Foreign Relations of the United States, 1969–1976, Volume E–11, Part 2, Documents on South America, 1973–1976

384. Memorandum From the Chairman of the Interdepartmental Group for Inter-American Affairs (Kubisch) to the President’s Assistant for National Security Affairs (Kissinger) and the President’s Assistant for International Economic Affairs (Eberle)¹

Washington, July 26, 1974.

Review of U.S. Policy Toward Venezuela

In accordance with the instructions of NSSM 203/CIEPSM/35 of June 10, 1974, I attach a review of U.S. policy toward Venezuela with particular emphasis upon those aspects of relationships affected by recent manifestations of economic nationalism.

The study reflects agreement by all members of the augmented NSC Interdepartmental Group for Inter-American Affairs consisting of the following agencies: State, Defense, Joint Chiefs of Staff, Treasury, CIA, AID, Commerce, USIA and the Federal Energy Administration. Representatives of CIEP and NSC also participated in the preparation of the report.

Attachments:

Review of U.S. Policy toward Venezuela

CONTENTS

	Page
I. SUMMARY AND INTRODUCTION
A. Venezuela’s Importance to the United States	1
B. New Directions	2
II. THE DEVELOPMENT OF ECONOMIC NATIONALISM
A. The Setting	4
B. The Major Industries Affected
1. The Petroleum Industry	5
2. The Iron Ore Industry	6
3. Other Industries	7
C. Government Policies Toward Foreign Investment
1. The AD and COPEI 1958–1973	7
2. President Carlos Andres Perez’s New Economic Program for Venezuela: The Speech of April 29, 1974	9
U.S. AND VENEZUELAN INTERESTS AND NEGOTIATING PROSPECTS
A. The Perez Government’s Attitude Toward the U.S.	12
B. New Possibilities for a Larger International Role for Venezuela	13
C. The Move to Nationalization: Objectives and Negotiating Positions
1. Petroleum
a. GOV Interests and Options	15
b. The Companies’ Stake and Assessment of their Negotiating Position	18
c. United States Government Interests	20
d. USG Assessment of the Negotiations	21
2. Iron Ore	23
3. Other U.S. Companies	25
D. U.S. Commercial Interests in Venezuela	26
E. U.S. Political Interests	27
F. U.S. Security Interests	28
PROSPECTS FOR A BILATERAL AGREEMENT	29
U.S. POLICY OPTIONS	32
A. A Hands-Off Policy	32
B. A Parallel Dialogue	34
C. An Out-Front Policy	35
D. Increase U.S. Support for Venezuela’s Development	36
E. Creation of an Explicit “Special Relationship”	37
VI. RECOMMENDATION	39

ANNEXES

A. President Perez’s Speech of April 29

B. United States Oil-Related Interests and Objectives in Venezuela

C. Goals, Objectives, and Aspirations of Venezuelan Petroleum Policy

D. Venezuelan Government Operation of a Reverted Oil Industry

E. Prospects for a Special Relationship

F. An Illustrative List of Actions the U.S. Might Take To Support Venezuelan Development

I. SUMMARY AND INTRODUCTION

A.Venezuela’s Importance to the United States

Venezuela is profiting greatly from sharply inflated petroleum prices. Total government revenues from petroleum for 1974 are anticipated to be about $9 billion; Venezuela’s international reserves have already risen in the last six months from less than $2 billion to nearly $5 billion. Venezuela’s leaders consider this situation a major opportunity to “sow petroleum” in behalf of long term national development through a new economic program, part of which calls for nationalization of the petroleum industry within two years. The disposition of these new earnings has also become an important factor on the inter-American scene, for they reinforce Venezuela’s aspirations to leadership and offer a new source of capital assistance for less-favored nations.

Venezuela also has one of the strongest and most dynamic democratic governments in Latin America and a strategic location at the southern entrance to the Caribbean. Its importance to the United States is further underscored by the following:

—Venezuela is our single largest foreign source of petroleum, providing about 28 percent of U.S. imports and 10 percent of our total national consumption. It continued to export oil to us throughout the recent embargo even though it is a founding and active member of OPEC.

—Venezuela provided 30 percent of U.S. iron ore imports in 1973, valued at $127 million, and 10 percent of total U.S. consumption of iron ore.

—U.S. private investment in Venezuela totals some $2.5 to $3 billion, of which $1.5–2.0 billion is in the oil industry. This investment has contributed $150–$200 million annually to the U.S. balance of payments in the form of profits and interest.

—The United States annually exports over $1 billion worth of goods and services to Venezuela, making it our third largest market in Latin America, and our 12th largest in the world. With its sharply increased petroleum income Venezuela should become a rapidly growing market for U.S. products and services.

—Venezuela will likely occupy a pivotal position in the development of the “New Dialogue” between the United States and Latin America: its membership in the Andean Pact, its growing influence in the Caribbean, and the historic alliances between its civilian leaders and those of Colombia, Costa Rica and Puerto Rico all give Venezuela significant regional influence.

B. New Directions

With its wide popular support, Venezuela’s newly-elected government has initiated a sweeping new economic program aimed at achieving control over major national resources and reducing disparities in personal income. President Carlos Andres Perez considers this program essential to the survival of democracy in Venezuela.

Venezuela now proposes to recover national control of its basic industries. Petroleum and iron ore have traditionally supplied 95 percent of all Venezuelan export earnings. Both industries are controlled almost in their entirety by foreign interests, mostly from the U.S. Their nationalization is seen by Venezuelan leaders as serving Venezuela’s broad interests and, at the same time, enhancing its position of leadership in the Americas. They do not view it as an anti-American posture. Nor is there evidence of a general Venezuelan policy of supplanting U.S. investment in the Americas.

Implementation of the new economic program is in its incipient stage. Affected U.S. business interests are in touch with the Government of Venezuela, seeking to identify their future role in the country. They believe that their marketing facilities in this and other countries, together with their advanced technology in the extraction, refining and industrial utilization of both petroleum and iron ore, will provide them with important bargaining chips with a government which needs those elements and appears to have sufficient support to eschew the narrow course of hypernationalism. On the other hand the GOV holds the option of reducing oil production substantially and looking for technical expertise in the international market place. Compensation for expropriated properties should become an issue only if even the minimum expected accommodation fails.

The U.S. national interest would be served by continued access in the short run (4 to 6 years) to Venezuelan iron ore and, in the long run, to Venezuelan petroleum. In seeking to advance these interests and in handling the compensation issue, if it arises, we must have due regard for other political, security, and commercial interests affecting our relations with Venezuela.

Developing circumstances have eliminated or greatly attenuated, in the Venezuelan case, many of our standard instruments of negotiating leverage, such as financial assistance, AID programs, oil preferences and offers of formal bilateral agreements. In lieu thereof, the defense and advancement of our important interests will best be served by improved rapport, based on frank and friendly dialogue with the Government of Venezuela. By demonstrating that we recognize Venezuela’s aspirations and will support them on a basis of reciprocal consideration and accommodation, we increase the likelihood of a successful outcome of negotiations over the future role of our companies. Our priority task is to initiate this constructive dialogue and create an environment conducive to its successful fruition.

[Omitted here are Sections II, III, and IV.]

V. U.S. Policy Options

In line with NSSM-CIEPSM guidance, the options which follow focus on a major nationalization of U.S. investments in the context of our broader interests in Venezuela. Because negotiations are still at an incipient stage, we lack any significant elaboration of the GOV’s position on the future role U.S. iron and petroleum companies might play in extracting and processing those materials. The options which follow, therefore, represent broad approaches to the negotiations and to the environment in which they are taking place. Further analysis will be warranted as negotiations progress, particularly if a movement toward confrontation develops.

The U.S. oil and steel companies’ particular interests relating to their investment in Venezuela fit within a broader U.S. concern with protection of U.S. investments overseas, with maintenance of a flow of energy and raw materials to our economy, and with preservation of longer term political and security interests in Venezuela. Similarly, the acquisition of control over its extractive industries fits within a broader Venezuelan government program of industrial and general economic development. The options below take these interrelationships into account. The first three present differing levels of general USG involvement in the negotiating between the companies and the GOV. Options four and five represent more general approaches to supplement the negotiating options.

A. A Hands-Off Policy.

This course of action would leave the process of negotiation to the private U.S. companies which are involved. We would follow the negotiations carefully, so as to be prepared to become involved if the course of negotiations turned against the companies in such a way as to threaten our interests. Normal diplomatic interchanges with the GOV, either at its initiative or in cases where we were certain such interchanges would not be objected to by the GOV or the companies, would not be precluded, but we treat the negotiations as a matter basically between the companies and the GOV.

Advantages

a. Would conform to the role suggested to us by the companies themselves. This role was urged because of the companies’ fear that U.S. involvement in the negotiations might be conterproductive and cause the GOV to take a more extreme position in order to demonstrate its independence from the U.S.

b. Would leave negotiations to the experienced hands of the interested private parties, most of whom have a long history of relationship and dealings with the government of Venezuela.

c. Would reduce the risk of confrontation with the GOV by not directly addressing Venezuela’s contention that subsidiaries of foreign firms doing business in the country are subject only to Venezuela jurisdiction.

d. Would avoid premature USG involvement by deferring participation until it had become more clearly necessary.

Disadvantages

a. If the negotiations turn against the companies, our involvement may come too late to support either their or our own national interests.

b. The private companies alone may not have sufficient bargaining strength to compete with the government of Venezuela and will therefore be at a disadvantage in the negotiations.

c. Important national interests are involved, involving both oil and iron ore supply and prices, and more broadly long-term relationships which we may not be able to protect if the negotiations are left completely in the hands of the private companies.

d. Important principles of U.S. international economic policy are involved, e.g. prompt, adequate, and effective compensation for expropriated properties, which should be advanced at the governmental level. This consideration is not likely to arise, however, until the companies first goal of maintaining a role in Venezuela, and perhaps even a reasonable guarantee of continuing access to the petroleum, fails.

B. A Parallel Dialogue.

Recognizing that important national interests are involved in the negotiations apart—if not neatly separable—from the specific regarding the nationalization of U.S.-owned interests, we should quietly maintain a dialogue with the GOV to identify possible broader problems arising from the negotiations. This dialogue should be carried on regularly, but, for the USG part at least, in a manner consistent with option one as regards avoiding comment on, or involvement in, specific of the company negotiations.

Advantages

a. To a great extent such a dialogue is unavoidable. We cannot stop diplomatic exchange during the negotiations.

b. The advantages considered under a and b of option one would apply.

c. To enter a parallel dialogue would implement our joint commitment at Tlatelolco. We agreed there to bring out conflicts of national interests and to deal with them frankly, with concern for results and less for complicating public treatment of them.

d. There will inevitably be publicity on progress of the negotiations, and on points of conflict. The large number of companies involved will almost inevitably lead to a public confusion on what is really happening. We must be clear on what is, in fact, happening. Consultation on these problems would serve the purposes of both governments, assuming a continuing will to keep the setting conducive to an agreed accommodation of interests.

e. The separate officially communicated Venezuelan view of how the negotiations are proceeding could be useful to the U.S. companies involved, as well as to the USG.

Disadvantages

a. We may get drawn into discussion on ongoing negotiations to a depth which our companies would not welcome. Our official comments would be subject to misinterpretation and possible use against the companies positions.

b. It takes two to make a dialogue and the new government has not been disposed to consult in advance on its policy initiatives.

c. We would be more open to the traditional Latin charge that the USG supports the aims of its national firms to the detriment of the independent development of Latin American countries. (This potential might be lessened to the extent that the USG avoided official discussion of specific issues or support for company positions.)

C. An Out-Front Policy

The USG would seek to interpose itself between the private companies and the Government of Venezuela. The USG would take an active role in the negotiations and/or attempt to use strong political and economic pressure in support of an outcome that would protect U.S. and company interests.

Advantages

a. The prospect of an outcome more favorable from the standpoint of U.S. interests might be greater by virtue of the greater bargaining power brought to bear, although this is by no means certain.

b. A clear signal would be given—in Venezuela and elsewhere—of our unwillingness to accept continued erosion of the U.S. business presence and our national economic interests abroad despite the political costs which might be involved.

Disadvantages

a. This would almost insure early confrontation with the new and basically friendly government of a leading Latin American democracy, causing potentially serious harm to our overall relations and security interests.

b. There is reason to believe that the government of Venezuela sees itself as embarking upon a comprehensive new economic development program rather than a bilateral problem with the U.S. Such a confrontation risks a polarization, with the United States being internationally cast in a role of opposition to the force of nationalism in Latin America.

c. We are not exactly dealing from strength in today’s relations with Venezuela. Our elements of leverage are perhaps lower than ever before in view of (1) our need for Venezuelan oil, (2) the importance attached to Venezuelan cooperation in the vitalization of inter-American relations, and (3) the affluence and economic independence which Venezuela enjoys today by virtue of surplus oil revenues.

d. Given the complexity and the economic and legal issues involved, especially with regard to the petroleum issue, it would be difficult if not impossible for the U.S. Government to play a meaningful role in specific negotiations, except perhaps, if compensation becomes a central issue.

D. Increase U.S. Support for Venezuela’s Development.

To improve the environment for negotiations we would, without publicity or declaration of any “special relationship,” identify the USG officially with the GOV aspirations to industrialize and diversify its economy. Steps in this direction could include facilitating the training of Venezuelan technicians abroad, encouragement of U.S. industrial and commercial involvement in the Venezuelan development plan, assistance in the GOV’s drive to upgrade the depressed agricultural sector, reaffirmations of our willingness to assist with the modernization of Venezuelan armed forces, and general cooperation in the inter-American context. This program should, to the extent possible, operate in support of continuing favorable relations with the Venezuelan government. A sufficiently adverse turn of the company negotiations or of GOB public posture toward this country would, of course, call for a reassessment of the value of such cooperation and atmospherics. From such a positive approach we would expect to develop the most cooperative background possible which would promote a favorable GOV attitude toward our interests. (See elaboration of possible courses of action in Annex F.)

Advantages

a. This would be a constructive approach to Venezuela’s legitimate charting of a more ambitious course of national development.

b. There is a good chance that the GOV would be receptive to this approach.

c. There would probably be a useful fallout across the entire spectrum of our relations with Venezuela providing a beneficial setting for the protection of our economic interests and the interests of the U.S. companies in Venezuela.

Disadvantages

a. Such a cooperative approach would be difficult to sustain if the GOV took harsh action against U.S. companies.

b. It could be subject to serious criticism from elements in the U.S. who do not view nationalization as legitimate nor past U.S. posture in these case as “firm” enough.

c. It might encourage others to treat our overseas interests arbitrarily in the belief that such action is rewarded rather than punished.

E. Creation of an Explicit “Special Relationship”

As in the case of Saudi Arabia, we would attempt to negotiate a publicly proclaimed “special relationship”, commissions and working Groups, interchange high-level visits, and set out to assist in the development and the diversification of Venezuela’s economy. We would offer to assist Venezuela substantially with modernization of her armed forces, consistent with the requirements of inter-American security. A formal bilateral agreement might be part or the end result of this effort. Part of the package would, of course, provide for a mutually satisfactory outcome of the negotiations with the companies.

Advantages

a. International recognition would be afforded Venezuela as a nation of special importance to the United States, and special relationships would come publicly into existence with the implication of two-way trades on measures affecting each other.

b. Massive U.S. attention and assistance might result in Venezuela giving special consideration to our economic interests.

c. Might lead to substantial expansion of hemisphere’s petroleum reserves.

Disadvantages

a. Such singling out of Venezuela would be resented by other members of the inter-American community.

b. Venezuela has invested heavily in developing its “Third World” credentials and may not itself consider a “special relationship” with us compatible with these and with its pretensions to leadership in Latin America.

c. The substance of such a relationship might be much less than the form. The immediate economic, political, and military advantages which we have to offer Venezuela might not be sufficient incentive for the GOV at this time to make major economic concessions in return. See Section IV “Prospects For a Bilateral Agreement,” and Annex E “Prospects for A Special Relationship.”

d. Given these circumstances, the GOV is unlikely to be willing to enter into any bilateral trade, investment, or energy agreement. An offer on our part to discuss such a special relationship might result in the GOV stiffening its position in negotiations with the companies.

e. It might be premature to offer such a relationship to Venezuela until negotiations with the companies have progressed sufficiently to indicate that such a massive USG effort is necessary to preserve our interests. A premature offer could indicate to the GOV that we consider the position of the companies weak, and therefore encourage the GOV to go for a maximum takeover of U.S. investments.

VI. Recommendation

Options B, A Parallel Dialogue, and D, Increase U.S. Support for Venezuela’s Development, taken together, offer the greatest chance for the USG to assume a role supporting both our national interests and a favorable outcome for company negotiations. Their advantages are outlined above. The companies have generally not sought official intervention in negotiations over nationalization, yet the Secretary has committed the United States to meet points of conflict with Latin American countries in continuing dialogue, and with a minimum of public posturing. The balancing act set out in B describes a course essentially meeting both imperatives.

The dialogue should be constant, quiet, and at the highest level possible. We should seek to bring out the objectives of each government in the negotiations and identify broad areas of agreement and of disagreement. Misapprehensions over these should be avoided at the start so that we do not limit necessarily the area of maneuver and compromise through feeding public antagonism. The course of negotiations will also involve many disparate companies with differing aims and personalities, leading inevitably to a confusing picture of what is happening. It will be important that we hear the GOV version of the negotiations at each stage, even though the USG should be constrained from getting between the parties except at the point—essentially at the end of the line—when the compensation question will call for our close review, and possible official comment or action.

In the important case of oil company negotiations, our interest in a continuing flow of Venezuelan oil to this country would call for a new analysis of our options should the Venezuelan position be to exclude U.S. companies from Venezuelan operations at a precipitate rate, or to threaten diversion of the oil to other markets. Both possibilities offer little benefit to Venezuela in our view, yet are possible results of the negotiating process.

Option D should be fleshed out immediately, using a Venezuela Working Group to identify means available to the USG to be of assistance to Venezuela in attaining its developmental objectives. The timing and visibility of these moves to be helpful to Venezuela will have to be examined closely. There is some danger in “discontinuing” to the extent that our actions might be construed as “buying” favorable treatment for U.S. firms and handing Perez’s opposition a political opening. We face the same sensitivity, however, when we do not do in normal interchange what we might have been expected to do, exposing ourselves to the opposite change of holding positive actions hostage to the same favorable treatment of U.S. interests.

In our approach to Option D we should make a strong effort to head off the charge that the conflict of national interests, to some degree inherent in the nationalization process, implies a U.S. intention to restrain or subvert Venezuelan development. The Venezuelan government will furthermore be under political pressure to broaden its options and show its independence. The tendency is strong in any country enjoying newly available financial means to go to excess in removing all appearance of dependence. The longer range ties, which are recognized to be beneficial to both sides, will have to be reinforced carefully and continously in order to lay the basis for a political climate in Venezuela which will permit a reasonable accommodation to U.S. interests.

[Omitted here are the Annexes.]

1. Summary: Kubisch transmitted an NSC interdepartmental group’s review of U.S. policy towards Venezuela. The study focused on potential responses to Venezuelan economic nationalism.

   Source: National Archives, Nixon Presidential Materials, NSC Institutional Files (H-Files), Box H–205, NSSM Files, NSSM 203. Confidential. The review was prepared as a response to NSSM 203/CIEPSM 35, June 10, published as Document 380. The annexes are attached but not printed.