To capitalise on the still significant opportunities that exist in Venezuela it is vital to understand the drivers behind government policy and to adapt to a changing economy
The economic outlook for Venezuela remains both challenging and uncertain for foreign businesses, say Fernando Peláez-Pier and Patrick Petzall, partners at Caracas-based Hoet Peláez Castillo & Duque.
“The government continues to use nationalisation and expropriation as means to control strategic economic activities and to punish regulatory violations and those not adhering to the official policy line,” says Peláez-Pier, who is currently the President of the International Bar Association (IBA).
“Nonetheless, even within this scenario there exists significant opportunities for foreign businesses as investors, contractors or suppliers of goods and services to the public sector.”
Venezuela has one of the highest inflation rates in the world yet has suffered five consecutive quarters of negative growth. Currency exchange control has also been tightened as the Central Bank’s foreign reserves have dropped by more than 20% this year alone.
“Foreign investment from markets such as the US and Europe into traditional industrial and service sectors has fallen noticeably in recent years. This is the direct result of the political and economic environment and the punishments being handed out to companies that breach increasingly burdensome regulations,” says Petzall.
At the same time Venezuela has seen a rise in investment from new economic partners including Russia, China and Brazil, stimulated through new bilateral agreements and growing involvement in infrastructure projects, he says.
“The oil and gas sectors have been subject to ever-greater regulation and restrictions but remain the most attractive investment sector of the economy. It is worth noting also, that as the government’s funding needs increase so grows the dependence on foreign investors capable of expanding production to enhance the foreign currency revenue stream.”
Understanding the changing political and economic scene, and learning how to do business with the Venezuelan State, is critical to the success or even survival of any significant business venture, adds Peláez-Pier.
“In a scenario of greater government control, regulation and direct participation in all sectors of the economy, foreign companies must understand that business opportunities are largely confined to the public sector. Understanding what drives government interest and the key regulations that shape the channels for interaction is therefore essential.”
Certain methodologies must be employed to ensure positive outcomes, he emphasises. “For the current government, all matters have a political relevance – foreign businesses must support certain government objectives, particularly relating to social policy, but they must also avoid any appearance of direct political participation,” says Peláez-Pier.
Understanding the current budgetary constraints impacting on government payments is vital as is an awareness of the details of the exchange control regime.
Companies must focus on those activities where it remains permissible to retain foreign currency revenues and to avoid dependence on the standard foreign currency approval process. It is important also, to understand the public contracting regime and to be diligent in complying with all labour and tax regulations.
“Companies have to analyse the best strategy to structure their business and to take advantage of the numerous cooperation agreements, investment treaties and double taxation agreements, and they need to be prepared to adapt to longer business installation periods and higher costs – forming a ‘business ready’ company can take from several weeks to a few months,” says Petzall.
Protections do however exist for foreign investors and Venezuela remains party to several bilateral investment protection treaties, they say.
Nonetheless the current government is strongly against international arbitration and looks to impose the local jurisdiction in any new joint venture, contract or transactions executed with state agencies.
“The government is likewise moving away from ICSID but has so far refrained from actually denouncing the treaty – ongoing disputes do though remain and the Government continues to pursue their defence both professionally and aggressively,” says Peláez-Pier.
The key for companies wishing to do business in Venezuela is therefore to be prepared to deal with uncertainty and change, he insists. “You have to understand that it remains a very complex business environment but also be flexible, and to have patience, as opportunities are still out there.”