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Chavez Ups The Ante

By Kenneth Stier,|Special to CNBC.com
Friday, 30 Nov 2007 | 5:50 PM ET

A constitutional referendum in Venezuela on Sunday is expected to significantly consolidate the power of President Hugo Chavez -- paving the way for a lifetime presidency and possibly an era of strong-man socialism -- but is not expected to fundamentally alter economic relations with the U.S., which are dominated by oil trade, analysts said Friday.

Polls show the vote is close, particularly as university-based opposition has gathered strength in recent weeks, mounting street demonstrations, including one on Thursday that brought out tens of thousands.

Hugo Chavez
Howard Yanes
Hugo Chavez

Chavez, who was re-elected for a third term last December with 63% of the vote -- is seeking some 69 changes -- both small and large -- to the constitution, all bundled into one yes or no ballot issue.

Chavez’s latest power grab has also triggered political defections from his ruling coalition. In addition, a close former ally, Gen. Raul Baduel –- defense minister until July -- has repeatedly denounced the move as a “coup.”

“If the proposal is approved, Venezuelans will soon be living a reality that differs significantly from anything that they -– or the people of any Latin American country, with the possible exception of Cuba –- have experienced in the past,” warns Francisco Rodriguez, the former chief economist of the Venezuela National Assembly until 2004.

“These reforms weaken basic economic rights, especially private property, and checks and balances on the action of government, and together this provides the foundation of a totalitarian regime,” adds Ricardo Hausmann, the country’s planning minister in 1992-1993 and now a professor at Harvard’s JFK School of Government.

Others see far less significance to the event. Patrick Esteruelas, an analyst with Eurasia Group, a political risk advisory firm, says it is not “very materially consequential,” pointing out it merely legalizes the de facto power that Chavez has already grabbed for himself.

For instance, the referendum would strip the country’s central bank of its autonomy but Chavez has been helping himself at will to the country’s foreign exchanges reserves to pay for discretionary social programs spent on the country’s poor that are his power base.

The country’s coffers have swollen with a nearly five-fold increase in the price of oil since Chavez first took office in February 1999.

The Chavez Effect on Oil
Discussing what Chavez's success could mean for oil prices down the road, with CNBC's Sharon Epperson, Michelle Caruso Cabrera & Melissa Francis

Another measure to be voted on will no longer require the government to wait for a court decision before it expropriates private property and absolves the government of the need to pay compensation.

But Chavez’s government has already been nationalizing strategic sectors of the economy, including energy, telecommunications, electricity and food industry -– sometimes without compensation.

Exxon Mobil has filed for international arbitration against Venezuela for unilateral changes imposed by Caracas in the ownership and operational control of company assets, and ConocoPhillips and others are also considering similar appeals.

Source: Wikimedia Commons

But legalizing this power is bound to increase the unease of the business community, especially foreign investors who like established rules, and where the U.S. government has limited influence.

One irony of the deeply antagonistic relationship between the U.S. and Venezuela is their economies’ mutual dependence, which has actually grown in recent years.

Venezuela supplies about 11% of all U.S. imports of crude oil and petroleum products but as Venezuela’s oil production has declined, due to a lack of reinvestment, a greater percentage is now shipped to the U.S. -– more than 60% of its total exports.

Despite bilateral tensions – including threats from Chavez to stop exports to the U.S. or to close the five wholly-owned refineries Caracas owns in the U.S. - there has been no interruption of supply and none is anticipated because of the extreme economic pain it would inflict on both economies.

The level of concern about Chavez’s latest move depends on whether it is seen as ideologically driven, as another step towards socialism, or a more pragmatic consolidation of power.

Despite Chavez’s fiery, revolutionary rhetoric assertion of state control over the private sector has, so far been “selective and sporadic, not systematic,” says Michael Shifter of the Washington-based Inter-American Dialogue.

“This is a guy on a mission to accumulate as much power (as possible) and I don’t think he is going to disturb the private sector as long as it serves his political interests,” says Shifter, noting that a sizeable portion of the Venezuelan private sector has made an accommodation with Chavez.

But that’s been a matter of increasing necessity as the state has inserted itself more and more into the economy, including strict price controls, which have been popular with the masses so far, but which are to blame for shortages of a growing range of basic items, including milk, eggs and toilet paper.

Flush with petrodollars, Venezuela has enjoyed strong growth of about 10% in the last three years but populist economic policies -- including heavy government spending, lax monetary policy, and price controls –- are now coming home to roost in the form of 20% inflation.

The official foreign exchange rate overvalues the Venezuelan currency by some 300%.

Economists say that the longer the government delays correcting that, as well as other economic and fiscal oddities, the more painful the adjustment will be.

Chavez has said he would slow down the socialist transformation of country if he loses the referendum but he is considered unpredictable.

If he succeeds, Chavez will almost be politically unassailable even though his populist economic policies are unsustainable.

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