The Venezuelan business environment

The Bolivarian Republic of Venezuela (“Venezuela” or the “Republic”) is one of the largest Latin American economies, given its status as one of the world’s largest oil producers and exporters.

Over the last few years, however, the Venezuelan Government has nationalized a number of businesses in the telecom, power, oil, oil service, bank, and several other industries. The Government has also imposed price controls on many core goods and significant exchange control restrictions that limit the ability to purchase foreign currency.

Despite all these setbacks, Venezuela continues to be a country with significant business opportunities for foreign investors willing to assume risks.

The business environment

Venezuela has the fifth largest proven oil reserves in the world (and the largest in the Western Hemisphere), and the second largest proved natural gas reserves in the Western Hemisphere. If we include an estimated 235 billion barrels of extra heavy crude oil in the Orinoco Belt region, Venezuela holds the largest hydrocarbons reserves in the world. PDVSA, Venezuela’s oil and gas state-owned company, is one of the world’s largest oil companies: they have acknowledged that significant additional foreign investment would be required to achieve its production goals. The Government has signed joint venture agreements for the development of oil and gas projects with international partners from China, India, Italy, Japan, Russia, Spain, the United States of America, and Vietnam among others. All of this creates enormous business opportunities for companies in the oil and gas sector.

The Venezuelan market is also a significant source of profits for several multinational consumer-products makers operating in the country since Venezuelans spend a relatively high proportion of discretionary income on personal products and services, beverages and tobacco, apparel, communications (mobile and smartphones), TV and electronic products. In the next few years, imports are expected to increase much faster than exports with the expansion of consumer demand and the decreasing in the national production of consumer goods.

Venezuela has signed economic cooperation treaties with several countries, including Brazil, China and Russia, providing an adequate framework for investments in projects by companies from such countries.

Venezuela is also a party to international treaties to avoid double taxation with several countries that protect investors against certain changes in tax legislation and is a party to bilateral investment treaties with several European, Latin American and Asian countries, which provide for adequate compensation in case of expropriation or nationalization and access to international arbitration in a neutral forum. Despite Venezuela’s withdrawal from the International Centre for Settlement of Investment Disputes, several of the existing bilateral investment treaties permit arbitration under the UNCITRAL Arbitration Rules and the ICSID’s Additional Facility rules. In certain cases, the Venezuelan Government has reached agreements with foreign investors in businesses subject to nationalization and has paid compensation in U.S. dollars.

The Venezuelan government has engaged in infrastructure and other strategic projects with foreign investors under contracts providing for payments in foreign currency and, in certain cases, for international arbitration to settle potential disputes.

Venezuela is divided into three levels of government:  the national level, the state level and the municipal level.  There are 23 states, a capital district and various federal dependencies, and each state is divided into several municipalities.  The political structure of Venezuela is governed by the Constitution of 1999, as amended in February 2009.

At the national level, the government is divided in the executive, legislative, judicial, civic and electoral branches.  The President of Venezuela (the “President”) is the head of state, head of the national executive branch, and the commander-in-chief of Venezuela’s armed forces.  All executive powers are vested in the President.  The President is also entitled to veto laws passed by the National Assembly.

The national legislative power is vested in the Asamblea Nacional or National Assembly.  The National Assembly has only one chamber, and its members (diputados) are elected by universal suffrage for terms of five years, and may be re-elected for unlimited five-year terms.  The National Assembly is empowered to enact laws, which require the promulgation of the President and its publication in the Official Gazette to become effective.  The work of the members of the National Assembly is done through several Commissions and Sub-Commissions.

The judicial branch is vested in the Venezuelan Supreme Tribunal (Tribunal Supremo de Justicia) and various lower tribunals.  The Supreme Tribunal is the final court of appeals.  It has the power to void laws, regulations and other acts or decisions of the executive or legislative branches that conflict with the Constitution or the laws.  The current number of justices of the Supreme Tribunal is 32.  Justices of the Supreme Tribunal are appointed by the National Assembly for twelve-year terms

The Supreme Court has five chambers, the Constitutional Chamber, the Social Cassation Chamber, the Civil Cassation Chamber, the Criminal Chamber, Electoral Chamber and the Political-Administrative Chamber.  Each Chamber is composed of three justices, except for the Constitutional Chamber which is composed by five.

The Venezuelan court system is a national system; there are no state courts, but there are national courts sitting in each respective state.  Judges are appointed by the Supreme Court.  The jurisdictions of courts are divided by subject matter: civil, commercial, labor, tax, administrative, criminal and family, among others.

Venezuelan courts are generally biased in favor of the Venezuelan government (the Republic or Venezuelan state-owned companies); therefore, it would be very difficult to win a case against the Venezuelan government in a Venezuelan court. In addition, bringing judicial proceedings against the Venezuelan government may have adverse effects on the business of the claimant and on its ability to be awarded further projects or contracts from the government.

At the state level, the government is divided in the executive and legislative branches.  The executive branch of a state is in charge of its governor (gobernador) elected by universal suffrage within each state.  State legislative power is vested in state assemblies whose members are also elected by universal suffrage within each state.  States have virtually no taxing power but they may create taxes on non-precious metals and minerals that are not reserved to the State.

At the municipal level, the government is divided in the executive and legislative branches.  The executive branch of a municipality is in charge of its mayor (alcalde), elected by universal suffrage within each municipality.  Municipal legislative power is vested in municipal assemblies (consejos municipales) whose members (concejales) are also elected by universal suffrage within each state.  Municipalities are empowered to levy business tax on gross income and to approve construction projects in cities and other population centers.

The author of this post is Fulvio Italiani