Venezuela Snapshot - Business Risk & Corruption
(International Politics - Risk & Threat)
Since the death of Chavez and the election of Maduro in Presidential elections in April 2013 (who won by a wafer thin margin of 1.5%), the opposition disputed the results and submitted a formal complaint to the Supreme Court, which was rejected. As a result there were large anti-government protests some of which were violent and deadly that took place in Caracas and other major cities. There have been subsequent “suspect” elections since and the level of violence and large scale protests have increased dramatically not only with the perceived rigged political system but also in protest at the spiralling decline in the standard of living.
The management of Venezuela's oil wealth has been a dominant economic and political issue for most of the past 100 years. Venezuela has a huge investment and economic growth potential purporting to welcome foreign investment and equal treatment for foreign companies. The economy of Venezuela is heavily dependant on oil production and exports. Oil exports represent 95% of total export and at least 40% of the fiscal revenues.
The price of oil internationally has been cut in half since 2014, resulting in tremendous financial impacts for Venezuela, which has more oil reserves than any other country in the world. The current economic crisis is indicative of lucrative government programs that were created when international oil prices were above $100 per barrel but became unaffordable and gutted the nation's budget oil prices dwindled to $55.
Because oil shipments constitute more than 95% of Venezuela’s total exports, it appears inevitable for its federal government to eventually default on its loans. Venezuela’s economic collapse has had dire humanitarian consequences on its population as the enormous amount of inflation has made it so the government cannot import the minimal amount food, medicine, to support its citizens. The country’s imports are down 50 percent from 2016-17 levels, causing medical shortages and the price of groceries to rise dramatically.
Starting with the election of Chavez in 2006 right up to the present day, companies operating in Venezuela have experienced a change in conditions as the country or rather Chavez (and Continued by Maduro) proclaimed an acceleration in the drive towards "21st Century Socialism" by further nationalising the economy. According to a US State Department Report, some of these reforms led to reduced property rights which are not protected as the government took over so called "Strategic Interests" of the people, such as in areas of food production, processing and distribution, construction materials, utilities, media, telecommunications, buildings, real estate, the list goes on. Acting in "the people's interest" the government requires no proof in order to seize private goods and violence and threats are common place.
This political and regulatory uncertainty in recent years has seriously discouraged foreign investment in the country. Several risks in addition to those mentioned in the previous paragraph, such as political instability, heavy bureaucracy and corruption continue to inhibit the business climate.
Venezuela was ranked 131st in the World Economic Forum's "Global Competitiveness Report and 182nd in the World Bank's Ease of Doing Business Report. (For further information on this, read the World Bank's more in-depth publication and guidance for business "Economy Profile Venezuela.")
Bribery and corruption is a major concern.
Recently, Venezuela was ranked 161 out of 175 countries in Transparency International's Corruption Perception Index (CPI). Indeed a recent World Bank Enterprise Survey found that almost 40% of businesses surveyed identified the risk of corruption as a major constraint in doing business. In addition to the World Bank, other international organisations have cited lack of transparency and open competition in awarding contracts and the existence of political constraints prevailing in most procurement cases. Other areas of specific risk concern in this area apply to the judiciary, police (particularly concerning), land administration, customs and the Environment, Natural Resources and Extractive Industry.
It goes without saying that any foreign companies wishing to do business in in a frontier market such as Venezuela (indeed in any foreign markets) are advised to engage the services of good local, experienced attorneys to develop, implement and strengthen integrity systems and to carry out extensive due diligence before committing to investing. Another important note of caution and risk here, government exchange controls can make it difficult for foreign businesses invested in the country to repatriate dividends to overseas headquarters in foreign currency.
One final general point not specific to Venezuela is something that is sometimes either overlooked or not taken into account and that is Intellectual Property Rights (IPR). IPR are territorial and only give protection in the countries where they are granted or registered. If a foreign company wishes to work or trade internationally, then they should consider registering their IPR in their export markets
This snapshot is a precis of a fuller more analytical and in-depth Venezuela report.
