Inside out: business in Venezuela; J@pan Inc's column concerning business opportunities outside of Japan.

Venezuela is one of the most resource-rich nations in the world yet it is also one of the most politically risky countries today. Doing business there is not something that investors or enterprises do without careful consideration. Western media doesn't do the country any favors with its portrayal of President Hugo Chavez as a US-hating communist intent on nationalizing every major industry in the country. And, they are not simply making this up--Chavez has been on a nationalization streak and doesn't hide his contempt for Washington. However, probing a bit deeper, Fox News' report of his "thievery," "immorality" and "leading his people down a pathway to hell" is a little misleading. That is not to say that there isn't a good deal of risk involved in doing business in Venezuela, but a look at the profits that some are managing to make there gives a fuller picture than the Western media's reactionary hyperbole.

Slippery slope?

The big news in Venezuela is always about oil. Chavez has been facilitating domestic companies, such as Petroleos de Venezuela SA (PDVSA), take bigger and bigger stakes (at least 60%) in oil development projects, often to the detriment of foreign players such as Exxon Mobil, Chevron, BP, Total SA and more. Last year, the latter was involved in a dispute with the Venezuelan government after it lost 16.7% of its stake in the Sincor block project. However, demand for Venezuelan oil is high and profits are still being made. Despite the problems, Total SA is continuing to work with PDVSA to develop the Junin oil fields in Faja de Orinoco. Total's diplomacy, and the consistent refusal of its CEO, Christophe de Margerie, to be swayed by geopolitical pressures, has allowed the company to announce that there will be new projects for Total in Venezuela in the future. The company currently produce 180,000 barrels a day from its operations there.

Chavez gains political capital from his martyr-style orations against US imperialism but he gains even more from his government's increased share in oil revenues. This means there is room for compromise--Chavez needs the foreign oil companies as much as they need Venezuelan oil. Companies talking the right language therefore have some reason to weather the risk and keep funding oil development. For the moment at least, there is no indication that Chavez wants to, or is able to, remove foreign investors from the energy industry in Venezuela.

Indeed, despite his talk, Venezuela is unlikely to sever links with the US, which purchases 60% of Venezuelan oil (11% of US energy imports). In the meantime, ever ready to fill any gap, China, via the China Development Bank, sunk US$4billion into oil exploration in the country.

Mine fields

The other major area of foreign interest in Venezuela is mining and metals. Although oil revenues account for 90% of the country's export revenues, aluminum, gold and iron are abundant and many countries depend on Venezuelan metal resources. Japan for example, receives aluminum from the company Industria Venezolana de Amuminio as a result of five Japanese companies, including Showa Denko, owning a 20% stake in the firm.

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In gold mining too, there is also substantial foreign involvement. South African mining giant Gold Fields has been active in Venezuela since 1992 when it moved to acquire the Canada-based explorer Bolivar Gold; specifically this boosted its position and profits by giving it control of the Choco 10 mine in the El Callao gold district. Meanwhile, Canada's Crystallex International Corp has long been producing gold in the country and in January 2008 issued CDN$60 million of equity to fund development projects at its Las Cristinas gold mine.

However, these companies have also experienced problems working with Venezuela. Showa Denko announced that it was having serious supply issues this winter--missed deliveries apparently reducing Japan's stockpile of aluminum to its lowest level in 13 years. The Choco 10 mines have faced problems with water shortages and striking workers negatively affecting gold production by an estimated 5,000 ounces last summer. For Crystallex too, there have been innumerable difficulties, not least a series of acrimonious squabbles with the government about who actually owns the mine. Worries about new mining laws and press hype around such disputes has damaged investor confidence and Chavez treads a fine line between boosting government revenue and driving away badly needed foreign mining corporations. For those prepared to stay the course however, the risk is balanced by the prospects of highly lucrative rewards--gold in particular continues to be a profitable bull market.

Between the lines

In sum, Venezuela remains risky but its natural resources yoke it to the global capitalist economy at a number of levels. While political risk has risen in terms of appropriation of assets and government-led tax hikes for foreign extractors, in some ways political stability and infrastructure has improved. Chavez has a relatively strong grip on power and despite its scathing attacks on Chavez and warnings of inflation, even The Economist has been forced to admit that it expects the Venezuelan economy to grow.

As reported in an article by Mark Turner, equities analyst for hedge fund advisory service Hallgarten and Company, Venezuelan Finance Minister Rodrigo Cabezas spoke about the nationalization of the telecommunications and electricity sectors, saying "other national and international companies would not be affected by similar measures, as they are a focus of capital that we want to keep on producing, keep employing people and not to be paralyzed. We want people to rest assured that what we are doing is for the benefit of all society." Such words must be viewed with a good element of cynicism but they too often fall out of reporting in favor of Chavez's rhetorical ranting which needs an equal amount of scrutiny. In an interview with Turner however, he was quick to point out that although the "'Chavez threat' is, I believe, overplayed at times, there is little doubt that other places in South America offer the same investment opportunities with much less perceived or real political risk."

Our take is that foreigners doing business with Venezuela need to go in with both eyes and mind open--it may be a risky place to work but its treasures under the earth and Chavez's passion to make money, even with a socialist face, make it an emerging market that should not be written off at first glance.