Solution sought for Venezuela crisis

news.ft.com By Andy Webb-Vidal in Caracas Published: January 23 2003 19:28 | Last Updated: January 24 2003 1:09

Top diplomats from six countries are due to meet in Washington on Friday to search for a solution to Venezuela's escalating political and economic crisis.

Colin Powell, US secretary of state, is to meet foreign ministers and representatives of Brazil, Chile, Mexico, Portugal and Spain - members of the so-called "group of friends" of Venezuela.

The meeting follows the failure of a two-month mission by the Organisation of American States to broker a settlement between Hugo Chávez, Venezuela's president, and opposition groups.

Meanwhile, oil exports from what was previously the world's fifth-largest exporter have collapsed to about 10 per cent of previous levels as a result of the strike by oil employees.

Analysts say the crippling and costly stoppage, which has sent crude prices to a two-year high, will leave Venezuela struggling to produce half of its former capacity of 3m b/d until at least several months after the strike is over.

Concerns are also growing that the highly polarised crisis threatens to evolve into civil war if unresolved. A suspected bomb exploded on Thursday near a pro-government rally, killing one person and injuring 12.

"It really is a race against time for the international community to put something on the table and get both sides to agree to avoid a bloodbath," said Miguel Diaz, director of the South America Project at the Center for Strategic and International Studies.

Two proposals were floated this week by Jimmy Carter, former US president, who said an amendment to the constitution that cuts Mr Chávez's mandate from six years to four - ending it this year - could pave the way for early elections. Alternatively, both sides could agree to fix a date in August for a recall referendum on Mr Chávez's rule.

But opposition groups, led by business leaders and union bosses, suspect Mr Chávez will renege on any agreement and are loath to lift the strike, even as it weakens.

Mr Chávez, wary about the inclusion of the US in the "group of friends", warned against the group taking a stance that impinges on Venezuela's "sovereignty".

Diplomats in Caracas said the wording suggested Mr Chávez was ready to risk diplomatic isolation to stay in power, despite opinion polls indicating that as many as 70 per cent want him to step down.

Foreign businesses operating in Venezuela are, meanwhile, becoming concerned over what looks set to be the imposition of foreign exchange controls, as the government appears unready to establish a new currency trading system.

Mr Chávez said exchange controls would replace the central bank's dollar auction system, which was suspended on Wednesday after a 31 per cent slide this year in the domestic currency, the bolívar, and the depletion of foreign reserves.

A central bank source said a new system had yet to be designed and the bank would only act as "cashier", rather than operator.

Economists expect exchange controls to include a preferential dollar rate for key imports, while the authorities turn a blind eye to a parallel market in which the dollar is likely to trade at a premium of anywhere between 20 and 40 per cent.

Bankers said the dollar was on Thursday being offered at about 2,300 bolívars, a 25 per cent premium to Wednesday's close, despite currency trading officially being suspended.

The replacement system will be revealed next week, but businesses are concerned over a range of effects.

"The three principal concerns of the private sector are transparency, flexibility and the possible use of exchange controls as a political weapon," said Antonio Herrera, vice-president of the Venezuelan-American Chamber of Commerce.

"Without having a definite formula in place, you can create an atmosphere of intense speculation and a panic situation in the next few days."

At least in the short term, the impact of exchange controls is more of a concern to domestic businesses than to portfolio investors on Wall Street.

Unlike the impact of the collapse of Argentina's convertibility system in 2001, Venezuela's foreign debt accounts for only 1 or 2 per cent of emerging market debt portfolios.

The prospect of exchange controls is a signal that, for now, the Venezuelan government is intent on avoiding default on its $22bn of external debt.