Colombian Cos In Venezuela Face Risk With Chavez's Latest Move

Venezuelan President Hugo Chavez' warning to suspend trade with Colombia, repeated several times over the past year and a half, is somewhat worrisome, but his threat of expropriating assets of Colombian companies is causing greater concern.

Late Tuesday, Chavez froze diplomatic relations with Colombia and threatened to shut the border for trade between the two countries. Moreover, he threatened to expropriate Colombian companies' assets in Venezuela.

"It is not easy for Colombia to find a market that absorbs $6 billion (of our exports), but it is certainly not easy for Venezuela to find another partner that will supply products with good quality and price," Colombian Trade Minister Luis Guillermo Plata said Wednesday.

Venezuela is Colombia's second-largest market for exports, after the U.S. But a rupture in trade flows would likely be far more problematic for Venezuela - which imports manufactured goods and about two-thirds of the food that it consumes - than for Colombia.

Chavez's move follows accusations from top officials in Bogota that Swedish-made rocket launchers sold to Venezuela were found in the hands of the Revolutionary Armed Forces of Colombia, or FARC, a Colombian rebel group that's also listed as a terrorist organization by the U.S. and the European Union.

The allegations reignited concerns in Colombia that the Chavez administration supports the FARC, Latin America's largest guerrilla organization that finances itself mainly through narco-trafficking, kidnapping for ransom and extortion.

While Chavez has said he's neutral with respect to the conflict in Colombia, he has also condemned the Colombian government's get-tough approach on the FARC, which has garnered President Alvaro Uribe the highest popularity ratings in Latin America.

Last year, when Colombia forces struck a FARC camp in Ecuador, killing the group's second-in-command, Chavez suspended diplomatic relations, sent Venezuelan troops to the border with Colombia, and honored the slain rebel leader.

Colombian markets haven't taken Chavez's latest economic-retaliation threats lightly.

While risk aversion has made a comeback globally this week, the Colombian peso Wednesday shed much more than most other "high-yielding" currencies, losing 2.5% of its value against the dollar. The country's IGBC benchmark stock index fell 0.2%, while the yield on the 2020 TES bond jumped to 9.012% from 8.876%.

Jimena Zuniga, a New York-based analyst at Barclays Capital, said the peso's depreciation was an "exaggerated" reaction, pointing out that Venezuela cannot afford to cut the supply of goods from Colombia.

"Venezuela would suffer in terms of worsening food shortages, increasing already high inflation and more pressure on the fiscal deficit," she added.

Venezuela depends on Colombia for basic goods such as dairy, meat, clothing and, more strategically, imports 300 million cubic feet of natural gas a day, twice as much as originally agreed upon.

Petroleos de Venezuela SA, the state-owned oil firm, needs the gas for its oil reservoirs to increase pressure and boost production, and as raw material for its petrochemical industry.

In past rows between the two countries, Venezuelan authorities had not shut the border for more than a few days. Colombian exports to Venezuela actually rose 17% in 2008 from the previous year.

Chavez's other threat to nationalize or expropriate Colombian assets in Venezuela could gain traction and add to investors' worries. During his decade in power, he has expropriated some of the largest companies in the country and brought large swaths of the economy under government control, including the biggest private firms and assets in the energy, power, telecommunications, building materials and agricultural sectors.

Last year, in one nationalization spree, Colombia's largest cement maker, Cementos Argos SA (CEMARGOS.BO), lost a cement plant it bought in 1998. The company is still awaiting compensation from the Venezuelan government.

Colombian companies operating in Venezuela include food processor Grupo Nacional de Chocolates SA (CHOCOLATE.BO) and privately owned dairy Alpina SA.

In addition, Almacenes Exito SA (EXITO.BO), Colombia's largest retailer, owns a minority stake in a Venezuelan supermarket chain called Cativen. Exito is controlled by French retailer Casino Guichard Perrachon SA (12558.FR).

Officials from Alpina and Exito declined to comment on the situation. Chocolates said it will take a "cautious" approach to avoid contributing "tensions that must be handled with diplomacy."

-By Inti Landauro and Diana Delgado, Dow Jones Newswires; 57-1-6107044 Ext 1131; [e-mail]

(Darcy Crowe in Caracas contributed to this article.)