537. Telegram From the Embassy in Venezuela to the Department of State1

1840. 1. President Leoni’s confident announcement that basis for solution of problems between petroleum companies and GOV has now been found and final agreement and discussion of bright economic prospects has pulled rug out from under those political elements who have been seeking discredit and undermine stability government. At same time, it is most positive step in last several months toward restoration economic confidence. Details speech reported separate tel.2 While die-hard opposition sectors will undoubtedly continue their efforts, without substantive base of crisis between petroleum sector and government their cries of gloom, doom and communism will be ineffective. Thus, inspired anxiety (Embtel 1449)3 which has existed past two months should taper off rapidly.

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2. Political effects of particular importance include:

Opposition groups at ordinary session Congress which opens October 1 unlikely mount meaningful opposition to government on pending basic legislation, including tax reform bill.
Position of main opposition parties, COPEI, FDP, and FND, are at tactical disadvantage and will have hard choices to make when tax reform bill finally comes to vote.
With revenue base assured for remaining two years and several months of administration, government can move ahead confidently with social-economic program. AD party, particularly in states receiving substantial assistance in public works and alliance for progress projects, will be assured resources for building a record of accomplishment.
Opposition groups may now concentrate on charges of government mismanagement and press for investigation of public expenditures.
URD party which had considered withdrawal from coalition and expressed particular concern re petroleum policy may now be considerably more reluctant leave government.

3. Question of attitude Venezuelan military toward government and their role in nation’s stability (which is always key ingredient) had again arisen last week as result number top level transfers which purportedly included replacing two top respected army officers with generals who are widely considered AD favorites. However consensus Country Team is that while number of top level changes have developed, the controversial changes have not yet occurred. Regardless whether they now do occur or not, government, having removed fundamental petroleum question from contention, has at same time significantly reduced possibility that military malcontents could count on national economic crisis as foundation for Golpe aspirations.

4. In addition, it should be noted that AD party at its national convention last week emphatically confounded irresponsible critics and press speculation by unanimously selecting highly respected Minister of Interior, Gonzalo Barrios, as party’s secretary general. AD sources confirm to us that President intervened forcefully with party leaders to insure party unity would not be undermined by personal ambition by various potential presidential candidates.

5. In short, government agreement in principle with petroleum companies constitutes fundamental contribution national stability, and outlook today considerably brighter than it has been for several months.

  1. Source: National Archives and Records Administration, RG 59, Central Files 1964–66, PET 6 VEN. Confidential; Priority. Repeated to USCINCSO, Bogota, Georgetown, and Mexico for Assistant Secretary Gordon.
  2. Telegram 1846 from Caracas, September 30. (Ibid., POL 2 VEN) Although Leoni did not announce the details of the settlement, the government allowed the companies to sell oil at competitive prices in return for payment of taxes on the basis of predetermined “reference prices.” The companies also agreed to pay $155 million in back taxes through 1965.
  3. In telegram 1449 from Caracas, September 9, the Embassy explained that “uncertainty in financial community in past month resulted in contraction credit available and in last week a limited run on dollars. These developments in turn stimulated concern within the business community and now within the public at large.” (Ibid., POL 15 VEN)