Cablegate: 2010 Investment Climate Statement

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TAGS: ECON PGOV EINV EFIN ETRD ELAB USTR OPIC KTDB VE
SUBJECT: 2010 INVESTMENT CLIMATE STATEMENT

REF: 09 STATE 124006

1. (U) In response to reftel, please find following the submission
of the 2010 Investment Climate Statement for Venezuela.

2. (U) Openness to Foreign Investment

Economic and political uncertainties, a recent history of actual
and threatened nationalizations, and increasing state intervention
in the economy, make Venezuela's investment climate considerably
less welcoming than its relatively liberal legal framework would
otherwise suggest. As a result of these risks, foreign direct
investment in Venezuela has been lower in recent years than in most
other Latin American countries. In 2008, despite these challenges,
many companies with investments in Venezuela recorded strong
profits thanks to five consecutive years of high economic growth
fueled by record oil prices and massive government spending. In
2009, the investment climate was less favorable given increasing
political and economic uncertainty and the decline in oil prices,
although many companies decided to maintain their investment
position in Venezuela in the expectation that the economic
environment will eventually improve. Strict labor laws and the
devaluation of dividends and payments to suppliers have also
increased the costs of withdrawing from the Venezuelan market. In
2010, Venezuela's economic outlook is continued recession or anemic
growth.

Important developments in 2009 and early 2010 included the
devaluation of the official exchange rate, a series of banking
interventions, an electricity crisis that caused rolling outages
throughout the country, and the nationalization of assets in the
petroleum, steel, tourism, agribusiness, and banking industries.
The Government of the Bolivarian Republic of Venezuela (GBRV) has
also revoked or refused to renew important concessions held by
private companies.

In August 2007, as part of his push toward "21st Century
Socialism," President Chavez proposed a series of constitutional
reforms that would have, among other things, defined Venezuela as a
socialist state and significantly weakened protections for private
property. Voters rejected these proposals by a slim margin in a
December 2007 referendum, but President Chavez decreed 26 new laws
on July 31, 2008, that implemented some of the rejected
constitutional reforms and weakened property rights. Notably, the
Law of Agro-Food Security and Sovereignty increased state power
over food distribution, while an amendment to Venezuela's consumer
protection law eliminated the need for a previous declaration of
public utility by the National Assembly before the executive can
start expropriation procedures. Both laws permit the GBRV to seize
goods or property in the interest of the larger community. In
2009, in a new threat to property rights, the GBRV published an
Urban Lands Law that empowered the state to seize "underutilized
urban land" and designated over 1000 properties in Caracas "of
cultural interest," placing restrictions on their transfer and
modification.

Growing state intervention in the economy has created a series of
distortions. The GBRV has maintained a fixed exchange rate and
exchange controls since February 2003. In January 2010, President
Chavez announced a devaluation of the bolivar, but the official
bolivar/dollar exchange rate remains overvalued. As a result,
there is intense competition to gain access to hard currency at the
official rate (including for repatriation of capital and/or
profits), and rationing of official dollars has led to the
development of a parallel foreign exchange market. The GBRV also
maintains price controls on a wide variety of goods and services.
These controls have caused shortages and have created disincentives
to investment, in some cases driving companies that produce
price-controlled goods out of business.

In 2009, Venezuela ranked 174th in the Heritage Foundation's Index
of Economic Freedom, reflecting substantial declines in eight of
ten economic freedoms since last year. According to the Heritage
Foundation report, Venezuela had the second lowest score in Latin
America due to an increasingly interventionist government,
inefficient and rigid regulation, opaque and burdensome investment
laws, corruption in civil society and the judiciary, and the
weakening of property rights. The World Bank's 2010 "Doing
Business Report" ranked Venezuela 177th in terms of the ease of
doing business, with an average of 141 days and 16 procedures
necessary to start a business. Transparency International's 2009
Corruption Perceptions Index ranked Venezuela as the second most
corrupt country in Latin America.

Measure

Year

Index/Ranking

TI Corruption Index

2009

162

Heritage Economic Freedom

2009

174

World Bank Doing Business

2010

177

Legal Framework for Foreign Investment

In theory, Venezuela's legal framework for foreign investment is
relatively liberal: the law requires equal treatment for both
foreign and local companies, with the notable exception of a few
sectors in which the state or Venezuelan nationals must be majority
owners, including hydrocarbons and the media. Repatriation of
capital and dividends is allowed, subject to the exchange control
regime. In practice, the Venezuelan judicial system is highly
politicized.

The 1999 Constitution

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

Decree 2095

Decree 2095 of 1992 established the legal framework for foreign
investment in Venezuela. This decree implemented Andean Community
Decisions 291 and 292 and lifted most prior restrictions on foreign
participation in the economy. (Venezuela withdrew from the Andean
Community in April 2006, but the GBRV has continued to apply some
of the Andean Community norms in the absence of any other
regulations.) Article 13 of the decree explicitly guaranteed
foreign investors the same rights and imposed the same obligations
as applied to national investors "except as provided for in special
laws and limitations contained in this Decree." Decree 2095 also
guaranteed foreign investors the right to repatriate 100 percent of
profits and capital, including proceeds from the sale of shares or
liquidation of a company, and allowed for unrestricted reinvestment
of profits.

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

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

Foreign professionals are free to work in Venezuela without
restriction-provided that they possess a government-issued identity
card or government-approved work permit-but must first revalidate
their certification at a Venezuelan university. Consulting
services under contract for a specific project are not subject to
this requirement.

The Hydrocarbons Sector

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

Over the last several years the GBRV has made a number of changes
in royalty, tax policies, and contracts that have substantially
increased uncertainty for foreign companies operating in Venezuela.
For example, the 2001 Hydrocarbons Law did not expressly
grandfather contracts executed under earlier legislation.
Specifically, it did not include the 33 operating service contracts
awarded for "marginal" or inactive oilfields in three rounds in the
1990s, exploration and production profit-sharing agreements awarded
in 1996, and four so-called "Strategic Associations," legal
entities with majority private and minority PDVSA ownership formed
in the 1990s to extract and upgrade Venezuela's extra heavy oil in
the Faja region. The GBRV argued in 2001 that no grandfather

provision was necessary because retroactive application of
legislative provisions is forbidden by constitutional mandate.

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

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

In October 2004, the GBRV unilaterally eliminated a nine-year
royalty holiday ceded to the Strategic Associations, arguing that
this was allowable under earlier hydrocarbons legislation. The
GBRV then informed companies with operating service contracts in
early 2005 that they must migrate the contracts to joint ventures
that conform to the 2001 Hydrocarbons Law. It threatened to seize
fields operating under the services contracts on December 31, 2005
if oil companies did not sign transition agreements to migrate
their contracts. Sixteen oil companies signed memorandums of
understanding converting their contracts to joint ventures on March
31, 2005. In January 2008, ENI and Total, two companies that did
not sign MOUs in 2005, reached an agreement with PDVSA.

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

In April 2008, a new windfall profit law was promulgated, mandating
a special contribution by parties that export or transport natural
or upgraded liquid hydrocarbons abroad. The contribution is
calculated at a variable rate, which is determined using a formula
involving the current price of oil and total exports from
Venezuela.

On September 18, 2008, an Organic Law on the Restructuring of the
Internal Liquid Fuels Market came into effect. The law mandated
government control of domestic transportation and wholesale of
liquid fuels and set a 60 day period for negotiations with the
affected companies. The law does not define the term "liquid
fuels" which created uncertainty as to whether it will apply to
products other than gasoline and diesel fuel, such as motor oils or

lubricants. This law affected several foreign companies which had
investments in the downstream sector.

On May 7, 2009 Venezuela enacted the Organic Law that Reserves to
the State the Assets and Services related to Hydrocarbon Primary
Activities. The bill specifically affected petroleum service
companies involved in the injection of water, steam, or gas as
secondary recovery methods, as well as services rendered for the
performance of primary activities on Lake Maracaibo. It provided
for the "extinction" of contracts executed in the past between
PDVSA and private companies. It stipulated that all contracts and
activities governed by the law would be subject to Venezuelan law
and subject to the exclusive jurisdiction of Venezuelan Courts.
Under the provisions of this law, over 75 companies, including
three U.S. firms, were expropriated by the GBRV.

On July 10, 2009, Venezuela's Organic Law for the Development of
Petrochemical Activities entered into force. The new
Petrochemicals Law has a limited scope of application and does not
apply to activities regulated by the 2001 Hydrocarbons Law or the
1999 Gaseous Hydrocarbons Law. The Petrochemicals Law reserves
basic and intermediate petrochemical activities for the State, as
well as the assets and facilities required for their handling. It
allows the State, through MENPET, to create mixed companies in
which the GBRV will control at least 50 percent of the shareholder
equity and exercise effective control over company decisions. The
legislation mandates that certain investment incentives for the
GBRV (e.g. technology transfer, incentives for industrial
development, infrastructure supply, facility maintenance, social
resources, import substitution, price advantages, and estimated
profits) will be required for authorization of a mixed company.
The Petrochemicals Law gives priority to the supply of the domestic
market and the development of state and socialist companies. Upon
expiration of the term of a mixed company, its works, ancillary
facilities, and equipment shall be delivered to the State, free of
encumbrance and without any indemnity whatsoever.

3. (U) Conversion and Transfer Policies

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

The Law Governing the Foreign Exchange System (Gazette No. 4897 of
1995) permits the executive branch to intervene in the foreign
exchange market "when national interests so dictate." President
Chavez used this law to create the Commission for the
Administration of Foreign Exchange (CADIVI) on February 5, 2003 to
regulate the purchase and sale of foreign currency. A Foreign
Exchange Crime Law (Gazette No. 38,272 of 2005; revised by the
National Assembly in December 2007) established criminal penalties
and fines for transactions made outside the official foreign
exchange process. The exemption for bond operations in this law
has led to the creation of a parallel foreign exchange market,
known as the "permuta" (swap) market, which is essentially a
currency exchange market that operates through bond swaps. In
early 2008, the GBRV prohibited the publication in Venezuela of the
parallel exchange rate. In January 2010, President Chavez
announced that the Central Bank of Venezuela (BCV) and the
executive branch would intervene in the parallel foreign exchange
market to "eliminate the speculative increase in hard currency."

In March 2005, the official exchange rate was fixed at 2,150
bolivars (Bs) per USD. (On January 1, 2008, the government
introduced a redenominated bolivar known as the "bolivar fuerte"
and adjusted the official rate to 2.15 bolivars per USD.) On

January 11, 2010, the GBRV devalued the bolivar and established two
exchange rates, an official rate at 2.6 Bs/USD (which applies to
certain priority imports) and a "petroleum dollar" rate at 4.3
Bs/USD (which applies to non-priority imports and most other
categories of foreign exchange requests).

According to President Chavez's announcement on January 8, 2010,
the official exchange rate will apply to imports of food, health
products, machines and equipment, and science and technology; to
imports made by the public sector; to remittances to family
members; to hard currency for students studying abroad; to
embassies and consulates in Venezuela, to retired pensioners; and
in other special cases. The petroleum dollar rate will apply to
"everything else," including the repatriation of dividends.
Despite the devaluation, the official exchange rate remains
overvalued, and companies that manufacture tradable goods in
Venezuela find it very difficult to compete against goods imported
at the official rate. The parallel market is relatively shallow
and volatile: it closed around 6 Bs/USD at the end of 2009.

Foreign companies wishing to repatriate capital, dividends, or
profits at the petroleum dollar rate have to secure authorization
from CADIVI. CADIVI authorized approximately USD 579 million in
repatriations in the first three quarters of 2009, down from 1.17
billion in 2008. However, many companies did not receive the full
authorization they requested from CADIVI or received it after
significant delays. Most companies have not had repatriations
approved at the official rate for dividends after the 2006 fiscal
year. Some companies have therefore turned to the parallel market
for repatriation.

4. (U) Expropriation and Compensation

The government has nationalized significant assets in recent years.
Given President Chavez's public threats to various sectors, this
trend is expected to continue. In January 2007, President Chavez
announced his intent to nationalize strategic sectors. Shortly
thereafter, the GBRV took over an electric company and cable
company owned by US companies and investors. In 2008, the GBRV
announced nationalizations of multi-national cement companies, a
steel maker (SIDOR) and the Banco de Venezuela. In 2009, the GBRV
nationalized assets in the petroleum, tourism, agribusiness, and
banking industries. As noted above, ConocoPhillips and ExxonMobil
have not come to agreement with the GBRV for the expropriation of
their respective investments in the Strategic Associations and have
filed for international arbitration. The Swiss cement supply
company Holcim has also opened international arbitration
proceedings following the nationalization of its assets in
Venezuela. Oil service companies with expropriated assets are also
considering filing for international arbitration.

Venezuela's 2001 land law, as modified in 2005, calls for the
redistribution of "unproductive" land. The GBRV claims to have
seized over 4.7 million acres of land since 1998. Some of this
land was expropriated without compensation. These actions have
discouraged investment in several key agricultural subsectors and
reduced their output potential. The GBRV has also conducted
inspections of plants to determine if they are in violation of
Venezuelan law. These inspections have also led to occupation or
nationalization. In March 2009, the GBRV expropriated a rice plant
after claiming that the company was in violation of Venezuelan law
for producing parboiled rice instead of government-regulated white
rice.

On February 21, 2007, the GBRV published the "Decree Law of Popular
Defense against hoarding, speculation, boycott, and any other
conduct that affects consumption of food or products under price

controls." The law defines all stages of the production cycle for
regulated foods as within the ambit of "public utility and the
social interest." It also empowers the government to expropriate
any business that fits this sweeping definition in order to protect
"food security and sovereignty." The GBRV invoked this decree to
direct the military to seize two slaughterhouses in 2007.

5. (U) Dispute Settlement

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

Decree 2095 allows for the arbitration of disputes as "provided by
domestic law." The Commercial Arbitration Law (Gazette No. 36,430
of 1998) eliminated the previous requirement for judicial approval
of arbitration; arbitration agreements involving national or
international firms can therefore be automatically binding. The
law also allows state enterprises to subject themselves to
arbitration in contracts with private commercial entities, but
requires that they first obtain the approval of the "competent
statutory body," as well as the "written authorization" of the
responsible minister. As noted above, however, the 2001
Hydrocarbons Law prohibits PDVSA from entering into agreements
providing for international arbitration.

In a few cases, the GBRV has accepted the results of international
arbitration in disputes involving foreign investors and government
entities. Recent GBRV statements and actions, however, call into
question whether this trend will continue. For example, in a
February 2006 decision involving Haagen-Dazs, GBRV courts
invalidated an American Arbitration Association award entered in
Miami. In April 2006, a GBRV court set aside an International
Court of Arbitration award entered in favor of an Italian
electronics company against VTV, the state owned television
channel, in connection with a concession agreement.

In October 2008, the Venezuelan Supreme Court, while acknowledging
the existence of a fundamental right to arbitration, resolved that
the GBRV must expressly consent to it. The ruling challenged the
legal analysis cited by a number of former investors who believe
that Article 22 of the 1999 Law on Promotion and Protection of
Investors provides them with access to arbitration with the World
Bank International Centre for Investment Disputes (ICSID). The
Court reasoned that Article 22 does not provide a clear and open
offer of consent to ICSID arbitration. The impact of this decision
remains to be seen.

6. (U) Performance Requirements and Incentives

Foreign companies receive the same tax treatment as domestic
companies with the exception of the non-associated natural gas
sector, where foreign investors receive preferential tax treatment.
Performance requirements related to workforce composition are
discussed in the labor section below. The state oil company,
PDVSA, seeks to maximize local content and hiring in its
negotiations with foreign companies. It also requires companies to
make social contributions.

7. (U) Right to Private Ownership and Establishment

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

8. (U) Protection of Property Rights

Real Property Rights

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

Intellectual Property Rights

Article 98 of the 1999 constitution guarantees state protection for
intellectual property rights "in accordance with the conditions and
exception established by law and the international treaties
executed and ratified by the Republic in this field." Under the
1999 constitution, intellectual property rights are classified as
cultural and educational rights rather than economic rights, as
they were in the past. Venezuela is a signatory to the Berne
Convention for the Protection of Literary and Artistic Works, the
Geneva Phonograms Convention, the Universal Copyright Convention,
and the Paris Convention for the Protection of Industrial Property.
Although Venezuela is a member of the World Intellectual Property
Organization (WIPO), no official GBRV delegation has attended a
WIPO meeting in the last five years. In the past, Venezuela has
implemented its obligations under the WTO Agreement on
Trade-Related Aspects of Intellectual Property Rights (TRIPS)
through Andean Community Decision 486.

The Venezuelan Industrial Property Office or SAPI, through its
actions and occasional public antagonism towards IPR, often draws
criticism from IPR advocates and rights holders. IPR protection is
also hindered by the lack of adequate resources for the Venezuelan
copyright and trademark enforcement police (COMANPI) and for the
special IPR prosecutor's office. SAPI has publicly advocated for
anti-IPR legislation and has not issued a pharmaceutical patent
since 2004. Both President Chavez and Commerce Minister Eduardo
Saman have publicly called for the elimination of patents. In
2009, the GBRV nullified two patents for an antibiotic produced by
a pharmaceutical company after the company protested the local
production of two generic copies of the drug. Pirated software,
music, and movies are readily available throughout the country. In
the 2009 Special 301 Annual Review, Venezuela remained on the
"Priority Watch List."

Patents and Trademarks

Venezuela has provided the legal framework for patent and trademark
protection through Andean Community Decision 486 (and Decision 345
for plant varieties). In September 2008, however, SAPI issued a
press release resurrecting the Industrial Property Law of 1955,
which expressly prohibited patent protection for pharmaceuticals
and other products. The return to the 1955 law codifies the GBRV's
de facto policy of refusal to issue patents, particularly in the
area of medicines. The GBRV has not awarded a patent for new
pharmaceuticals since 2004. Since 2002, Venezuela's food and drug
regulatory agency has approved the commercialization of generic
drugs without requiring unique test data. These drugs are the

bioequivalent of innovative drugs that have already received market
approval. This practice thereby denies the innovative drug
companies protection against unfair use of their test data as
required by TRIPS. From a trademark standpoint, the 1955 Law
changes the registration procedure and adds the cumbersome and
expensive requirement of publishing trademark applications in a
local newspaper before they can be published in the Industrial
Property Bulletin. The Law also contains numerous provisions which
conflict with TRIPS.

Venezuela does not automatically recognize foreign patents,
trademarks or logotypes, so foreign investors must be sure to
register patents and trademarks appropriately and in as many
categories as are applicable. It is advisable not to have agents or
distributors do so because the agent can then claim that he/she is
the registered owner of the trademark in question. Following the
nationalization of a well-known domestic coffee company in 2009,
the GBRV expropriated the trademark and brand. Venezuelan
authorities have indicated that a new industrial property law is a
priority and, in fact, there is at least one draft which began
circulating during the last quarter of 2009. SAPI's web page also
mentions a new law and invites input; however, the page does not
contain the text of any draft law which could be used as the basis
for comments.

Copyrights

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

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

Since 2004, the National Assembly has also been considering a
Copyrights bill. The bill, which was proposed by SAPI, has been
very controversial and raised serious concerns in the private
sector. Among other things, the bill calls for the local
registration of all works, certification by a government-appointed
commission to approve the copyright, a significant increase in
royalty rates, and a provision to expropriate works if in the
national interest.

9. (U) Transparency of Regulatory System

The Government of Venezuela adopted three laws in the early 1990's
to promote free market competition and prevent unfair trade
practices: a Law to Promote and Protect Free Competition (Gazette
No. 34,880 of 1992), an Antidumping Decree (Gazette No. 4441 of
1992), and a Consumer Protection Law (Gazette No. 4898 of 1995).

In 1997 the government created a new agency, Pro Competencia, to
implement the 1992 law. A government procurement law of 2001
supposedly increased transparency in the competitive bidding
process for contracts offered by the central government, national
universities, and autonomous state and municipal institutions.

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

are struggling to cope with the growing array of regulations in
areas as diverse as the tax code, labor, and the environment.

As noted above, an amendment to Venezuela's consumer protection law
was included as part of the 26 decree laws passed on July 31, 2008.
This law renamed the consumer protection institute-now
INDEPABIS-and gave it broader powers. Since then, INDEPABIS has
operated in the absence of implementing regulations which has given
its inspectors an extraordinary degree of discretion, resulting in
uneven standards and enforcement. INDEPABIS conducted over 15,000
inspections in 2009, and several franchise operations, both
domestic and foreign, have been shut down for several days or have
faced serious fines due to what some observers see as over-zealous
enforcement. Reports indicate that INDEPABIS and industry have
agreed to work out more predictable standards and operating
procedures.

10. (U) Efficient Capital Markets and Portfolio Investment

Capital Markets

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

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

Credit Markets

Financing is available from a variety of sources, and there is no
discrimination against foreign investors seeking access to credit.
The credit market is highly regulated, however. The maximum
nominal interest rate banks can charge is 33 percent. Banks are
required to set aside 44 percent of their portfolio for loans to
the housing, agriculture, small business, manufacturing and tourism
sectors, in some cases at preferential rates.

The majority of banking sector assets are concentrated in the
country's six largest banks, which are generally solid. However,
the banking sector as a whole is highly exposed to the public
sector through government deposits and bond holdings, some banks
have a large percentage of their portfolio in consumption loans,
and some banks are pushing the limits of capital adequacy
requirements. In November 2009, the GBRV took over or shut down
eight banks, ostensibly for violating a number of regulation
requirements, but also raising concerns about the levels of
government corruption within the banking system. The GRBV now
controls approximately 30 percent of the banking sector by assets.

11. (U) Competition from State Owned Enterprises

Private enterprises are often at a disadvantage when competing with
public enterprises, specifically in terms of accessing foreign
exchange at the official rate. For example, non-petroleum public
sector imports are eligible for an exchange rate of 2.6 Bs/USD,
whereas the majority of private sector imports are eligible only
for the 4.3 Bs/USD rate. Public sector companies, in some cases,
do not need to go through the GBRV's exchange control board,
CADIVI, to request hard currency at the official exchange rate, but
CADIVI often delays or refuses the applications of private
companies, limiting or denying their access to foreign exchange at
one of the two official exchange rates.

State Owned Enterprises (SOEs) are active in almost every sector of
the Venezuelan economy, including hydrocarbons, mining, media,
telecommunications, tourism, and agribusiness. In the largest and
most important SOEs, the CEO is often a minister in the GBRV. The
CEO of PDVSA is also the Minister of Energy and Petroleum; the rest
of PDVSA's board members are also appointed by the President. The
pattern is similar in other important SOEs, such as the Venezuelan
Corporation of Guayana (CVG), a state holding company that includes
companies in basic heavy industry, such as electricity generation,
steel production, iron ore mining, and aluminum production.

12. (U) Corporate Social Responsibility

Many companies in Venezuela have attempted to integrate corporate
social responsibility (CSR) into their business models, although it
is difficult to measure the general awareness of CSR among
consumers. By law, companies bidding on state contracts must
earmark five percent of their budget for CSR-related activities.
This requirement has raised concerns about corruption, particularly
when companies are not vigilant about the organizations receiving
the funds and how they administer them. While some foreign and
local enterprises have adopted generally accepted corporate social
responsibility practices such as the OECD Guidelines for
Multinational Enterprises, these principles are not broadly
applied.

13. (U) Political Violence

Venezuela's political climate is polarized between supporters and
opponents of President Chavez and his policies. However, there
were no major incidents of political violence that specifically
targeted foreign-owned companies or installations in 2009.

14. (U) Corruption

Corruption is a very serious problem in Venezuela and appears to be
worsening. Venezuela has laws on the books to prevent and
prosecute corruption, and accepting a bribe is a criminal act.
However, the judicial system has been accused of being politicized
and ineffective in applying these laws. Government contracts are
vulnerable to corruption because the tender process frequently
lacks transparency. The current regime of price and foreign
exchange controls has also provided opportunities for corruption.

15. (U) Bilateral Investment Agreements

Venezuela has concluded the following bilateral investment
agreements as of June 1st, 2009:

Partner

Date of Signature

Date of entry into force

Argentina

16-Nov-93

1-Jul-95

Barbados

15-Jul-94

31-Oct-95

Belarus

6-Dec-07

13-Aug-08

Belgium and Luxembourg

17-Mar-98

29-Apr-04

Brazil

4-Jul-95

---

Canada

1-Jul-96

28-Jan-98

Chile

2-Apr-93

25-May-95

Costa Rica

17-Mar-97

2-May-01

Cuba

11-Dec-96

15-Apr-04

Czech Republic

27-Apr-95

23-Jul-96

Denmark

28-Nov-94

19-Sep-96

Ecuador

18-Nov-93

1-Feb-95

France

2-Jul-01

30-Apr-04

Germany

14-May-96

16-Oct-98

Indonesia

18-Dec-00

23-Mar-03

Iran, Islamic Republic

11-Mar-05

7-Jun-06

Italy

14-Feb-01

---

Lithuania

24-Apr-95

1-Aug-96

Netherlands*

22-Oct-91

1-Nov-93

Paraguay

5-Sep-96

14-Nov-97

Peru

12-Jan-96

18-Sep-97

Portugal

17-Jun-94

7-Oct-95

Russian Federation

7-Nov-08

---

Spain

2-Nov-95

10-Sep-97

Sweden

25-Nov-96

5-Jan-98

Switzerland

18-Nov-93

30-Nov-94

United Kingdom

15-Mar-95

1-Aug-96

Uruguay

20-May-97

18-Jan-02

*Effective November 1, 2008, Venezuela revoked its Bilateral
Investment Treaty with the Netherlands. Revocation did not have
any immediate consequences for investments made prior to the date
of revocation. The BIT remains in force for these investments for
a period of 15 years.

16. (U) OPIC and Other Investment Insurance Programs

OPIC programs in Venezuela were suspended in 2005 as a result of
Venezuela's decertification for failure to cooperate in suppressing
international narcotics trafficking. The certification process is
an annual event, and in September 2009 the President again
determined that Venezuela "failed demonstrably" in living up to its
obligations under international counternarcotics agreements and
conventions.

However, the President issued a national interest waiver so that
the United States could continue to support specific civil society
programs and small community development programs in Venezuela.
The Export-Import Bank has not provided new financing for projects
in Venezuela since formally placing Venezuela "off cover" for new
lending in April 2003. Both OPIC and the Ex-Im Bank currently have
significant exposure in Venezuela contracted prior to suspending
operations.

17. (U) Labor

Venezuela's National Institute of Statistics (INE) estimated 6.6
percent unemployment as of December 2009, but this estimate does
not include individuals who work in the informal sector or those
who are self-employed-both groups collectively constitute more than
half of the nation's workforce. Several factors make human
resources a challenge for domestic and foreign investors alike: a
significant number of skilled and professional Venezuelans have
sought employment opportunities abroad due to domestic political
and economic uncertainty; government programs that support poorer
Venezuelans have also made it more difficult for companies to
attract unskilled labor; and the power of traditional trade unions
has diminished as the government has supported the establishment of
thousands of "parallel" unions that are closely aligned to
government interests. Only 12 to 13 percent of the total workforce
is unionized.

In 2009, Venezuela saw a continuing increase in protests and work
stoppages by unions in both the public and private sectors. Union
protests-in some cases resulting in deaths-disrupted operations at
many companies in 2009, including auto assembly plants owned by
General Motors, Toyota, and Mitsubishi, and forced the temporary
shut-down of various oil drilling operations and oil service
companies. Meanwhile, the GBRV has repeatedly delayed negotiations
over collective bargaining agreements for workers in the public
sector, leaving more than two million public employees without
collective contracts, including employees in the oil and gas
industry, teachers, and electrical workers.

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

18. (U) Foreign-Trade Zones/Free Ports

The Free-Trade Zone Law (Gazette No. 34,772 of 1991) provides for
free trade zones/free ports. The three existing free trade zones,

created in subsequent Gazette decrees, are located in the Paraguana
Peninsula on Venezuela's northwest coast, Atuja in the State of
Zulia, and Merida (but only for cultural, scientific, and
technological goods). These zones provide exemptions from most
import and export duties and offer foreign-owned firms the same
investment opportunities as host country firms. The Paraguana and
Atuja zones provide additional exemption of local services such as
water and electricity. Venezuela has two free ports that also
enjoy exemptions from most tariff duties: Margarita Island (Nueva
Esparta) and Santa Elena de Uairen in the state of Bolivar.

19. (U) Foreign Direct Investment Statistics

U.S. FDI in Venezuela is concentrated largely in the petroleum,
manufacturing, and finance sectors. In 2006, according to U.S.
Department of Commerce statistics, the stock of U.S. foreign direct
investment (FDI) was USD 10.9 billion. More recent FDI statistics
are unreliable: the US Department of Commerce reports an increase
in FDI since 2006, but information from the local market suggests
that there has been very little new FDI in Venezuela in recent
years. In 2007, the net inflow of FDI to Venezuela represented
roughly 0.4 percent of Venezuela's GDP.
CAULFIELD

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