UPDATE: Venezuela Still Eyeing Santander Unit Nationalization

Venezuelan President Hugo Chavez dispelled speculation that he would backtrack from the nationalization of the local Grupo Santander unit and said his government would restart negotiations with the Spanish banking giant.

"We're not retreating," Chavez said during a cabinet meeting broadcast Thursday night. The nationalization of the local Santander franchise, known as Banco de Venezuela (BVL.CA), "will serve to strengthen our banking system," he said.

Chavez first announced the nationalization of the Banco Santander SA (STD) unit in July, intervening as the Spanish group started to negotiate the sale of the bank to a local financial group.

There has been mounting speculation Chavez would back down from the nationalization as he faces a financial crunch because of the drop in the price of oil, which accounts for 50% of state revenue.

Local research firm Econalitica says the bank, one of the largest in Venezuela, could cost $890 million.

Spokesmen for Santander in Caracas and Madrid declined to comment. There was no activity in Banco de Venezuela's shares on the Caracas stock exchange, which traded at VEB0.4 ($0.18).

Faced with lower oil prices, Chavez has recently gone on the offensive. This week the National Assembly passed a new law giving him control over airports and seaports, some of which were under the control of opposition leaders.

Earlier this month, he seized control of Cargill Inc.'s rice operations in Venezuela and threatened to expropriate the country's largest food producer. The government also seized control of a plantation owned by Irish paper packaging giant Smurfit Kappa Group Plc (SK3.DB).

"The recent round of nationalizations/expropriations in the food industry is also hurting market sentiment," said Alberto Ramos, an economist with Goldman Sachs.

The president has a long list of pending payments for his nationalization drive, which according to Econalitica could cost his government more than $11 billion.

The government has yet to pay for last year's nationalization of the cement industry, including the assets of Mexico's Cemex (CX), France's Lafarge SA (LFRGY), and Switzerland's Holcim Ltd. (HOLN.VX), as well as the country's largest steel mill, formerly controlled by Ternium SA (TX).

Their payments are likely on hold because of the decline in the price of oil. Venezuela's oil basket in 2009 averages $36.75 per barrel, well below the $60 per-barrel price the government used to calculate its budget.

Despite this financial squeeze, the Santander outfit remains a prized target for Chavez because of its nationwide branch network, which he wants to use to bolster the presence of state-owned banks.

The economic situation, which Chavez is expected to address on Saturday by unveiling an economic package to respond to the decline in oil revenue, hasn't deterred Chavez's "goal to have a strong presence in the banking system," said Abelardo Daza, an analyst with Equivalores, a Caracas-based brokerage firm.

"The government's priority right now is to keep the spending programs, not pay for the nationalizations," Daza said.

-By Darcy Crowe, Dow Jones Newswires; (58) 212 905 6304; [e-mail]