Dollars become luxury items for Venezuela companies

www.forbes.com Reuters, 03.03.03, 11:18 AM ET By Alistair Scrutton

CARACAS, Venezuela (Reuters) - Every day Venezuelan businessman Rafael Pedraza scours an official Web site to see if President Hugo Chavez's government will allow his firm to buy dollars, now as scarce a commodity as the whiskey he wants to import. "We're on edge," said Pedraza, an executive in Venezuela for Diageo, a whiskey importer that needs dollars to buy new inventories. UK-based Diageo, the world's largest spirits company, must also import basic supplies like bottle tops and labels for its rum exports to keep business going. While oil output is recovering after a two-month opposition strike, that other life blood of business, foreign exchange, has dried up since leftist Chavez introduced exchange controls in February to stop dollars hemorrhaging out of the world's No. 5 oil producer. The strike, which slashed vital oil output and choked off government revenues, was called to try to force the populist president to resign and hold early elections. He stayed put but decreed emergency currency and price curbs to shore up an oil-relient economy already reeling into recession. Diageo is hoping against the odds. Chavez, railing against the "dolce vita," has labeled whiskey a luxury that may not be on a list of goods the government will allow to be imported. By Wednesday, a new mechanism for buying dollars will kick in. A state-run currency board, run by an ex-military officer with close ties to Chavez, is expected to publish on its Web site those products that can be imported after six weeks of a total ban on dollar purchases. Priority, Chavez has said, will go to goods such as basic foods and supplies for utility firms. The president promised that not one dollar would go to "coup mongers" - a phrase used to describe strikers and political opponents. Thousands of business executives like Pedraza are also on tenterhooks as their inventories slowly fall. "As I understand it, nobody has yet got a single dollar," said Francisco Mendoza, head of the exporters association and who owns a fruit export firm. He expects non-oil exports to nearly halve this year as access to finance dries up. It is a shortage with political overtones. Investors worry that Chavez will use the controls to further squeeze companies - largely his foes - in what opponents say is another step down the road towards imposing Cuban-style Communism. "Businessmen are devastated. Aside from red tape problems, most executives I've talked to say they fear that the controls will become a political tool," said a European diplomat. "Over 60 percent of raw materials are imported and companies desperately need dollars," Mendoza said, complaining that his firm could not buy imported seeds and fertilizers.

NO MORE MCDONALD'S? "Those with products not on the list need not bother apply," said Edgar Hernandez, the currency board head who took part in a failed 1992 coup led by Chavez. The government is expected to sell about $600 million a month, about half the actual demand for the greenback before the new controls. U.S. icons like McDonald's may also be hit. Hernandez has singled out against fast-food companies, saying they will not be in the priority category for dollar import authorizations. He added that other luxuries like "some very tasty foreign" cheeses may also be kept off the list. Firms must supply hefty paperwork, from tax returns to financial balances, to get dollars. It will take at least 10 days to get dollars once the mechanism starts. This red tape worries businessmen who say that it will open up the system to corrupt state officials. Some European executives sat down recently in a plush Caracas boardroom to talk over the new controls. "It was a very bleak atmosphere, universally depressing really," said one person who attended the meeting. Firms can go to a parallel market -- something the government has condemned although as yet it is not illegal. "The trouble is that is it at least 30 percent more expensive and it's risky," said Mendoza. Newspapers, some of the most vocal opponents of Chavez, are waiting anxiously. They suffered shortages of imported paper and print in the mid-1990s during previous currency controls. But the government has denied it will persecute newspapers. "It's still early to know whether it will be used as a political tool. But since the controls we haven't imported any paper or printing equipment. said Maria Rosa Rullo, spokeswoman for El Universal, one of Venezuela's biggest daily newspapers. "The situation will get critical in two weeks," she added. (Additional reporting by Patrick Markey)