US embassy cable - 04CARACAS3501

C O N F I D E N T I A L  CARACAS 003501 
 
SIPDIS 
 
 
NSC FOR SHANNON/BARTON 
TREASURY FOR OASIA - SIGNORELLI 
SOUTHCOM ALSO FOR POLAD 
BUENOS AIRES FOR TREASURY REP 
 
E.O. 12958: DECL: 11/12/2014 
TAGS: ECON, EFIN, PGOV, PREL, VE 
SUBJECT: AMBASSADOR'S TOUR D'HORIZON WITH FINANCE MINISTER 
 
Classified By: Economic Counselor Richard M. Sanders.  Reasons:  1.4(b) 
 and (d). 
 
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Summary 
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1.  (C)  At a November 10 luncheon with the Ambassador, 
Finance Minister Nobrega touched on a range of issues 
including:  Eximbank lending (he'd like it to return, but 
downplays the impact of its absence); the GOV's surprise 
increase in petroleum royalties (he admits it was badly 
handled); Ministry-Central Bank relations (he's all for the 
Bank's independence, but it should do what he is asking); 
foreign exchange (he still wants to move to a dual rate); and 
the political environment (he will need to fight to maintain 
a measure of fiscal discipline).  He was concerned about 
still strained Venezuelan-U.S. relations.  The Ambassador 
stressed that USG policies were pragmatic, but principled and 
that he saw the economic area as one were progress was 
possible.  End summary. 
 
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Eximbank and OPIC 
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2.  (C) On November 10, the Ambassador, accompanied by 
econcouns, lunched with Finance Minister Tobias Nobrega and 
his senior advisor Ali Lenin Aguilera.  The Ambassador led 
off by saying that on financial issues there were few areas 
of conflict between our two governments.  Nobrega agreed, 
stating that while the U.S. Export-Import Bank's "delay" in 
returning Venezuela to "on-cover" status was unfortunate, and 
was paralleled by similar policies among European credit 
agencies, the impact on Venezuela's ability to obtain 
financing was minimal.  The end result, he said, was that for 
certain equipment, Venezuelan customers turned to Brazilian, 
Indian, or Chinese suppliers. 
 
3.  (C)  The Ambassador agreed that such restrictions hurt 
both the U.S., which lost a potential market, and Venezuela, 
which lost opportunities to obtain products from preferred 
sources at advantageous terms.  However, he went on, 
relations between Venezuela and Eximbank and its sister 
agency OPIC depended in large measure on resolving specific 
issues.  In particular, he mentioned, OPIC's payment of an 
expropriation claim to U.S. firm SAIC as a result of state 
oil producer PDVSA's unilateral dissolution of their joint 
venture INTESA posed a problem.  While recognizing this was 
outside of Nobrega's direct responsibilities, he urged all 
effort to find a way to address this case. 
 
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Oil Royalties 
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4.  (C)  Nobrega asked the Ambassador how serious had been 
the fall-out from the GOV's unilateral increase in the 
royalty rates it received from the international oil 
companies for their Orinoco heavy oil production.  The 
Ambassador said that he had made clear the USG position. 
While Venezuela, like any other country, has the sovereign 
right to determine its own tax and royalty policies, the GOV 
is also bound by its international agreements and contracts. 
U.S. firms' evaluation of the investment climate is affected 
by this kind of unpleasant surprise, which in their view runs 
contrary to specific contractual obligations assumed by the 
GOV.  They will have to determine what legal remedies, if any 
they have available to them.  Nobrega said that he thought 
the increase had been handled poorly, and said that, coming 
as it did before the recent gubernatorial elections, 
seemingly had been undertaken with an internal political 
motivation.  He observed that he himself had been surprised 
by this, as he has been by other decisions announced in the 
past on President Chavez's Sunday "Alo, Presidente" 
television show, such as the decrease in value-added tax, 
which he himself had opposed.  Despite the royalty flap, he 
insisted that Venezuela would remain open to international 
petroleum investment, and that the management of state oil 
concern PDVSA increasingly wanted a big PDVSA, producing more 
oil, and that this inevitably would mean more deals with 
foreign companies. 
 
 
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Central Bank 
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5.  (C)  Asked about his motivations for pressing the Central 
Bank to recalculate upwards the local currency profits 
generated by exchange rate devaluations which it was 
obligated to remit to the GOV, Nobrega said, that the Central 
Bank's management was hiding behind fallacious legal and 
accounting arguments.  Basically "they are fanatical 
monetarists" and are convinced that if the local currency is 
introduced into the economy there will be a big rise in 
inflation, despite all indications to the contrary under 
current economic circumstances.  In any event, the Bank is 
obligated to obey the law.  That said, he professed himself 
to be a supporter of Central Bank autonomy, and one of those 
who pressed to include it in the 1999 constitution.  He said 
that expiring terms meant there would be changes in Central 
Bank leadership.  He dismissed rumors that he would take over 
the Bank Presidency; a finance minister's moving to the 
Central Bank, he said would "look bad." 
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Forex 
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6.  (C)  Asked whether he was satisfied with the 
administration of foreign exchange controls, Nobrega said 
that he remained opposed to their indefinite retention, and 
preferred to move to a dual rate, while retaining reasonable 
reporting and control requirements for exchange flows such as 
those imposed by Brazil.  (Comment:  Planning Minister 
Giordani is a big fan of controls and thus far has thwarted 
Finance Ministry efforts to move to a dual rate from the 
current system under which there is rationing of foreign 
exchange at a fixed, preferential rate by the Foreign 
Exchange Administration Commission (CADIVI) and a parallel 
market with a freely set rate existing in a quasi-legal 
limbo.  End comment.) 
 
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Finance and Politics 
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7.  (C)  Nobrega suggested that continued high oil prices 
meant that Chavez was likely to remain highly popular and 
gain re-election in 2006.  He himself wanted to concentrate 
on reforming Venezuela's cumbersome tax law during the next 
year and on assuring sufficient savings to allow public 
finances to withstand any eventual weakening in oil prices. 
The current political environment, in which the absence of a 
viable opposition tended to encourage internal divisions 
among and within pro-Chavez parties made his task difficult, 
but he was prepared to be tough, and if necessary, become a 
sacrifice and "take that long vacation I have earned" if that 
would accomplish his ends.  He said that he would like to see 
improvement in the diplomatic front to match the progress on 
the economic front; strained Venezuelan-U.S. relations 
remained worrying.  The Ambassador said that USG policy was 
pragmatic, without ceding on areas of principle, and that 
economic and commercial issues were ones where hopefully 
progress could be made. 
 
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Comment 
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8.  (C)  Nobrega was evidently concerned about the impact of 
the oil royalties increase.  (He and Energy Minister Ramirez 
have repeatedly crossed swords in the past, most recently 
about putting the large PDVSA "social investment" 
contribution under normal budget discipline.  Nobrega has 
only partially won that battle.)  For the rest, he was 
upbeat, as befits a Venezuelan finance minister at a time of 
high oil prices.  His asserted commitment to fiscal 
discipline, while perhaps genuine in comparison with the 
position of other members of the GOV, rings a bit hollow in 
view of the continued populist spending policies at the heart 
of Chavez,s political and economic model. 
 
Brownfield 
 
 
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      2004CARACA03501 - CONFIDENTIAL