Legal Venezuela: after Chávez

In contrast with its Latin American neighbours, Venezuela has barely featured on the radar of globe-trotting international law firms. The left-wing government in Caracas is perceived to have favoured public over private enterprise, and overseen an escalation in violent crime and corruption. In recent months, it has also been facing rising political instability.

Foreign investors have stayed away in response to a restrictive currency exchange control regime, introduced in 2003, and a series of nationalisations under the 14-year rule of the late Hugo Chávez. Net inflows of foreign direct investment (FDI) into Venezuela stood at $2.2bn in 2012, compared  with $76.1bn into Brazil and $30.3bn into Chile, according to World Bank data.

In February, continuing shortages of basic goods and sky-rocketing inflation (as high as 56% last year) prompted Venezuelans – with many students among them – to take to the streets in opposition to the socialist government of president Nicolás Maduro, who succeeded Chávez in April 2013. Security forces are said to have responded to anti-government demonstrations with ‘excessive use of force’. The protests left 40 people dead. Amnesty International has described the country’s crisis as ‘one of the worst threats to the rule of law in decades’.

Maduro, meanwhile, alleges that long-time adversary the US is helping to orchestrate the unrest, which has the explicit aim of ousting the elected government, to get its hands on the country’s vast energy reserves. According to US-born lawyer Eva Golinger, a longstanding ‘Chavista’ and supporter of the country’s government, in the period between 2000 and 2012 the US gave Venezuelan opposition groups about $120m, under the guise of NGOs or ‘organisations of civil society’.

Notwithstanding Venezuela’s poisonous relationship with the US, there is plenty of potential business to be had for foreign law firms. The country has the world’s largest proven oil reserves, ahead of Saudi Arabia, and the second largest natural gas reserves in the western hemisphere; it is also rich in other natural resources, including gold, nickel and diamonds. And while much has been made of closer economic ties with Latin America and Asia, the US remains Venezuela’s number one trading partner – ahead of China.

In March, in an effort to soothe the country’s economic woes – forecasts are for a 1% fall in GDP this year – the government introduced a new currency exchange system for the dollar, dubbed Sicad II (Sicad Dos), which aims to increase the supply of dollars to pay for imports, and reduce the role of the black market.

Investment banks have welcomed the move. Bank of America Merrill Lynch said in a report that ‘a new group of pragmatists, headed by economics chief Rafael Ramírez, is firmly in control of economic policy,’ adding that the government ‘is also moving ahead to reform the investment regime in the oil sector, overhaul tax policy and relax price controls in ways that could significantly improve the efficiency of resource allocation in Venezuela’.

Michael Hatchwell, Globalaw immediate past president and a Gordon Dadds partner, says: ‘Once a country starts showing signs that it wants to reform, the financial community gets behind it and things start moving forward, and you begin to see the change in attitude to investment and risk-taking in the country.’ He adds, pointing to Mexico and Brazil, among others: ‘That’s what’s happened in a number of South American countries to great effect. It doesn’t mean they don’t have issues, but some of them have transformed themselves in recent years.’

For Carlos Delgado, managing partner in the Caracas office of Baker & McKenzie, Venezuela’s oldest and biggest international law firm, Sicad II ‘is a huge step forward in terms of creating confidence among investors’ – and together with other expected market-oriented reforms will bring a boost to firms with global clients. ‘For all of this you need an international lawyer to counsel,’ he says.

That is not to say that lawyers have been twiddling their thumbs. Lawyers, both international and local, have compensated for the scarcity of deal activity with work in other areas, such as corporate restructuring. ‘That’s when a client says: “I would like to remain in Venezuela, but I would need to change my business model so as to reduce or mitigate somehow the country’s risk factors”,’ Delgado explains. The nationalisation or expropriation of assets by the government is a big one.

Norton Rose Fulbright (NRF), which established a presence in Venezuela in 1997, has an impressive roster of international clients there, including General Electric, Baker Hughes, Cisco Systems, Bridgeston Firestone and Diageo. Caracas-based partner Ramón Andrade says that over the past year, the firm has been particularly busy advising clients ‘not in terms of new investments, but in terms of protection of existing investments’.

This, for example, means helping privately owned businesses put in place ‘preventive measures’ as safeguards against the risk of either direct or ‘creeping’ expropriations by the Venezuelan state. NRF is also representing clients in international arbitrations against Venezuela.

There are currently 28 pending arbitrations before the World Bank’s International Centre for Settlement of Investment Disputes filed against Venezuela by multinationals, including mining companies Anglo American, Rusoro Mining, Gold Reserve and oil group ConocoPhillips.

But Fulvio Italiani, a partner at D’Empaire Reyna Abogados, one of Venezuela’s most prominent law firms, says that the nationalisation wave may soon be over. ‘There are existing cases that we are handling, but the new government of president Maduro is not showing signs of wanting to nationalise more companies,’ he says.

All firms have also been advising clients on Venezuela’s complex exchange rate system, which significantly restricts access to foreign currency by businesses operating in the country. The newly launched Sicad II co-exists with Sicad. Sicad was launched in February 2013 as a floating-rate currency auction for the private sector but failed to meet market expectations. Finally, there is the official, fixed exchange rate, which is mainly for purchasing essentials such as food and medicines. Dollars are also sold on the black market for more than 10 times the official fixed rate of 6.3 bolívars.

‘One of the biggest challenges for an investor in Venezuela is how to repatriate their earnings,’ says Delgado. Except for imports of basic necessities, access to dollars for the repatriation of earnings or dividends was ‘almost impossible’ until Sicad II, he says. ‘The inability to repatriate profits is placing tremendous pressure on our clients,’ adds Andrade, who nevertheless regards Sicad II as ‘a definite improvement from a legal perspective’.

Currency restrictions remain in place under Sicad II however. While individuals and businesses can approach authorised brokers with currency bids, Venezuela’s Central Bank must still approve the transaction.

To compensate for the scarcity of transactional activity, some law firms such as Ardila, Bauder, Mata & Peñaloza have diversified into completely new areas. The Caracas-based law firm is the product of a 2010 merger between Escritorio Bauder & Asociados and Gabinete de Abogados Ardila y Asociados. Partner Humberto Bauder explains that after Chávez was elected in December 1998 his own firm, Escritorio Bauder & Asociados, progressively lost all its international clients, and so had to find new ways of staying afloat.

‘In over 40 years of practice, I never wanted to become involved in providing criminal law advice, but after the merger we discussed the convenience of diversifying into white-collar crime, which is where the work is at the moment, and linking up with criminal lawyers,’ Bauder says. Under the Foreign Exchange Crimes Act, failing to involve the country’s central bank in the purchase, sale, import, export, transfer or receipt of foreign currency is subject to fines and potential imprisonment.

Although work for foreign corporations investing in the country has declined, this has in part been compensated for with investment advice to internationally oriented privately owned Venezuelan companies. Bauder says: ‘The focus has changed. Now it is the Venezuelan corporations that are investing abroad.’

Venezuela’s nationalisation of major parts of the economy under Chávez, including in the oil, steel, finance and agricultural sectors, means that ‘the possibilities of growing in Venezuela are essentially reduced’, he says. But Ardila, Bauder, Mata & Peñaloza is well placed to assist Venezuelan private enterprises doing business abroad through its membership of Globalaw, a global network of over 110 independent law firms, he adds.

International law firm Squire Sanders, which serves Venezuela from its offices in Miami, Washington, Houston and New York, has also been very active in assisting Venezuelan privately owned clients doing business abroad, particularly over the past five years. Partner Alfredo Anzola says: ‘These are companies that for a multitude of reasons have decided to expand their operations outside Venezuela, and are penetrating the Latin American market very heavily.’

Most recently, Miami-based Anzola assisted Pasteurizadora Tachira with setting up operations in the Dominican Republic, including advising the dairy producer on the acquisition of a milk processing plant, and on negotiating supply and distribution agreements, including in Panama. Another expansionist client of Squire Sanders is Venezuela’s largest private company, beer and food producer Empresas Polar, which also has operations in Colombia and the US.

There is also legal work related to global M&As where foreign corporations have subsidiaries in Venezuela. For example, D’Empaire recently acted as local counsel to global asset manager Carlyle Group on its acquisition of the auto-paint business of US chemical company DuPont that spans several countries, including Venezuela. The firm also acted as local counsel to Brazil’s investment bank BTG Pactual on its recent acquisition of Globenet from Brazilian telecom carrier Oi, which also has a Venezuela subsidiary.

Employment has been another important area of practice for law firms, particularly since 2012, when the introduction of new labour legislation – known as the Ley Orgánica del Trabajo, los Trabajadores y las Trabajadoras – made it more difficult for employers to dismiss their employees. ‘You cannot fire an employee unless you reach an agreement with them. So we have been very busy with negotiations and collective bargaining agreements,’ says Italiani.

Law firms have also been capitalising on international investors’ high demand for Venezuela’s  bonds, whose yields are among the highest in emerging markets. D’Empaire assisted US Citigroup and Russia’s Evrofinance in the $5bn bond issue by Venezuela’s Petróleos de Venezuela S.A. (PDVSA), announced in May. The firm also advised Citigroup on another PDVSA debt sale, worth $3bn, at the end of last year. The state-run oil giant has reportedly sold about $37bn in bonds since 2007.

‘There is a huge [international] market for Venezuelan bonds at a discount,’ says Italiani, who adds that the PDVSA bond sales should help increase the availability of hard currency on Sicad II. The Venezuelan government is also selling bonds to finance crude oil exploration and production projects with international partners in the country’s Orinoco Oil Belt.

In project financing mostly related to oil, China has emerged as a major player, lending more than $40bn to Venezuela since 2008. D’Empaire, for its part, recently advised the Industrial and Commercial Bank of China on a $3bn loan to PDVSA. ‘The Chinese bank lends money to the government and the government agrees to repay [the loan] by delivering oil,’ Italiani says.

Oil and gas

Oil and gas is the engine powering the business of most international law firms in Venezuela, one of 12 members of the Organization of the Petroleum Exporting Countries, or Opec. Venezuela currently produces around 2.3 million barrels of oil per day, according to Opec, with oil revenues accounting for 95% of export earnings and around 55% of the federal budget. ‘Venezuela being one of the largest oil countries in the world, most of the business done there is associated with the energy industry,’ Anzola says.

The potential for future growth in the oil sector is enormous. ‘The government is now in serious talks with the big oil companies to get into strategic alliances with them to develop the huge extra-heavy oil reserves that we have,’ Delgado says, referring to the 235 billion barrels of extra heavy crude in the Orinoco Belt, the largest hydrocarbons reserves in the world. ‘But in order to do that you need technology and financing,’ says Delgado. And lawyers, of course.

There are two factors that should encourage greater investment from foreign oil multinationals.

First, Sicad II sells dollars at a rate of around 50 bolívars, which is significantly more than on the other two official exchange systems. ‘This means that [foreign] oil companies who want to do business in Venezuela can bring their dollars in here and receive 50 instead of 6.3 bolívars, so it reduces the costs of operating in Venezuela,’ says Italiani, whose firm’s oil clients in Venezuela include Italy’s Eni and Russia’s Rosneft.  

Second, the government looks to be relaxing control if not ownership of oil ventures. Since 2006, oil and gas activities such as exploration, production and distribution have been reserved exclusively to PDVSA, which can undertake them either directly or through empresas mixtas (joint ventures) in which PDVSA must control more than 50% of the equity.

This change prompted ExxonMobil and ConocoPhillips to exit Venezuela in 2007, after the government took back control of a number of Orinoco joint ventures, and also to file arbitration claims. Other oil companies have reportedly since withdrawn from the Venezuela, including Malaysia’s Petronas and Russia’s Lukoil.

In the Orinoco Belt, international oil companies which are currently in empresas mixtas with PDVSA include Eni, Rosfnet, Chevron and Repsol.

But although lawyers the Gazette contacted do not envision a change in the legislation governing foreign participation in the oil and gas sector, they expect private oil companies to gain greater decision-making powers through contractual negotiations. ‘The government is willing to give the private oil company, which is the minority shareholder, more of a role in the operation of the joint venture,’ Italiani says, pointing to procurement as one area where this is already happening.

Over the past year, PDVSA has secured $11bn in financing to boost output in joint ventures through a ‘novel mechanism’ permitting joint venture partners to have ‘greater control over the cashflow derived from operations’, according to Bank of America Merrill Lynch.

Notwithstanding the reformist signals, there remain real problems in doing business in Venezuela. The country is placed 181 out of 189 in the World Bank’s 2014 ‘ease of doing business’ ranking.

It is also one of the most corrupt in the world, according to Transparency International, whose 2013 corruption perception index ranked it 160 out of 177.

Hatchwell says: ‘Venezuela is a seriously challenging market. It is not the first place where you would establish a law firm in that part of the world. In fact, it is a long way down the list.’ Only a few foreign law firms have offices in Caracas. Hatchwell adds that with the US Foreign Corrupt Practices Act and the UK Bribery Act ‘the ability to do business in places like Venezuela for subsidiaries of US or UK companies is seriously problematic’.

Another major headache is the shortage of local legal talent foreign firms need to best serve their clients. ‘The main challenge that law firms face in Venezuela is the brain drain. Young lawyers don’t want to stay in Venezuela, and they are leaving for other countries where they have better prospects, short-term and long-term,’ says NRF’s Andrade.

Young talent is driven away not only by Venezuela’s economic problems, but also crime and insecurity, Italiani explains. Venezuela-born Anzola adds: ‘If you are not a Venezuelan national or you have spent a long time living outside Venezuela, you have to pay attention to safety, which is one of the primary concerns that anyone doing business in Venezuela has today.’

Also, exchange controls are not just a headache for clients, but also for their law firms. Under the  three-tier rate system, the bolívar is worth a different amount in dollars depending on the method of exchange. Coupled with the floating rates on Sicad and Sicad II, firms struggle to calculate fees. ‘We don’t function as a subsidiary, we are the same law firm, so we have to follow the same accounting principles as [the rest of] Baker & McKenzie,’ says Delgado.

Furthermore, clients prefer to offload their bolívars on their service providers, including law firms. ‘We usually get a lot of local currency that we don’t know what to do with, and that we cannot repatriate,’ says Delgado, although he is hopeful things will improve with Sicad II.

Finally, there’s Venezuela’s high inflation, which the Institute of International Finance expects to reach 60% this year, and the 88% devaluation that accompanied the introduction of Sicad II.

‘You cannot always adjust your rates because this won’t be accepted by the market,’ Delgado says. ‘You have to be creative and convince clients to pay you in hard currency, and try and adjust your rate in bolívars to the extent that is acceptable in the market. It is a balancing act, and you have to be monitoring it almost on a monthly basis.’

Despite the difficulties, the outlook in Latin American’s oil state appears more positive for foreign investors than it was only a few months ago, especially given that unrest on the streets has diminished. Venezuela may remain off the radar screens of international businesses and their law firms, but this may not be for long.

Marialuisa Taddia is a freelance journalist