Argentina and Venezuela, Business partners

Aug 9th 2007 | BUENOS AIRES

From The Economist print edition

An alternative Dracula makes a buck

SUDDENLY the economic outlook has turned a bit stormy for Argentina’s president, Néstor Kirchner. Rationing of gas and electricity has become routine. Investors have lost confidence in the officially-massaged inflation numbers and credit markets are queasy. While yields on Brazil’s bonds rose by only 53 basis points in the month to August 6th, those of Argentine bonds rose by 166 points—just when the government must roll over $3 billion in maturing debt.


AFP The bond between Chávez and Kirchner


But Mr Kirchner seems to reckon he has a saviour in his Venezuelan counterpart, Hugo Chávez, a man whose government has both energy and money. Visiting Buenos Aires this week, on yet another South American tour, Mr Chávez offered to buy $500m in Argentine bonds (and another $500m later). “He’s always been there when we’ve needed him,” said Alberto Fernández, Mr Kirchner’s chief of staff. In return, Argentina has given diplomatic support to Mr Chávez.


This relationship annoys those Argentines who think their country would benefit from closer ties to the United States and Europe, and those Venezuelans who think their money is being squandered. But there is more to this alliance than meets the eye: contrary to appearances, Mr Kirchner extracts political advantage and Venezuela’s government financial gain.


It began more than three years ago, with an agreement under which PDVSA, Venezuela’s state oil company, sells fuel oil to Argentina. The proceeds, amounting to $560m so far, go to a trust fund Venezuela uses to buy Argentine products. With Argentina wanting to diversify its sources of financing after its 2001 debt default, Mr Chávez has stepped in, buying bonds totalling $4.7 billion before the latest purchase. With his help “Argentina is freeing itself from Dracula, it’s breaking the IMF‘s chains,” Mr Chávez said.

But Mr Chávez is getting his pound of flesh too. The bonds he has just bought pay interest of almost 11% (the IMF charges less than 5%). His government sells them on at a discounted price to favoured Venezuelan banks (see article), which must acquire the dollars to pay for them at the black-market exchange rate (twice the official rate). And Argentina has paid about 20% more for PDVSA‘s fuel oil than the prices offered by competing firms.

The tie to Mr Chávez burnishes Mr Kirchner’s credentials with the Argentine left, which is disappointed by his firm lid on public-sector pay. When backing Mr Chávez would entail a political price at home, Mr Kirchner has been unwilling to pay it. Although Iran is one of Venezuela’s closest allies, Mr Kirchner last year supported a judge’s decision to indict eight former Iranian officials for the bombing in 1994 of a Jewish community centre in Buenos Aires. When Venezuela’s ambassador protested at the decision, Mr Kirchner secured his removal. Meanwhile, the PDVSA trust fund has provided lucrative contracts—with no tenders involved—for well-connected Argentine firms.


Mr Kirchner’s wife, Cristina, is representing the first family in a presidential election in October. She recently said that Latin America needs Mr Chávez to solve its energy problems. Yet Argentina’s conspicuous friendship with Venezuela does nothing to reassure other foreign investors. They have shunned the country, but will be needed more as its economic recovery starts to slow.

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