Murphy</I></B> would like to know if Chavez is liable to
expropriate assets, ramp up oil taxes and make further land grabs should oil
prices fall substantially.</P>
<P>Oil prices, as Mr. Murphy is quick to point out, will determine how far
Chavez will be willing to push his revolutionary agenda. With oil sales
accounting for over 50% of the government’s income and production stagnant at
2.65 million barrels per day, the government will only be able to ramp up
revenues through high prices and fiscal earnings.</P>
<P>Government officials in Caracas have already made a consistent effort to
generate more fiscal revenues through tax hikes and hostile expropriations.
Foreign oil companies are being pressured to convert all existing operating
agreements to new joint ventures where PDVSA will hold a majority-controlling
stake by the end of the year or face the risk of seeing their contracts revoked.
Both service operators and investors in the heavy crude Orinoco belt reserves,
which together account for 1.1 million barrels per day or 40% of total
production, are facing higher royalties and income tax rates as the oil and
energy ministry makes every effort to extract a more favourable deal. Non-metal
mining companies and landholdings in the radical eastern states of Cojedes and
Carabobo have also seen their titles revoked and will be replaced by state run
cooperatives.</P>
<P>In a scenario of declining oil prices and shrinking government resources, the
Chavez administration is more likely to continue squeezing the private sector
for funding and consider more radical measures. Oil prices however should not
necessarily collapse to trigger a radical response. As fiscal spending continues
to increase at the present rate, oil prices only need to fall slightly for
Venezuela to start facing a financing shortfall.</P></FONT></BODY></HTML>
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