Thursday, October 06, 2005

Economic notes from Venezuela 

I know this blog is “Oil Wars” not “Venezuelan Economics” so I have to resist my urges sometimes to post too much about the Venezuelan economy. But today there was just too much news on it (and good news at that!) so I couldn’t resist. Those who are bored by this can just skip this but for the rest of you here it goes:

Earlier this week the big news was Venezuela shifting billions of dollars in its foreign reserves out of the U.S. The opposition pounced on it as more evidence of Chavez’s lunacy or, at the least, bad policies. Yet in the news today we had this:

The dollar started its trading day lower on word of another central bank's decision to diversify out of dollar holdings.

Venezuela has shifted $20 billion in U.S. Treasurys into funds sent to Europe, the Financial Times reported, citing central bank director Domingo Maza Zavala. The same report quoted other bank sources as saying the amount transferred was only $10 billion.

Venezuelan President Hugo Chavez has an adversarial relationship with the U.S., although the central bank said the transfer was carried out for financial reasons, the FT said.

Russia and other central banks took similar steps earlier this year, developments that worked against an otherwise appreciating dollar since hitting multiyear lows in late 2004.

"We don't think that the [Venezuela] story itself is all that significant, but coming at a time when U.S. stocks were collapsing as well, it did seem to trip the dollar," said Steve Barrow, chief currency strategist at Bear Stearns.

So despite the alleged insanity of Chavez “Russia and other central banks took similar steps earlier this year”. Could it be that Chavez controls those other central banks too? Not likely. Could it be that those other central banks are rational people who understand economics and know that the dollar is at grave risk of a significant devaluation due to fundamental problems with the U.S. economy? Yup, I think that’s it. And, wow, could that mean that Chavez isn’t some wild eyed lunatic but rather an astute observer of the world scene who is taking prudent measures to protect Venezuela’s economic interests? I think so.


Here is another one that has been oft repeated in this blog and might bore some but again I can’t resist:

CARACAS, Venezuela, Oct 6 (Reuters) - New car sales in Venezuela rose nearly 40 percent in September compared with a year earlier as the oil producer's economy kept up strong growth, the Venezuelan Automobile Chamber, CAVENEZ, said on Thursday.

A total of 17,587 cars were sold last month, compared with 12,595 cars in September 2004, when Venezuela was pulling out of a two-year slump triggered by a deep political crisis over the government of left-wing President Hugo Chavez.

No wonder the escualidos can’t mount any demonstrations – their middle class supporters are all too busy tooling around in their new cars! Anyways, for someone like Chavez who it is said is destroying private property and capitalism that is one heck of a lot of private property being sold by capitalistic car companies like G.M, Ford, and Toyota. But heck, even the consummate activity of capitalism, advertising, is doing well! All this brought to Venezuela by that “communist-fascist” Chavez. Go figure.


This blogger has warned people many times that you really don’t want to mess with Venezuelan tax authorities. Apparently some people didn’t get the message:

Venezuela's tax authority on Thursday ordered the temporary closure of the local offices of IBM and Microsoft for alleged tax irregularities.

Nokia, Ericsson and Siemens, as well as car part maker Bosch Rexroth and assembler Honda Motor, were also told to close for 24 to 48 hours.

The targeting of top western multinationals as part of a “zero tax evasion” policy is a further sign of an increasingly assertive behaviour by President Hugo Chávez, as bountiful oil revenues strengthen his leftwing government.

Seniat, Venezuela's tax collection agency, said the companies would be fined several hundred dollars for alleged irregularities in book-keeping.

Mr Chavez has set as one of his government's aims the reversal of a historic and widespread culture of non-payment of taxes in oil-rich Venezuela. Like many of the top officials in the Chavez administration, the tax agency's chief inspector is a former army captain seen as very close to the president and who is feared by some and admired by others for his no-nonsense efficiency and zeal.

Maybe the gringos thought they’d be exempt? I guess they are being disabused of that idea. Good for Venezuela that the rich and big companies now have to pony up their fair share of money to help pay for government services. I bet some other countries wish they had a tax service this efficient. In fact, rumor has it that if Hillary Clinton becomes the U.S. president in 2008 she is going to tap Jose Vielma Mora as the next head of the I.R.S.!!


Lastly, we end up this economic news with what else for Venezuela but oil. It seems a few more foreign oil companies have seen the light:

Three More Venezuela Oil Cos. OK Ventures

CARACAS, Venezuela (AP) - Three more foreign oil companies have agreed with the Venezuelan government to run their oil fields as part of a state-controlled venture rather than independently under contract.

Oil Minister Rafael Ramirez announced that Japan's Teikoku Oil Co.,France's Perenco and Argentina's Tecpetrol have agreed to change their operating contracts into joint ventures with state-run Petroleos de Venezuela
S.A, PDVSA, at an oil conference in the eastern city of Cumana, a spokeswoman for the oil ministry said Thursday.

The three firms operate a total of five fields in Venezuela: Teikoku and Perenco each have two fields, while Tecpetrol operates one.

The move to joint ventures is one of a series of steps taken by the government of Venezuelan President Hugo Chavez to exert more control of the industry and increase state revenue at a time when oil prices are high.

The government has said it may take as much as an 80 percent stake in the new companies and required all 32 operating agreements held by 22 private oil companies to make the switch to joint ventures by the end of the year. Those that refuse will have their oil fields reclaimed by the state.

A total of 11 companies have now agreed to the changes. In August, eight firms signed the preliminary joint-venture agreements.

The move to joint ventures follows a 2001 hydrocarbons law that requires state-run PDVSA to hold a majority stake in all oil exploration and production projects.

Previously, Venezuela also hiked royalties and changed tax rules so that firms pay 50 percent income tax instead of a previous 34 percent preferential rate to pump oil.

By applying the revised tax rate retroactively to contracts signed in the 1990s, the government is now claiming that foreign oil companies owe US$3 billion (euro2.51 billion) in back taxes.

Venezuelan officials have said those tax claims must be finalized before the joint ventures are finalized.

Venezuela is the world's fifth largest oil exporter.

Before this is all said and done I bet most all of the oil companies will agree to Venezuela’s new terms. After all, with oil at more than $60/barrel its not as if they aren’t making money. Further, they know how to read opinion polls so they can see Chavez probably isn’t going anywhere for a while. Thus they are faced with two choices – 1) either accept Venezuela’s terms and still make a handsome, if less spectacular, profit or 2) leave Venezuela. They’re rational so they choose the former.

And remember all the chicken little predictions that foreign oil companies would lose interest in Venezuela due to the governments aggressive stance towards them. Well guess who wants to invest a lot of money in expanding production in Venezuela’s Orinoco oil belt? Yes, none other than Chevron.


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