Some global developments you may have missed, courtesy of Maplecroft‘s global risk map.
In Venezuela President Hugo Chavez is nationalizing gold and repatriating international reserves. In India, the arrest of anti-corruption activist Anna Hazare is pressuring prime minister Manmohan Singh’s government. And the energy industry is getting flak in Australia and the U.S.
Below the map we’ve included an article from Maplecroft on the increasing government and business environment risk in Venezuela:
On 17 August 2011, President Hugo Chavez announced his intention to nationalize Venezuela’s gold sector and repatriate international reserves. Chavez stated that he was preparing a decree that would allow Venezuela to capitalise on record international gold prices, a resource of which the country has vast potential.
Chavez claims that the industry’s nationalization will allow the government to establish tighter reins on the proliferation of illegal mining that has had subsequent impact on both Venezuela’s environmental and economic capacity. The repatriation of international reserves may also be an attempt to avoid potential sanctions against his government by the US and UK, particularly if tensions escalate prior to the presidential elections scheduled for December 2012.
Nationalization of the gold industry may further curtail revenue sources as the government is unlikely to have the capability to invest sufficient funds necessary to satisfy production. The centralization of Venezuela’s key economic sectors such as oil, mining and telecommunications has negatively impacted the favourability of Venezuela’s investment climate, limiting potential growth.
The repatriation of international reserves will expose the country to fluctuations in the price of gold, significantly affecting their value. The move is also likely to further strain relations with western economies that currently hold the majority of reserves. A wider threat that other countries will follow suit also poses risks to the stability of the gold market, as banks will need to replace their bullion stocks.
Chavez’s political opposition will likely accuse him of using the extra funds raised by nationalization and repatriation of gold for his 2012 election campaign and thus squandering Venezuela’s economic stability.
Nationalization of the gold industry
Nationalisation of the gold industry is unlikely to eradicate the existence of illegal mining operations. The chief executive of the only non-state-owned gold mining company operating in Venezuela, Rusoro Mining Ltd. (RML.V), Andre Agapov, stated that illegal mining likely contributes to double the production of formal operations in the country. Chavez plans to deploy the military to gold mining sites in order to eliminate the rising level of criminality resulting from illegal operations that have hindered formal mining projects. However, this is likely to result in increased levels of violence which may further deter potential investors.
It is unlikely that the government will be able to capitalise on the vast potential of gold reserves without external finance and expertise. Formal production has been limited to an estimated11 tonnes per annum despite the availability of large gold deposits. This may be attributed to the instability of the investment climate and disputes over Chavez’s limitations on exports. In 2010, Chavez raised the possible rate of export to 50% from 30%. However, companies such as Rusoro claim that this still significantly hinders potential production rates.
Nationalisation plans in the gold industry will likely revitalize legal challenges made by companies whose operations were blocked in February 2011. Canadian mining company Crystallex International Corp. and Gold Reserve Inc. are both pursuing international arbitration, seeking $3.8bn compensation, after the government terminated contracts.
Repatriation of international reserves
Repatriation of international reserves may limit Venezuela’s dependence on the economic performance of countries where it is held. It is estimated that the Central Bank of Venezuela owns 365.8 tonnes of gold, 211 tonnes of which are held overseas in banks in the UK, US and Switzerland. Following Chavez’s announcement, Finance Minister Jorge Giordani referred to the threat of economic instability in both the US and Europe. Giordani specifically highlighted the potential for sovereign debt crises in the US and EU which could jeopardize the security of Venezuela’s reserves.
However, in a repatriation scenario, the security of Venezuela’s international reserves will also be at risk due to the potential fluctuation of the price of gold. This will be of particular concern due to the fact that the country is already heavily reliant on international oil prices.
Perhaps of greater worth to Chavez, repatriation will limit the opportunity for ‘hostile’ countries to freeze Venezuela’s assets with international sanctions. In his announcement, Chavez posed events in Libya as an example, stating that there was ‘practically a confiscation of …resources’. Chavez will instead aim to strengthen ties with political allies by linking Venezuela’s economy to that of the BRIC nations, and switching reserves to BRIC investments.
Nationalisation and repatriation will further strain relations between Venezuela and the west, and the US in particular. In reaction to repatriation and diversion from western economies, it is possible that Venezuela may be subject to raised interest rates on its debt and a substantial cut in its credit rating.
Venezuela is unlikely to capitalise on the wealth of resources available due to insufficient funding and expertise and the investment climate will be severely impacted by increasing intent to nationalize key industries. This in turn will hinder economic growth.