GRANDA AFFAIR CAUSES TRADE JITTERS

C O N F I D E N T I A L CARACAS 000165 SIPDIS STATE FOR WHA/AND NSC FOR CBARTON TREASURY FOR OASIA-GIANLUCA SIGNORELLI HQ USSOUTHCOM FOR POLAD E.O. 12958: DECL: 09/30/2014 TAGS: ECON ETRD PGOV VE SUBJECT: GRANDA AFFAIR CAUSES TRADE JITTERS Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.4 D ¶1. (C) SUMMARY: On January 14, in a speech to the Venezuelan National Assembly, President Chavez announced that he was suspending trade ties with Colombia as a result of the alleged kidnapping of FARC "Foreign Minister" Rodrigo Granda. In the aftermath of this announcement, banks and companies with interests in trade with Colombian- the second biggest trading partner after the United States- have been scrambling to put together contingency plans in case of a border closure. As of January 19, the border has not been closed, and trade has slowed down only marginally as Venezuelan authorities put a bit more rigor into what are usually cursory inspections of documents and cargo. Gasoline smuggling appears to be the one area in which the GOV seems to be really taking action. END SUMMARY -------------- Repercussions of the Granda Grab -------------- ¶2. (C) Asserting an unsatisfactory Colombian response to the alleged violation of Venezuelan sovereignty in the capture of Rodrigo Granda, the "Foreign Minister" of the Colombian FARC rebel group, President Chavez announced on January 13 that he was recalling the Venezuelan Ambassador from Bogota, and on January 14, that he was freezing "all business, all agreements" with Colombia. Chavez specifically mentioned the $200 million gas pipeline project agreed to between the two countries in July and which would facilitate the transportation of natural gas to Venezuela for re-injection into PDVSA's oil fields in western Venezuela. In addition, although not mentioned in his speech, we understand that the next in a series of high-profile bilateral business missions with senior government participation which was to take place in Cartagena, has been put on hold. -------------- Business is Concerned -------------- ¶3. (C) Colombia is Venezuela's second largest trading partner after the United States. Cross-border trade amounted to nearly US$2.5 billion in 2004. Venezuela exports to Colombia are made up primarily of steel and petrochemicals, while Colombian exports include textiles, cars and car parts, food, pharmaceuticals, and plastics. Following the Chavez's vaguely phrased announcement, companies in Venezuela scrambled to activate what contingency plans they had if the border were in fact to be closed. Particularly concerned were multinational automobile companies who rely on foreign parts for their Venezuelan assembly plants. In conversation with a Valencia-based NAS customs advisor on January 18, executives from General Motors said they rely in large measure on parts imported from Colombia. Ford, too, relies heavily on parts from Columbia, but reported that it can shift its supply chain to alternate suppliers in Brazil, Argentina and Mexico. ¶4. (C) Gustavo Marturet, President of Banco Mercantil, one of the largest locally owned banks in Venezuela, told Econcouns on January 18 that he was deeply concerned by Chavez's remarks of January 14 since his bank has major financial exposure to cross-border trade. He said that he and his counterparts at Banco de Colombia had been investigating possible impacts on bank exposure and were relieved to hear that trade has been largely unaffected. He remains cautious regarding possible future actions by the GOV. -------------- Facts on the Ground -------------- ¶5. (C) On January 18, Carmen Leonor Martinez, Executive Director of CAVECOL, the Venezuelan-Colombian Chamber of Commerce, told Econoff that goods continue to flow across the border in both directions, though traffic into Venezuela was much slower than normal. Martinez also reported a marked increase in the number of Venezuelan National Guard troops along the border, and that document requirements-- normally loosely enforced if enforced at all-- were being strictly enforced. She also reported that Colombian exporters were hesitant to send additional shipments to Venezuela for fear that their trucks would be confiscated or that the GOV would not authorize hard currency payments through the foreign exchange authority CADIVI. She said that agricultural concerns in Colombia were particularly concerned since they export large quantities of milk and corn flour to Venezuela for sales through the GOV's Mercal chain of stores aimed at low income consumers. ¶6. (C) Members of the Venezuelan National Guard in the state of Tachira, stationed near the border with Colombia, told Emboff the border was never actually closed and they had not received any orders to do so. There was however a two-day operation to crack down on gasoline smuggling across the border. They suggested that this crackdown was provoked by the increase in political tension between the two countries. DAO sources reported that the pro-Chavez commander who controls the border in the state of Zulia attempted to close the border there, but relented when the indigenous Guajiro population, many of whom hold both Venezuelan and Colombian citizenship, began protesting. -------------- Gasoline Smuggling -------------- ¶7. (C) Gasoline smuggling is a fixture in the border area, where Colombians make regular cross-border visits to Venezuelan gas stations to buy gasoline at the officially mandated price of 97 Bolivars per liter (US$.05 at the official rate). The gasoline is then sold in Colombia at a hefty premium, but still less than the Colombian market price of around US$.50 per liter. According to media reports, PDVSA, the Venezuelan state oil company, has now resumed supplying gasoline to stations along the border, which had been halted on January 17, including the special border stations that allow Colombians to make purchases. However, these stations will be open for fewer hours than they had been before. As a result of gas shortages on the Venezuelan side of the border, the price of black-market gasoline in Colombian border towns has reportedly doubled since last week. -------------- Comment -------------- ¶8. (C) The GOV's crackdown on gas smuggling in the border region appears to be a way to remind Colombia that Venezuela does have some leverage; however, the relationship is symbiotic, and a full-scale border closure would entail the GOV subjecting its economy to another shock at a time when it appears to be gaining traction. Nonetheless, in a government where politics tends to trump economics it cannot be ruled out. For now, trade appears to be moving fairly normally. With the dispute between the two governments still unresolved, businessmen have every reason to remain nervous. McFarland NNNN 2005CARACA00165 - CONFIDENTIAL