THE FOREIGN EXCHANGE MARKET - THERE OUGHTTA BE A LAW

C O N F I D E N T I A L CARACAS 002907

SIPDIS


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

E.O. 12958: DECL: 9/17/2014
TAGS: ECON, EFIN, PGOV, VE
SUBJECT: THE FOREIGN EXCHANGE MARKET - THERE OUGHTTA BE A
LAW

REF: A. CARACAS 1943
B. CARACAS 921

Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.4 D

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SUMMARY
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1. (C) In 2003, a bill was introduced in the National
Assembly to punish violations of the newly created foreign
exchange controls. The proposed text was harsh and has not
progressed far since its introduction, but there are
indications that it will be up for discussion in the session
that began September 15. Pro-GOV members of the National
Assembly Finance Committee provided us with a copy of the
most recent draft. While the name has been softened and the
penalties reduced, it still seeks to criminalize relatively
minor financial transactions. Meanwhile, actual liquidations
of foreign exchange in August reached their highest amount
since the controls were instituted. Merely having under
consideration a law criminalizing parallel market
transactions allows the GOV to intimidate the private sector.
If the final version is similar to the most recent draft, it
will be a blow to any hopes for serious business-government
dialogue. END SUMMARY.

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WHERE IT STANDS NOW
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2. (C) Shortly after the GOV imposed foreign exchange
controls and set up a new government agency (The Foreign
Exchange Control Administration, CADIVI) to monitor them in
February 2003, it introduced a draft "Law of Foreign Exchange
Crimes" to impose criminal penalties for violations of the
new regime. After languishing for over a year, the bill
passed its first reading in May 2004. Since then, it has not
moved forward, as legislators focused on legislation to
change Venezuela's Supreme Court. However, contacts have
told us recently that a new version of the bill, which the
Chavista majority could quickly pass into law, will be ready
soon.

3. (SBU) The text approved in the first reading is posted on
the National Assembly website, and is both harsh and full of
vitriolic language. It calls for a 5-10 year prison sentence
and (not/not or) a fine for simply buying/selling over USD
1000 on the black market. The "Exposition of Motives" (EOM)
repeatedly describes unspecified acts (implied to be any
foreign exchange transaction not conducted via official
channels) as "malignant," directly damaging the economic
order," and defining them as "criminal," even while
acknowledging that there are no pre-existing penalties for
such acts. It highlights the "drastic and sustained
shrinking of international reserves" which gave rise to
controls and speaks of the "necessity and urgency" of
establishing penalties for violating them.

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WHERE IT'S GOING NEXT
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4. (C) National Assembly Finance Committee Chairman Rodrigo
Cabezas and fellow committee member Jose Sanguino (both of
the pro-Chavez Fifth Republic Movement, MVR) told econcouns
on September 9 that the bill was currently awaiting action by
a sub-committee (Note: the Assembly returned to work on
September 15). They said that some obstacles in the text had
already been worked out, such as significantly raising the
USD 1000 minimum transaction that will be considered a
criminal act, but implied that the final version would
encompass all qualifying transactions not approved by CADIVI.
The bill now bears the somewhat less polemical title of "Law
of Illicit Exchange Activities," rather than "Crimes."
Cabezas said Colombia, where foreign exchange transactions
are free but registered, could be a model. Sanguino
indicated they wanted to avoid events like during the 1994
banking crisis, when people were known to have taken
"suitcases full of cash" out of the country without
consequence, since there was then no law against it.


Econcouns stressed that businesses needed the flexibility
provided by being able to transfer money predictably, and
Cabezas asserted that there were now fewer obstacles and
bottlenecks in the CADIVI process.

5. (C) Econcouns requested a copy of the most recent draft,
which post received from Cabezas on September 17. Despite
the softer name, it still calls for prison sentences (now of
two to six years) for individuals who exchange USD 4000 or
more, or businesses that exchange USD 9000, outside of CADIVI
procedures. It also requires declarations of the import or
export of such amounts, except for temporary visitors, though
they are not exempt from the requirement to use official
exchange mechanisms and penalties for failure to do so. The
"Exposition of Motives" has been toned down, but a new
section blames circumvention of the exchange regime for
"producing a devastating effect on the key economic
variables, such as increased inflation, interest rates, a
diminishing of the credibility and financial stability of the
Republic as a potential destination of investment and
capital."

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WHAT IT COULD DO
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6. (C) Meanwhile, it is unclear how this proposed law may
eventually affect GOV activities. The Ministry of Finance
has been selling dollar-denominated bonds, structured so that
investors can buy in part them with dollars obtained at the
official rate and re-sell them at the parallel market
exchange rate (see ref B). The Finance Ministry has recently
obtained legislative authority to borrow an additional USD
1.5 billion. Perhaps wanting to retain the option of
structuring further transactions in the same way as past
ones, Finance Minister Nobrega has publicly referred to the
idea of such a law as "complicated." Venezuelan-American
Chamber of Commerce legal analyst Bernardo Galavis told
econoff August 31 that he believes the version of the bill
that will come out of the "second reading" will essentially
be written by the Ministry of Finance. Alejandro Dopazo,
head of the Public Credit Office at the Ministry of Finance,
attempted to downplay the influence his Ministry had on the
process, but opined to econoff on September 2 that the final
version of the bill will be watered down.

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STATUS OF FOREIGN EXCHANGE REQUESTS
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7. (U) In the meantime, while the business sector views with
concern the possible imposition of criminal penalties for
exchange violations, there are fewer complaints about CADIVI
operations than at any previous time. While there are
individual cases with problems, the majority of businesses
seem to be getting as much exchange as they need. Actual
liquidations reached a high of USD 63.9 million per day in
August, up 11% over July, 37% over the first half of 2004 and
71% from the fourth quarter of 2003, as ever more of
Venezuela's foreign exchange needs are met through the
official system as opposed to the parallel market.

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COMMENT
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8. (C) There are conflicting signals coming from the National
Assembly and the Finance Ministry as to what the law will
contain and when it will move forward. Criminalizing foreign
exchange activities, nonetheless, has not been among the
legislative priorities enunciated publicly by President
Chavez and his leading legislators; but for the GOV, the
threat of such legislation offers the same intimidation
quotient as a law at this time. Also, pushing the
legislative agenda would compete with the GOV's high profile
outreach program to the business community which has included
large public meetings between Chavez and businessmen, as well
as smaller meetings on his part and that of ministers with
the leaders of individual sectoral business associations
(while umbrella private sector association FEDECAMARAS
remains frozen out). The GOV's message appears to be that,


while there is no room for business community activism on
"political" issues, the GOV is prepared for dialogue and
compromise on purely "economic" ones. Should the most recent
draft of this bill become law, that message would be severely
undermined.
Brownfield


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2004CARACA02907 - CONFIDENTIAL