Foreign Relations of the United States, 1977–1980 Volume XXIV, South America; Latin America Region

334. Memorandum Prepared in the Central Intelligence Agency¹

RP-M-77-10162

Washington, June 22, 1977

SUBJECT

• Venezuela on the Eve of President Perez’ Washington Trip

SUMMARY

President Carlos Andres Perez wants a relationship with the US based on mutual benefit and respect. He comes to the US on 27 June looking for this partnership and for assurances that the Carter administration regards him as an important and dependable ally. He seeks US cooperation and support on global and regional issues important to Venezuela. His desire to portray himself as leader of Latin America and Third World countries and as a vigorous defender of their interests will govern much of what he says and does during his two-day visit. An improved US-Venezuela relationship is unlikely to diminish Caracas’ strong support for OPEC because Perez believes that a unified OPEC is necessary to secure Venezuela’s economic future.²

[4 sections (81 lines) not declassified]

Expectations for Trip

The Perez visit—the first time a Venezuelan president has visited the White House since 1970³—has become a matter of great, almost obsessive interest among Venezuelan political leaders. This state of mind is characterized by:

—a high level of expectation and intense desire for close association with the Carter administration;

—the “love-hate” ambivalence that normally characterizes Venezuelan relationships with the US; and

—an egocentricity that assumes Venezuela is as important to the US as the US is to Venezuela.

Venezuelan officials hope for a close relationship with the Carter administration because of ideological affinities, the prestige that association can bestow domestically and internationally, and the possibility of securing benefits for Venezuela’s development.

The Carter administration’s defense of democracy, human rights, and nuclear nonproliferation and its attitudes toward Cuba and Panama have all struck responsive chords in Venezuela. Even the US energy policy is seen as complementing Venezuelan views that petroleum is a nonrenewable resource. Venezuelans in general see the new US administration as a refreshing change from past US governments because of its focus on ethics and personal liberties. President Perez believes that for the first time in more than a generation an opportunity exists for Caracas to achieve a really close political partnership with Washington.

These feelings are strengthened by a firm conviction that President Carter’s policies buttress Perez’ position at home. In response to criticism by some sectors of his Cuban and Middle East positions, Perez can point to the US policies with similar objectives. Nervous about the growing power of Brazil, Perez has applauded the US stand on nuclear nonproliferation. Having argued for reestablishing relations with Cuba and for renegotiation of the Panama Canal Treaty, Perez sees Washington’s moves in these directions as vindicating his view of regional politics.

Perez faces a challenge to his status within the governing Democratic Action Party from the aging father of the Party, former president Betancourt. An issue dividing the two men is the choice of a candidate to carry the party banner in the presidential elections scheduled for December 1978 and the ideological direction that the party will follow for the next five years. [less than 3 lines not declassified] One of Perez’ objectives on the trip will be to demonstrate Washington’s approval of his administration and thereby boost his claim to the party leadership.

Perez also perceives his visit as an opportunity to establish relationships beneficial to Venezuelan development. In practical terms, for example, Venezuela needs a close economic relationship with the United States. Nevertheless, Perez will remind US officials that Venezuela supplied petroleum to the US during the Arab boycott and has played a moderating role in OPEC meetings. He will insist upon revision of the 1974 US Trade Reform Act which contains an exclusion provision applicable to all OPEC members. Venezuelan officials believe they have commitments for such a change from officials of the previous administration;⁴ they will regard the Carter administration’s fulfillment of this pledge as a symbol of US interest in a new relationship with Venezuela.

Economic Considerations

Economic growth is being maintained at about 6 percent under the impetus of an ambitious $27 billion public investment program. Consumption is being further bolstered by high government expenditures for wages, welfare programs, and subsidies. Soaring imports and extensive price controls nevertheless are holding the lid on inflation again this year, despite some food shortages resulting from last year’s poor crop. Venezuela’s inflation rate is well below those of most other OPEC countries; the cost of living index increased at an annual rate of about 8 percent, just under the 1974–1976 average.

Caracas thus far is financing much of its investment program with foreign borrowing while attempting to keep its estimated $8.5 billion foreign reserves intact. The government has already borrowed $2.3 billion in Eurocurrency and Eurobond markets in the past nine months, and probably hopes to obtain as much as $1.1 billion more later this year. Even so, Venezuela may well incur a small payments deficit this year comparable to the $200 million shortfall in 1976. The deficits reflect a reduction in the current account surplus caused by rising imports and net capital outflows generated by foreign aid and compensation payments for the nationalized oil and iron ore industries. Venezuela achieved a $4.1 billion payments surplus in 1974.

The Nationalized Oil Industry

Since nationalization on January 1, 1976, current oil operations have gone smoothly, in large part because the former owners are helping to run the industry under technical service and marketing contracts. At 2.3 million b/d, oil output is below capacity but slightly above planned conservation levels of 2.2 million b/d. So far this year, exports have not been adversely affected by Venezuela’s position on the high side of the OPEC dual price system. Oil sales are handled largely by the former owners, although Petroven, the government oil holding company, is selling 20 percent of oil exports on its own account.

Exploration and development efforts since nationalization have reportedly been a disappointment to President Perez. In the first year of government ownership, investment outlays amounted to $500 million, less than one-half the planned amount. Exploration efforts remained near the low levels of company drilling in the last year of private ownership, and oil reserves fell 3 percent during the year to 14 billion barrels.

Compensation Problems

Relations with the foreign oil companies are somewhat strained because the government has failed to pay full compensation on schedule. More than one-half the nearly $1 billion in compensation bonds is still being held by Venezuela in the Guarantee Fund set up to ensure that the companies properly maintained oil facilities prior to nationalization. The funds will not be released until final review of field evaluations of production equipment, pipelines, refineries, and settlement of back tax claims. Asset deductions are estimated to average 25 percent of the deposits in the Fund, but some range as high as 55 percent.

Government claims for back taxes could further reduce final compensation. The Comptroller General has filed a claim against the companies’ deposits totaling more than $500 million, and additional tax claims have been made by the Ministry of Finance. The Comptroller General’s claim probably will have to be decided by the Venezuelan Supreme Court. Despite assurances from the Energy Ministry that the claim has little or no legal basis, foreign companies have yet to win a significant tax case before the Supreme Court.

President Perez promises to resolve compensation problems by the end of this year, but further delays are still likely. The Supreme Court probably will not be able to act on the Comptroller’s tax claim before the present congressional session ends in July. Since the October–December session is traditionally set aside for the budget, congressional approval for release of the Guarantee Fund is unlikely this year and would be difficult to obtain during next year’s presidential campaign.

[Omitted here is one section on the Economic Outlook Through 1980.]

1. Source: Central Intelligence Agency, Office of Support Services (DI), Job 80T00071A, Box 8, Folder 37: Venezuela on the Eve of President Perez’ Washington Trip. Secret; [handling restriction not declassified]. Prepared by the Latin American Division of the Office of Regional and Political Analysis, the Office of Economic Research, [1½ lines not declassified].
2. [3 lines not declassified]
3. President Rafael Caldera Rodriguez made a state visit to Washington June 2–4, 1970. See Foreign Relations, 1969–1976, vol. E-10, Documents on American Republics, 1969–1972, Documents 665 and 666.
4. For discussion of the OPEC exclusion from GSP, see Foreign Relations, 1969–1976, vol. E-11, Part 2, Documents on South America, 1973–1976, Document 388.