Venezuela - no country for compensation

The economic situation has gone from bad to worse in Venezuela and the country must pay its debts to avoid further financial catastrophe. With inflation predicted to rise as high as 110 per cent in 2015, Global Insight assesses an economy in turmoil.

Ruth Green

Gripped by high inflation, chronic shortages and an ever-widening fiscal deficit, Venezuela a year ago was not a pretty picture. But after 12 months that have seen further unrest, currency devaluations, a dramatic slump in oil prices and a bitter stand-off between the government and international airlines, turmoil has taken on a whole new meaning in Venezuela.

‘The economic situation in Venezuela has worsened considerably since measures have not been taken to resolve the main problems affecting the country,’ says former IBA President Fernando Peláez-Pier, a partner at Hoet Peláez Castillo & Duque in Caracas.

Despite indications that Nicolás Maduro’s government was taking action to combat the crisis, ongoing shortages of basic food, medical supplies and foreign currency – not to mention the estimated $12bn a year the government is spending to subsidise domestic gasoline sales –  have pushed the economy to breaking point.

‘In July this year [Rafael Ramírez], president of PDVSA [Petróleos de Venezuela], [former] Minister of Energy and Vice-President of the Economy, announced in London and made a statement to the international press that they would adopt a series of measures to counteract some of these problems, announcing an increase in the price of petrol […] as well as the revision of exchange controls with a view to creating a single, unified exchange rate system,’ says Peláez-Pier.

And after Ramírez was removed from these posts in the government’s widespread cabinet reshuffle in September, it seemed increasingly unlikely that change will be on the cards, according to Peláez-Pier. ‘It is expected that inflation will reach 75 per cent by the end of the year and according to economists it will rise to around 110 per cent in 2015.’

‘The economic situation in Venezuela has worsened considerably since measures have not been taken to resolve the main problems affecting the country’

Fernando Peláez-Pier
Hoet Peláez Castillo & Duque; former IBA President

However, in mid-November, as part of a package of 28 new laws, the government said it would increase taxes on luxury goods, alcohol and tobacco to help diversify and revitalise the economy.

Moreover, already home to one of the most complex exchange rate systems in the world, in a bid to resolve its ongoing cash flow problems, earlier this year the government drew the ire of many international companies as it introduced a new ‘preferential rate’ of 6.3 Venezuela bolívares per US dollar for state-owned companies and importers of certain goods, such as food and medicine.

Effectively devaluing the bolívar for flights abroad, this did not sit well with international airlines, which refused to sell tickets, consequently Venezuela quickly turned into a de facto ‘no fly’ zone.

The effect on the country has been staggering, says Mia Wouters, Chair of the IBA Aviation Law Committee and Of Counsel at LVP Law in Brussels. ‘International airlines operating on routes to and from Venezuela have downsized dramatically their seat availability,’ she says. ‘According to the International Air Transport Association, international airlines have cut seat availability in and out of Venezuela by 49 per cent.

‘The airline problem in Venezuela derives from a government requirement that ticket sales need to be in local currency. But airlines are unable to convert the money they receive into hard currency, which is due to delays in authorisations from the government, which operates a strict foreign exchange control.’

Although the government is estimated to owe international airlines in the region of $4bn, it has been slow to repatriate the funds, making basic travel for Venezuelans virtually impossible.

‘It is also practically impossible nowadays to buy airline tickets in bolivars, meaning that you have to buy them outside of Venezuela in dollars and the tariffs are much higher compared to similar segments charged by the same foreign airlines within the region,’ says Peláez-Pier.

‘This has generated a great deal of difficulty for travel, whether for business or pleasure. Due to the government’s own limited available foreign exchange it is not thought in the short term that it will honour airlines’ debt and the situation will continue to deteriorate.’

Wouters agrees that a conclusion seems a long way off, but says the situation cannot continue. ‘Airlines have been negotiating and some have reached an agreement, but they received no guarantee. Flying to a country where they cannot be paid is in the end not sustainable for the airlines,’ she says, adding that Venezuela’s domestic carriers are also struggling. ‘They find it hard to obtain dollars to import spare parts for maintenance. Some aircraft are just sitting on the tarmac because they don’t have spare parts.’

And as the largest oil reserves holder in the world, air travel, unsurprisingly, isn’t the only area in Venezuela under the international spotlight.

In early October a World Bank arbitration tribunal ruled the country should pay Exxon Mobil $1.6bn to compensate for Venezuelan assets seized in 2007. The ruling was seemingly welcomed by the government, which hailed it as a victory in the face of ‘exaggerated claims’.

Given the likelihood that the final settlement would be significantly lower than the original claim – since it will take into account the $900m PDVSA has already paid the US oil giant following a 2012 ruling by the International Chamber of Commerce – and the fact that Exxon had originally claimed at least $10bn over the 2007 nationalisation of its Cerro Negro and La Ceiba projects in the Orinoco Belt – it seemed as if Venezuela had gotten off lightly.

Yet around two weeks later the International Centre for Settlement of Investment Disputes (ICSID) announced it was temporarily suspending the enforcement, after receiving a request from the Venezuelan government to revise the award.

Although Venezuela opted to withdraw from the ICSID Convention in January 2012, from a legal perspective the country is still required to pay out to successful claimants for the dozens of ICSID claims that were pending or had already been initiated by 25 July 2012.

And while Peláez-Pier says the timing is curious, occurring when the government faces the ominous task of paying around $5bn in foreign debt, he said Venezuela would have no choice but to foot the bill.

‘The government is going to pay and has to pay the amount but today, more than ever, it requires the support of foreign oil companies, not only to maintain current production levels, but also increase them through new exploration, exploitation, development, without taking into account the need to maintain existing infrastructure in different refineries, and for this PDVSA needs financing and the participation of foreign companies.’

And as Venezuela continues to moot the idea of selling the US refining unit of PDVSA subsidiary Citgo to generate some much-needed cash flow, he says the ICSID ruling was a stark reminder of Venezuela’s dire economic situation.

‘Even though the amount it has been asked to pay is comparatively low compared to the amount asked for, it still represents a serious problem for Venezuela in relation to its cash flow problems.’  

Ruth Green is a freelance journalist and can be contacted on