Chavez Rolls Back Seizures as Shortages Hurt Re-Election Bid

December 16, 2011, 12:46 PM EST

(Adds gold nationalization in 23rd paragraph.)

Dec. 16 (Bloomberg) -- Venezuela’s President Hugo Chavez is enlisting Mexico’s Gruma SAB, French retailer Casino and other international companies to boost supplies of milk, corn flour and cement as shortages threaten to dent his bid for re-election in 2012.

Chavez, a self-declared Marxist, is rolling back policies that have allowed him to expand control over the economy. He is forging alliances with corporations he previously accused of price-gouging, such as Casino Guichard Perrachon SA, based in Saint-Etienne, and Gruma, Mexico’s largest corn flour maker.

“The government has realized that 100 percent expropriations don’t work and that’s why they’re looking to work with the private sector,” said Luis Vicente Leon, president of Caracas-based pollster Datanalisis, in a phone interview. “For the government, it’s the best of both worlds.”

Since taking office in 1999, Chavez has seized assets of 1,045 companies, according to Venezuelan manufacturing association Conindustria. The nationalizations have cost the government at least $9.9 billion in compensation paid to companies, while claims for another $20 billion are under dispute at international courts, said Jose Luis Saboin, an economist at Caracas-based research company Ecoanalitica.

Earlier this month, Chavez and Gruma agreed to form joint ventures to produce corn flour, rice, pasta and oatmeal. Last year, Chavez seized one of the Monterrey-based company’s local units.

‘Flexible Model’

“In the past, socialist models that nationalized everything were forced to later ease their policies,” the 57- year-old Chavez said Aug. 1 on state television. “We’re moving towards a flexible model, our historic creation.”

Calls to Gruma’s press department by Bloomberg News weren’t returned.

Cali, Colombia-based Forsa SA, which produces aluminum molding for construction, last month agreed to form a joint venture with Chavez to produce materials for his housing projects.

Chavez also invited Cemex SAB, the largest cement maker in the Americas, to re-invest in the country after paying the Monterrey-based company $600 million this month to resolve a three-year dispute over compensation for assets he had seized in 2008.

Shortages are being aggravated by 27 percent inflation that’s the highest of 78 economies tracked by Bloomberg, and a slow recovery from a year-and-a-half recession. Foreign direct investment has plunged 75 percent to $1.2 billion in 2010 from $5 billion in 1998, according to the central bank.

In the first nine months of this year, gross domestic product grew 3.8 percent, according to the government.

Borrowing Costs

Venezuela has the highest borrowing costs of major emerging-market countries. Investors demand a yield of 1,276 basis points, or 12.76 percentage points, more than U.S. Treasury bills to hold the government’s debt, according to JPMorgan Chase & Co.’s EMBI Global index.

Steel and cement producers are among the companies that have pared output this year, delaying Chavez’s hallmark program to build homes for the poor, while supermarket shelves are missing staple foods at a time when the former tank commander is canvassing for votes.

Milk is one item difficult to obtain. Angela Mera, a 51- year-old house cleaner, said she hasn’t found powdered milk for two months in the three supermarkets near her home in the Caracas working-class neighborhood of El Valle. Cooking oil is also in short supply, while the only coffee she has was brought by a friend from Colombia, she said in a Dec. 15 interview.

“Even my friends who work at supermarkets sometimes can’t get hold of products,” she said.

Past Hostility

The recent accords with private business show Chavez has become aware of the failings of many state enterprises, Leon said. They also mark an end to past hostility to foreign companies.

In January 2010, Chavez seized a chain of 41 stores partly owned by Casino on accusations of price gouging following a 50 percent devaluation of the bolivar. “You must respect our house,” he said at the time. Ten months later he agreed to pay Casino $690 million for an 80 percent stake in the company’s local supermarkets.

Casino retained the other 20 percent and is “providing operational support to and developing co-operation with the new state-controlled entity,” Casino spokesman Frederic Croccel said in an e-mailed response to questions. He declined to comment on how the relationship with the Venezuelan government works.

Some Protection

For foreign companies, partnering with Chavez provides some protection from further meddling, Leon said. It also allows them to retain a “foot in the door” in the anticipation of an improvement in the investment climate if the opposition holds onto a lead in polls and unseats Chavez in next year’s presidential election, he said.

“It’s a commercial operation without the risk of being the sole owner in a country where the state can do what it likes,” Leon said.

Venezuela’s Information Ministry didn’t immediately return an e-mail seeking comment on Chavez’s nationalization policy.

Chavez’s last nationalization of a publicly traded U.S. company was in October 2010 when he seized a unit of glass container manufacturer Owens-Illinois Inc. The Perrysburg, Ohio- based company filed for arbitration in September after posting a $335 million charge from writing off the takeover.

Rusoro Mining Ltd., a Vancouver-based miner that operated two prospects in Venezuela, is currently in talks to form a joint venture with the state after Chavez nationalized the gold industry in August.

Production Plunging

The policy shift comes as nationalized companies flounder under inexperienced management and fail to attain production targets, said Richard Obuchi, a professor in public policy at the Institute of Superior Administrative Studies business school in Caracas.

Output at Siderurgica del Orinoco has dropped 35 percent since 2009, when Chavez acquired Venezuela’s biggest steelmaker from Luxembourg-based Ternium SA for $1.97 billion, union leader Jose Jimenez said Sept. 23.

Steel rods are key to Chavez’s plan to eradicate a housing deficit. Chavez on Dec. 11 said the project would build 50,000 fewer homes next year than the initial goal of 200,000.

Henrique Capriles Radonski, a front runner to win an opposition presidential primary scheduled for February, said nationalizations have sapped productive industries.

“There’s an excess of government intervention in everything,” Capriles, Governor of Miranda state, said Dec. 12.

Agricultural Output

Boosting agricultural production to slow inflation and replenish food stocks is another part of Chavez’s electoral strategy. Food processors, stores and more than 2.5 million hectares (6 million acres) of farm land and ranches have been seized during his administration.

While forming partnerships with the private sector may cut the financial burden for the government, Chavez is unlikely to drift far from his radical course, Saboin said.

“While Chavez may adapt the format for nationalizations, if he wins another term he will continue to increase his hold over the economy and won’t cut back on nationalizations any more than he needs to,” Saboin said. “Pragmatism is the order of the day, but only in the areas where it’s required.”

--With assistance from Andrew Roberts in Paris and Carlos Manuel Rodriguez in Mexico City. Editors: Daniel Cancel, Richard Jarvie

To contact the reporter on this story: Charlie Devereux in Caracas at cdevereux3@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net