What can miners expect from Chavez re-election and his '21st century Bolivarian revolution'?

Venezuela's President Hugo Chavez’s easy re-election has given him another six years as the head of the oil-rich South American country. It has also given mining and oil companies another reason to look for greener pastures.

The 58-year-old leader, who has remarkably helped Venezuela to reduce inequality to the point that the country now boasts the fairest income distribution in Latin America, has also driven away mining investors and companies.

Since Hugo Chavez assumed as President in 1999 he has been on a nationalization spree.

Examples abound: In 2007 his government took a majority stake in four oil projects in the vast Orinoco heavy crude belt worth an estimated $30 billion.

In 2009, Chavez confiscated a major gas project from Williams Cos Inc and a range of assets from local companies.

In 2010 he seized 11 oilrigs from Oklahoma-based Helmerich & Payne Inc.

And last year he continued with the gold industry. He passed a decree that allows the state to collect a 13% royalty on gold mining, but smaller operations are only be subject to a 3% tax. Military zones were also established to crack down on illegal mining operations.

Gold companies wanting to do business in Venezuela are, since then, forced to become minority partners with the government.

The new law also eliminated the option for companies to avail themselves of international arbitration; should disputes occur, they will be solved in Venezuelan courts.

Russian-Canadian miner Rusoro Mining Ltd. (TSXV:RML), which was until recently  the only private gold miner left in Venezuela, has been severely affected by the measure.

Last July, the company asked an arm of the World Bank to intercede in a legal dispute with Venezuela after the country took over the junior’s investments without compensation.

Canadian Crystallex International (TSX, AMEX: KRY) and US-based Gold Reserve (TSX-V, Amex: GRZ), respectively, are also seeking compensation after Venezuela withdrew the companies' rights to their properties.

Fifth largest economy in Latin America

Last year, Venezuela's Gini coefficient —index that measures inequality among certain values’ frequency— fell to 0.39. By way of comparison, Brazil's was 0.52, in itself a historic low.

It is fair to say that since Hugo Chavez became president in 1999, every Venezuelan has now a more equal slice of the cake, but the problem is that cake has not been getting much bigger. In fact, the county faces a crumbling infrastructure, an overvalued currency and under-performing industry.

"Venezuela is the fifth largest economy in Latin America, but during the last decade, it's been the worst performer in GDP per capita growth," Arturo Franco from the Center for International Development at Harvard University told BBC News.

It all depends, says the expert, on how you measure Venezuela's progress.

If you compare life under Mr Chavez with the previous 20 years, under a now discredited two-party system widely blamed for rampant corruption, the Chavez era is preferable.

But if you look at the superior economic performance of neighbouring Brazil and Colombia during the same period, it suddenly doesn't look so rosy.

Chavez’ biggest economic challenge is the declining productivity in Venezuela’s oil industry, which accounts for 95% of exports and funds the President’s social initiatives. The country also supplies subsidised oil to its regional leftist allies, mainly Cuba and Bolivia.

Diego Moya-Ocampos, analyst at IHS Global Insight, told Financial Times (subs. required) Chavez’ administration will require more oil revenues, which means more oil production.

“That means Chávez will also have to be more flexible with foreign company terms in the Orinoco oil belt”, where more than two-thirds of Venezuela’s 300bn barrels of oil reside, he was quoted as saying.

In the meantime, analysts and investors alike will be watching to see whether the opposition fragments and gives Chavez free reign to carry out his so-called “21st century Bolivarian revolution.”

Photo by Vitoriano Jr. / Shutterstock.com