Cablegate: Bolivarian Republic of Venezuela: 2008 Investment Climate


DE RUEHCV #0069/01 0172038
P 172038Z JAN 08





E.O. 12958: N/A

REF: 2007 STATE 158802

1. Per request in reftel, this cable transmits the 2008 Investment
Climate Statement for the Bolivarian Republic of Venezuela.

Begin text
Openness to Foreign Investment
Given economic and political uncertainties, a recent history of actual
and threatened expropriations, and increasing state intervention in the
economy, Venezuela's investment climate is considerably less welcoming
than its relatively liberal legal framework suggests. Foreign direct
investment in Venezuela is much lower than in most other Latin American
countries as a result of these factors. On the other hand, many
companies with existing investments in Venezuela are recording strong
profits thanks to four consecutive years of high economic growth fueled
by record oil prices and massive government spending.

Important developments in 2007 included expropriation of key companies
and assets in telecommunications, electricity, and petroleum sectors,
which were previously considered the most promising areas for foreign
investment in Venezuela. Expropriations in each sector included
significant assets owned by U.S. companies, some of which received
compensation. During 2007, President Chavez also threatened to
expropriate companies in the banking, cement, health, education, steel,
petrochemical, dairy, and food distribution sectors. The government
also revoked or refused to renew important concessions in the tourism
industry previously held by private companies.

As part of his push toward "21st Century Socialism," President Chavez
proposed in August 2007 a series of constitutional reforms that would
have, among other things, defined Venezuela as a socialist state and
significantly weakened protections for private property. While voters
rejected these proposals by a slim margin in a December 2007
referendum, President Chavez has stated his intention to continue to
pursue them.

Growing state intervention in the economy has created a series of
distortions. The Venezuelan government, abbreviated hereafter as the
BRV (Bolivarian Republic of Venezuela), has maintained a fixed exchange
rate and exchange controls since February 2003. The official
bolivar/dollar exchange rate is clearly overvalued thanks to
accumulated inflation of over 50 percent since the rate was last
adjusted in March 2005. As a result, there is intense competition to
gain access to hard currency at the official rate (including for
repatriation of capital and/or profits), and rationing of official
dollars has led to the development of a parallel foreign exchange
market. The BRV also maintains price controls on a wide variety of
goods and services. These controls have caused shortages and have
created disincentives to investment, in some cases driving companies
that produce price-controlled goods out of business.

Venezuela's legal framework for foreign investment, on the other hand,
is relatively liberal. Outlined in further detail below, it generally
provides equal treatment to foreign and local companies, with the
exception of several sectors, including hydrocarbons and media, in
which the state or Venezuelan nationals must be majority owners.
Repatriation of capital and dividends is allowed, subject to the
exchange control regime.

Legal Framework for Foreign Investment
The 1999 Constitution

The Venezuelan Constitution of 1999 treats capital investment as a
means of promoting the development of the national economy. Article
301 of the Constitution adopts international standards for the
treatment of private capital, with equal treatment of local and foreign
capital. The Constitution reserves strategic sectors such as oil and
hydropower for the State.

Decree 2095

Decree 2095 of 1992 establishes the legal framework for foreign

investment in Venezuela. This decree implemented Andean Community
Decisions 291 and 292 and lifted most prior restrictions on foreign
participation in the economy. (Venezuela withdrew from the Andean
Community in April 2006, but the BRV has continued to apply most Andean
Community norms in the absence of any other regulations.) Article 13
of the decree explicitly guarantees foreign investors the same rights
and imposes the same obligations as apply to national investors "except
as provided for in special laws and limitations contained in this
Decree." Decree 2095 also guarantees foreign investors the right to
repatriate 100 percent of profits and capital, including proceeds from
the sale of shares or liquidation of a company, and allows for
unrestricted reinvestment of profits.

Under Decree 2095, foreign investors need only register with the
Superintendent of Foreign Investment (SIEX) within 60 days of the date
a new investment is made. Foreign companies may generally open offices
in Venezuela without prior authorization from SIEX as long as they do
not engage in certain sales or business activities that would require
registration. No prior authorization is required for technical
assistance, transfer of technology, or trademark-use agreements,
provided they are not contrary to existing legal provisions.

Decree 2095 reserves three areas of economic activity to "national
companies": (1) broadcast media, (2) newspapers, and (3) professional
services that are regulated by national laws. These services include
law, architecture, engineering, medicine, veterinary medicine,
dentistry, economics, public accounting, psychology, pharmacy, and
management. A "national company" (as defined in Article 1 of Andean
Community Decision 291) is a company in which Venezuelan nationals hold
more than 80 percent of the equity. Foreign capital is therefore
restricted to a maximum of 19.9 percent in the areas noted above. The
Investment Promotion and Protection Law of October 1999, whose
regulations were published in July 2002, maintained the same reserved

Foreign professionals are free to work in Venezuela without restriction
but must first revalidate their certification at a Venezuelan
university. Consulting services under contract for a specific project
are not subject to this requirement.

The Hydrocarbons Sector

A number of sectors are regulated by "special laws" that supplement the
Constitution and affect the business environment. These sectors
include hydrocarbons, mining, telecommunications, banking, and
insurance. Of these, it is the hydrocarbons sector in which there are
significant restrictions on foreign investment.

The 2001 Hydrocarbons Law reserves to the state the exploration,
production, "gathering," and initial transportation and storage of
petroleum and associated natural gas. Under this regime, primary
activities must be carried out directly by the state, by a 100 percent
state-owned company such as Petroleos de Venezuela (PDVSA), or by a
joint venture company with more than 50 percent of the shares held by
the state. The law left refining ventures open to private investment
as well as commercialization activities, under a license and permit
regime. It also stipulated that any arbitration proceedings would
henceforth be in domestic not international venues.

Over the last several years the BRV has made a number of changes in
royalty, tax policies, and contracts that have substantially increased
uncertainty for foreign companies operating in Venezuela. The
Hydrocarbons Law did not specifically grandfather contracts executed
under earlier legislation, specifically the 33 operating service
contracts awarded for "marginal" or inactive oilfields in three rounds
in the 1990s; exploration and production profit-sharing agreements
awarded in 1996; and four so-called "Strategic Associations," legal
entities with majority private and minority PDVSA ownership formed in
the 1990s to extract and upgrade Venezuela's extra heavy oil in the
Faja region. The BRV argued in 2001 that no grandfather provision was
necessary because retroactive application of legislative provisions is
forbidden by constitutional mandate.

In October 2004, however, the BRV unilaterally eliminated a nine-year
royalty holiday ceded to the Strategic Associations, arguing that this
was allowable under earlier hydrocarbons legislation. The BRV then

informed companies with operating contracts in early 2005 that they
must migrate the contracts to joint ventures that conform to the 2001
Hydrocarbons Law. It threatened to seize fields operating under the
services contracts on December 31, 2005 if oil companies did not sign
transition agreements to migrate their contracts. Sixteen oil
companies signed memorandum of understanding converting their contracts
to joint ventures on March 31, 2005. Two companies, ENI and Total, did
not sign a MOU, and PDVSA took control of their fields.

President Chavez issued a decree in late February 2007 requiring the
four strategic associations to convert to joint ventures in which PDVSA
would hold a 60 percent stake. The decree established an April 30,
2007 deadline for completing the conversion. ConocoPhillips and
ExxonMobil refused to migrate their investment stakes in three of the
four associations. As a result, the BRV took control of their
investments. Both companies are treating the government's actions as
expropriations. They have filed arbitration claims against the BRV and
are continuing to negotiate compensation.

In contrast to the legal framework for petroleum, the 1999 Gaseous
Hydrocarbons Law offers more liberal terms to investors in the
unassociated natural gas sector. This law opened the entire natural
gas sector to private investment, both domestic and foreign, and
created a licensing system for exploration and production regulated by
the Ministry of People's Power for Energy and Mines. The state retains
ownership of all natural gas "in situ", but PDVSA involvement is not
required for gas development projects. Complete vertical integration
of the gas business from wellhead to consumer is prohibited. President
Chavez has publicly stated, however, that he would like to modify the
terms of the 1999 law, i.e. to require that the state have a
controlling interest in primary unassociated natural gas activities.

Conversion and Transfer Policies

Foreign investors in capital markets and foreign direct investment
projects are guaranteed the right to repatriate dividends and capital
under the Constitution and Decree 2095. In practice, however,
repatriation poses problems for many companies.

The Law Governing the Foreign Exchange System (Gazette No. 4897 of
1995) permits the executive branch to intervene in the foreign exchange
market "when national interests so dictate." President Chavez used
this law to create the Commission for the Administration of Foreign
Exchange (CADIVI) on February 5, 2003 to regulate the purchase and sale
of foreign currency. A Foreign Exchange Crime Law (Gazette No. 38,272
of 2005; revised by the National Assembly in December 2007) established
criminal penalties and fines for transactions made outside the official
foreign exchange process. The exemption for bond operations in this
law has led to the creation of a parallel foreign exchange market,
known as the "permuta" (swap) market, which is essentially a currency
exchange market that operates through bond swaps.

The official exchange rate was adjusted to 2150 bolivars (Bs) to the
dollar in March 2005. With accumulated inflation of over 50 percent
since this adjustment, the official exchange rate is clearly
overvalued, and companies that manufacture tradable goods in Venezuela
find it very difficult to compete against goods imported at the
official rate. Although government officials have emphatically stated
there will be no devaluation in 2008, many economists predict either a
devaluation or the introduction of a dual exchange rate system. The
parallel market is relatively shallow and volatile; it closed 2007 at
5700 Bs/USD. As of January 1, 2008, the government began to introduce
a redenominated bolivar known, during the transition period, as the
"bolivar fuerte." 1000 old bolivars are worth 1 new bolivar (or
"bolivar fuerte"); the official exchange rate became 2.15 bolivars
(fuerte) to the dollar. Both old and new bolivars will circulate
during the transition period, which will last a minimum of six months.

Foreign companies wishing to repatriate capital, dividends, or profits
at the official rate have to get authorization from CADIVI. In 2007,
CADIVI authorized over USD 3.3 billion in repatriations. However many
companies did not receive the full authorization they requested from
CADIVI or received it after delays of six months or more. Some
companies have therefore turned to the parallel market for


Expropriation and Compensation

The government has expropriated significant assets in recent years.
Given President Chavez' threats to various sectors, this trend is
expected to continue. The largest expropriations in 2007 were the
nationalizations of CANTV and Electricidad de Caracas (EDC), the
seizure of the assets of Radio Caracas Television (RCTV), and the
conversion of the Faja heavy oil strategic associations to joint
ventures. In the cases of CANTV and EDC, the government paid
compensation to shareholders including U.S. companies Verizon (which
owned 28 percent of CANTV) and AES Corporation (which owned 82 percent
of EDC). In the case of RCTV, a privately held Venezuelan company, the
government has not paid compensation for the assets seized. As noted
above, ConocoPhillips and ExxonMobil have not come to agreement with
the BRV for the expropriation of their respective investments in the
strategic associations. They have filed for arbitration and are
continuing to negotiate with the BRV.

Venezuela's 2001 land law as modified in 2005 calls for the
redistribution of "unproductive" land. The BRV claims to have seized
4.7 million acres of land since 1998; some of this land was
expropriated without compensation. These actions have discouraged
investment in several key agricultural subsectors and reduced their
output potential.

On February 21, 2007, the BRV published the "Decree Law of Popular
Defense against hoarding, speculation, boycott, and any other conduct
that affects consumption of food or products under price controls."
The law defines all stages of the production cycle for regulated foods
as within the ambit of "public utility and the social interest." It
also empowers the government to expropriate any business that fits this
sweeping definition in order to protect "food security and
sovereignty." The BRV invoked this decree to direct the military to
seize two slaughterhouses in 2007.

Dispute Settlement

Venezuela's legal system is available to foreign entities seeking to
resolve investment disputes, and legal proceedings have generally not
discriminated against foreign entities. However, the legal system is
often slow and inefficient, and it has been accused of being both
corrupt and lacking independence from the executive branch.

Decree 2095 allows for the arbitration of disputes as "provided by
domestic law." The Commercial Arbitration Law (Gazette No. 36,430 of
1998) eliminated the previous requirement for judicial approval of
arbitration; arbitration agreements involving national or international
firms can therefore be automatically binding. The law also allows
state enterprises to subject themselves to arbitration in contracts
with private commercial entities, but requires that they first obtain
the approval of the "competent statutory body," as well as the "written
authorization" of the responsible minister. As noted above, however,
the 2001 Hydrocarbons Law prohibits PDVSA from entering into agreements
providing for international arbitration. The BRV has in the past
accepted the results of international arbitration in disputes involving
foreign investors and government entities. Recent BRV statements and
actions, however, call into question whether this trend will continue.
For example, in a February 2006 decision involving Haagen-Dazs, BRV
courts invalidated an American Arbitration Association award entered in
Miami. In April 2006, a BRV court set aside an International Court of
Arbitration award entered in favor of an Italian electronics company
against VTV, the state owned television channel, in connection with a
concession agreement.

Performance Requirements and Incentives

Foreign companies receive the same tax treatment as domestic companies
with the exception of the non-associated natural gas sector, where

foreign investors receive preferential tax treatment. Performance
requirements related to workforce composition are discussed in the
labor section below. There are allegations that CADIVI is requiring
companies to make investments in specific geographic areas as a
condition to receive hard currency allocations. The state oil company,
PDVSA, seeks to maximize local content and hiring in its negotiations
with foreign companies.

Right to Private Ownership and Establishment

There are no legal limits on foreign ownership, except as noted in the
Constitution, Decree 2095, and "special laws" (see above).

Protection of Property Rights

Real Property Rights

Foreign investors may pursue property claims through Venezuela's legal
system. See also the Expropriation and Compensation section for
discussion of expropriation of real property rights and the Dispute
Settlement section for a discussion of the legal system.

Intellectual Property Rights

Article 98 of the 1999 constitution guarantees state protection for
intellectual property rights "in accordance with the conditions and
exception established by law and the international treaties executed
and ratified by the Republic in this field." Venezuela is a signatory
to the Berne Convention for the Protection of Literary and Artistic
Works, the Geneva Phonograms Convention, the Universal Copyright
Convention, and the Paris Convention for the Protection of Industrial
Property. Although Venezuela is a member of the World Intellectual
Property Organization (WIPO), no official BRV delegation has attended a
WIPO meeting in the last four years. Venezuela implements its
obligations under the WTO Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS) through Andean Community Decision
486. (As noted above, Venezuela has withdrawn from the Andean
Community but the BRV continues to apply most Andean Community norms in
the absence of any other regulations.)

The Venezuelan Industrial Property Office (SAPI), through its actions
and occasional public antagonism towards IPR, often draws criticism
from IPR advocates and rights holders. IPR protection is also hindered
by the lack of adequate resources for the Venezuelan copyright and
trademark enforcement police (COMANPI) and for the special IPR
prosecutor's office. SAPI has publicly advocated for anti-IPR
legislation and has not issued a pharmaceutical patent since 2004.
Pirated software, music, and movies are readily available throughout
the country. In the 2007 Special 301 Annual Review, Venezuela remained
on the "Priority Watch List."

Patents and Trademarks

Venezuela provides the legal framework for patent and trademark
protection through Andean Community Decision 486 (and Decision 345 for
plant varieties). The Andean Tribunal's 2002 interpretation of
Articles 14 and 21 of Decision 486 does not allow for the patenting of
"second-use" products (e.g. new uses of previously known or patented
products). Under pressure from the Andean Community and in line with
some changes in leadership at SAPI, Venezuela has revoked previously
issued patents.

Very few patents for new pharmaceuticals were awarded in 2004 and none
were issued in 2005, 2006, or 2007. Since 2002 Venezuela's food and
drug regulatory agency has approved the commercialization of generic
drugs without requiring unique test data. These drugs are the
bioequivalent of innovative drugs that already received market
approval. This practice thereby denies the innovative drug companies
protection against unfair use of their test data as required by TRIPS.

Venezuela does not automatically recognize foreign patents, trademarks
or logotypes, so foreign investors must be sure to register patents and

trademarks appropriately and in as many categories as are applicable.
It is advisable not to have agents or distributors do so because the
agent can then claim that he/she is the registered owner of the
trademark in question.


Andean Community Decision 351 and Venezuela's 1993 Copyright Law
provide the legal framework for the protection of copyrights. The 1993
Copyright Law is modern and comprehensive and extends copyright
protection to all creative works, including computer software. A
National Copyright Office was established in October 1995 and given
responsibility for registering copyrights, as well as for controlling,
overseeing and ensuring compliance with the rights of authors and other
copyright holders.

COMANPI, the Venezuelan copyright and trademark enforcement branch of
the police, fails to provide adequate copyright enforcement. Due to
its lack of personnel, limited budget, and inadequate storage
facilities for seized goods, COMANPI has had to work with the National
Guard and private industry to enforce copyright laws. COMANPI can only
act based on a complaint by a copyright holder; it cannot carry out an
arrest or seizure on its own initiative. The BRV's tax authority
(SENIAT) has been more successful enforcing IPR laws. It has taken
action against some businesses importing or selling pirated goods on
the basis of presumed tax evasion.

Since 2004, the National Assembly has also been considering a
Copyrights bill. The bill, which was proposed by SAPI, has been very
controversial and raised serious concerns in the private sector. Among
other things, the bill calls for the local registration of all works,
certification by a government-appointed commission to approve the
copyright, a significant increase in royalty rates, and a provision to
expropriate works if in the national interest. Had ChavezQ December
2007 constitutional reform package passed, it was rumored that the bill
would have been issued via presidential decree.

Transparency of Regulatory System

The Government of Venezuela adopted three laws in the early 1990's to
promote free market competition and prevent unfair trade practices: a
Law to Promote and Protect Free Competition (Gazette No. 34,880 of
1992), an Antidumping Decree (Gazette No. 4441 of 1992), and a Consumer
Protection Law (Gazette No. 4898 of 1995). In 1997 the government
created a new agency, Pro Competencia, to implement the 1992 law. A
government procurement law of 2001 supposedly increased transparency in
the competitive bidding process for contracts offered by the central
government, national universities, and autonomous state and municipal

Despite this legal and institutional framework, there is little
transparency in Venezuela's regulatory system. The vast majority of
contracts are awarded without open competition. There is often little
coordination between the government and private sector, and even among
different government agencies, in the process of promulgating new laws.

As a result of this lack of coordination and the state's increasing
intervention in the economy, many companies are struggling to cope with
the growing array of regulations in areas as diverse as the tax code,
labor, and the environment.

--------------------------------------------- -----
Efficient Capital Markets and Portfolio Investment
--------------------------------------------- -----

Capital Markets

Access to the Venezuelan secondary capital market is relatively easy,
and foreign firms essentially enjoy treatment equal to that of domestic
firms. Foreign companies may issue common and preferred stocks, bonds,
and other securities in Venezuelan capital markets. Foreign investors
may also buy shares directly in Venezuelan companies or on the Caracas
Stock Exchange.

A Capital Markets Law (Gazette No. 36,565 of 1998) gave autonomy to the
National Securities Commission and provides regulations for
intermediaries, establishes new conditions for public offerings,
enhances the transparency of brokerage operations, and makes
regulations more flexible for small firms that wish to issue stocks.
The Collective Investment Entities Law (Gazette No. 36,027 of 1996)
allows for creation of collective investment companies such as mutual
funds, collective investment venture capital companies, and collective
real estate investment companies.

Credit Markets

Financing is available from a variety of sources, and there is no
discrimination against foreign investors seeking access to credit. The
credit market is highly regulated, however. The maximum nominal
interest rate banks can charge is 28 percent. Banks are required to
set aside 34 percent of their portfolio for loans to the housing,
agriculture, small business, and tourism sectors, in some cases at
preferential rates.

Thanks to several years of sustained economic growth and to the high
liquidity generated by exchange controls, the banking sector's
financial soundness indicators were generally strong as of December
2007. However the banking sector is highly exposed to the public
sector through government deposits and bond holdings, some banks have a
large percentage of their portfolio in consumption loans, and some
banks are pushing the limits of capital adequacy requirements. The
majority of banking sector assets are concentrated in the country's six
largest banks.

Political Violence

Venezuela's political climate is polarized between supporters and
opponents of President Chavez and his policies. This polarization
resulted in several periods of political protests and mild civil unrest
in Venezuela during 2007, one immediately following the May 28 closure
of RCTV and one in the run-up to the December 2 constitutional
referendum. There were no major incidents of political violence
targeted against foreign-owned companies or installations.


Corruption is a very serious problem in Venezuela and appears to be
worsening. According to Transparency International's Corruption
Perceptions Index, Venezuela is the second most corrupt country in
Latin America and one of the most corrupt in the world. Venezuela has
laws on the books to prevent and prosecute corruption, and accepting a
bribe is a criminal act. However, the judicial system has been
ineffective historically and is accused of being overtly politicized.
Government contracts are vulnerable to corruption because the tender
process frequently lacks transparency. The current regime of price and
foreign exchange controls has also provided opportunity for corruption.

Bilateral Investment Agreements

Venezuela currently has bilateral investment agreements in force for
the promotion and protection of investment with the following
countries: Argentina, Barbados, Belgium-Luxemburg, Brazil, Canada,
Chile, Costa Rica, Cuba, the Czech Republic, Denmark, Ecuador, France,
Germany, Iran, Lithuania, Netherlands, Paraguay, Peru, Portugal, Spain,
Sweden, Switzerland, the United Kingdom and Uruguay. No agreement
exists with the United States.

OPIC and Other Investment Insurance Programs

OPIC programs in Venezuela were suspended in 2005 as a result of
Venezuela's decertification for failure to cooperate in suppressing
international narcotics trafficking. The certification process is an

annual event, and the most recent determination (September 2007) also
decertified Venezuela. The Export-Import Bank has not provided new
financing for projects in Venezuela since formally placing Venezuela
"off cover" for new lending in April 2003. Both OPIC and the Ex-Im
Bank currently have significant exposure in Venezuela contracted prior
to suspending operations.


Venezuela's National Institute of Statistics (INE) estimated
unemployment at 6.3 percent as of November 2007. While this rate would
suggest some availability of labor, several factors make human
resources a challenge for domestic and foreign investors alike. Even
as rapid economic growth has increased the demand for labor, a
significant number of skilled and professional Venezuelans have sought
employment opportunities abroad due to domestic political and economic
uncertainty. At the same time, government programs that support poorer
Venezuelans have also made it more difficult for companies to attract
unskilled labor. The BRV has extended a freeze on layoffs through
December 2008 with the possibility of further extension, one of several
measures that have decreased labor market flexibility. The power of
trade unions has generally diminished during President Chavez's tenure,
although they are still active in certain sectors.

The Organic Labor Law (Gazette No. 5152 of 1997) places quantitative
and total wage cost restrictions on the employment decisions made by
foreign investors. Article 27 requires that the number of foreigners
hired by an investor not exceed 10 percent of a company's employees,
while salaries paid to foreigners may not exceed 20 percent of the
total company payroll. Article 28 allows for temporary exceptions to
Article 27 and outlines the requirements for hiring technical expertise
when equivalent Venezuelan personnel are not available. Article 20 of
the law requires that industrial relations managers, personnel
managers, captains of ships and airplanes, and foremen be Venezuelan.

Foreign-Trade Zones/Free Ports

The Free-Trade Zone Law (Gazette No. 34,772 of 1991) provides for free
trade zones/free ports. The three existing free trade zones, created
in subsequent Gazette decrees, are located in the Paraguana Peninsula
on Venezuela's northwest coast, Atuja in the State of Zulia, and Merida
(but only for cultural, scientific, and technological goods). These
zones provide exemptions from most import and export duties and offer
foreign-owned firms the same investment opportunities as host country
firms. The Paraguana and Atuja zones provide additional exemption of
local services such as water and electricity. Venezuela has two free
ports that also enjoy exemptions from most tariff duties: Margarita
Island (Nueva Esparta) and Santa Elena de Uairen in the state of

Foreign Direct Investment Statistics

The stock of U.S. foreign direct investment (FDI) in Venezuela in 2006
was USD 11.5 billion on a historical-cost basis according to U.S.
Department of Commerce statistics. U.S. FDI in Venezuela is
concentrated largely in the petroleum, manufacturing, and finance
sectors. Note that these figures, the most recent available, do not
include changes to the stock of U.S. FDI in Venezuela as a result of
the 2007 expropriations.

According to the Central Bank of Venezuela, the net flow of FDI into
Venezuela was USD 317 million in the first nine months of 2007, and the
net flow of FDI from Venezuela to other countries was USD 3 billion
over the same period. The FDI inflow to Venezuela represents roughly
0.2 percent of Venezuela's GDP, compared with the Latin American
average of roughly 2.5 percent of GDP.

End text

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