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).

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Summary
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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.

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Eximbank and OPIC
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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.

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Oil Royalties
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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.


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Central Bank
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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."
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Forex
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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.)

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Finance and Politics
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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.

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Comment
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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


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2004CARACA03501 - CONFIDENTIAL