Nicaraguan Seizure Could Hurt Investments

In response to a tax dispute with Exxon Mobil Corp., Nicaraguan officials took control of a fuel storage terminal owned by the Texas-based oil company, leaving foreign investors …

In response to a tax dispute with Exxon Mobil Corp., Nicaraguan officials took control of a fuel storage terminal owned by the Texas-based oil company, leaving foreign investors and the U.S. wondering if history is about to repeat itself.

Nicaraguan police seized the terminal Aug. 18, acting on a judge’s orders backed by the claim that Esso, a subsidiary of Exxon, owed as much as $3 million in taxes. Esso disputes the taxes due and the legality of the seizure of its assets and is negotiating with the Nicaraguan government to reclaim the terminal.

The fuel terminal has been used recently to store oil shipped from Venezuela. Venezuelan president Hugo Chavez is a close ally of Nicaraguan president Daniel Ortega and Venezuela has been selling oil to Nicaragua at a discounted price to help alleviate Nicaragua’s energy shortage.

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In his second stint as Nicaragua’s president, Ortega has encouraged foreign investment and tourism in the country, in contrast to his rule in the 1980s as a member of the Sandinista National Liberation Front (FSLN), when he favored extreme nationalism and nationalized many foreign-owned properties.

The FSLN rule left the Nicaraguan economy in shambles, forcing hundreds of thousands to flee a country fraught with war and poverty. A U.S. economic embargo played a large part in the political party’s defeat in 1990.

If Ortega reverts to his leftist tendencies, it may spell bad news for foreign investments in Nicaragua. Investors who have invested or who are looking to invest in Nicaragua should be cautious. (For more information on investing in Nicaragua and Daniel Ortega’s political past and future, see Nicaragua Real Estate.)

Venezuela has made recent moves to nationalize its oil sector (for more information on the oil market in Venezuela, see Privatized Oil Could Hurt Venezuelan Economy) and although it is too early to tell what this move may mean for Nicaragua, the country is walking a fine line. Ortega and Chavez agreed on a deal in January wherein Venezuela will send some 10,000 discounted barrels of oil to Nicaragua daily, according to the Associated Press.

Despite Ortega’s close relationship with Chavez and Venezuela, he promised to maintain ties with Washington D.C. and respect private property after his election in January, according to the Associated Press.

Nicaragua’s move may not turn out to be significant if tensions with Exxon and the U.S. are resolved, but the possibility that Ortega might return to his leftist and nationalistic past should give potential investors pause. If the situation blows over and Ortega continues with his reformed behavior, current investors should still be able to succeed, based on the area’s economy and potential for growth. However, if this is an indicator of Ortega’s future actions, investors could lose big.

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