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Ch?ez' Oil-Fueled Revolution


It seems there's no stopping Venezuelan President Hugo Chávez. He's already curbing the power of the big oil companies operating in Venezuela. Now he's stepping up a program of expropriation that could bedevil a number of businesses, both locally owned and foreign. The moves come just as Chávez seems prepared to further consolidate his power at legislative elections in December. The pro-Chávez coalition hopes to increase its majority in the 167-member National Assembly by more than 20 seats, to around 110. "It's going to be a battle for us," concedes Gerardo Blyde, a legislator from the opposition First Justice Party.

The opposition has pledged to join forces for the elections, but remains discredited after last year's defeat in a referendum that attempted to oust Chávez from office. If voters reward Chávez with a big win, as expected, the way will be clear for sweeping new moves in his Bolivarian revolution -- his populist effort to tap Venezuela's oil wealth to impose socialism in the country. "Chávez is dead set on his revolution; there's no turning back," says Aníbal Romero, a political scientist at Simón Bolívar University in Caracas. "The question is how fast and how far."

Food fight

Chávez is moving quickly. He has been boosting spending on health and education since coming to power in 1999, but he is now increasing government control of the economy, to investors' dismay. Oil companies with operating contracts in Venezuela, such as Chevron () and BP PLC. (), have been ordered to set up joint ventures controlled by state oil company Petróleos de Venezuela (PDVSA), and royalties have been hiked from 16.7% to 30%. Chávez now has targeted more than 700 plants, particularly in the food industry, that are idle or not operating at capacity for possible expropriation. On Sept. 26 the state seized control of a plant operated by Alimentos Polar, the country's No. 1 private food manufacturer. "This is an unfair and arbitrary expropriation," Polar President Lorenzo Mendoza told reporters, adding that the facility was operational. The move followed the seizure of a shuttered H.J. Heinz Co. () tomato processing facility. The company is negotiating to sell the plant to the state. Chavez defends the moves. "We will only expropriate what is necessary," he said in a recent speech.

The President is also going after rich landowners. Authorities recently began taking control of 21 large ranches spread over hundreds of thousands of acres. Chávez has threatened to hand part of the land to poor Venezuelans unless owners legally document their ownership and show that their spreads are being productively used. In another shock to investors, Chávez disclosed plans to review -- and possibly revoke -- mining concessions and create a national mining company. The news caused shares in Canada's Crystallex International Corp., () which has operations in Venezuela, to plunge 52% from Sept. 19 to Sept. 28. "What happens here in Venezuela will undoubtedly have some impact on the commercial decisions of companies, not just from the U.S. but from all over the world," U.S. Ambassador to Venezuela William Brownfield told reporters in Caracas. "Nationalization is a step backward," adds a State Dept. official in Washington.

It may sound risky, but Venezuela can afford it. Gross domestic product soared 17.9% in 2004 as the country rebounded from two years of recession following a long strike at the national oil company. Growth of 6.5% is forecast for this year and next, says Efraín Velázquez, president of the National Economic Council. Thanks to a new law, Chávez can dip into the country's $32.6 billion in international reserves for social spending.

How to win friends

While Chávez goes out of his way to irritate President George W. Bush -- he's a close friend of Fidel Castro's -- he's using Venezuela's wealth to win support in his neighborhood. His Petrocaribe initiative offers 196,000 barrels of oil a day to 13 Caribbean countries -- including 98,000 to Cuba alone -- with long-term financing options. He has set up the Petrosur alliance with Venezuela, Brazil, and Argentina to work on joint oil exploration and development. A similar alliance could be forged with Colombia, Peru, Bolivia, and Ecuador. PDVSA is looking to invest in half a dozen of the region's oil refineries.

Chávez, 51, is up for reelection in 2006, and he vows to stay in power until at least 2021. Critics say his shakeup may redistribute income from the rich and middle classes to the poorest, but the spending won't be sustainable if oil prices tumble. "With oil prices this high, Chávez doesn't need investment," says Miguel Octavio, director of BBO Financial Services, a financial advisory firm. "But if they drop by $15 or $20 [a barrel], there will be problems." Annual foreign direct investment has fallen from $5 billion in 1998 to $1.5 billion last year, according to Central Bank figures. The President's bet is that he'll transform his country without foreign investors and before the oil markets shift. With Venezuela's opposition so divided, Chávez' experiment could continue for years.

By Stephen Ixer in Caracas

EDITED BY Edited by Rose Brady


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