Chavez choking Venezuela

Investor's Business Daily Editorial:

Venezuelan dictator Hugo Chavez has expropriated $4.5 billion in assets from two U.S. oil firms. It's an ugly loss, but they will live. What's in doubt is Venezuela's future.

No one knows what exactly will take over the mighty Orinoco-region investments that ConocoPhillips and Exxon Mobil will likely vacate as Chavez declares yet another "people's victory."

But there's little chance the country will be able to match what those two companies could add to oil output and national development there. And the loser will be Venezuela.

Markets Wednesday offered a hint of what's ahead, with Exxon's stock ending 2% higher, leading the market upward on a down day, and Conoco ending flat.

Bear in mind that Exxon lost nearly a billion dollars in Venezuelan investments, and Conoco lost four times that much, amounting to 10% of its proved reserves.

Yet credit agency Standard & Poor's declared Conoco's rating undented by the move, and Exxon said it would "move forward," probably signalling a bid to recover some of the value of its assets in U.S. courts.

Suddenly, Venezuela's U.S. Citgo refining and marketing network has become a juicy target.

But Venezuela is another story. Its currency, the bolivar, and its sovereign bonds both plunged as Exxon and Conoco announced they're leaving.

Most Venezuela watchers saw a link. Standard & Poor's, for instance, downgraded the country's outlook, citing "a highly negative climate for investment, which results in virtually no foreign and private investment."

Venezuela has strict capital controls on its currency, so the bolivar trades only in the local black market. Its value to the dollar fell from 4,050 to 4,180 yesterday as dollar demand for capital flight rose, Bloomberg reported.

Even the "official" rate of 2,150 bolivars to the dollar signals ruinous inflation, likely well above the most recent inflation rate of 19%. A lack of dollars has emptied store shelves of imported goods, causing food prices to shoot up.

This is a bad sign for Venezuela. Markets basically shrug when two major investors leave, while brutally punishing Venezuela's government for its treatment of its U.S. investors. Chavez's regime is like one of the country's anaconda snakes, squeezing the very life out of Venezuela itself. Sadly, it's part of a long downward slide that shows no end.

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For the economy, he's beginning to do what all dictators do — slowly choking Venezuela's private sector to death.

There's nothing unique about his approach.

He's doing what dictators from Zimbabwe to North Korea to Iran have done. Waving the flag of nationalism, he's coming first for "foreigners," making a big show of his expropriations to rally support. Oil is the biggest part of Venezuela's economy, accounting for about 25% of its GDP in 2006, and about 60% of its exports.

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Less well known, but with unusual venom, Chavez has also come for Venezuela's private sector, driving many businesses to flee to neighboring Colombia, and sending many of its entrepreneurs abroad.

Like the country's fabled anaconda, Chavez is choking this once-prosperous economy to death, leaving what's left only a ruin.

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The big choke is underway in Venezuela. Attacks on capital are always self defeating. When the UK socialist started attacking capital in that country, it went to the US and and consequently the UK went from leading the world in patents to badly trailing the US. Chasing capital from Venezuela is going to make the country poorer.