VENEZUELAN PAYMENTS LATE FOR BRAZILIAN EXPORTERS

UNCLAS SECTION 01 OF 03 SAO PAULO 000538

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PARIS FOR ECON - TOM WHITE

E.O. 12958: N/A
TAGS: EFIN ETRD BEXP ECON BR
SUBJECT: VENEZUELAN PAYMENTS LATE FOR BRAZILIAN EXPORTERS


SENSITIVE BUT UNCLASSIFIED; PLEASE PROTECT ACCORDINGLY

Summary
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1. (SBU) The Venezuelan Office that regulates the payment of
foreign currencies (Commission for the Administration of Official
Exchange - CADIVI) is taking an average of six months or more to pay
Brazilian companies for their products, adding up to a total
estimated at USD 100 million, according to representatives of the
Sao Paulo Federation of Industry (FIESP). Although this represents
only 3 percent of Brazilian exports to Venezuela, the impact on
individual businesses is significant, especially for smaller
companies, and the situation is giving pause to all enterprises
selling to Venezuela who wish to be paid in a timely manner.
According to the Sao Paulo Federation of Industries (FIESP),
representatives of 75 companies met in their offices in late May to
express concern over CADIVI's cumbersome processing guidelines,
multitude of forms, and priority system in approving payments. In
some cases, companies have been waiting up to three years to receive
payments. With the drop in the exchange rate of the U.S. dollar in
Brazil, waiting an extra 3-6 months for payment can signify an
additional loss of income. FIESP has responded by sending two
working groups to Venezuela to express concern and address the
problem, and plans to send a more formal mission in the near future.
Industrial sectors most affected by this payment delay are
aluminum, electrical materials, vehicles and tractors, and machinery
and mechanical instruments. End Summary.


2. (SBU) During a meeting on a related matter, representatives of
the Sao Paulo State Federation of Industries' (FIESP) Department of
International Relations and Foreign Commerce raised with Econoff
ongoing problems in dealing with CADIVI. An article on the subject
appeared that same day on the front page of Valor Economico, one of
Brazil's major economic journals. Pedro Pedrossian Neto, the
Foreign Trade Economic Analysis Supervisor handling the matter for
FIESP, cited the intensive bureaucratic process required for
Brazilian companies to receive payment for exports to Venezuela (18
distinct procedures),and the two controls required for foreign
exchange payments that CADIVI must authorize (acquisition and
liquidation of exchange funds). In order to trade with Venezuela,
Brazilian companies must register with CADIVI, a process requiring
the originals and copies of nine separate documents. (Comment:
Brazilian companies are all too familiar with the document-heavy
regulations and bureaucracy of doing business in Brazil, so to bring
complaints against another country's governmental agency implies
that the difficulties they are facing with Venezuela must be
serious. End Comment.)


3. (SBU) Adding to the payment delay is the priority system of
payments determined by the Venezuelan government: 1) goods and
services designated as most urgently needed; 2) foods, raw materials
and products for health; and 3) raw materials for industry. This
places industry last in line for payment processing. Carlos
Cavalcanti, FIESP's Deputy Director General for International
Affairs and Foreign Trade, is of the opinion that "the motive for
the delay is not a lack of funds, because Venezuela has the money,"
but rather is a tactic of BRV President Chavez to discredit
Venezuelan private sector entities in preparation for a future
attempt to nationalize more industries. Cavalcanti stated that this
is also the opinion of the Venezuelan importers.


4. (SBU) In the meeting of the 75 businesses present at FIESP to

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complain about the situation, the sectors whose representatives
cited the biggest problems were aluminum, electrical materials,
vehicles and tractors, machinery and mechanical instruments,
representing 36 percent, 26 percent, 11 percent, and 5.5 percent
respectively of the total volume of export payments owed. Total
delayed payments owed to Brazilian companies amount to about USD 23
million, with some companies having waited up to three years.
However, according to Cavalcanti, the real figure of payments owed
for Brazilian exports to Venezuela is probably closer to USD 100
million, as many of the companies do not wish to reveal their true
figures. Pedrossian Neto mentioned this was the case with
Coca-Cola, whose representative attended the meeting but probably
did not disclose the full amount of payment the company is owed.


5. (U) The aluminum sector cited 26 outstanding transactions to the
tune of USD 8.4 million, with 80 percent of them having already
waited 3-6 months. In the area of electrical materials - for the
most part cell phones, the principal item on the export list for
Brazilian products to Venezuela in 2006 - the delayed payments total
USD 5.9 million, with 56 percent of the companies waiting six months
to one year. Companies exporting vehicles and tractors are owed USD
2.6 million corresponding to 110 transactions.


6. (SBU) Another crucial factor affecting Brazilian companies is
the dollar loss associated with the wait time. With the falling
dollar exchange rate, a payment made even 3 months later than normal
can mean a significant loss in income. Pedrossian Neto provided one
company's real life experience to highlight the seriousness: A
company exported USD 1.96 million worth of goods to Venezuela and
expected payment on 25 October 2006. At that time, a dollar was
worth 2.14 Reals, which meant an expected income of 4.2 million
Reals. If the company were to receive the payment as of today,
after a wait of over seven months with the dollar trading at less
than 2 Reals, the payment would be approximately 3.8 million Reals,
representing an income loss of more than 421 million Reals. FIESP
also calculates a "lost opportunity cost" for this transaction: If
the company had received payment at the time of product delivery,
and invested this amount at a rate of 7.66 percent for this same
period, the investment would have yielded 320,000 Reals. This "lost
opportunity cost," in addition to the actual lost income for the
payment delay, would amount to a total loss of 741,000 Reals.


7. (SBU) According to Pedrossian Neto, FIESP has sent two separate
working groups to Caracas to discuss the problem with CADIVI, one in
March and the other in early June. FIESP has also solicited the
assistance of Banco do Brasil in Venezuela, since the bank has
offices and contacts there and is more familiar with the process of
converting funds. A more formal mission will be sent in the near
future if the problem is not resolved. Also, FIESP plans to request
assistance from the Brazilian government to address this problem
with Venezuela. According to Cavalcanti, however, this will not be
an easy mission and may not yield results. He cited FIESP's
attempts last year to request GoB assistance with non-tariff
barriers that were hindering Brazilian commerce, among them the
slowness of CADIVI. All these barriers were duly reported to the
WTO, with the exception of those related to Venezuela.


8. (SBU) Comment: Even though the delays in payments for exports
to Venezuela encountered by Brazilian companies represent only
three percent of total trade between the two countries (USD 3.6
billion in 2006),CADIVI's performances presents an institutional
risk that could affect continued bilateral trade. Brazilian
companies are accustomed to bureaucratic procedures, but delayed

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payment of several months to years, compounded by the loss of income
caused by the falling dollar rate, has created a serious
disadvantage for Brazilian exporters and constitutes a severe
disincentive for companies that may be considering entering the
market. While some of the problem may be attributed to bureaucracy,
Venezuelan importers stated to FIESP that this is simply a maneuver
of Chavez to discredit Venezuelan private industry in order to
nationalize those industries in the future. End Comment.


11. (U) This cable was coordinated with Embassy Brasilia.

McMullen