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Friday, January 16, 2009

Hugh Chavez and Reputation Capital

Venezuelan predident and general all-around jerk (I can think of better descriptors, but this is a generally family-friendly blog) Hugo Chavez was a very good example of a free cash flow problem on a national scale. He was flush with cash from Venezuela's huge oil reserves, and used oil wealth to play the part of loudmouth and anti-US demnagogue. Along the way, he hammered many of the large-multinational oil companies with increased taxes, nationalization of their oil fields, and raids on their offices.

Now, with oil prices dropping, the Venezuelan economy is sputtering, and Chavez is suffering from cash shortages. So, he's reaching out to the same companies he previously gave the boot to (while seizing their assets). He's offering them access to Venezuela's oil fields. But it looks like his past actions might be causing some second thoughts:
Under the current bidding rules, the onus for financing the new projects lies with the foreign companies, even though Petróleos de Venezuela would maintain control. Banks might balk at such a prospect. Distrust also lingers in dealing with Petróleos de Venezuela.

"An agreement on a piece of paper means nothing in Venezuela because of the way Chávez abruptly changes the rules of the game," said a Venezuelan oil executive who has had dealings with oil companies from China, Russia and other countries.

Imagine that - reputation capital actually matters.

I've used Chavez for years as a walking, talking (or, at least, braying) example of country risk. Now I can him for an example of teh efdects of losing reputation capital, too.

Of course, I'm sure psychology professors get to use him in examples too.

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