The Power and the Money

Bad politics at the OAS, updated

  It strikes me that the diplomats trying to reinstall President Zelaya, particularly Secretary General José Miguel Insulza of the Organization of American States, are employing a lousy strategy.  The problem is that Honduras is a still a democracy.  The new government is conducting everything with an eye to the November elections, and unless the diplomats recognize that, they won't succeed.

You can't understand the coup in the context of a military takeover, because the military has not taken over and does not appear to be calling the shots.

The interim government needs to be persuaded that any compromise or backdown on their part will be a vote-winner.  There are a number of ways that could be accomplished.  The government could agree that Zelaya's expulsion was unconstitutional, give one of the military leaders a slap-on-the-wrist, and invite Zelaya back to reassume the presidency while facing trial.  (The same way, say, President Clinton faced trial.)  They could have Zelaya reassume the presidency after issuing a public apology for violating the Supreme Court order.  They could sit down and hammer out a third compromise.

The problem right now is that the OAS seems to have only sticks.  Getting hit with sticks, however, might just increase Liberal support at the polls in November; nationalist sentiment tends to work that way.  Delegitimization is a good prod, but Micheletti can't only be offered a choice between admitting his party is undemocratic and running out the clock, because he'll choose the latter.

Instead, we have Insulza in Tegucigalpa refusing to negotiate with anyone.  The military has admitted that it screwed up in banishing the President, and the OAS can't figure out a way to broker a compromise.  Instead, we've got a tragedy:  the death of an innocent. 

More on the Honduran constitution

  Hmm.  My opinion of the coup is moving back towards legal. 

In November 2003, the Honduran government (still under President Maduro) amended the constitution.  (You can find a history of all Honduran constitutional reforms here.)  The reason, ironically, was that they wanted to repeal the traditional absolute immunity held by high government officials in both the executive and legislative branch.  Thus, they repealed Article 205, clause 15, which had read: 

[Congress has the power] To declare if there is cause against the President, presidential delegates, Congressional deputies, Supreme Court justices, members of the National Electoral Tribunal, Chief of the Armed Forces ... and Subdirector of Administrative Probity.

They also altered Article 313, clause 2, as follows:

Original:  [The Supreme Court of Justice has the power] To begin initial proceedings against high state officials, when the National Congress has declared cause.

New:  [The Supreme Court of Justice has the power] To begin initial proceedings against high state officials and deputies.

The implication, I think, is that the Supreme Court has the power to remove officials from office when it determines that they have broken the law.  President Zelaya pretty clearly broke the law when he refused to obey an order from the Supreme Court to call off the referendum, and as I pointed out earlier, the Honduran constitution clearly (if stupidly) bans any consultatory referenda touching on presidential term limits. 

So my new version is:  Zelaya broke the law, the Supreme Court called him on it, and the military took the initiative in enforcing the Court's order.  (Maybe too much initiative.)  That interpretation will depend on how closely the armed forces and the Supreme Court cooperated in the ouster.  (The more it looks like the Court got the ball rolling, the more legal the coup will seem.)  Given the legal fog, the Obama Administration seems to be taking a pitch-perfect tone here.  Some other governments, like Brazil and Colombia, may have walked themselves into positions that they are going to regret. 

Be sure, though, to take my positions with a grain of salt.  I change them as the facts change, and as radically as necessary.  For a subtler discussion of the implications of the coup, go here.                            _{(Photo courtesy of Steven Taylor.)}

UPDATE:  The whole mess is filled with judgment calls.  Zelaya wanted to call a constitutional convention, which he publicly admitted would be intended to change the constitution to allow for re-election.  The referendum question that the Supremes kiboshed, however, only called for a convention, with no other stipulations.  So ... were the Supremes justified?

It all comes back to the problem that a constitution which declares procedural matters to be forever inalterable is a badly-written constitution.

An Andrew Jackson moment

  “The decision of the Supreme Court has fell still born, and they find that they cannot coerce Georgia to yield to its mandate.”
                                                                        —President Andrew Jackson

The common misquote of the above is much sexier:  “John Marshall has made his decision; now let him enforce it!”  Which is not a bad summary of Manuel Zelaya’s throwdown when his country’s Supreme Court told him that he could not go ahead with his planned referendum on repealing term limits.  Zelaya’s “No one will stop Sunday’s vote!” is on a par with Jackson’s aphorism.

In fact, it is worth considering what was in Zelaya’s televised speech on Sunday, after the Honduran Supremes slapped him down.  “The Court of Justice, which makes justice only for the powerful, the bankers and the rich of this country, has declared illegal the people’s participation in a legitimate and constitutional poll ... What a shame for all Hondurans, this Court of Justice!  We’re in the presence of a technical coup d’état.  It’s a swipe at Honduran democracy.  I want to appeal to the commanders of the Armed Forces, the officers and the soldiers.  They are part of the people, they should not play this game of the media elite and economic oligarchy, of a deviant bourgeoisie.”

Why is this significant?  Because Honduras could have avoided this crisis with a better constitution.  The Honduran constitution had two major flaws.  First, it took re-election off the table forever.  I mean that quite literally.  Read: 

Article 5:  Voting in advisory plebiscites is mandatory.  Projects intended to reform Article 374 of this constitution will not be objects of referenda or plebiscites.

Article 373:  The National Congress can alter this Constitution in ordinary session with two-thirds of the votes of all members. 

Article 374:  In no case can be reformed the previous article, this article, the constitutional articles that refer to the form of government, the national territory, the presidential term, the prohibition that no citizen can again be president who has carried out the role under whatever title, and the one referring to those who cannot become president of the republic for the subsequent period.

It is a bad bad idea to declare any procedural part of a constitution to be forever inviolable.  The U.S. constitution does this in respect to the apportionment of the Senate, and that is a bad idea that may yet come back to haunt us. 

The Honduran constitution then added insult to injury with its second flaw:  a complete lack of procedures by which the courts, legislature, or popular opinion could remove a sitting president for breaking the law.  The closest is Articles 321-327, which lay out the responsibility of public servants and organisms that break the law and cause civil damages to individuals, or Article 233, which lays a pretty draconian anticorruption law.  But neither really apply in this situation. 

In short:  Zelaya broke a stupid constitutional clause.  Twice, in fact, first by firing an officer who refused to administer an unconstitutional referendum and second by proceeding with the referendum anyway.  Congress could not do anything.  At that point the increasingly-angry military, acting in concert with the Supreme Court, decided to extraconstitutionally remove the president from office. 

I do not like it.  But I am also not sure that this is an abrogation of democracy either.  Judging by their statements, the Obama Administration is equally torn:  they would like Zelaya back, but they aren’t going to wade into another country’s Andrew Jackson moment. 

What do you think?

P.S.  I am not a fan of Andrew Jackson.

Coup in Honduras, updated

  It seems as though the Honduran military just deposed President Manuel Zelaya.   That said, this is not a stereotypical South American coup:  Congress appears to have ratified the Army's action, and a civilian is taking control. 

In an unsurprisingly pointless move, Hugo Chávez put his military on alert.  (Or at least he says that he did; it would not surprise me to find that no official orders have been given.)  He went on to declare, “The people of Alba are in combat, because this does not end today.”  The leaders of the Alternative Bolivariana have condemned the “coup” and its leaders will hold a summit in Nicaragua today. 

But Alba's declaration is less political than it sounds.  Unasur, the OAS, and the United States have all condemned the ouster, although the U.S. is not calling for Zelaya to be reinstated.   

I don't know why the military moved before Congress did, or why the new leaders are going through this charade of pretending that Zelaya resigned before he actually resigned.  But I do know that Zelaya ignored a Supreme Court ruling on June 25th that ordered him to reinstate the general that he had fired because the general refused to use to the Army to organize an unofficial referendum on abolishing term limits.  (I met Zelaya's predecessor about a year ago;  he didn't have a lot of good to say about his successor.)   I'll add here that Article 374 of the Honduran constitution, stupidly, declares that the ban on re-election can not be reformed in any way, no how, forever and ever.  A dumb provision, however, is still a provision. 

For what it's worth, my guess is that the coup will stand.  There is enough of a fig leaf of legality about it to allow OAS governments to walk back their condemnation.  Now, escalating street protests could force the U.S. to pressure the Honduran congress into reversing its vote.  But if I had to bet right now, based on what I've heard from Tegucigalpa, Zelaya will remain out of power.

UPDATE:  The legality of the situation is shakier than the above implies.  Hell, it seems to be blatantly illegal, a good old-fashioned coup.  Why have I changed my mind?  Well, as far as I can figure, the Honduran constitution has no provision for the congressional removal of the president.  The closest provisions are as follows:

Article 205, Section 12:  [Congress has the power to] accept the constitutional oath of office of the elected President and Vice-president of the republic, and other appointees they select; grant them permissions and accept or reject thier resignations and fill vacancies in the case of the complete absence of one of them;

Article 205, Section 20:  [Congress has the power to] approve or disapprove the admistrative conduct of the executive branch;

Article 242:  In the case of a temporary absence of the the President of the Republic, the Vice-president will carry out the functions of the President.  Should the Presidency be permanently vacant, the Vice-president will exercise the powers of the executive branch for the remainder of the constitutional term.  Should the Vice-presidency also be vacant, the powers of the executive branch will be exercised by the president of the National Congress.

Thus, the need to declare that President Zelaya had “resigned” before giving the executive powers over to Roberto Micheletti.  (The office of Vice-president is currently vacant, so having the power pass to Micheletti is kosher ... it's the whole removing of Zelaya what appears to be illegal.)  Note that while Micheletti says that everything is constitutional, this article from the Honduran press cites no clauses or precedents. 

The whole thing looks much shakier upon skimming the text of the constitution in the light of day, or least what passes for it in this, the fourth straight week of rain in New England.  I'll go ahead and call it a “coup.”  It's chances of standing are less than I originally believed.

A different perspective

  I haven't been to Mérida, Venezuela, in decades.  (I haven't been to the one in Yucatán for about as long, either.)  I used to have an aunt who lived nearby.  She's long gone, and last I heard both her grown children (and their families) lived in Houston and Miami.  

Anyway, Gringa Diary is by an Australian socialist fervently working to further the triumph of the Bolivarian Revolution and turn back to the forces of imperialism.  I believe her name is Tamara Pearson.  It's a fascinating look into the Revolution, up-close-and-personal. 

Of course, her perspectives on the value of Mr. Chávez or the long-term impact of his policies on the poor of Venezuela are quite different from my own.  But she's so earnest about it.  Which is sort of touching, in a way.  More importantly, the true-believer tone infuses the blog with this sense of reading something for a parallel universe.  You read her stories, and more often than not find yourself scratching your head at her emotional reaction or logical analysis, so different from your own. 

But you can't get angry; she's so enthusiastic about it all.  Recommended. 

There is no bloody resource curse already

  So there are these people out there, notably the Oracle of Flat, talking about how high oil prices lead countries to do all sorts of crazy things, like take stuff or invade their neighbors or build weird shit. Which is a problem, see, because except for the building of the weird shit the real world just doesn't fit the model. 

Above you’ve got an example of weird shit.  Ditto to the right.  But what about the neighbor-invading or stuff-taking?  Well, I don’t have a whole lot to say about neighbor-invading at the moment, but there is some stuff-taking in the news: the Bolivarian Republic just cancelled all its oil service contracts.  That’s a form of stuff-taking, yet, as the great and immortal Onyx once said, but wait it gets worse!   The government also intends to nationalize the contractors’ assets.  That is stuff-taking of the purest form, which the “resource curse” models predict isn’t supposed to happen when oil prices are low.  After all, the government is supposed to need the service companies to keep production up.  And yet, here we are.

“Oil service companies” are at-their-simplest basically oil companies that extract petroleum for a fixed price on behalf the owner ... in Venezuela’s case, the government.   With nationalization of the oil services, the government gets a threefer:  the assets, the value of future payments, and the value of all unpaid bills.  But it loses the companies’ ability to run and maintain the assets and opens itself up to arbitration and lawsuits.  It also loses future investment.  Oil companies will tolerate expropriations-that-weren’t, like the Bolivarian Republics’s so-called “nationalizations” up until now.  They have less patience over the real thing.  It’s a particular problem for Venezuela because its wells tend to have a half-life around three years.  Without continual new investment, production will decline.

I’m not sure what Chávez’s motivation is, although I can speculate.  I am sure, though, that this is another sign that the whole petropolitics idea is worth a lot less than a gallon of crude, even at current prices.  Sure, it might be possible to take the political resource curse theories and mash them to fit recent events in Venezuela, but then you would wind up with a theory that predicted that governments nationalize when prices go up and they nationalize when prices go down; or that they nationalize when they don't need foreign technology and they nationalize when they do.  In other words, you would get a theory that predicted that the governments of oil producing states should always nationalize at all times. 

The proper word for such a theory?  Worthless. 

Venezuela cede

  The Bolivarian Republic just settled with the Argentine owners of Ternium over Sidor, its Venezuelan steel unit.  The Venezuelan government nationalized Sidor in 2008.  Chávez offered $800 million.  Ternium scoffed and asked for $4 billion.  They just decided upon $1.97 billion.  Is that a fair price?

Ternium bought Sidor for $1.79 billion in 1997 and subsequently invested a lot of money, but that doesn't really tell you anything.  On the other hand, Sidor enjoyed revenues of $2.4 billion in 2007.  At a discount rate of 10 percent, the agreed-upon price implies a Sidor profit margin of 8 percent, which is consistent with the steel industry's average margin during the 2001 recession.  Conversely, at a profit margin of 16 percent, about what the industry earns in a boom, the implied discount rate is 19 percent ... which seems reasonable for a high-risk area like Venezuela.  (Bernard?) 

Upon announcement of the deal, the price of Ternium shares jumped 49 percent, to $15.67.  That said, the stock peaked at $45.18 on July 2, 2008, before sliding to $34.01 on August 8, and then collapsing to $4.65 by November 20.  The problem with interpreting that price collapse as evidence that the offered price isn't fair?  President Chávez announced the nationalization in April. 

In other words, the price appears to be fair.  Another demonstration of the power of ICSID?  Perhaps. We don't know if the Venezuelan government offered more money out of fear of an adverse arbitration result, or if it offered more money at the urging of the “semi-dictator” of Argentina, or it offered more money because the President of the Bolivarian Republic decided that it was simply the right thing to do. 

But we do know that the foreign oil companies can go to ICSID, and that Caracas seems to be a bit worried about the prospect.  We also know that Cemex is pursuing the ICSID route.  So we will see if the empire strikes back at the Revolution.

P.S.  FWIW, Argentine embassy accounts in France remain frozen.

Bolivarianism and Mercosur

 The Bolivarian Republic is seeking to join Mercosur.  Brazil's government supports the idea, but the Congress is a bit wary.  Foreign secretary Celso Amorim defended Venezuela's accession in a stormy committee meeting the day before yesterday.  In it, Amorim had to point out, loudly, that there is no evidence that the Venezuelan government stole elections.  A few days earlier Amorim was in Caracas attempting to persuade President Chávez to eliminate Venezuelan tariffs on 500-odd products before the Brazilian senate votes on the accession treaty, so as to reduce opposition. 

The thing is, I'm having trouble understanding how any of this matters.  Mercosur has a parliament, with members appointed from national Congresses, but it doesn't do anything.  (Which isn't surprising, but Brazil hedged its bets anyway:  as of 2011, Brazil will appoint 75 of the parliament's 154 members.  That kinda makes it unlikely that the other members will want to give it any serious power.)  Mercosur has a tribunal, but it doesn't do anything either.  Private individuals, unlike in Europe, can only bring suits by acting through their national governments.    Anyway, its decisions are regularly ignored.  In fact, its first decision was ignored.  And it failed its really big test, the Argentine blockades against an Uruguayan paper mill.  There's really nothing about investor protection or property rights in the founding treaties; the decision against Argentina rested on the fact that the blockades were in fact blocking trade.

In short, Mercosur is neither much of a confederation nor an effective tool for an informal Brazilian empire.  Which explains why Chávez wants in.  Why not?  But does not fully explain why Brazil wants him in, or why Brasilia insists on effective control over a powerless parliament. 

There is something going on here that I don't understand.

UPDATE:  The picture comes from Jussi in comments.  It had to be posted.

Oh no he di’n’t

  Well.  One of the leaders of the Republican party, a former Speaker of the House, and a plausible presidential candidate, goes to the Bronx and calls Cristina Fernández a “semi-dictator.”   

No, seriously.  Chávez, though, got to be a full dictator, while poor Danny Ortega got lumped in with Cristina among the “semis.” 

Now that is funny.  Ortega, who unlike the other two has in fact engaged in election fraud, becomes the same as Fernández.  Now, it is true that about a year ago she tried and failed to make an end-run around Congress in order to impose an agricultural export tax.  But our last president tried and succeeded to make an end-run around Congress in order to detain suspects indefinitely and monitor all communications crossing the country's border ... and while George Bush the Younger was many things, a “semi-dictator” was not one of them. 

Meanwhile, I really do need to repeat that Venezuela is not a dictatorship.  Most of the anti-Chavista opposition recognizes that.  And even should Chávez turn it into one, Venezuela poses no threat to the United States.  Let him slosh money around!  He gets nothing for it.   

Still, I can understand how he makes a useful foil for American conservatives.  I've heard lefties say stupider things about President Uribe ... although never anyone as prominent as Newt Gingrich.  But making Argentina into an enemy of the United States?  Huh?  Argentina??

So I've really got to wonder.  Can somebody explain what's going on with the GOP and the crazy pills?  I'm at a loss.

I guess I must reluctantly come around to the position that it is time to eliminate the filibuster. 

The other Castro

  Cipriano Castro managed to make a bit of a hash of Venezuela during his brief regime.  He gained power in 1899, at the head of a revolutionary army.  His army mobilized resources by confiscating property; sometimes of opponents, sometimes not.  Eventually he provoked a bunch of European navies into blockading him.  The resulting diplomatic mess eventually dragged in the United States, who was worried that Germany intended to, say, scarfle off some Venezuelan islands and establish a naval base.  Or something.

So it isn't really clear to me why Hugo Chávez would want to replace a bust of Rómulo Gallegos with one of Cipriano Castro in the presidential palace. 

And then Leticia Arroyo sent me this speech by Castro made on December 9th, 1902, just as the European navies started sinking Venezuelan ships in the harbor of La Guaira:

Venezuelans!

The insolent foot of the foreigner has profaned the sacred soil of the Fatherland!  An extraordinary act in the history of the civilized nations, without precedent, without possible justification, a barbarous act because it is an attack on the most rudimentary principles of international law, an ignoble act because it is the fruit of an immoral and cowardly collusion of force and betrayal, it is something that the English and German squadrons have just done in the harbor of La Guaira just a few moments ago:  in a simultaneous and coordinated action they surprised and captured three undefended ships of our navy that had entered dock for repairs. 

The battle is unequal because two of the most powerful nations of Europe have conducted an attack against our country, which has barely made it out of a  long and painful convalescence ... But justice is on our side, as is the God of the Nations who inspired Bolívar and the constellation of heroes who accompanied him in the great work of bringing us, at the cost of great sacrifice, our Fatherland free and independent ... For my part I am prepared to sacrifice everything on the altar of the Fatherland, everything, including what one might call my anguish over our internal differences.  I have no memory of what disagreements may have occurred in the past.  Erased in my thoughts are the politics and fighting of all who were opposed to my aims, of all who have been able to leave a trace of pain in my heart.  In front of me lies no less than the luminous vision of the Fatherland, of which Bolívar dreamed, of which I dream.

... I open the doors of the Republic’s jails for the political prisoners who still remain in them; I also open the doors of the Fatherland for those Venezuelans who remain abroad for similar reasons and return to them under the constitution the properties of all the revolutionaries who lost them for reasons of public order.  Further still, if I survive these events ... I am prepared to return to private life, leaving behind my sword, of course, at the service of the Republic, and you can be sure that I will retire sans nostalgia for power, because my greatest aspiration is to see my great Fatherland prosperous and happy.

Now I see exactly what Hugo sees in this guy.  I can imagine him giving this speech on Aló Presidente, word for word.  Some things never change indeed.

When lawyers declare war!

  You know, the more I learn, the more I think that President Correa of Ecuador is really playing with fire in defaulting on his debts.  Brazil is mad at him, and you don't want to get the new imperial rulers of South America mad at you.  But more importantly, he's got his American creditors mad at you ... and it seems as though those creditors may have a rather powerful legal recourse.  It'll all depend on the definition of a “central bank.”

But let's start at the beginning.  What happens when lawyers declare war on a country?  Well, remember this post, on the U.S. sanctions against Manuel “La Piña” Noriega ?  Turns out that the sanctions weren't really Elliot Abrams' idea.  Rather, the credit goes to a lawyer, William Rogers, acting on behalf of his client, former President Eric Delvalle of Panama. 

La Piña, you see, had an anger-management problem.  He decapitated Hugo Spadafora, one of his political opponents.  When the President of Panama, Nicolás Barletta, made the mistake of thinking that he, you know, ran the country, and decided to investigate the head-chopping, Noriega locked him in his office and threatened his family.  At 3am, President Barletta appeared on national television and offered his resignation, which the National Assemby accepted in a late-night emergency session.  Eric Delvalle, the education minister, then became President.  A little while later, Delvalle decided to pass on to La Piña an American offer to let him peacefully resign with all his ill-gotten gains.  In response, Pineapple-face ejected Delvalle from the presidency.  Delvalle got word that he was going to be arrested the next day, and managed to make it to an American military base.  His ambassador-at-large hired Rogers, and then ...

Another senate

  One rather strange thing, when you think about it, is the incredible influence that the United States Constitution has had over political structures in Latin America.  None of those polities developed under similar circumstances — the Argentine Republic comes closest, and it's not very close — and none of them had similar political traditions.  So its rather strange when you realize both how universal the American presidential-bicameral model has become and how durable it's proved. 

It turns out that Bolivia also has a U.S.-style senate.  Before the recent constitutional reform, each province enjoyed three senators.  Now each one has four.  Not much of a change there, unless the system for electing those senators (still undetermined) has the result of dividing the delegations from the other provinces while united the Media Luna ones, or vice versa.  That's remotely possible:  the old system worked like Argentina, giving the election winner two senators and the runner-up one, while the new system is proportional.  Depending on the election rule chosen, the effect would be to strengthen parties with overwhelming support within their province and split delegations from provinces with more divided electorates.  But we'll need to see both what proportional rules is chosen (the constitution seems unclear on whether the provinces or the legislature will set the rules) in order to know the actual effect.

In short, in terms of the Bolivian legislature, the new and awfully-named “Plurinational Legislative Assembly” doesn't change much.  Not only is equal representation preserved in the Senate; the new reserved “indigenous” seats in the lower house are designed to insure that the Media Luna's current representation will not change. 

My opinion of the Bolivian senate, however, is very different from my opinion of the Argentine, American, and Brazilian senates.  Those are undemocratic travesties that need to be reformed.  (Here's a much more democratic way of apportioning the U.S. senate among the states.)  Inertia and the power of special interests are the only reasons to keep them. 

The Bolivian senate, on the other hand, is a necessary compromise to hold a deeply-divided country together. President Morales's original proposal for a single-house FTFP legislature with a block of reserved “indigenous” seats would most likely have served only to keep fueling the political violence that wracked Bolivia last year.  Given that it's hard to see anyone benefitting from a breakup of the nation, the undemocracy of a senate is a price worth paying. 

¡Hasta la reelección siempre!

  I am starting to miss Anonymous.  He was obnoxious, abrasive, and arrogant, but I am now realizing that this blog is lesser sans his commentaries. 

But anyway, great news from Venezuela!  It looks like we just might have Hugo Chávez to kick around for a while more.  And I'll admit that I am in fact generally opposed to term limits.  What have they ever gotten the United States?  Eisenhower and Reagan were unlikely to have run again for health reasons, and a third Clinton term would have spared us ... you know.  All the stuff. 

Of course, Hugo isn't Ike, Ron, or Bill.  And there are circumstances under which term limits might make sense, especially in countries with histories of patronage politics.  But still.  In addition, the Bolivarian republic placed term limits on all elected offices, which is why Venezuelans voted on the following somewhat turgid question to change five different constitutional articles:

Do you approve the amendment of articles 160, 162, 174, 192 and 230 of the Constitution of the Republic, as approved by the National Assembly, that increases the political rights of the people by allowing any citizen holding elected office to be nominated as candidate for the same office for the constitutionally-established period of time, depending upon his or her possible election, exclusively by popular vote?

I like the “increases the political rights of the people” part.  Clever framing.  And, well, true. 

In short, as unenthused as I am with President Chávez, I can't view the outcome of this election as some sort of great loss for Venezuelan democracy. 

Plus, I'd bet against his victory in the next election.

Schoolhouse rock, Venezuelan-campaign style

 A friend of mine (who works for the government ... shhhh!) sent me this Venezuelan television commercial.  It's about the referendum on abolishing presidential term limits. 

Kinda catchy, I think.  Can the Sí-side match it?

The expropriation that wasn't

  Kevin Drum and Dan Drezner wonder why the oil companies would get back into Venezuela after the way Hugo Chávez treated them the first time around.  The answer is simple:  Chávez didn’t treat them badly.  When oil prices head back up, they’ll do fine even if he plays the same movie all over again. 

“What???” you say?  How can that be?  Simple.  Between 2004 and 2006, the Bolivarian Republic of Venezuela expropriated the marginal surplus generated by the run-up in oil prices.  It did not, however, reduce the revenues of the oil companies.  They took home about $10 a barrel when the contracts were signed in the late 1990s, and they took home about $10 a barrel in 2008.  In fact, some of the companies that had signed service contracts under the old regime received more money under the Bolivarian regime than they would have under the original rules.

So why not get back in?  It isn’t like there are a whole lot of places around the world for the oil companies to invest in, especially not on-shore.  Most oil reserves are closed to the majors, and political risk is everywhere, including Alaska under its radical socialist governor.   The companies have little chance of enjoying the upside from a return to high prices, but with estimated costs of $6-$7 a barrel, Venezuela is still a good bet. 

Details and money graph below the fold.

By the power of ICSID

  How vulnerable are Latin American nations to international arbitration? 

Venezuela makes the answer easy to find.  The Bolivarian Republic owns $14.5 billion in direct investments abroad, mostly Citgo refineries and gas stations.  It also enjoys $22.9 billion in accounts receivable, mostly for oil delivered by not paid for.  Some of that are debts incurred by the Petrocaribe countries, but most of it is with the United States, and it is all potentially attachable in a settlement.  (The liquid assets are probably owned by the central bank, which has $39 billion in reserves, and are considered immune.)  Blocking those accounts receivable is the 21st-century equivalent of parking a gunboat in the harbor.  Hugo needs to tread very carefully, and considering that Cemex is still being run from Monterrey, it looks like he has been.

How about Argentina?  Mecon gives the answer for 2007 right here, on page 15.  The Argentine government owns $8.2 billion in foreign assets.  Sounds vulnerable!  It's not, however.  $6.0 billion consists of “créditos por financiación de entes binacionales.”  The big one is the  Yacyretá dam on the Paraguayan border, an $11 billion project.  I suppose one can imagine a world in which ... uh ... no, I can't really imagine a world in which foreign investors in Argentina could go after Yacyretá.  And given that it loses money, I'm not sure that they'd want to.  Another $1.5 billion represents Argentina's paid-in capital to multilateral lending organizations like the IMF and World Bank.  In theory, I suppose, that money is very vulnerable to an adverse ICSID (aka CIADI in Spanish) ruling, considering that ICSID is part of the World Bank group.  In practice, I don't know of any cases where the a multilateral institution has reassigned capital from a national entity to a private interest.  I don't even know how that would work, accounting-wise:  the multilateral entity would need to find cash to pay the private investors for its shares, since only governments can hold capital stakes in multilaterals.  That would get beyond messy right quick.  In short, Argentina isn't all that vulnerable to the postmodern imperialism of the 21st century.  So why not nationalize the airlines?

What about Ecuador?  Sadly, its central bank does not make the figure easy to find.  It does not track Ecuadorean foreign direct investment at all.  And what it does track is not broken out into public v. private, save for central bank reserves.  (Which is an odd concept in a dollarized economy, but the number is there.)  I'm still stumped. 

Correa lo hizo

  “Hay gente que rectifica lo que dice, hay mucha gente que se contradice.”  —René Pérez

Well, it appears that Ecuador just went and defaulted on its foreign debt.  I think that this is a bad idea.   The problem, of course, is that I am on record as supporting the U.S. decision to allow its financial protectorates in Latin America to default in 1931.  The only reason that I think Britain’s subsequent decision to default was bad is that is prevented the union of Trinidad and the United States.  I have also argued that Argentina’s much later default was a good idea. In fact, I have even implied that I think there might be good arguments in favor of an Argentine default right now.  (Really.  Read the linked post closely.  I more than imply that.) 

So why do I think that this move is stupid?  After all, Ecuador is suffering from a collapse in oil prices.  What’s the problem? 

First, Ecuador does not have to default.  Debt is around 21% of GDP, and debt service is only around 1%.  A balance-of-payments crisis this is not, even with the crash in oil prices.

Second, Ecuador is vulnerable.  I don’t know how vulnerable.  Why don’t I know?  Well, I haven’t been able to find Petroecuador’s balance sheets, so I don’t know how many American assets it holds.  Nor do I know how many commercial assets the Ecuadorean government may hold.  And I certainly don’t know how many payments to the Ecuadorean government pass through vulnerable payments centers.  But the fact that I don’t know these things make me think that the country is very vulnerable.  Call it a hunch, but a lack of transparency often means that there is something to hide.

I should point out that I have met the fellows from Greylock and Elliott who will be going after the country.  They are very very good at what they do, and they are very motivated. 

Third, Ecuador could use access to the World Bank.  It will probably lose that.  It has already lost access to Brazilian development funds. 

It could still be a bluff.  This is just a default; many stand to profit from such a thing.  The Ecuadorean government may just be engaging in a complicated political redistribution, and it will restart payments once the relevant parties have taken their profits.  Alternatively, should a second Great Depression really emerge, then early default will seem like a brilliant move. 

But short of those two possibilities — a short-term move or a prediction of disaster — it just seems unwise to me.

The empire's demise has been prematurely reported

  The United States just announced that the the Millenium Challenge Corporation will suspend $60 million in grants to the government of Nicaragua.  The reason?  Rigged local elections.  Now, I don't expect the aid suspension to accomplish much.  It's important to bear in mind that the U.S. still provides more aid than the Bolivarian Republic to most putative members of the Bolivarian alliance. 

In other Revolutionary news, the Bolivarian summit in Caracas announced that the alliance would consider establishing a common currency.  That is rather weak brew, and I will be very (albeit pleasantly) surprised if it happens.  Why pleasantly?  Well, a common currency spanning Venezuela, Nicaragua, Cuba, Honduras, Bolivia, Dominica and possibly Ecuador would be a fascinating monetary experiment to watch.  Sadly, I feel pretty confident that it isn't going to happen. 

Around the Revolution

  “You know, I’ve always wondered what South America would look like if no one gave a damn about coca or Communism.  It’s always impressed me the way you boys have carved this place up.”

“I’ll take that as a compliment, coming from a Brit.” 

Now that the U.S. election is over and James Bond is officially a friend of Evo Morales, it's time to take a trip around the Bolivarian Revolution.  How is the red banner faring around the continent? 

Nicaragua dreaming

Somehow I just don't think that this is going to happen.  I mean, it's nice that Managua recognized South Ossetia and Abkhazia, but Russia just doesn't have the money right now.  No, if you're going to reward your faraway friend (although I'm at a loss as to why Moscow would want to) this seems like the way to do it.

And much as Nicaragua is a full-up member of the Alternativa Bolivariana, Venezuela doesn't have the money to toss away on such a megaproject right now.  Astoundingly enough, Caracas is going to have to cut back spending if oil goes below $90, a level of fiscal irresponsibility to rival Washington. 

Still, for a guy who proposes transcontinental railways and really likes to build stuff, I'm surprised that a Nicaraguan canal hasn't caught his eye. 

A new constitution

Rafael Correa is the president of Ecuador.  He has a Ph.D. in economics from the University of Illinois.  Anti-Chávez well-educated high-earning professional Venezuelan women told me on multiple occasions that they consider him very attractive.

That, however, is not why he's in the news.  He's in the news because Ecuadorean voters approved a new constitution today.  Opponents call it “Bolivarian.”  Even non-opponents have called it “socialist.” Both are silly.  Correa is far from Bolivarian.  (Update:  It has been pointed out in comments that he declared himself Bolivarian in 2006, although he is generally considered to have distanced himself from Venezuela.)  Those same professionals who called Correa handsome also called him sensible, and I tend to agree.  Correa is relatively radical.  But he's also sensible and clearly a democrat. 

Which doesn't mean that the new constitution is a good thing for Ecuador.  More below.   

Postmodern commentary

Here is some excellent commentary on recent commentary on the events in Bolivia:

Two different takes on Bolivia’s political crisis, one from Larry Birns and Jessica Bryant, and the other from Marcela Sánchez. The first argues that the escalating tension is a result of a pattern of American disrespect to Latin American democracy. The second argues that Latin America showed a great deal of maturity in resolving the problem themselves, neither waiting for Washington nor using the crisis as a pretext to take pot shots at the Bush administration. I find Sánchez’s argument about ten million times more convincing.

Not everyone who blames the U.S. at every moment should be accused of blaming America first, but Birns and Bryant certainly seem predisposed to pointing the finger at Washington. Evo Morales kicks Ambassador Philip Goldberg out of La Paz, and its Goldberg’s own fault because “he failed to be helpful.” That’s a pretty high standard. Why is it in incumbent on a foreign ambassador to help in an internal political crisis? Any time there is a crisis in a foreign capital, should the American ambassador be tossed if he fails to be helpful? Also, how could the U.S. help by inserting itself into a complex and longstanding local political issue? Hasn’t that usually been a recipe for problems? Short of endorsing Morales, what could Washington do to satisfy Birns and Bryant? It essentially avoided stepping on Morales’ toes publically, which shows admirable restraint, given the number of times Morales has thumbed Washington in the eye, and that Washington is ideologically more closely aligned with the opposition than with Morales. At the risk of supporting W, it seems like the U.S. played this one right. It’s better to let Latin America solve its own problems without U.S. mediation.

The Birns-Bryant piece is also needlessly (and bizarrely) wordy. For instance, the phrase “the baleful consequences of the inherent disrespect the U.S. historically has exhibited toward the region” has about a third more words than necessary. Later, they refer to the need to “architect a new relationship with the region that can be deemed credible.” Architect as a verb? Why, when the Queen’s English offers us build, construct, create, develop, erect, carve out, and many other possibilities that are, in fact, verbs?

By the way, after the scare from the marches, it looks like things are calming down in Bolivia.  Evo deserves props for putting his constitution on the table and agreeing to sit down and talk with the opposition governors about the new constitution. 

(Semantic note:  the Bolivian title is in fact “prefect.”  A symbol of the crisis was, in fact, the self-promotion of the Santa Cruz “prefect” to “governor.”  That said, they've already got more power than the English “prefect” implies, so I'll be sticking with “governor” as my translation of “prefecto” until convinced otherwise.  I'll also stick with “province” as my translation of “departamento” because it sounds way way better and less confusing than “departament” in American English.)            

Going south?

Cooler heads may not have prevailed in Bolivia.  I'm not sure what to make of this report from Pronto, but is sounds doubleplusungood:

From email from my parents (who live in Santa Cruz): Evo has just announced an alleged a coup plot between Goldberg (the US ambassador expelled a few days ago), Costas (the Santa Cruz prefect), and a number of high-ranking military officers. Meanwhile, reports from Pando suggest that five of the bodies were Venezuelan soldiers, who are being repatriated. Costas has also asked Evo to call of the MAS protests who are still marching towards the city of Santa Cruz; he’s also called for a suspension of labor & a public assembly in the main plaza for a cabildo (a “popular assembly”) to decide what to do. (FYI: The last Santa Cruz cabildo proclaimed Costas “governor” & demanded regional autonomy.) Also, as of now, the 24 de Septiembre celebrations are cancelled — the first time that has happened in more than 50 years. This doesn’t look good at all.

The part about “Venezuelan soldiers” is particularly perplexing.

   

The good news is that it seems as though Evo agreed with Costas and got the marchers to stop.  So sanity still might prevail.      

Yankee go home

Human Rights Watch published an unflattering report about civil liberty under President Chávez.  As these things go, the report isn't all that damning.  It basically accuses him of, well, setting up a political machine:  (1) using the executive power of the state to go after political opponents; (2) undercutting the independence of the judiciary; and (3) denying resources to independent or opposition organizations.  It doesn't accuse him of tossing opponents in jail or ending freedom of expression. 

The reaction of the Bolivarian Republic?  Expel the authors.  The irony needs no comment.

Here is an English-language response to the report from the Venezuela government.  Here is an explanation of the expulsion.  Let me point out that the expulsion is entirely legal under Venezuelan law, and that many fully-democratic nations have similar (if seldom used) provisions. 

The HRW report is an interesting read, if you have the time.   

Old news from Santa Cruz

So Hugo declared on September 12th that he was prepared to intervene militarily if Bolivia's constitutional government came under threat.  The reaction in Santa Cruz?

As a patriotic American, I can't tell you how much it warms my heart to see demonstrators burn somebody else's flag.

UPDATE:  It gets better!  When the commander of the Bolivan troops sent to Pando arrived at the Cobija airport, he had to insist to an angry mob that he was not heading a Venezuelan invasion force.

No, it gets much better.  Chile's foreign minister, Alejando Foxley, publicly complained that President Chávez's antics nearly wrecked the Unasur summit.

Thankfully, Evo realized that Caracas wasn't helping him, albeit belatedly, and told his defense minister to reject Venezuelan overtures.  (It obviously would have been a bad idea for Evo to have done it himself.)  So far, negotiations with the Media Luna provinces seem to be going well.  Here's hoping. 

Cooler heads prevail

  An agreement has been reached to settle the conflict in Bolivia, at least for the time being.  The “Great National Agreement” is, IMHO, a thing of great beauty.  Basically, everyone involved realized that they were all going to lose if the violence escalated and decided to take a deep breath and calm down. 

Judge for yourself.  The text is below the fold.

Full moon rising?

Cooler heads may be prevailing in Bolivia.  The Army has taken control of Cobija, the capital of Pando province.  Governor Leopoldo Fernández has fled, accused of masterminding a massacre of government supporters.  Meanwhile, the National Democratic Council, which consists of the five governors of the Media Luna provinces (including Chuquisaca), announced that it will call off the roadblocks, although their supporters still occupy government offices outside Pando. 

Council representatives met throughout last night with Vice-President Álvaro García and the Vice-minister for Decentralization, Fabián Yaksic.  They seem to have arrived at an accord, which while not a resolution of the dispute, is at least an agreement to sit down and talk about it. 

Hugo Chávez, unfortunately, is being his own typically helpful self.  He's declared that Venezuela will intervene if Morales falls.  He's hurled accusations of treason at the head of the Bolivian armed forces, General Luis Trigo.  “I am willing to die for Bolivia,” said the President of the Bolivarian Republic. 

The president of Uruguay, Luis Alberto Lacalle, had an interesting response.  “Careful.  We've got Chávez, who suffers from verbal incontinence.  It could occur to him tomorrow to send a soldier to Bolivia, and that could cause a horrible conflict in the region.” 

Half moon at bay

The consequences of persistent inequality are with us today.  They appear to be pushing Bolivia towards civil war in slow motion.  Today there was a brief flutter of news about the situation because Evo expelled the American ambassador, and the U.S. followed suit, but in general you've got media silence in America.  The split is between the central government and “autonomists” in the “Media Luna,” which is marked off in dark green in this map taken from Mark Weisbrot: 

Things are bad.  How bad?  American Airlines just stopped flying to the country.  Autonomists in Santa Cruz have seized control of most federal offices in the province.  Tarija — which produces 60% of Bolivia's natural gas — experienced bloody riots yesterday, where autonomists seized the customshouses and airport and federalistas (my term, not a Bolivian one) blew up the governor's parking garage.  Meanwhile, the nightmare that my Brazilian and Bolivian colleagues discussed in Venezuela?  Well, it came true for about 12 hours. 

Brasilia is reacting in a manner that could best be described as confused, but understandably so.  On Tuesday, the Brazilian foreign minister committed a Kinsley, when he stated that if Morales can't secure the pipeline, then his government will be forced to open relations with the Media Luna.  Today, however, the Brazilian national security advisor reiterated Brazil's position that Bolivia has but one government and intimated that his government might send troops to support Evo. 

So what's it all about?  I'm sure you all can guess, but a rough overview is below the fold. 

El Hugo del extremo norte

In a previous post, I wrote that total taxes as percentage of revenues on hydrocarbon extraction in Alaska were 25 percent.  Well, I've just had a chance to play with the data, and it turns out that my estimate was flawed.  (It failed to take into account that profit margins in Alaska are substantially higher than the overall profit margins in hydrocarbon extraction across the United States.)  Direct taxes on Alaskan oil & gas actually turn out to be 32 percent of gross revenues ... 33 after Governor Palin's tax hikes. 

One-third of revenues is a nice round number that you can use to put hydrocarbon tax burdens in other countries into perspective.  Bolivian taxes, for example, had fallen impressively low by the time Evo Morales assumed office, and some revision was almost certainly in order.  Time will tell whether he found the right level, and the means by which he raised taxes caused unnecessary uncertainty, but a substantial tax hike on the industry was the right thing to do by the people of Bolivia.  Regardless of whether you're a Bolivarian.

Reason to fear

I worry about Venezuelan government spending.  I just don't believe that oil prices are going to stay this high for long.

I could be wrong, but one of the things I learned in Venezuela was that Belize started producing oil in 2006.  They quite literally found oil on some dude's farm.  Production is now up to 3,000 barrels per day.  That's about 15 trips per day for a typical tanker truck.

Even more strangely, Venezuela gives Belize money through Petrocaribe.  Chávez, I would think, gets even less out of his spending there than in the rest of the Caribbean. He is, in essence, giving away money to up global oil production with only a very small claim on the corresponding returns. 

So, nothing in the global scheme.  But when prices are so high that Belize gets into the oil industry, you've got a tidal wave of other producers waiting in the wings.  They'll be high-cost, of course, so given the increase in global demand the days of $20-per-barrel oil are over.  In fact, I'd bet that the days of $40 oil are over.  But I wouldn't bet on triple-digit prices being with us for much longer.

Strangely enough, I'd like to be wrong.  For the planet.   

There really was a revolution

My previous post on the Bolivian hydrocarbon nationalization of 2006 made it seem like nothing changed.  And in terms of the security of supply (in price or quantity), not much did.  Ditto, the industry wasn't really nationalized.  Rather, the decree gave Bolivia's state hydrocarbon company, YPFB, a mandated 32% share of the output of the San Alberto and San Antonio fields, on top of a 2005 law that cancelled the preferential tax treatment the previous law had granted new gasfields.  Thus, Brazil's equanimity in the face of “nationalization.”

In other words, the nationalization was in fact a tax hike, and a rather large one.  According to work by Luis Carlos Jemio, the state's take of gross revenues jumped from 28% in 2004 to 41% in 2005 and 65% in 2006. 

How high is that?  Well, I just spent more time than I should have estimating the total value of taxes (including corporate income taxes) paid to the federal and state governments by oil and gas companies operating in Alaska.  The result?  In 2006, they paid 25% of their gross revenues (or 50% of their declared profits) in taxes and royalties.  Now, these estimates do not include gasoline taxes, or any other taxes on refined products ... because the Bolivian figures don't either.  They also do not include the tax hikes that the Palin administration just pushed through, but those hikes will only up the figure on gross revenues to 26%.

In other words, Bolivian tax revenues went from around the level found in Alaska to almost 2½ times that level.  There really was a revolution.  (And now you understand why the gas-producing provinces in the east are so damn upset.)

Was it a good idea?  I'm undecided.  Investment in exploration boomed in 1996, with the passage of the law favoring new fields, but started declining in 1999 and was down two-thirds by the time 2005 rolled around.  If one makes the assumption that geology drove that decline, then Morales hiked taxes at just about the right time.  If no more investment is coming anyway, why worry about discouraging it?

To be fair, foreign direct investment in exploitation (not exploration) did collapse in 2006.  That said, Bolivia could potentially make up for that via service contracts and the like.

The reason that I'm undecided is that I don't know how much of the exploration decline was due to geology, and how much was due to the increasing political instability in Bolivia.

But I'm not that undecided.  In this case, I think a massive tax hike on the industry was fully justified, and probably the best thing for the people of Bolivia.  Now if only they can figure out how to divvy up the new revenues without blockading roads or shooting at each other ...   

Daleyismo en Venezuela

I argued that President Chávez is building a political machine in Venezuela, not unlike the machines that used to riddle American politics.  Since Venezuela is obviously not a communist country, or even heading that way, I called it “Daleyism.” 

Anonymous responded:  “This is an absolutely retarded phrase. There is not a shred of evidence that this is happening in Venezuela. I’ve lived here for over three years, and know all kinds of families that do not belong to the PSUV, that absolutely hate Chavez, and have voted against him repeatedly, and they still have full access to ALL the benefits of the government, including state health care, education, subsidized food, pensions, etc. etc.” 

Anonymous, however, is wrong. 

How do I know that?  Simply put, because the Venezuelan government provided us with the data we need to see Daleyism in action.  In 2003, the opposition collected 3.5 million signatures calling for a recall election under the 1999 constitution.  In 2004, the government put all 3.5 million names on the web, including birthdates and addresses.  Chang-Tai Hsieh, Ted Miguel, Daniel Ortega (not this one, another Daniel Ortega), and Francisco Rodríguez realized that they could take the government’s list and check it against the Venezuelan household and industrial surveys.  The surveys follow 150,000 people twice a year, and include birthdates, gender, and residence, enough to match 87,100 of them against the list.  The industrial surveys track firms, but the identity of the firms’ board members is public.  Access to this data, then, let them see what, if anything, happened to the incomes and employment of signers versus non-signers. 

People who signed the recall petition saw a 4% drop in their incomes relative to non-signers.  Why?  Easy:  there is a big relative drop in public-sector employment of signers (4.3%), and signers who lost their jobs were more likely to have to move into the informal (and badly-paid) sector.  Now, Venezuela is a politicized society:  government supporters (ID’d as the signers of a counterpetition) saw an even bigger relative drop in their private-sector employment (5.9%), but they didn’t see a drop in their income, because they moved into the public sector.

Richard Joseph Daley would be impressed.

But Hugo Chávez is better than Richard Daley; no, he’s almost as good as Richard Nixon.  Remember my last post about Venezuela?  How Chávez has improved tax collection?  Well, as any American who remembers the Nixon administration knows quite well, a politicized and effective tax authority can be a very useful part of a machine.  Turns out that companies whose board members signed anti-government petitions saw a 33% relative increase in their assessed taxes.  (US$305,360 versus US$229,020.)  That’s the “ugly” part of Venezuela’s better tax administration.

They also received 51% less subsidized foreign exchange.  In a country where the government rations foreign exchange at subsidized prices, that’s one hella competitive disadvantage.

Brilliant machine politics!  Part of me can’t help but be impressed, although I suspect, given my general humorlessness about legal corruption here at home, that feeling would go away right quick were I in fact Venezuelan. 

More later on the misiones and PDVSA’s social spending.  But right now, back over to you, Anonymous.

Taxes and revolution

President Chávez has accomplished one big thing over the last few years:  he's significantly raised non-oil tax revenues.  Venezuela, like most Latin American countries, needs public spending on public goods.  For that, you need revenue ... preferably revenue that isn't directly tied to commodity prices.  For all the other mishandling of the Bolivarian Revolution, one necessary thing that the government has done right was bring on the fisc.

   

Of course, I had some doubts about this at the airport, where the first thing you see at customs is a big poster exhorting you not to cheat on your taxes.  That kind of thing is rarely a good sign.

But numbers are numbers.  The yellow vertical line shows the date of Chávez's inauguration; the vertical axis is the percentage of GDP collected by these other taxes.  The dotted blue line shows a continuation of previous policy.  Underlying numbers come from Seniat, the Venezuelan tax authority.

So how did he do it?  Ah, that's a good story, below the fold.

Building a machine

Chávez is building a very sophisticated political machine.  And I do mean machine.  The idea is to make key aspects of everyday life dependent on support for the United Socialist Party of Venezuela (PSUV).  It's not Communism; rather, it's Daleyism, put in charge of a country.  Do it right, and there will be no need for secret police or election stealing.  Do it wrong, and your government will eventually (if you're unlucky) start breaking heads or (if you're lucky) become like Mexico.

(Photo courtesy of oilwars.blogspot.com.)

The least machine-like part of the emerging PSUV machine involves the Mercal stores.  The Bolivarian Republic imports food and other basic products (or purchases them from approved suppliers) at market prices, and then resells them to the public through the Mercales.  I visited several; except for the one in a high-priced part of Chacao, there were always lines.  This should not be unexpected, of course.  If the idea is to get basic products into people's hands at subsidized prices, then lines are what should result, if the prices really are subsidized.

The problems?  Well, the first general issue is that it's never clear whether blanket subsidies are an effective poverty-fighting program.  It's also even unclear whether they are an effective vote-getting policy.  After all, Mexico's elected governments (see Chapter Six) have switched to targeted programs, as have Brazil's ... and politicos in both countries are very good at fighting for votes.  Mexico's IMSS and ISSSTE tiendas are no longer subsidized, or crowded, and the Conasupo stores are long gone. 

The second, Venezuela-specific issue is below the fold.   

Vaqueros contra llaneros

Longtime readers of TPTM (all three of you) will note that Cemex has attracted some small controversy in these great United States as well as Venezuela.  But since Puerto Rico seems to have reconciled itself to vasty plumes of tire smoke floating across its southern shore, Venezuela is where the Cemex action is at these days.

So, how much are Cemex's assets in Venezuela worth?  Priceless, if this publicity still from El Economista is to be believed:

More seriously, according to today's El Economista, Venezuelan operations generated about 4% of Cemex's earnings before interest, taxes, depreciation and amortization.  In 2007, Cemex earned US$ 4.6 billion before interest, taxes, depreciation and amortization.    Four percent of that number is US$ 183 million. 

Cemex as a whole earned US$ 3.22 per ADR.  It's price/earnings ratio varied between 8 and 13 over the course of 2007; it's 12-month P/E is currently down to 6.2.

In other words, a simply back-of-the-envelope calculation puts the value of Cemex's operations in Venezuela between 183m × 6.2 = US$ 1.14 billion, and 183m × 13 = US$ 2.38 billion.

Since that 6.2 measure already embodies market belief in rising political risk and the recent run-up in input costs, I'd have to say that the US$ 1.3 billion value claimed by Cemex sounds pretty conservative.

Caracas probably shouldn't have taken on Monterrey so cavalierly.  Nobody should take on Monterrey so cavalierly.  Monterrey is a tough town, and businesses from Monterrey are tough businesses.  They've seen this sort of thing before, and they've come out ahead.

In this particular fight between the cowboys of the northern deserts and the cowboys of the southern plains, my money is on the regiomontanos of the northern desert. 

ICSID v Chávez

So, President Chávez nationalized the cement industry the other day.  Venezuela agreed to buy 89 per cent of Lafarge for $267m and 85 per cent of Holcim for $552m, but Cemex requested $1,300m.  Venezuela sent in troops to take over Cemex's installation, and then offered $650m.  Chávez called the Mexicans “disrespectful.”  After accusing Cemex of tax evasion and excessive pollution, he went on say, “They're as Latin as we are, but they feel closer to el Norte.”  President Calderón of Mexico was not happy, but there was not a lot that Mexico could do about it. 

But there is someone who can ... ICSID.  I've mentioned it before.  ICSID is powerful.  When lefties blather on about "empire" or whatever, things like ICSID are what they mean, even if they don't know it.  ICSID can cause pain.  In fact, Venezuela's nationalizations have consistently (so far Exxon and Conoco are the only exceptions) given the nationalized companies everything that they want. 

Of course, it costs a lot to go to ICSID, and it costs even more to get national courts to actually order attachments after a ruling, so companies usually don't start an arbitration unless they think that they can win.

Cemex appears to think it can win.

And it seems that the Venezuelan government agrees with Cemex.  Right after Cemex announced that it was going to take the Bolivarian Republic to ICSID, Venezuelan officials announced that hey, yo, don't get all upset about the troops thing, let's talk.  Sixty more days, okay?  At which point President Chávez told the world that he has a secret letter from President Calderón that will help resolve everything.  “We asked the Mexican government to give us one more chance with Cemex's executives to see if we can come to a mutual understanding,” he said. 

My money is on Cemex getting something close to the $1.3 billion that it wants.  But it will be interesting to watch.  Even if you're a Cemex shareholder.

    

Bolivia versus Brazil

  On May Day, 2006, Bolivian troops occupied the country's natural gas facilities.   

Petrobras, Brazil's national oil company, owned the largest stake in the fields and Brazilian industries depended on Bolivian gas.  Yet Brasilia reacted quite calmly.  Why?

Simply because Bolivia had no leverage.  The “nationalization” raised taxes on the gas companies (Petrobras, Repsol, British Gas, and Total), but changed nothing else.  Brazil wasn't happy about losing the profits, of course (the Federal Republic of Brazil owns a 55.7% stake in Petrobras), but all Brasilia really cared about was retaining access to the gas at a reasonable price.  And that's what they got:  the red line shows the date of the nationalization:  the big run-up in price preceeded it.

Petrobras and Bolivia had a “take-or-pay” contract, in which Petrobras promised to purchase no less than 65% of Bolivia's daily capacity, even if they couldn't use it, at rates based on this (get ready for it):

The price per million BTUs, PGt = 0.475 × [0.5 × (FO1t-1/FO10) + 0.25 × (FO2t-1/FO20) + 0.25 × (FO3t-1/FO30)] + 0.5 × PGt-1, where FO1 is the price in $/ton of fuel oil with a 3.5% sulphur content (aka, “Cargoes FOB Med Basin Italy”), and FO2 and FO3 are the price of fuel oil with a 1.0% sulphur context (aka, “U.S. Gulf Coast Waterborne” and “Cargoes FOB NEW.”

Another way of putting it is that the contract stipulated that if oil prices doubled, it would take two years for Bolivian gas prices to increase 97 percent.  Which doesn't quite seem to have been what happened, since crude oil prices don't quite track fuel oil and Brazil sometimes needed to overpay when it couldn't use all the gas on offer, but close enough.

In other words, the revolution turned out to be something of a dud.  Petrobras kept its assets and its contract.  Bolivia did get more revenues but a tax hike didn't require troops.  Political theater, it was.

Of course, whether it was good theater depends on your seat.  Investment in the gas industry has collapsed, and Petrobras now prefers to access higher-cost gas deposits at home ... not because of the taxes, but because of the uncertainty.  Similarly, the dramatic way in which the tax hikes were guised as a nationalization meant tossing out the old revenue-sharing agreements with the provinces, and thus the current autonomy crisis.

It's not clear where the country goes from here.  I had lunch with a Bolivian and a Brazilian who joked about civil war.  The Brazilian was sanguine until the Bolivian suggested that eastern rebels might cut off the taps.

“No, you can't have a war,” joked the Brazilian, “until we get the other gas projects going. Then we will happily sell you weapons.”      

A special bond

On August 8th, my third day in Venezuela, the Bolivarian Republic announced that it would be buying another tranche of Argentine bonds, worth US$1.5 billion.  So what happened?  Something unexpected:  the price of Argentine bonds tanked, and the gap between the yield on Argentine bonds and U.S. Treasuries spiked above 7 percentage points.

The vertical white line is August 8th.

Now why would a bond purchase by a flush buyer cause investors to worry?  It’s not that Argentina overissued.  The country had only sold $7.46 billion of bonds to Venezuela, all of which involved refinancing existing debt, since the country is still running a budget surplus.  Nor is it the country’s recent default and repudiation:  that risk was already priced in. 

Well, the Bolivarian Republic bought the bonds from Argentina, but it sold them on to Venezuelan banks instead of holding on to them.  Why?  To soak up bolívares held by the banks before the banks lent them out.  It turns out the banks didn't hold on to these issues, but dumped them that very day “at practically whatever price,” in the words of La Nación’s business page.   

Moody’s downgrade from “positive” to “stable” followed along on August 14th, like clockwork. 

Of course, as you can see, the Bolivarian Republic’s own bonds aren’t doing too well either.  Strange, for a country in the midst of an oil boom, and supposedly known for its prudent budgeting ... no, really.

This is not going to end well.  More on that later, after a brief diversion into Bolivia’s gas nationalization.

At some point I really am going to have to start making those AFOE posts that I’ve been promising.  Too much real work, that’s my excuse.  Say ... are there any topics that I promised to blog about and never got around to?    

Bolivarians and Bolivians

Another thing that I didn't quite realize until I got to Venezuela is just how important the international dimension of the Bolivarian Revolution is to President Chávez. 

The above photo is of a speeding red jeep, of the sort that Chávez has distributed to various functionaries, with “Viva Bolivia libre” painted on the back window.  We were up in the “Country Club” neighborhood, a wealthy part of town where the government planned to build public housing until Chavista supporters started buying homes in the area.  Those plans, mysteriously, now seem to be on hold.

It was a Saturday, the day before Bolivia's recall referendum.  Chávez is deeply vested in Evo's success, and so he organized mass demonstrations in support of Evo Morales here in Caracas.  Parts of the city were a sea of red, gold, and green, and Evo supporters could be seen everywhere.  It formed a decent counterpoint to the opposition demonstration held on the same day. 

Bolivia is a member of the Alternativa Bolivariana para las Américas (aka, ALBA), along with Nicaragua, Dominica, and Cuba.  Honduras is on the verge of joining.  It isn't entirely clear what ALBA does (there's not a lot of institutional heft to it) but the Venezuelan government has vested a lot of rhetoric.  It also seems to have invested no small amount of money.  A back-of-envelope calculation from data in this Miami Herald article implies that subsidies to Cuba alone are worth around one billion dollars a year.  Information in this Reuters piece implies an even higher cost:  34 million barrels a year, worth around $4 billion, in exchange for Cuban doctors.  Chávez has given aid to Bolivia and Nicaragua under ALBA, purchased billions and billions of Argentine debt in support of the Kirchners, and finances oil purchases in the circum-Caribbean.

There are two mysteries to Chavista internationalism.  First, what's its extent?  How many resources has Caracas put into spreading Bolivarianism?  Second, what does President Chávez get out of it?  Neither one has a clear answer, but I'll take a very superficial stab at one below the fold.

26 leyes

Last weekend saw the opening of the Olympics and the outbreak of a genuine old-fashioned shooting war in the Caucasus.  Which means that the news from South America has been somewhat obscured.  I will take that as an opportunity. 

There are things that you can only really learn about a country by travelling there. I am now rather more certain both that the Revolución Bolivariana is fairly secure and that it will end badly.

On Saturday I attended an opposition demonstration that was rather poorly-attended for a country where the president had just decreed a series of reforms that had been rejected in a referendum less than nine months earlier. The big slogans were “No es no,” and “Pueblo, madura, esto es dictadura.”

The latter translates into the rather hectoring “Grow up, people, this is a dictatorship.” That’s not the slogan of an opposition that’s fired up and looking to convince people. No, that’s a cry of frustration.

More tellingly, the counter-demonstrators were good-humored and teasing, rather than angry and intimidating. “Oposición, madura, esto es locura” or “Opositores, maduran, cuanto tiempo durarán.”

Both sides had to do some violence to the proper placement of the emphasis in order to preserve the rhythm, but that’s what a good chant is all about!  Unfortunately, some of the demonstrators insisted on shouting “Pueblo, madura, esto es comunismo,” which just doesn’t work on any level.  Not when you keep strolling past branches of McDonald’s and ads for beauty creams on your way downtown. 

A bit more detail (and more pictures) below the fold.

Newsflash: another most excellent election result

Venezuelan voters just nixed constitutional reform.  This is good news.   

I have another point, though, which is that people should keep in mind that Chávez has maintained a scrupulous dedication to legality since coming to power.  I won't analyze why, but I will say that, and the fact that the man has not governed outside the law says good things about both his administration and the country.

Yeah, I said "administration," not "regime."  If the referendum had gone the other way, I might have chosen differently.  But it didn't.  And like I said, that's good news. 

Adelante, Juan Carlos, Adelante

I am not a fan of monarchy in general.  And with grandparents who fought on the losing side of the Spanish civil war, I certainly find it difficult to be much of a fan of the Spanish monarchy in particular.  Similarly, and for much more concrete reasons, I am no fan of José María Aznar. 

But I am a fan of José Luis Zapatero.  And King Juan Carlos did good facing down that coup back in '81. So much as I enjoy Hugo Chávez's bluster, I gotta give props to the King here.  It might almost be enough to make me a monarchist, were I not just so bloody American at heart.