Identifier
Created
Classification
Origin
04CARACAS1943
2004-06-09 12:50:00
CONFIDENTIAL
Embassy Caracas
Cable title:  

PDVSA MONEY GOES STRAIGHT TO GOV SPENDING

Tags:  ECON EFIN EPET PGOV VE 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L CARACAS 001943 

SIPDIS


STATE FOR WHA/AND
NSC FOR CBARTON
TREASURY FOR OASIA-GIANLUCA SIGNORELLI
HQ USSOUTHCOM FOR POLAD

E.O. 12958: DECL: 05/21/2014
TAGS: ECON EFIN EPET PGOV VE
SUBJECT: PDVSA MONEY GOES STRAIGHT TO GOV SPENDING

REF: A. CARACAS 1443

B. CARACAS 1904

Classified By: AMBASSADOR CHARLES S. SHAPIRO FOR REASONS 1.5 (B) & (D)

C O N F I D E N T I A L CARACAS 001943

SIPDIS


STATE FOR WHA/AND
NSC FOR CBARTON
TREASURY FOR OASIA-GIANLUCA SIGNORELLI
HQ USSOUTHCOM FOR POLAD

E.O. 12958: DECL: 05/21/2014
TAGS: ECON EFIN EPET PGOV VE
SUBJECT: PDVSA MONEY GOES STRAIGHT TO GOV SPENDING

REF: A. CARACAS 1443

B. CARACAS 1904

Classified By: AMBASSADOR CHARLES S. SHAPIRO FOR REASONS 1.5 (B) & (D)


1. (C) SUMMARY: Central Bank (BCV reserves) peaked on May 14,
and have since been dropping sharply. The chairman of the
National Assembly Finance Committee and the President of
state-owned oil company PDVSA have publicly confirmed that
the reason for the decline is that PDVSA has ceased turning
over its income to the BCV for conversion into Bolivars, an
act that critics call illegal and unconstitutional. The
reason for this diversion appears to be to subsidize a new
"Special Development Fund" announced recently by President
Chavez, which is purportedly worth USD 2 billion. After
asking the BCV for, and not receiving, his mere "millardito"
(a billion USD - see reftel A),he apparently has found a way
to simply take two, courtesy of high oil prices. END SUMMARY.

--------------
RESERVES DROPPING
--------------


2. (SBU) BCV reserves peaked at a total of 24.721 billion USD
(including the Macroeconomic Stabilization Fund, or FEM, a
separate account for GOV revenue, theoretically to be built
up when oil prices are high, but which in fact has less now
than since its second month of existence) on May 14, but have
since fallen to only 23.869 billion as of June 4. NOTE: This
is not due to BCV providing forex to pay for imports, as the
amount of foreign exchange CADIVI (the Commission for Foreign
Exchange Administration) approved in May was only USD 17
million more than in April. Even if forex approvals had
increased substantially, it would not be enough to account
for the drop, since reserves had been growing steadily since
exchange controls were put in place in January 2003. For
example, the reserves grew by just over 1 billion USD in
April 2004, 2.9 billion since January 1, and 8.58 billion in
the 12 months ending April 30. END NOTE.

--------------
PDVSA WITHHOLDING INCOME
--------------


3. (U) Newspaper articles on June 3 stated that PDVSA's

finance team had received orders to suspend selling foreign
currency to the BCV for at least the period of June through
August of this year. Daily "El Nacional" quotes anonymous
BCV reps as saying that at least $750 million was also
diverted in the month of May. In the face of these stories,
Rodrigo Cabezas, MVR party Deputy and head of the National
Assembly Finance Commission, announced June 4 that this was
indeed the case, and was the result of a decision made by the
PDVSA board of directors. The reason Cabezas gave is that
any reform to the FEM law would have been delayed until the
second half of the year, so PDVSA "assumed responsibility"
and found a "short-cut." PDVSA President Ali Rodriguez
subsequently echoed Cabezas' comments on June 7 and assured
that the move was perfectly legal, and in fact was done with
the approval of the BCV.


4. (U) Numerous independent economists have questioned this
action, on grounds of legality and transparency. The BCV
law, for example, specifically states that foreign exchange
obtained from oil exports "must be sold exclusively to the
Central Bank." Also, the Constitution precludes any
extra-budgetary spending. Salomon Centeno, another member of
the Finance Committee (and deputy from opposition party
Accion Democratica) stated that the Assembly did not approve
such an act and called for a special commission to
investigate it.


5. (C) The BCV seems to at least be aware of the reasons,
although it is not clear that it approved the short
circuiting of normal procedures, as PDVSA President Rodriguez
asserted. Milton Guzman, an economist at private Banco de
Venezuela and former BCV employee, told econoff that his
former co-workers have told him of an internal BCV memo that
had circulated, telling employees in the financial operations
area that the PDVSA money would not be forthcoming. The
development fund may actually be the idea of BCV President
Diego Castellanos, who suggested it in a February 2004 letter

to the Finance Committee during a period of public debate
about the "excess reserves." However, this letter did not
offer approval of the current method, since it stated that
any fund must be "in conformity with currency exchange
standards," which Cabezas indicated at the time would be the
case. No one from the BCV has made any public statements
about the issue since the reserves began dropping.

--------------
MONEY FOR SOMETHING
--------------


6. (U) The destination of these funds appears to be a new
"Special Development Fund" announced by President Chavez on
May 23. He stated that USD 2 billion in oil funds would be
used to finance national development projects, and said that
USD 200 million were already designated for a sugar mill
(being built with assistance from Cuban experts),a new state
airline, a subway line in a Caracas suburb, and an irrigation
system in western Venezuela. Chavez claimed at the time that
the money had been found in a "secret" PDVSA account that had
been hidden by the BCV. Banking Superintendent Trino Alcides
also stated that this account was indeed worth just over USD
2 billion.

--------------
ONLY THE BEGINNING? PERHAPS NOT
--------------


7. (C) There are strong indications that funds have been
diverted in this manner for some time, though not in their
entirety. Some weeks ago, Luis Zambrano, senior economist of
Banco Mercantil, told econoff he had learned that PDVSA was
using money from its "Rotating Fund" (fondo rotatorio) to
fund domestic social programs. This fund, maintained in
dollars, is legal, but was created for the express purpose of
facilitating PDVSA's routine foreign purchases of equipment
and other goods. Zambrano believes that this method was not
utilized until 2004, and estimated that spending from it
would reach USD 3.3 billion for 2004 if Chavez remained in
power.


8. (C) Efrain Velazquez, President of the National Economic
Council (CEN, a group of private economists and businessmen
that was created nearly 50 years ago to advise the executive
branch and is now all but ignored),told econoff in May that
he was involved in discussions about a possible new law to
affect BCV reserves (reftel A). The proposed text would
allow PDVSA to keep between one and two billion USD a year,
and designate the funds for "social projects." When
Velazquez protested that this would be inflationary, the BCV
reps at the meeting told him it should not be a concern
because the money would be spent in dollars "for political
activities abroad." Velazquez told econoff that he believes
that such funds would likely be spent domestically, but
suggested that is any of it were spent outside of Venezuela,
it might go to Evo Morales in Bolivia or other ideological
allies.


9. (C) Analysis of official GOV numbers raise questions as
well. While the reserves have been rising since January
2003, BCV numbers indicate that the rate of increase has been
slowing. They increased by about USD 710 million/month over
the course of 2003 (and USD 950 million/month from August to
December, when CADIVI forex liquidations were at levels
comparable to those of 2004),but by only USD 633
million/month in 2004 through April. This 10.8% slowdown is
despite an 11.6% increase in oil prices, from an average of
USD 25.82 per barrel in 2003 to USD 28.82 in 2004 (through
April - up to USD 34.40 for May).

--------------
COMMENT
--------------


10. (C) Considering that a BCV employee told econoff that the
"secret" PDVSA account that Chavez planned to tap was never a
secret (nor does it make sense for it to have had USD 2

SIPDIS
billion in it),we believe that Chavez' assertion was simply
laying the groundwork for the PDVSA decision. Since the BCV
has refused to turn over money that "rightfully" (according
to Chavez) belongs in the hands of the GOV, they can argue

that robbing the BCV is only taking back what has been taken
from them. Chavez, repeatedly thwarted by the BCV and their
bothersome insistence on legality, is clearly unwilling to
settle for less.


11. (C) We have our doubts as to how much of the money will
be spent on big ticket infrastructure projects such as those
Chavez named. Much, we expect, will go to financing thinly
disguised transfer payments to his key lower-income
constituents through the various "missions." In any event,
it does not appear that the money will be spent under the
budget, which is debated publicly and subject (at least
theoretically) to scrutiny by the National Assembly. How the
USD 2 billion will be converted to Bolivars is another
unknown. If it does not pass through the Central Bank,
presumably it will be exchanged on the quasi-legal (though
hardly transparent) parallel market.
SHAPIRO


NNNN

2004CARACA01943 - CONFIDENTIAL