NATIONALIZATIONS WITHOUT COMPENSATION AS GBRV

C O N F I D E N T I A L SECTION 01 OF 04 CARACAS 001690 SIPDIS HQ SOUTHCOM ALSO FOR POLAD TREASURY FOR RJARPE NSC FOR JSHRIER COMMERCE FOR 4431/MAC/WH/MCAMERON E.O. 12958: DECL: 12/08/2018 TAGS: ECON EFIN EIND VE SUBJECT: NATIONALIZATIONS WITHOUT COMPENSATION AS GBRV CHECKBOOK TIGHTENS REF: A. 2007 CARACAS 59 ¶B. CARACAS 494 ¶C. CARACAS 532 ¶D. CARACAS 1061 ¶E. 2007 CARACAS 1281 ¶F. CARACAS 1200 ¶G. CARACAS 1135 ¶H. CARACAS 1522 ¶I. CARACAS 1554 Classified By: Economic Counselor Darnall Steuart for reasons 1.4 (b) and (d). ¶1. (C) Summary: In 2008 the government of the Bolivarian Republic of Venezuela (GBRV) has announced but not finalized a growing number of nationalizations. To the best of our knowledge, deals or payments are still pending for three multinational cement companies (Cemex, Holcim, and LaFarge), steel maker Sidor, and Banco de Venezuela. The National Assembly has decreed several smaller takeovers, including that of gasoline wholesalers and distributors, and there are rumors swirling about GBRV interest in several other companies, including an engineering services company and a supermarket chain. In contrast to two major nationalizations which took place in 2007, the GBRV has not moved expeditiously in 2008 to finalize the takeovers. The delays are likely a function of limited capacity and, more recently, tighter purse strings. While they represent a financial burden for the companies' original owners, these delays are not necessarily a problem for the GBRV, which is able to reap short-term political and economic benefits without an immediate cost. Several of our contacts believe this model - of nationalization without prompt compensation - is increasingly becoming a trend. End summary. -------------- 2008 Nationalization Spree Begins in April -------------- ¶2. (SBU) President Chavez started 2007 with a bang, announcing the nationalizations of key companies in the telecommunications and electricity sectors on January 8, 2007 (ref A). He followed these moves with the declaration in February 2007 that the four strategic associations in the Faja heavy oil belt would be forced to migrate to joint ventures with majority PDVSA control. In 2008, President Chavez waited until April to announce another string of major nationalizations, specifically three multinational cement companies (April 3, 2008; ref B) and steel maker Sidor (April 9, 2008; ref C). Several months later, Chavez declared his intent to nationalize the Banco de Venezuela (July 31; ref D). -------------- But Deals or Payments Are Still Pending -------------- ¶3. (SBU) The nationalizations announced in January 2007 were concluded fairly expeditiously, with the GBRV striking deals with the U.S. companies who were majority owners of Electricidad de Caracas and CANTV on February 8 and 12, 2007, respectively. The migration of the Faja projects from strategic associations to joint ventures took place formally on June 26, 2007, after intensive negotiations (ref E), although ExxonMobil and ConocoPhillips did not agree on terms with the GBRV and subsequently filed for arbitration. In stark contrast, the GBRV has either not concluded or not paid for the major nationalizations announced in 2008, although in many cases it has taken operational control of the companies in question. The remainder of this cable gives post's understanding of the current status of these nationalizations, as well as of several smaller actual or potential takeovers. -------------- The Cement Companies -------------- ¶4. (C) After an extremely slow start to negotiations with Holcim and LaFarge, the GBRV announced deals had been reached with them on August 18 (for USD 552 and 267 million, respectively) and took over operations the following day (ref F). These deals were in the form of Memoranda of Understanding (MOUs) stipulating a price and the percent of CARACAS 00001690 002 OF 004 minority ownership retained by the former owner but putting off a final agreement on operational responsibilities. In both cases, the GBRV has not yet paid and did not conclude the final operating agreements by mid-October, as stipulated in the MOUs. Holcim Executive Director for Venezuela Louis Beauchemin (strictly protect) told Econoffs November 4 that Holcim is doubtful it will be paid and that negotiations on the operating agreement have turned highly contentious. ¶5. (C) After failing to reach a deal with Cemex, the GBRV sent the National Guard to take control of Cemex operations on the night of August 18. Cemex issued a press release August 20 stating it would seek international arbitration at the International Center for Settlement of Investment Disputes (ICSID) as the GBRV's "offer of USD 650 million significantly undervalued" its business in Venezuela. Mexican Ambassador Mario Chacon (strictly protect) has told us consistently that the GBRV has not negotiated seriously, with Cemex executives unable to meet with PDVSA president Rafael Ramirez. (Note: President Chavez tasked PDVSA with negotiating the cement deals. End note.) On November 24 Chavez told reporters he was awaiting results of an environmental study in order to factor the "contamination" Cemex had caused into the price. Recent press reports cite PDVSA sources arguing that the global fall in Cemex share prices means the price should be lower than initially offered. On December 5, a Cemex spokesperson said the International Center for Settlement of Investment Disputes had agreed to take up the arbitration case. -------------- Sidor -------------- ¶6. (SBU) Prior to the nationalization announcement, the Argentine conglomerate Techint (through its subsidiary Ternium) owned 60 percent of Sidor, with the GBRV and individual shareholders (primarily employees or retirees) each owning 20 percent. The GBRV took operational control of Sidor on July 12, through the state-owned Corporacion Venezolano de Guayana. The nationalization decree set a mid-July timeframe for reaching a deal with Ternium such that the GBRV would acquire at least 60 percent ownership of Sidor. That deadline was extended to August 18. On August 29, Ternium stated President Chavez had rejected its latest offer and asked the GBRV to reopen negotiations. On November 24, Chavez told reporters the deal was "almost closed," with a price "defined" and "written" and an agreement reached on payment installments. He also noted, however, that Ternium had requested a single payment, which the GBRV would not agree to. (Note: Despite Chavez' remarks, we will assume no deal has been finalized until Ternium announces otherwise. End note.) The GBRV and Ternium have recently traded accusations about who is responsible for losses registered in the third quarter of 2008 and the lack of dividend payments to shareholders, and over the summer the GBRV opened an investigation for alleged underpayment of taxes from 2003 to ¶2007. -------------- Banco de Venezuela -------------- ¶7. (SBU) Over four months after Chavez' dramatic announcement, the Banco de Venezuela (BdV) nationalization appears to be stuck in limbo. While the GBRV initially appeared in a hurry to strike a deal with BdV's owner Grupo Santander (ref G),Chavez recently said he was in no rush. Furthermore, he cited the drop in Santander's share value as reason for the GBRV to lower its offer; Vice President Ramon Carrizales recently made a similar argument, citing instead BdV losses resulting from the global financial crisis. We believe Santander initially sought USD 1.2 to 1.5 billion for BdV plus a contract to administer the bank's technological platform for several years. The GBRV has not taken over management of BdV, though we understand that many of the bank's senior executives are seeking other jobs. While the bank's overall market share has not suffered, it has clearly lost some private clients and replaced them with government entities. For the months August through October, for example, overall deposits in BdV grew at the same rate as at other universal banks (9.3 percent),but public sector deposits increased far faster (38 percent, as compared to 5.6 CARACAS 00001690 003 OF 004 percent for all universal banks). -------------- -------------- Gasoline Distributors and Other Possible Nationalizations -------------- -------------- ¶8. (SBU) The GBRV has decreed at least two other nationalizations since summer 2008, including gasoline distributors and a small manufacturer, Helvesa. The nationalization of the gasoline distributors was decreed in the Organic Law Reordering the Domestic Market in Liquid Combustibles, passed by the National Assembly and published in the Official Gazette on September 18. This law gave PDVSA 60 days to negotiate compensation for private gasoline distributors, which included local and multinational companies and, according to press reports, accounted for 55 percent of the internal market. PDVSA subsequently postponed the deadline for taking over the distributors until after the November 24 election. According to the president of the Energy and Mining Committee at the National Assembly, PDVSA "absorbed" the distributors in the final week of November but negotiations over compensation continue. ¶9. (SBU) Helvesa, a 250-employee company that manufactures tubes for the petroleum industry based in Anzoategui state, was declared "of public utility" by the National Assembly on October 30, with the intent that it be taken over by PDVSA or an affiliate. The president of the Energy and Mining Committee justified the takeover by saying the company was "partially paralyzed" and promising the rights of workers would be respected. While we do not know the details, this takeover could represent an example of workers calling for the GBRV to nationalize the company. Sidor's nationalization, which Chavez justified as a measure to protect workers' rights, opened the door for other workers' unions to demand nationalization. Workers from at least two other companies, Ceramicas Carabobo (specifically its Bolivar state plant which manufactures refractory bricks) and Vivex (which supplies glass for car assemblers),have also recently called for nationalization. ¶10. (SBU) Chavez recently provided further encouragement to workers to call for nationalization if treated unfairly. On December 1 he said the state "had to rescue" and "nationalize" companies which have problems with their workers. He also claimed there were "a few other" companies pending future nationalization, without specifying which. We understand the GBRV has been in discussions with a supermarket chain and the engineering services company Inelectra, though one contact recently told us there would be no deal with the supermarket chain and the Inelectra discussions had reached an impasse. Some of our contacts believe the wave of nationalizations will slow down or stop because, in the words of the manager of a leading tire manufacturer in Valencia, "the government's checkbook is empty." Others are not so sure. One contact told us low profile takeovers of small companies were continuing, with the companies' owners resigned to receiving little or no compensation from the GBRV. Another contact confirmed this practice in the health sector (ref H). -------------- Comment -------------- ¶11. (C) The two most obvious reasons the GBRV has not closed the major pending nationalizations of 2008 are dwindling funds and limited capacity for negotiation and management. Estimating the Sidor, BdV, and Cemex nationalizations at USD 1.2, 1.2, and 0.8 billion, respectively, and adding the pending payments to Holcim and LaFarge, the GBRV would owe roughly USD 4 billion. While the GBRV almost certainly has the wherewithal to cover such an outlay, it would represent a significant portion of its precious stock of liquid hard-currency assets (ref I). From the capacity perspective, it is clear the GBRV is stretched thin, to put it charitably. PDVSA, for example, has responsibilities ranging from food production and distribution to execution of Petrocaribe; it is not surprising PDVSA teams would be slow to negotiate the takeover of cement companies and gasoline distributors. ¶12. (C) A third and more troubling reason the GBRV has not closed these nationalizations is that it does not need to. CARACAS 00001690 004 OF 004 With the exception of BdV, the GBRV has taken over the major companies nationalized in 2008 without having paid. President Chavez' political and economic calculus is very focused on the short term, and he has found a formula to get some of the short-term benefits he wants (e.g., politically advantageous announcements, patronage opportunities, access to cash flow, and control over basic industries) without a short-term cost. Furthermore, he is using the delays in sealing deals with Cemex, Sidor, and BdV to create justifications for lowering the price. The medium and long-term costs will be enormous, of course. Contacts in the cement industry tell us GBRV management has already brought inefficiency and corruption (septel),and we expect the same is occuring at Sidor. The impacts are not just limited to the industries nationalized. With the exception of the oil sector, we are unaware of foreign companies considering major investments in Venezuela. And those foreign and domestic companies with productive operations already existing in Venezuela may see increased challenges by radical workers seeking nationalization. End comment. CAULFIELD