This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS  CARACAS 000714 
 
SIPDIS 
 
 
NSC FOR SHANNON/BARTON 
TREASURY FOR OASIA - SIGNORELLI 
SOUTHCOM ALSO FOR POLAD 
ENERGY FOR PUMPHREY AND LOCKWOOD 
STATE PASS USAID FOR DCHA/OTI - PORTER 
 
E.O. 12958: N/A 
TAGS: ECON PGOV EFIN ENRG VE
SUBJECT: ECONOMIC FALL-OUT FROM INCREASED POLITICAL TENSIONS 
 
 
Sensitive But Unclassified.  Please handle accordingly. 
 
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Summary 
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¶1.  (SBU)  The rise in political tensions over the 
revocatory referendum on Chavez's tenure in office and 
attendant violence is beginning to spill over into the 
economy.  The parallel market bolivar/dollar rate has spiked 
as has the spread on Venezuelan bonds.  It appears, however, 
that a planned bond issue will go forward.  In the face of 
rumors of a possible US embargo on Venezuelan oil, state oil 
company PDVSA President made soothing noises, only to be 
undercut by inflammatory comments by President Chavez.  Food 
sector businesses are reviewing their emergency supply plans, 
although they see no imminent crisis.  There are no problems 
with the electrical supply.  Some gasoline stations are 
closed, causing concerns about supply.  Flights at Caracas's 
international airport are proceeding as scheduled, although 
with many cancellations, presumably because of uncertainties 
regarding ground transportation. 
 
--------------------------------------------- ------ 
Financial Indicators  --  Currency and Country Risk 
--------------------------------------------- ------ 
 
¶2.  (U)  Even prior to the street protests, political 
tensions had taken a toll on international markets' 
confidence in Venezuela.  In the period following the 
February 5 devaluation of the official rate from 1600/dollar 
to 1920/dollar, the parallel rate (implicit rate between 
CANTV American Depositary Receipts trading on the New York 
Stock Exchange and CANTV ordinary shares trading on the 
Caracas Stock Exchange) was stable around 3050/dollar. 
However, as the prospects for the referendum have grown more 
dubious it has moved sharply upward, trading upwards of 3250. 
 As of March 1, the CANTV rate was at 3303/dollar.  By 
another measure, that of quasi-legal trading in dollars by 
stock market operators, the dollar is trading even higher, at 
3450/dollar. 
 
¶3.  (U)  Similarly, Venezuelan country risk, measured as the 
spread between its benchmark Global 27 bond and the 30 U.S. 
treasury bond, has increased.  This spread, which had been 
562 basis points (1 basis point = .01 percent) on February 6, 
had risen to 619 basis points on February 20 and 635 basis 
points on February 27.  We understand that as of mid-day 
March 2, the spread had climbed to over 700 basis points. 
 
 
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Bond Sale to Go Forward 
----------------------- 
 
¶4.  (SBU)  In the light of the turbulence in currency and 
bond markets there have been questions raised about whether 
the GOV will hold off on a long-planned large bond issue 
which would roll over existing locally denominated debt into 
a mixture of foreign and domestic obligations with longer 
maturities.  As was the case with previous issues, this one 
would have as its principal attraction for buyers the 
immediate exchangeability of purchased bonds for dollars at 
the official rate.  Econcouns asked Ali Lenin Aguilera, 
senior advisor to Finmin Nobrega, if the transaction, rumored 
to be going forward in the next few days would be delayed 
given that the higher interest rate which would have to be 
paid.  Aguilera responded that the Ministry had consulted 
with its investment banker, and would be going forward.  Once 
the numbers were run, it was clear that the losses from the 
higher interest rate would be made up by the fact that 
devaluation meant that the GOV would be paying fewer dollars 
for the same amount of bolivars on the rollover of locally 
denominated debt. 
 
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Oil Production Comments 
----------------------- 
 
¶5.  (SBU)  With Chavez's increasing effort to paint the 
 
current political crisis in terms of USG interference in 
domestic politics, rumors of a U.S. embargo on Venezuelan oil 
exports (the U.S. counts for 57 pct of Venezuela's crude 
exports) have circulated.  On February 28, PDVSA President 
Ali Rodriguez publicly discounted any rupture in 
U.S.-Venezuela energy relations, asserting that "nothing is 
heading in that direction," and that "the concern of U.S. 
authorities is to maintain normality in these relations." 
However, Rodriguez's calm words were overtaken by President 
Chavez's fiery remarks in his February 29 speech at which he 
suggested that in a crisis the USG might seize CITGO, 
Venezuela's downstream chain in the U.S. or otherwise 
"blockade Venezuela, but in that case "not a drop of oil 
would arrive from Venezuela" and that the U.S. should 
remember that it has "plenty of installations here" (that 
could be seized in retaliation.  (See septel for reporting on 
U.S. oil firms' reactions to Chavez's comments.) 
 
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Key Services:  Food Supply 
-------------------------- 
 
¶6.  (SBU)  Agricultural specialists queried representatives 
of the National Supermarket's Association (ANSA) and the 
Venezuela Food Producers' Chamber (CAVIDEA) regarding 
possible disruptions to food supply as a result of the street 
protests.  (Note:  Some supermarkets were shut down on March 
¶1.  Econoff saw long lines in front of some supermarkets on 
March 2.  End note.)  According to the representatives of the 
trade associations, a contingency plan for assuring food 
supplies is under review, and could be activated within the 
next 24-48 hours.  Supermarkets may operate under limited 
hours, as they did during the December 2002-February 2003 
general strike.  Although supportive of the political aims of 
the opposition strikers, the food sector is concerned about 
"effervescence in the street," which can easily turn into 
sackings of supermarkets.  At the wholesale level, there are 
adequate food stocks for three months, they advised. 
 
 
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Key Services: Gasoline 
---------------------- 
 
¶7.  (SBU)  As of March 2, there were reports (including from 
embassy staff) of some difficulties obtaining gasoline, as a 
result of filling stations being closed in areas near to 
roadblocks, either because managers felt it was unsafe to 
open or because they had run out of fuel to sell and had not 
received replacement supplies. (Note:  Running gas trucks 
near areas where burning barricades are up would be obviously 
unsafe.  End note.)  There are, however, other reports of 
open gasoline stations, without long lines.  A ChevronTexaco 
downstream manager told energy officer that the distribution 
plant in Guatire, which services Caracas, and the plant 
serving northern Valencia are indeed having problems in 
delivering fuel.  The Texaco station in Las Mercedes (used by 
the Embassy) has already run out of unleaded fuel.  State oil 
corporation PDVSA has assured ChevronTexaco that all 
refineries are operating normally and that the only gasoline 
problems lie in distribution. 
 
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Key Services:  Electricity 
-------------------------- 
 
¶8.  (SBU)  A check with a manager at "Electricidad de 
Caracas," the utility serving the capital, revealed the 
situation to be normal, with electrical power fully 
available.  Some of the firm's offices, however, had been 
closed or had reduced staffing because of transportation 
problems.  A report that the company's sub-station in 
Altamira, the site of some of the most severe street 
protests, was false, although there had been some damage to 
street lamps.  "Electricidad de Caracas" is majority owned by 
U.S. power holding company AES, and Chavez's comments about 
the possible seizure of U.S. industry in Venezuela in a 
crisis had not been well-received. 
 
---------------------- 
 
 
Key Services: Aviation 
---------------------- 
 
¶9.  (SBU)  Executives of U.S. air carriers flying out of 
Caracas's international airport advised that flights are 
proceeding normally, and that air crews who normally 
overnight at hotels near the airport, are having no trouble 
getting to their planes.  However, there have many 
cancellations, apparently the result of passenger concerns 
about their ability to get to the airport because of problems 
on the streets.  Taxi drivers are reportedly charging double 
or triple their normal airport fares.  An official of the 
National Institute of Civil Aviation (FAA-equivalent) told 
econ specialist that on March 1 there had been some 
rock-throwing incidents and temporary blockages of at least 
one of the tunnels on the airport highway, but these had been 
promptly stopped by police. 
 
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Comment 
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¶10.  (SBU)  A few days of snarled traffic in Caracas is not 
in and of itself likely to provoke any serious economic 
crisis.  But the fact remains that at its best Venezuela's 
economy, severely damaged by last year's strike and the only 
minimal recovery since then, is vulnerable to even modest 
shocks.  If street violence is prolonged, many people, from 
Wall Street bond traders to Caracas food shoppers, could 
start to panic, affecting the price and supply of both money 
and products. 
 
 
SHAPIRO 
 
 
NNNN 
 
      2004CARACA00714 - UNCLASSIFIED