Venezuela faces growing load of arbitration cases

by Ian James

As President Hugo Chavez seizes ever more private property in his push to build a socialist system, foreign companies are squeezing Venezuela's resources by filing claims for billions of dollars in compensation.
Heavyweights such as US oil giant ExxonMobil as well as smaller companies from around the world are demanding at least a third of the government's congressionally approved budget, which could hinder Chavez's ability to boost spending ahead of next year's presidential elections. The potential payout could also send a warning throughout Latin America, where governments in Argentina, Bolivia and elsewhere have nationalized portions of their economies.

Chavez can't ignore the claims if he wants to attract international investment and achieve his stated goal of boosting oil production. Venezuela's government is counting on ramped-up production to fund the government's many social, housing and other programs.
Paying the claims, however, could drain precious cash his government will need for those very same programs. Chavez acknowledged last month that the pending disputes are a concern.

Alejandro Grisanti, an economist with the investment bank Barclays Capital, said Venezuela will definitely have to pay to make the cases go away, and the question is how much.
Many of the cases are pending before the World Bank-affiliated International Centre for Settlement of Investment Disputes, or ICSID.

Patriotic moves?
Chavez maintains that government-run companies can provide services more cheaply than privately held ones and are linchpins to the new socialist system he's building. He has seized crucial businesses such as cement plants and farms, as well as oil projects that pump out billions of dollars in revenue.
To some of Chavez's followers, the expropriations are seen as patriotic moves to protect the country's resources from exploitation.

If anything, the seizures have frozen foreign investment in Venezuela, except from energy companies still lured by high oil prices and the country's vast petroleum reserves, said Chris Sabatini, senior policy director for the business group the Americas Society-Council of the Americas.
"It's called the intoxicating effect of high oil prices," Sabatini said. "Venezuela thinks it protects them from the normal laws of economics and investment."

The laws of most countries, including Venezuela's, allow governments to take over private property, provided they provide fair compensation. The failure to agree on compensation, however, often move disputes to the countries' courts, in the case of domestic companies, or to international arbitration bodies for foreign corporations.
Chavez has said his government offers fair compensation to companies, but reaching settlements can drag on for years.

Top government lawyer Carlos Escarra suggested Venezuela consider abandoning the arbitration body, following the leftist governments of Ecuador and Bolivia, which pulled out in the past several years. Asked about that possibility, Chavez called the arbitration centre one of multiple organizations "created to assure the domination of world capitalism".
"If we were to arrive at the definitive conclusion that we have to pull out of that, we'd pull out," Chavez said.

At least in the short term, though, experts say that's unlikely because such a move would hurt the country's ability to get credit internationally and attract oil investment.
Arbitration requirements are regular parts of oil service contracts.

Oil projects
Some of the biggest disputes erupted in 2007 when Venezuela seized majority control of the last privately run oil projects in the country. Many companies reached deals with the government and stayed on as minority partners of state company PdVSA.
But Irving-based ExxonMobil and Houston-based ConocoPhillips sued for compensation.

The Caracas-based consulting firm Ecoanalitica has estimated the bulk of the government's nationalizations involve more than $ 33.7 bn in assets, including about $ 23 bn in outstanding obligations.
Such an amount, if paid all at once, would be a significant financial hit for Venezuela, totalling about half of its $ 47.5 bn budget approved by lawmakers for this year.

When asked about the ExxonMobil case, Venezuelan Energy Minister Rafael Ramirez responded: "It's a difficult battle."
But he has also said that Venezuela isn't negotiating with ExxonMobil and isn't willing to "pay any penalization they may want to impose".