VZCZCXYZ0000
RR RUEHWEB

DE RUEHLI #0072/01 0531923
ZNY CCCCC ZZH
R 221923Z FEB 10
FM AMEMBASSY LISBON
TO RUEHC/SECSTATE WASHDC 8139
INFO RUEHCV/AMEMBASSY CARACAS 0003
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

C O N F I D E N T I A L LISBON 000072 
 
NOFORN 
SIPDIS 
 
E.O. 12958: DECL: 02/21/2020 
TAGS: ECON EFIN ETRD PGOV PREL ENRG EPET VE PO
SUBJECT: VENEZUELA WITHHOLDS PAYMENT TO PORTUGUESE COMPANIES 
 
REF: A. 09 LISBON 100 
     ¶B. 08 LISBON 2629 
     ¶C. 08 LISBON 1155 
     ¶D. 08 LISBON 1130 
     ¶E. 08 LISBON 210 
     ¶F. 07 LISBON 3193 
     ¶G. 07 LISBON 2744 
 
Classified By: Poleconoff Lucy Chang for reasons 1.4(b,d) 
 
¶1. (C) Summary: Portugal signed a series of commercial 
agreements with Venezuela in 2008 to expand economic 
cooperation.  While the agreements have increased Portuguese 
investment in Venezuela, Portuguese companies have confronted 
numerous challenges, including devaluation of the bolivar, 
delays in payment, and difficulties in repatriating capital 
to Portugal.  These obstacles are not likely to change 
significantly the GOP's soft stance toward Venezuela or its 
desire to strengthen economic ties; however, they will likely 
slow the pace of investment as Portuguese companies reassess 
the investment climate of the Chavez regime and take greater 
measures to protect their interests.  End Summary. 
 
CLOSER ECONOMIC COOPERATION 
--------------------------- 
¶2. (U) In May 2008, during an official visit of Portuguese PM 
Jose Socrates to Venezuela (refs C, D), Portugal signed an 
agreement with Venezuela to increase economic cooperation, 
particularly on oil trade.  According to MFA Deputy General 
for Technical and Economic Affairs Rui Monteiro, the 
agreement is a complement to a 1994 agreement and a "chapeau" 
for agreements in various industry sectors ranging from 
energy to tourism to agriculture, but is primarily a vehicle 
for Venezuela to trade oil and related products to Portugal 
in exchange for Portuguese goods and services.  The agreement 
also established a joint commission, co-led by Portuguese MFA 
State Secretary for Trade Fernando Serrasqueiro and his 
Venezuelan counterpart, to review implementation of the 
agreement and potential problems.  To date, the commission 
has met three times in Lisbon and Caracas, most recently in 
January. 
 
¶3. (U) Since the signing of the agreement, major Portuguese 
companies, including national airline TAP, construction firm 
Teixeira Duarte, and the Pestana Group (Portugal's largest 
hotel and tourism group), reported a significant increase in 
business.  TAP, which operates five direct flights per week 
between Lisbon and Caracas, estimated 44 million euros per 
year in business in the Venezuelan market, while Teixeira 
Duarte's construction operations in Venezuela yielded 9 
million euros in 2008, a 0.7 percent increase over the 
previous year.  The company anticipates even greater revenues 
in 2010 with contracts for the construction of a dam and 
expansion of a port in Venezuela. 
 
¶4. (SBU) MFA's Monteiro estimated that in 2008 imports from 
Venezuela to Portugal, primarily oil, totaled 140 million 
euros, while exports to Venezuela totaled 52 million euros. 
During the first half of 2009, imports from Venezuela 
amounted to 52 million euros while exports, primarily canned 
food, to Venezuela totaled 32 million euros.  Monteiro, who 
was recently posted in Venezuela for five years, observed 
that when he first arrived in 2003, there were only two major 
Portuguese companies operating there.  Teixeira Duarte has 
been in Venezuela for more than 30 years and has an interest 
in large infrastructure projects.  The Pestana Group, which 
opened a five-star hotel in Caracas in 2008, seeks to expand 
its hotel renovation business.  Portuguese Economy Minister 
Jose Vieira da Silva, who led a trade mission to Venezuela in 
January, expressed optimism over the future of the bilateral 
commercial relationship.  He announced that exports to 
Venezuela have increased five-fold since the signing of the 
commercial agreements and that Portugal seeks to continue to 
increase exports to Venezuela in 2010. 
 
VENEZUELAN CURRENCY CONTROLS 
---------------------------- 
¶5. (SBU) Despite da Silva's optimism, the commercial 
relationship between Portugal and Venezuela has not been 
easy.  In September 2009, Finance Minister Teixeira dos 
Santos (then also serving as Minister of Economy) visited 
Caracas to negotiate with the GOV for an estimated 89 million 
euros that had not been paid to Portuguese companies.  In 
recent months, Portuguese companies doing business in 
Venezuela have been grappling with the devaluation of the 
bolivar, in addition to ongoing Venezuelan government 
restrictions on repatriation of capital. 
 
¶6. (SBU) On January 8, the bolivar was devalued for the first 
time since 2005, by at least 17 percent.  Venezuelan 
President Chavez announced that the currency will be devalued 
from 2.15 to the U.S. dollar to 2.60 for "priority" imports, 
and to 4.30 (a 50-percent devaluation) for "non-essential" 
items.  Under this two-tier system, food and health care 
imports will be able to take advantage of the lower of the 
two fixed exchange rates, while cars, chemicals, and 
electronics will be charged at the higher rate.  Chavez, who 
was under pressure to devalue the currency to boost revenue 
from oil exports, stated that the two official rates would 
have the effect of "limiting imports that are not strictly 
necessary and stimulating export policy."  While the 
devaluation has been a boost to the tourism industry, making 
Venezuela a more attractive tourist destination for 
foreigners, it has exacerbated difficulties for 
Luso-Venezuelan importers in Venezuela.  With Portuguese 
imports now relatively more expensive than locally 
manufactured Venezuelan goods, the devaluation has induced 
import substitution and undermined free trade. 
 
¶7. (SBU) TAP acknowledged that there has been some delay in 
payment, exacerbated by the January 8 devaluation of the 
bolivar, and is reevaluating its service to and from Caracas 
in anticipation of possible decreased demand in Venezuela for 
TAP flights.  The Portuguese Agency for Investment and 
Foreign Trade (AICEP) reported that Luso-Venezuelan importers 
based in Venezuela have experienced difficulties in obtaining 
foreign currency in Venezuela where repatriation of capital 
is subject to authorization from the Central Bank and where 
hard foreign currency has been in short supply. 
 
¶8. (C) Portuguese MFA Venezuela Desk Officer Carlos Ferreira 
confirmed that Portuguese companies, like all companies in 
Venezuela, must receive authorization from the Venezuelan 
government to obtain foreign currency, which he described as 
a very cumbersome bureaucratic process.  He cited this 
administrative burden as a major reason for Venezuela's delay 
in payment.  According to Ferreira, the Chavez government, as 
a matter of fiscal policy, restricts the repatriation of 
capital.  He speculated that with the decrease in the spread 
between the official and black market exchange rates, 
Venezuela may relax its restrictions and make it easier for 
investors.  (As of January 2010, the black market rate was 
6.25 bolivars to the dollar.)  Ferreira described Portugal's 
relationship with Venezuela as generally good, but 
acknowledged that Portugal is concerned about recent 
developments.  He stressed, however, that Venezuelan 
restrictions on repatriation of capital have affected all 
investors, not just the Portuguese. 
 
¶9. (C) Monteiro acknowledged that the MFA has received 
complaints from Portuguese business owners, including 
complaints over the difficulty of importing raw materials 
into Venezuela, but, like Ferreira, underscored that 
"everything in Venezuela is very bureaucratic."  He 
characterized the delay in payment as more bureaucratic than 
political, and universal, affecting other countries as well. 
He estimated that there are 600,000 Portuguese in Venezuela, 
most of them dual nationals who initially operated businesses 
in traditional sectors, such as food distribution, public 
works, and hospital equipment distribution, and subsequently 
expanded into less traditional markets.  Since the 1990s, 
Portuguese companies have signed agreements with Venezuela in 
areas such as pharmaceuticals and shipping, supplying 
medicine to hospitals and maintaining vessels for the 
Venezuelan off-shore oil industry.  Monteiro said 85 percent 
of the Portuguese in Venezuela emigrated from the Portuguese 
island of Madeira in the 1950s and 1960s when the island was 
among Portugal's poorest regions. 
 
COMMENT 
------- 
¶10. (C/NF) Portugal has been soft on the Chavez regime 
because of its desire to do business with the oil-rich 
country and because of the large Portuguese community in 
Caracas.  In recent years, Portugal has courted Chavez as 
part of the GOP's economic diplomacy, forging stronger ties 
with economic cooperation agreements and frequent high-level 
visits.  GOP contacts have publicly praised ties with 
Venezuela, but have privately criticized Chavez's 
unpredictability, citing high turnover of government 
officials and tight fiscal control as impediments to 
investment.  The MFA acknowledged that Portugal will proceed 
"very slowly" in the wake of recent developments.  While the 
Venezuelan government's payment delay is not likely to deter 
Portugal's commercial interest in Venezuela or change its 
stance toward the Chavez government, it will likely slow 
investment as Portuguese companies think twice before 
investing in Venezuela's potentially lucrative but 
bureaucratically and politically difficult market. 
 
For more reporting from Embassy Lisbon and information about Portugal, 
please see our Intelink site: 
 
http://www.intelink.sgov.gov/wiki/portal:port ugal 
BALLARD