Analysts Hit Venezuela Nationalization

Customers come and go from a telephone service store owned by C.A. Nacional Telefonos de Venezuela, CANTV, in Caracas, Tuesday, Jan. 9, 2007. As Venezuela embarked on another six years under Hugo Chavez, the president announced plans to nationalize power and telecommunications companies and make other bold changes in a more radical push toward socialism. (AP Photo/Leslie Mazoch) (Leslie Mazoch - AP)

"(This announcement) should not surprise anyone. ... He has been saying he would do this for a long time," Petrobras Chief Executive Sergio Gabrielli told Brazil's state news agency. Petrobras is not involved in the Orinoco upgrading projects but has other oil and gas interests in the country.

But other sectors are likely to be spooked, and that won't help diversify an economy precariously dependent on oil, Palma said.

CANTV's nationalization also raises doubts about an April agreement by Verizon Communications Inc. to sell its 28.5 percent stake in CANTV to a joint venture of America Movil and Telefonos de Mexico SA controlled by Mexican billionaire Carlos Slim. The sale had been awaiting Venezuelan government regulatory approval.

Shares of both Mexican phone companies fell Tuesday: America Movil lost 2.6 percent and Telmex dropped 2.9 percent on Mexico's benchmark IPC stock index, which closed down 1.9 percent overall.

Chavez has increased state control over many areas of the economy since coming to power in 1999. The foreign exchange controls he imposed in 2003 make it difficult to repatriate earnings and acquire dollars for international payments, and his government seized ranchlands and company assets deemed idle, moves that scared off many long-term investors.

State-run companies have a poor record in Venezuela: areas now serviced by government-run electricity companies suffer frequent blackouts, and before CANTV was privatized, companies had to employ dozens of operators to work the phones because getting a connection was so difficult.

"The state companies have shown that they're hopeless, they don't know how to manage, they're totally incapable of directing any type of company," said Luis Salazar, 56, an economist walking in downtown Caracas.

The privatized CANTV has also provided another key benefit for Venezuelans _ one of the few ways to get around currency exchange controls. Investors could buy its stocks in Venezuelan bolivars and sell them on the New York Stock Exchange to acquire dollars. A government takeover of CANTV would close down this option for preserving wealth in an economy where inflation has been running at 17 percent.

Venezuela's electricity sector is largely state-run already and it wasn't clear if Chavez's call to re-nationalize companies privatized before he took power would affect Electricidad de Caracas, which has never been state-run and is owned by Virginia-based AES Corp. Stockholders, however, were not taking any chances and sold off shares.

Chavez has heightened the risk for anyone doing business in Venezuela, said Emilio Medina-Smith, an economist at Venezuela's University of Carabobo.

"The model that the government is going to follow is feasible with oil at $50 a barrel. But is it possible in the medium-term, long-term? Experience tells us no," he said.