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