Why Businesses are Leaving Venezuela, and Fast
by Danielle Schwab
What was once a resource rich, promising, Latin American country, over the years has deteriorated to the brink of economic collapse.
Horror stories have leaked out about waiting in lines for water, the inability to find medicine and the growing violence and muggings, all of which has not only left the people of Venezuela struggling to survive, but has also quickly become one of the worst places in the world to do business.
If a good market is defined as having a stable currency, a functioning government, is welcoming to foreign business and has a growing middle class population, Venezuela qualifies for none. Which is why a new risk report by commercial property insurer FM Global, named Venezuela the riskiest place in the world to do business, for the second year in a row.
Many companies are now re-thinking their operations in Venezuela, or have already packed up and left, unable to wait out President Nicholás Maduro, who has been driving the country’s economy into the ground.
As the situation worsens, we are seeing more and more multinationals finally giving up on Venezuela, whether they have reached a breaking point, were forced out, or were unable to get certain raw materials; there are few companies left standing.
Of course every companies’ decision to leave is influenced by various factors, but below are some of the major reasons companies are abandoning their operations as Venezuela falls deeper into an economic depression.
No access to raw materials
In late May, Coca-Cola announced it would temporarily stop production as they are unable to gain access to enough sugar in the country to produce their products.
Sugarcane production in Venezuela has been falling due to price controls and rising production costs, as well as a lack of fertilizer. As a result, many small farmers have turned to other crops that generate higher income and sugar has become another scarce material.
The country has become so economically depressed, there are food and medicine shortages and inflation is said to rise to 500% this year. Not only is this not good for operations, this also does not make for good consumers.
Kimberly-Clark, the maker of Kleenex and Huggies, said on July 9 that it was suspending operations in Venezuela and cited a “persistent deterioration” in Venezuela’s economic and business conditions for its decision to leave.
The same week the company announced its decision to leave, the Venezuelan government announced it would seize the facilities and continue to manufacture on their own, which has become nothing more than a PR scheme to try and shame the Americans for leaving people jobless.
Falling behind in payments:
Oil contractors have been scaling back drilling activity after the cash-strapped country fell more than $1bn behind in payments, threatening production of the commodity that provides the government with 95% of its export revenue.
A recent report from HSBC noted that several BP tankers carrying oil are stuck outside Venezuelan crude import terminals unable to discharge, because PDVSA (Venezuela’s state oil company) hasn’t paid for the oil. In addition, Schlumberger and Halliburton have both curtailed activity in the country in recent weeks due to lack of payment.
The devaluation of the currency
The biggest problem for foreign companies is that the amount of dollars circulating in Venezuela’s economy has reduced dramatically since 2013, prompting a further tightening of currency controls. This has meant that multinational companies’ revenues remain trapped in the local bolivar.
PepsiCo said on July 7 that it took a $1.4bn hit in 2015 as it deconsolidated its operations in Venezuela in the face of ongoing currency devaluation, while Mondelez International, the maker of Oreo cookies, reported a currency loss of $778m.
Beyond their inability to operate, the companies are facing hostility from the government of Venezuela and are being accused of taking directions from the U.S. government.
How did a country with the world’s largest oil reserves become unable to not only support its own people, but also unable to host foreign business? Even their own regional bloc, MERCOSUR, almost turned their back on them. The past 6 months there has been a controversy over whether Uruguay would pass the presidential rotation to Venezuela, as member countries are meant to serve 6-month rotations in alphabetical order. Because democratic governance is a requirement for MERCOSUR membership, at the urging of Paraguay, MERCOSUR heads of state are considering blocking Venezuela, at least temporarily, citing the erosion of democracy.
On August 6th, Brazil’s Senate expressed support for Venezuela’s Presidency, meaning Venezuela will not be temporarily suspended from the trading bloc, which will have numerous repercussions. Among these is the fleeting chance of a MERCOSUR-U.S. or EU Free Trade Agreement, which had become a possibility over the past 2 years as the trading bloc moved towards the right with the ouster of Brazilian President Dilma Rousseff and the election of the business-friendly Argentine President Mauricio Macri.
Besides the political implications, MERCOSUR countries account for a large percentage of Venezuela’a imports and the charts below illustrate that imports from MERCOSUR countries to Venezuela have grown, while exports to MERCOSUR countries from Venezuela account for much less. For example, in 2014, imports from Argentina accounted for $1.6 billion while exports to Argentina in the same year accounted for less than $10 million.
As Venezuelan-U.S. business relations continue to deteriorate, imports from MERCOSUR will become more and more vital, as there are already extreme shortages of food and medicine. So holding on to its membership in MERCOSUR will allow Venezuela to continue to sabotage relationships with U.S. businesses.
The current state of Venezuela’s economy proves that business cannot function in a hostile environment, and as we watch the government continue to fail to provide basic necessities, we are reminded that good business cannot exist with bad government. But with Brazil’s latest approval of Venezuela’s continued membership in MERCOSUR, it’s clear that multilateral institutions will continue to give Maduro’s regime legitimacy for the time being.
Originally published at asymmetrica.net on August 6, 2016.