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

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Summary
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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.

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Chavez Picks a Loyal Leftist
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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.

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Partial Payment
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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.

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Comment
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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


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2005CARACA00288 - CONFIDENTIAL