VENEZUELA: Chavez springs nationalisation surprise

Analysis

At yesterday's swearing-in ceremony for new members of his cabinet, President Hugo Chavez announced a range of plans to consolidate Venezuela as "a socialist republic". In particular, Chavez -- who will be sworn in for a new six-year term tomorrow -- called for the nationalisation of privatised utilities, the first time such a policy had been mooted:

• He demanded the nationalisation of strategic sectors, such as electric power, a measure interpreted to include electricity distributor Electricidad de Caracas, a company never previously in state hands and whose main shareholder is US-based AES.
• He referred specifically to the need to nationalise telecommunications company CANTV, Venezuela's largest publicly traded company, whose shareholders include US-based Verizon and Spanish Telefonica.
• He alluded to nationalisation of the four heavy crude joint ventures in the Orinoco belt, in which state oil company PDVSA currently participates with ChevronTexaco, ConocoPhillips, Total and ExxonMobil. Whereas it had earlier been suggested that the joint ventures would be renegotiated to give PDVSA a majority stake, similar to the changes made to the operating contracts for traditional oil operations last year (see VENEZUELA: Doubts over oil policy raise risk premium - June 15, 2006), the Energy Ministry has now suggested that the joint ventures may be nationalised directly.

In addition, Chavez proposed changes to the existing Commerce Code, as well as elimination of Central Bank autonomy (which he defined as a "neoliberal" concept) in the context of a planned constitutional reform. Moreover, he called on the National Assembly to extend his powers to legislate by decree, and announced that a package of "revolutionary laws" will shortly be announced.

Economic impact. The real impact of the announcements, which were made after stock markets closed and went far beyond any previous economic proposals, has yet to become clear -- not least the question of compensation to shareholders of any companies to be nationalised. Venezuelan law requires that shareholders should receive a fair price in the event of a buyout, and current high oil prices give the government the resources to carry out the operations. In the longer term, greater state intervention in the economy is likely to prove detrimental:

• The government lacks the professional and technical capacity to manage a range of newly nationalised companies effectively; concerns have already been expressed within PDVSA as to the direction of future corporate strategy and governance.
• The measures will almost certainly deter private investment, both domestic and international, implying that increased state investment will be required. While this may prove feasible in the current context of high oil prices, competing demands for social spending may force the government to reconsider spending priorities, particularly if global oil prices (or domestic output) should decline.
• The question of investment is likely to be especially crucial in the oil sector, not least given the cost of extracting and processing heavy crude in the Orinoco belt -- expected to account for an increasing share of Venezuela's total oil output. Although Iranian and Chinese state companies are already involved in nascent development projects in the Orinoco (see VENEZUELA: Politics and prices key to oil investments - August 31, 2006), neither has either the cutting-edge technology nor the refining capacity needed for the upgrading of heavy crude, which may affect plans to increase the importance of the Orinoco projects in total oil output.
• At the same time, increased state intervention will make it difficult to reduce Venezuela's over-dependence on hydrocarbons through greater diversification of the economy, given the strain on increasingly overstretched public sector resources and private investor sentiment.

Moreover, the measures, which will almost certainly raise further tensions with Washington, appear likely to distance Chavez from other centre-left governments in the region. Hitherto sympathetic governments in Argentina, Brazil and Chile will be unwilling to be associated with such radical measures (although they are unlikely to express criticism on the grounds of Venezuela's national sovereignty), whereas the governments of smaller potential allies such as Bolivia, Nicaragua and Ecuador lack the political weight to implement similar policies, even assuming (which appears dubious) that they might find such a possibility appealing.

Deepening the revolution. Since Chavez's re-election victory in December, the government had already moved to 'deepen' the Bolivarian revolution and address weakness in policy-making and service delivery (see PROSPECTS 2007: Venezuela stability remains at risk - December 28, 2006). In the past month, this has been evident in several areas:

• Cabinet changes. There has been a major overhaul of cabinet personnel. Most significantly, new appointments have been made to key welfare posts and the Interior Ministry. The changes underscore Chavez's determination to ensure that social policy reforms are consolidated and continuing problems of crime and insecurity addressed. Those promoted are noted for their closeness to Chavez. They are typically drawn from Chavez's own MVR party or radical Left groups. They include Chavez's own brother, Adan, who has been allocated the Education Ministry. The cabinet reshuffle marks an important shift in power away from moderate alliance partners, such as Patria Para Todos and Podemos. Further changes are expected at ministerial and junior ranks.
• Planned changes in the diplomatic service. As outlined in recent days by European Minister Rodrigo Chaves, these are intended to ensure uniformity in the Bolivarian position and message overseas. Chaves hinted at significant changes to the diplomatic corps in line with a re-evaluation of Venezuela's bilateral relations with individual European countries. Portugal, Italy and Spain will assume a higher level of importance for Venezuela, as it seeks to develop new commercial ties.
• Regional alliances. The government plans to sign social, economic, political and energy cooperation agreements with sympathetic regional neighbours that include the incoming administrations of Rafael Correa in Ecuador and Daniel Ortega in Nicaragua.
• Single Socialist Party. Preliminary moves are underway to unify the multiparty ruling alliance and create a single Socialist Party of Venezuela.
• Armed forces. A new Bolivarian mission for the Venezuelan armed forces is to be unveiled. This will deepen their engagement and identification with the revolutionary process. The implied mission changes and 'rebirth' of the military is underscored by the renaming of the Venezuelan Armed Forces, which will now be called the Bolivarian Armed Forces of Venezuela.
• Radio Caracas TV. On December 28 the government announced the decision not to renew the broadcasting licence of Radio Caracas TV (RCTV), which supported the 2002 coup attempt against Chavez and has maintained a strongly anti-government line. The decision, though not unexpected, has been widely condemned as an apparent move towards censorship (although thus far the media are in practice relatively free of restrictions and represent a broad range of opinion).