NATIONALIZATIONS WITHOUT COMPENSATION AS GBRV

C O N F I D E N T I A L SECTION 01 OF 04 CARACAS 001690

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HQ SOUTHCOM ALSO FOR POLAD
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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.

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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).

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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