The Sorry State of Foreign Investment in Venezuela

by Pete Martin:

“Write what you think is best, and I will read it when it comes out,” Nelson Ortiz instructed over the phone. Pressed, he explained: “The mail is not always safe.”

Until recently, Ortiz was the President of the Caracas Stock Exchange. Now, questioned about investment in Venezuela, he insisted upon speaking by phone, preferring to avoid email correspondence. Few Venezuelans spoke openly to the Globalist about trends in foreign investment. Multiple business leaders and diplomats asked to speak off the record, allowing the magazine to attribute to them only information available to the public. One business executive even listed databases and organizations that provided the information he had shared, requesting that the magazine cite public sources instead.

Such secrecy and anxiety rarely shrouds discussion of economic policy in the United States or Europe. But in Venezuela, national economic information, and the criticism it may elicit, are far from public.

Foreign direct investment (FDI) is defined as the total amount of money flowing into a country resulting in purchases of a ten percent or greater share in a company or industry. To measure FDI accurately, accurate statistics are necessary, but because the Venezuelan government does not release statistics on the national economy, foreign investment can only be analyzed using other publicly available records. This makes accurate measurement difficult.

Only one governmentassociated institution, El Banco de Venezuela (BCV), maintains and releases information about the status of the national economy. Though the bank is funded by the government, economists and political scientists consider it a reliable source for national economic information. According to the BCV, before Chávez’s ascension to the presidency in 1998, Venezuela received almost no outside investment, exacerbating the country’s economic stagnation.

Investment from abroad gradually increased during Chávez’s first few years in power. In 2000, Venezuela received roughly four billion dollars in foreign investment. Such investment, however, was largely limited to two industries: oil and telecommunications. Though Venezuelan oil is more expensive to extract in crude form than oil from the Middle East, increasing oil prices on the global market encouraged foreign companies to invest in Venezuela. Chávez initially welcomed investments from international telecommunications companies as well.

But Chávez’s decision to nationalize several key industries eventually hampered these initial investment ventures. In 2002, Venezuela received almost no foreign investment, and in each of the two following years, the country attracted less than one billion dollars from abroad. The numbers have continued to decline.Why the change? Ortiz, the former head of the stock market, explained that over the years, “trends in foreign investment in Venezuela have been influenced by oil and by politics.” Oil and politics, however, are impossible to separate in Venezuela.

The oil industry is controlled by PDVSA, the state-run oil company, which has full rights to Venezuela’s oil. But PDVSA has encouraged foreign oil companies to help extract Venezuela’s most valuable natural resource. In exchange for access to Venezuelan oil reserves, foreign companies must pay taxes and royalties to the government. PDVSA has taken particularly active steps to attract foreign national oil companies, including Cupet (Cuba), Petronas (Malaysia), CNPC (China), Repsol (Spain), Petrobras (Brazil), ONGC (India), and Petropars (Iran). Though these companies are primary foreign investors in Venezuela, private oil companies like ConocoPhillips, ExxonMobil, BP, Total, and Chevron Texaco have invested large sums as well.

Despite these companies’ presence, little new investment has arrived since the passage of new tax laws in 2000 that raised the costs of oil production for foreign companies. The one percent royalty paid by companies to drill for oil before 2000 became a 16 percent royalty. Additionally, companies were charged fees that did not exist before, sometimes paying taxes of up to 30 percent. Any remaining foreign investment in Venezuelan oil today is largely left over from contracts agreed upon before the new tax laws.

Even more troubling to foreign investors has been President Chávez’s socialist agenda. Since leading a coup in 1992 and achieving his first electoral victory in 1998, Chávez has gathered support by using strong nationalist and socialist rhetoric. He regularly implies that the people own the country’s wealth, rather than corporations or private investors. The country’s unofficial motto under Chávez , slapped on state-owned buildings and countless billboards around the country, reads: Patria, Socialismo o Muerte, translated as “Patriotism and Socialism or Death.” Capitalists from abroad are understandably wary of bringing their money into the country.

The actions of the Chávez government have only reinforced the president’s rhetoric, as the government repeatedly exercises its self-granted right to nationalize companies and industries. The telecommunications industry, privatized in 1991, was nationalized in several moves over a few years. The final move came in May, when the Venezuelan government announced it was buying 80 percent of CANTV, the largest telecommunications company in the country. The purchase included a 28.6 percent share previously owned by Verizon. Private investment in the industry has virtually ended. The national government has also “recovered” 4.5 million acres of privately owned farmland, saying the country must put an end to v, large private estates that have existed throughout Latin America for centuries.

This year, the Chávez government has been especially active in advancing some of its socialist policies. It bought Electricidad de Caracas, the country’s largest electricity firm, which, like the telecommunications company CANTV, had been privatized only fifteen years prior. And it has taken over the management of the massive Orinoco Belt drilling project, the oil venture that has attracted the majority of Venezuela’s foreign investment. At the end of June, ConocoPhillips, with large holdings in the region, had not been compensated for property seized in early May. Its investment had been valued in the billions.

Venezuela has long had problems attracting foreign investment. Today, the economy is stable enough to protect investment, but the national government puts that investment at risk. As one president of a Venezuelan company told the Globalist, “There is not much investment because people do not trust the government. Insecurity is really hurting the development of Venezuela.” President Chávez has all but told foreign investors to stay out. While other countries have opened their markets to foreign money, Venezuela has removed itself from the global economy in a series of small but significant steps. As Chávez has maintained his incendiary rhetoric and his government has nationalized key industries, investors around the world have chosen to invest in other more transparent, less risky economies.

“With the concerns that many investors have, between Venezuela and other countries, they’d rather be elsewhere,” said the same company’s president, again speaking under anonymity.