AMBASSADOR'S TOUR D'HORIZON WITH FINANCE MINISTER

C O N F I D E N T I A L CARACAS 003501 SIPDIS NSC FOR SHANNON/BARTON TREASURY FOR OASIA - SIGNORELLI SOUTHCOM ALSO FOR POLAD BUENOS AIRES FOR TREASURY REP E.O. 12958: DECL: 11/12/2014 TAGS: ECON EFIN PGOV PREL VE SUBJECT: AMBASSADOR'S TOUR D'HORIZON WITH FINANCE MINISTER Classified By: Economic Counselor Richard M. Sanders. Reasons: 1.4(b) and (d). -------------- Summary -------------- ¶1. (C) At a November 10 luncheon with the Ambassador, Finance Minister Nobrega touched on a range of issues including: Eximbank lending (he'd like it to return, but downplays the impact of its absence); the GOV's surprise increase in petroleum royalties (he admits it was badly handled); Ministry-Central Bank relations (he's all for the Bank's independence, but it should do what he is asking); foreign exchange (he still wants to move to a dual rate); and the political environment (he will need to fight to maintain a measure of fiscal discipline). He was concerned about still strained Venezuelan-U.S. relations. The Ambassador stressed that USG policies were pragmatic, but principled and that he saw the economic area as one were progress was possible. End summary. -------------- Eximbank and OPIC -------------- ¶2. (C) On November 10, the Ambassador, accompanied by econcouns, lunched with Finance Minister Tobias Nobrega and his senior advisor Ali Lenin Aguilera. The Ambassador led off by saying that on financial issues there were few areas of conflict between our two governments. Nobrega agreed, stating that while the U.S. Export-Import Bank's "delay" in returning Venezuela to "on-cover" status was unfortunate, and was paralleled by similar policies among European credit agencies, the impact on Venezuela's ability to obtain financing was minimal. The end result, he said, was that for certain equipment, Venezuelan customers turned to Brazilian, Indian, or Chinese suppliers. ¶3. (C) The Ambassador agreed that such restrictions hurt both the U.S., which lost a potential market, and Venezuela, which lost opportunities to obtain products from preferred sources at advantageous terms. However, he went on, relations between Venezuela and Eximbank and its sister agency OPIC depended in large measure on resolving specific issues. In particular, he mentioned, OPIC's payment of an expropriation claim to U.S. firm SAIC as a result of state oil producer PDVSA's unilateral dissolution of their joint venture INTESA posed a problem. While recognizing this was outside of Nobrega's direct responsibilities, he urged all effort to find a way to address this case. -------------- Oil Royalties -------------- ¶4. (C) Nobrega asked the Ambassador how serious had been the fall-out from the GOV's unilateral increase in the royalty rates it received from the international oil companies for their Orinoco heavy oil production. The Ambassador said that he had made clear the USG position. While Venezuela, like any other country, has the sovereign right to determine its own tax and royalty policies, the GOV is also bound by its international agreements and contracts. U.S. firms' evaluation of the investment climate is affected by this kind of unpleasant surprise, which in their view runs contrary to specific contractual obligations assumed by the GOV. They will have to determine what legal remedies, if any they have available to them. Nobrega said that he thought the increase had been handled poorly, and said that, coming as it did before the recent gubernatorial elections, seemingly had been undertaken with an internal political motivation. He observed that he himself had been surprised by this, as he has been by other decisions announced in the past on President Chavez's Sunday "Alo, Presidente" television show, such as the decrease in value-added tax, which he himself had opposed. Despite the royalty flap, he insisted that Venezuela would remain open to international petroleum investment, and that the management of state oil concern PDVSA increasingly wanted a big PDVSA, producing more oil, and that this inevitably would mean more deals with foreign companies. -------------- Central Bank -------------- ¶5. (C) Asked about his motivations for pressing the Central Bank to recalculate upwards the local currency profits generated by exchange rate devaluations which it was obligated to remit to the GOV, Nobrega said, that the Central Bank's management was hiding behind fallacious legal and accounting arguments. Basically "they are fanatical monetarists" and are convinced that if the local currency is introduced into the economy there will be a big rise in inflation, despite all indications to the contrary under current economic circumstances. In any event, the Bank is obligated to obey the law. That said, he professed himself to be a supporter of Central Bank autonomy, and one of those who pressed to include it in the 1999 constitution. He said that expiring terms meant there would be changes in Central Bank leadership. He dismissed rumors that he would take over the Bank Presidency; a finance minister's moving to the Central Bank, he said would "look bad." -------------- Forex -------------- ¶6. (C) Asked whether he was satisfied with the administration of foreign exchange controls, Nobrega said that he remained opposed to their indefinite retention, and preferred to move to a dual rate, while retaining reasonable reporting and control requirements for exchange flows such as those imposed by Brazil. (Comment: Planning Minister Giordani is a big fan of controls and thus far has thwarted Finance Ministry efforts to move to a dual rate from the current system under which there is rationing of foreign exchange at a fixed, preferential rate by the Foreign Exchange Administration Commission (CADIVI) and a parallel market with a freely set rate existing in a quasi-legal limbo. End comment.) -------------- Finance and Politics -------------- ¶7. (C) Nobrega suggested that continued high oil prices meant that Chavez was likely to remain highly popular and gain re-election in 2006. He himself wanted to concentrate on reforming Venezuela's cumbersome tax law during the next year and on assuring sufficient savings to allow public finances to withstand any eventual weakening in oil prices. The current political environment, in which the absence of a viable opposition tended to encourage internal divisions among and within pro-Chavez parties made his task difficult, but he was prepared to be tough, and if necessary, become a sacrifice and "take that long vacation I have earned" if that would accomplish his ends. He said that he would like to see improvement in the diplomatic front to match the progress on the economic front; strained Venezuelan-U.S. relations remained worrying. The Ambassador said that USG policy was pragmatic, without ceding on areas of principle, and that economic and commercial issues were ones where hopefully progress could be made. -------------- Comment -------------- ¶8. (C) Nobrega was evidently concerned about the impact of the oil royalties increase. (He and Energy Minister Ramirez have repeatedly crossed swords in the past, most recently about putting the large PDVSA "social investment" contribution under normal budget discipline. Nobrega has only partially won that battle.) For the rest, he was upbeat, as befits a Venezuelan finance minister at a time of high oil prices. His asserted commitment to fiscal discipline, while perhaps genuine in comparison with the position of other members of the GOV, rings a bit hollow in view of the continued populist spending policies at the heart of Chavez,s political and economic model. Brownfield NNNN 2004CARACA03501 - CONFIDENTIAL