VZCZCXRO0030
RR RUEHAO
DE RUEHCV #3411/01 3191952
ZNR UUUUU ZZH
R 151952Z NOV 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 7036
INFO RUEHAC/AMEMBASSY ASUNCION 0724
RUEHBO/AMEMBASSY BOGOTA 7117
RUEHBR/AMEMBASSY BRASILIA 5821
RUEHBU/AMEMBASSY BUENOS AIRES 1516
RUEHLP/AMEMBASSY LA PAZ 2406
RUEHPE/AMEMBASSY LIMA 0660
RUEHMN/AMEMBASSY MONTEVIDEO 0881
RUEHQT/AMEMBASSY QUITO 2492
RUEHSG/AMEMBASSY SANTIAGO 3824
RUEHAO/AMCONSUL CURACAO 1062
RUEHGL/AMCONSUL GUAYAQUIL 0711
RUEATRS/DEPT OF TREASURY
RUCPDOC/DEPT OF COMMERCE
RUMIAAA/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 CARACAS 003411 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR KLINGENSMITH AND NGRANT 
COMMERCE FOR 4431/MAC/WH/MCAMERON 
NSC FOR DTOMLINSON 
HQ SOUTHCOM ALSO FOR POLAD 
 
E.O. 12958: N/A 
TAGS: ECON EFIN VE
SUBJECT: SAVING FOR A RAINY DAY? BRV ACCUMULATES CASH 
RESERVES 
 
REF: A. CARACAS 01291 
 
     ¶B. CARACAS 02718 
     ¶C. CARACAS 2622 
     ¶D. CARACAS 3316 
     ¶E. CARACAS 3374 
 
¶1. (SBU) SUMMARY:  Embassy estimates are that the BRV 
currently has between USD 40 and 50 billion in available 
funds, apart from the USD 35 billion in foreign exchange 
reserves, distributed between the Central Bank (BCV) and 
private and public sector banks.  These funds represent 
"excess" oil revenues, pilfered foreign reserves, and unspent 
government funds and could cover government expenditures for 
9-11 months.  The fact that this huge, opaque reserve exists 
is demonstrative of Chavez's propensity for parallel 
networks, desire for a security blanket of money following 
the 2002 coup and 2002-2003 strikes, and is representative of 
the inherent corruption and dysfunctionality of the BRV 
bureaucracy. 
 
--------------------- 
SEVEN YEARS OF PLENTY 
--------------------- 
 
¶2. (SBU)  The price for the Venezuelan oil basket has risen 
from USD 11 when Chavez came into office in 1999 to USD 57.19 
on November 10, and BRV spending has increased over 100 
percent (in dollar terms) and over 700 percent (in Bolivars) 
during his tenure.  The BRV is also hoarding money.  While 
these transactions are intentionally opaque, current Embassy 
estimates are that the BRV had around USD 41 billion as of 
the end of August in available funds in addition to the BCV 
foreign exchange reserves. (Note: Our estimate is lower than 
many other local economic consultancies, which estimate 
around USD 45-48 billion.  Our estimate represents an 18% 
increase from April 2006 (see reftel A).  End Note.)  This 
amount is divided between treasury funds held in the BCV (USD 
5.7 billion), BRV deposits in private sector banks (USD 9.1 
billion), The Bank for Social and Economic Development 
(BANDES) (USD 10.2 billion), the Fund for National 
Development (FONDEN) (USD 14 billion, held by the Treasury 
Bank) and the Fund for Social and Economic Development 
(FONDESPA) (USD 2 billion).  (Note: These numbers are gleaned 
from BCV reports and public comments by BRV officials.  There 
is some doubt as to the accuracy of BRV financial accounting 
and many reports are significantly late.  End Note.) 
(Comment:  In addition to the rainy day funds and official 
reserves, PDVSA has tens of millions of dollars in escrow 
accounts tied to the Faja strategic associations.  PDVSA can 
only draw on the accounts by presenting audited financial 
statements.  It is very possible that PDVSA has additional 
funds held in off-shore accounts, but we have no way of 
verifying their existence.  End Comment.) 
 
¶3.  (SBU) These funds have varying degrees of availability. 
BRV funds held in treasury accounts at the BCV represent 
government revenues not yet expended and technically cannot 
be spent without National Assembly (AN) approval.  The AN has 
authorized almost USD 14 billion in additional credits (9 
percent of GDP) in 2006 and this money remains in treasury 
accounts until requested by the relevant ministry or agency. 
(Comment: It is unlikely that the BRV will be able to spend 
all of this money due to bureaucratic inefficiency and 
capacity problems (see reftel D).  We also note that PDVSA 
has had problems in the past executing on its investment 
budget.  End Comment.)  If the money is not spent in 2006, it 
will have to be re-authorized as an additional credit to the 
2007 budget.  The BCV is holding around USD 5.7 billion in 
treasury accounts. 
 
 
CARACAS 00003411  002 OF 003 
 
 
¶4.  (SBU) Another result of BRV inability to absorb and spend 
all of its authorizations has been for ministries and 
government institutions to store their money in private 
sector banks. Fifteen of the 50 active Venezuelan financial 
institutions count on 30 percent or more of their deposits 
from the BRV and thus are more or less reliant on BRV 
deposits for profitability, if not solvency.  This dependency 
has led to widespread corruption, wherein banks pay off 
government officials to obtain deposits and to ensure that 
they stay in place.   (Comment: A large-scale withdrawal of 
BRV funds could precipitate a banking crisis as the banks 
dependent on government deposits begin to fail, which could 
snowball as the Venezuelan banking system has many inter-bank 
ties and off-the-books relationships (see reftel C).  Such a 
dependence on government deposits also gives BRV officials 
leverage over a large portion of the banking sector.  End 
Comment.)  Our current estimates are that there are USD 9-10 
billion in private sector banks (representing about 1/5 of 
the assets of the Venezuelan banking sector).  This does not 
include trust funds and other off balance sheet financial 
holdings by the banking sector. 
 
¶5.  (U) BANDES is a public sector bank run by the Vice 
Minister of Finance Behrens.  Originally founded as the 
Venezuelan Investment Fund in 1974, it was revived by Chavez 
in 2001 and renamed.  BANDES received cash infusions from 
PDVSA after its re-constitution, but has since been nominally 
independent.  Its deposits, while not intended for budgetary 
spending, could easily cover for potential shortfalls by 
paying for projects that the government found itself 
incapable of funding.  At the end of August, 2006 BANDES had 
USD 10.2 billion in assets and USD 736 million in outstanding 
loans. 
 
¶6.  (U) FONDEN and FONDESPA essentially function as a 
parallel budget subject to Chavez's whims, and already cover 
budgetary shortfalls (for example by funding portions of the 
missions) (see reftel A).  FONDEN received USD 4.2 billion 
from BCV reserves over the past year and is receiving between 
USD 120 and 200 million weekly from PDVSA.  It currently has 
about USD 14 billion in assets.  (Note: Chavez has returned 
to the "excess" foreign reserves theme and expectations are 
that, if re-elected, he will demand another transfer of USD 
5-6 billion from the BCV to FONDEN early in 2007.  End Note.) 
 FONDEN is expected to spend USD 6-8 billion in 2006 and 
FONDEN's assets are held in the Treasury Bank in trust funds. 
 
¶7.  (U) In addition to these parallel mechanisms, PDVSA spent 
USD 5.384 billion in 2005 on "social expenses" and spending 
in 2006 should be even higher than in 2005 due to the higher 
average oil price USD 46.03 (for the Venezuelan basket in 
2005) instead of USD 57.19 (the Venezuelan basket so far in 
2006) and increased PDVSA participation in social activities. 
 (Comment:  PDVSA's duties seem to be branching out daily. 
In addition to being an oil company, it is now involved in 
agricultural projects (see reftel E), power generation, and 
the construction of infrastructure such as roads and schools. 
 End Comment.) 
 
---------------------- 
SEVEN YEARS OF FAMINE? 
---------------------- 
 
¶8. (SBU) While experts differ as to whether the size of 
financial holdings is demonstrative merely of BRV 
incompetence or specific Chavez planning, these funds will 
give the BRV a solid cushion against possible future falling 
oil prices.  Total BRV spending (including PDVSA social 
spending and FONDEN) could reach USD 60 billion in 2006 (39 
percent of GDP).  Spending has increased around 35 percent in 
 
CARACAS 00003411  003 OF 003 
 
 
real terms in 2006 and has increased 100 percent in real 
terms since 1999.  The consensus estimate for the Venezuelan 
oil basket next year is around USD 55, near this year's 
average, and oil production is not increasing.  (Note: It is 
currently estimated at 2.4 to 2.6 million barrels/day.  End 
Note.)  (Comment:  If government revenues remain steady (oil 
prices do not spike) and spending (including budget and 
parallel/off-budget) continues to increase, the BRV will 
begin to run significant deficits (in excess of 3 percent of 
GDP), starting as early as 2007.  End Comment.) 
 
¶9. (SBU) Comment:  This cushion of USD 40-50 billion (USD 
75-85 billion if international reserves at the BCV are 
included) provides a security blanket for Chavez and the BRV. 
 If there are further economic disruptions or a sharp 
decrease in oil prices or production, Chavez will be able to 
maintain government services and spending and thus his base 
of support.  A rough estimate is that even given a complete 
cessation of revenues (similar to the general strike of 
December 2002-January 2003), this money would allow the 
government to maintain current spending levels for nine 
months.  Should the price of the Venezuelan oil basket fall 
below the USD 40 a barrel that most experts agree represents 
Venezuela's break even point, the excess funds could cover 
budgetary deficits for 2 years or more.  End Comment. 
 
BROWNFIELD