GOV CONSOLIDATES CONTROL AT CENTRAL BANK

C O N F I D E N T I A L CARACAS 000288 SIPDIS STATE FOR WHA/AND NSC FOR CBARTON TREASURY FOR OASIA-GIANLUCA SIGNORELLI HQ USSOUTHCOM FOR POLAD BUENOS AIRES FOR TREASURY-MHAARSAGER E.O. 12958: DECL: 01/30/2015 TAGS: ECON EFIN PGOV VE SUBJECT: GOV CONSOLIDATES CONTROL AT CENTRAL BANK REF: A. 04 CARACAS 1443 ¶B. 04 CARACAS 1943 ¶C. 04 CARACAS 3927 ¶D. CARACAS 281 Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.4 D -------------- Summary -------------- ¶1. (C) Leftist economist and former state oil company head Gaston Parra has been confirmed as the new President of the Venezuelan Central Bank, just a few days after President Hugo Chavez hand-picked him as the replacement for out-going President Diego Castellanos. The Bank also agreed to give up some of the foreign exchange earnings - about USD 365 million - the administration had been demanding. The Central Bank is gradually losing its autonomy, and may soon be completely responsive to Chavez's desires. End summary. -------------- Chavez Picks a Loyal Leftist -------------- ¶2. (C) The National Assembly on January 27 confirmed Gaston Parra, currently the First Vice President of the Venezuelan Central Bank (BCV),as replacement for outgoing President Diego Castellanos, whose term ends on January 28. The selection was virtually a foregone conclusion after President Chavez named Parra as his preference on January 19. Deputy Rodrigo Cabezas, chairman of the National Assembly's Finance Committee, called Parra "a worthy, humanistic, upright and honest man, a good father to his family," several days before his committee actually met to review Parra's qualifications. The Assembly also approved Jose Felix Rivas to replace Manuel Lago as a BCV Director in February. ¶3. (C) Originally an academic at the University of Zulia, Parra was one of the primary authors of the portions of the current Venezuelan Constitution which deal with the hydrocarbons industry, and which became the basis for the Hydrocarbons Law which limited foreign companies to minority interests in any new oil projects. In February 2000, he was picked for the first Vice Presidency of the Bank by Chavez. He served as President of state oil company PDVSA for little more than a month in March-April of 2002. He was viewed as seeking to end the tradition of autonomous management at the corporation, and while he was in charge, PDVSA suffered a walk-out by managers and some workers which was part of the lead-up to broader protests and Chavez's own brief ouster. After Chavez returned to power, Parra was removed from PDVSA, and replaced by Ali Rodriguez, who was then viewed as a more conciliatory figure. Parra returned to his bank position. It has been repeatedly suggested that he has had a role in orchestrating the departure of many Bank employees who were unsympathetic to Chavez's policies through a combination of pressure and incentives (a juicy retirement package). Rivas is currently the Vice Minister of Planning and Economic Development in the Ministry of Planning. ¶4. (C) Reaction to the likely decision from economists of an orthodox orientation was not positive. Maxim Ross, an economic analyst and Chavez opponent, told the press that the selection "reflects a subordination of the Bank to the directives of the Executive" and "it is another demonstration of absolute power." He added that "Venezuelans should know that their pocketbooks are in danger, given that no one will guarantee the keeping of precepts to preserve the currency and guard the reserves." Omar Bello, a former senior Central Bank official (who briefly served as acting President) described Parra as "more a petroleum economist than a financial economist." He suggested that Parra would take a "developmental" approach as opposed to a "monetary" one, i.e. he would seek to use Bank resources to stimulate determined sectors of the economy, rather than concentrate on maintaining macro-economic balance and fighting inflation. -------------- Partial Payment -------------- ¶5. (C) Even before Parra's confirmation, it appears that the Bank is already moving to a more accommodating position vis-a-vis the GOV. Contrary to prior announcements (ref C), it has announced that it will provide more foreign exchange earnings (additional bolivars obtained by devaluations) from 2004 to the GOV, though not as much as the GOV has been demanding for over a year. The GOV had insisted upon at least 2.2 trillion bolivars (USD 1.15 billion, roughly the "millardito" - a mere billion - that Chavez had demanded from the international reserves in 2004 - see ref A),and the Bank has now offered 700 billion bolivars (USD 365 million). Domingo Maza, another BCV Director, stated publicly that this was made possible by a "methodological change", but did not clarify how the calculations differed. -------------- Comment -------------- ¶6. (C) Like the military and PDVSA, the Central Bank has been a relatively autonomous institution over which Chavez has systematically worked to gain control. With Parra in charge (and with Rivas soon to be on the Board),we can expect that in a pinch (i.e. a drop in oil prices) the bank will provide what he most needs - money, even at the price of inflation and the destruction of savings. Indeed, the GOV's appetite for spending is so strong that the Bank is being asked to do its part in meeting financing need even while oil prices are high. BROWNFIELD NNNN 2005CARACA00288 - CONFIDENTIAL