Published Date: October 22, 2008
By Alonso Soto

Ecuadorean President Rafael Correa will likely avoid nationalizing key industries, even as his tough negotiations to rework foreign contracts and his abrasive governing style worry investors and even some allies. Left-wing Correa is in an aggressive campaign to increase state participation in oil, mining and other sectors, spooking some investors who see him as a maverick. His tough style even frayed ties with Brazil last month when he ejected Brazilian construction company Odebrecht over a disputed dam.

But the US-trained economist knows how far he can take his fights, industry and government officials say. Correa has been more moderate than a socialist ally, Venezuelan President Hugo Chavez, who has taken over energy, cement and steel companies. "He plays hard, but within the limits of reality," Oil and Mines Minister Derlis Palacios, a trusted Correa associate, told Reuters. "We apply pressure but our demands are not crazy because no company has left (the country) yet.

Correa applies that strategy to foreign debt too. He presses bondholders for better terms by threatening to default while continuing to make bond payments. He has rallied popular support in the volatile nation with pledges to help the poor and reclaim benefits from foreign companies he says have pillaged the OPEC member country. In a last-minute deal applauded by voters, Correa got $480 million he demanded from telecommunications giant America Movil after he threatened to strip the Mexican company of its c
ell phone concession in May.

Now, emboldened by a September vote that approved a new constitution strengthening his control over the economy, Correa is pressing foreign oil companies to switch to contracts more favorable to the state. He even threatens to expel them if they "play with fire". Over the weekend, Correa said most oil companies signed temporary deals while they negotiate new service contracts, marking a victory in his drive to increase state control.

Correa's tough language is similar to that of Chavez and Bolivian President Evo Morales, who continue to worry markets. But investors say Correa is much more pragmatic. "People told me 'Why would you invest in Ecuador? That's crazy,'" said David Martin, an executive with Canada's Ivanhoe Energy that recently signed an oilfield deal. "Correa knows how to play the game. He is not like others in Bolivia and Venezuela," Martin said. "I will go to Venezuela, but only with someone like Correa by my side.

Despite his moderation, experts say Correa's style has helped curb investment in key sectors such as oil and mining, which are even more threatened now by the global credit crunch that is drying up financing for riskier, emerging nations. Falling world oil and metals prices, coupled with Ecuador's dwindling crude output and uncertainty over new mining laws, could squeeze its fiscal position next year, experts say.

Correa thinks he has all the power to force those investors to bow to his interests," said Jaime Carrera, head of the Quito-based Observatory of Fiscal Policy. "But what he is doing is scaring them away." Private oil output has dropped this year due to protracted negotiations and miners have delayed investment plans after the government banned exploration while it drafts a new mines law. "He is really hurting industries key to the future of this country," said Alexandra Vela, an analyst with the think tan
k Cordes. "Let's wait and see how far he can go." - Reuters