The Economist

Multinationals in Venezuela
Stay or go
Companies in the age of chavismo
Sep 17th 2016 | CARACAS

EIRA, a 38-year-old Venezuelan, used to like shopping. Now she stands beside barren shelves
in a Caracas supermarket. The average Venezuelan spends 35 hours each month queuing for
food. This supermarket’s few products include Kellogg’s Zucaritas, its muscular tiger cartoon
strangely pallid in hue—supposedly to make the packaging more eco-friendly but, many
Venezuelans reckon, more likely the result of an ink shortage.

The dearth of goods reflects the fact that Venezuela, led by Nicolás Maduro, the president, is in
freefall. The International Monetary Fund expects output to shrink by 10% this year and inflation
to top 700%. Businesses are prostrate. The country has never been rich, but having the world’s
largest oil reserves once meant many citizens could afford foreign brands. Not now. Firms have
long grappled with price controls, bizarre labour laws, the threat of expropriation and, since 2003,
currency restrictions. Plunging oil prices have further exposed the system’s frailty. As the
bolívar’s value has tumbled, firms with profits in the currency have reported big losses—for
example, Merck, an American drugmaker, announced a hit to its earnings of $876m for 2015.

For most firms, there is no easy solution. Two years ago Clorox, which makes household
products, decided to leave. That meant giving up not just sales but assets: the government
seized its factories. A more common approach has been to “deconsolidate” a subsidiary. When a
country’s rules are so restrictive that a parent firm cannot control its local operations, American
accounting rules let a firm mark its subsidiary to fair value and classify it as an investment. The
parent company’s earnings no longer recognise profits stuck in Venezuela, but the subsidiary
continues to exist. Goodyear, a tyremaker, and Ford, a carmaker, have done this. The cost of the
accompanying write-down can be high—for Procter & Gamble, it was a whopping $2.1 billion.
But the move lets firms maintain some presence in Venezuela in the hope that the country might
someday recover.

Those that have stayed operate in a morass. The government controls where goods are sold,
often directing products to neighbourhoods where it wants to boost political support, explains
Risa Grais-Targow of Eurasia, a research outfit. Parts and supplies are scarce. Many firms get
creative. Coca-Cola Femsa, a Mexican bottler that is partly owned by the American drinks giant,
has little sugar, for example, so it is making diet soda.

For the staff who remain, the outlook is bleak. Threats of arrests of employees are common,
since Mr Maduro blames shortages of essential items on a guerra económica waged by foreign
and local firms to stir discontent. Companies cannot afford to raise wages at the pace of inflation.
Some are at least providing a few important necessities. Many workers are bringing their
cafeteria lunches home, to share with their families. Given the conditions, one former executive
of a multinational who is based in Caracas thinks that foreign firms are hanging on for too long.
But they doubtless hope that tenacity will benefit them if and when a new regime comes