Monday, February 11, 2008

Chavez and Expropriation

Last week in class we were speaking of increased risks associated with doing business internationally. Political risks, in particular the risk of expropriation, are particularly difficult to hedge.

One of the examples we used was that of Hugo Chavez. Of course he has provided enough examples single handedly to fill several class periods. Two that are in the news right now show the irrationality of expropriation.

First the case of Exxon from Money CNN.

"Chavez sent his military to the Venezuelan hinterlands last year...He seized that along with the assets of five other oil companies....Exxon's investment was worth at least $4 billion, but Chavez refused to pay market compensation...he justified his breaking of contracts as sovereign decisions and told investors they'd have to be satisfied with minority partnerships run by ideologically correct Chavista "managers."

Seeing themselves as powerless..., some of the companies caved. But not knew a precedent could be set and refused to appease.

In so doing, it put all petrotyrants on notice that their power extends only as far as their borders...If they want to cut themselves off from the world by changing the rules, then it's off to international arbitration with them.

Today, Chavez faces a potential penalty of $12 billion if the British, Netherlands and Netherlands Antilles courts rule Exxon's way, compensate it and declare damages. Exxon even got a U.S. court to freeze $315 million in Venezuelan cash here to ensure compliance."

But Chavez is nothing if not stubborn, so he is threatening to shut off oil shipments to the US (of course oil sold to another country could be resold to the US, but that is another story.)

Oh and as if to show he really did not care what world courts said, he is threatening milk producers (not the actual cows!)

Chavez warns Parmalat, Nestle that milk plants could be seized - International Herald Tribune: "
President Hugo Chavez warned that his government could expropriate some milk plants to confront shortages, singling out Italy-based Parmalat SpA and Swiss-based Nestle SA.

Chavez mentioned the two companies...,saying such companies sometimes 'pressure' Venezuelan farmers to obtain their milk for export."

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