Venezuela's Chavez turns to confrontation in crisis

A guard patrols the entrance to a Cargill plant in Valencia, west of Caracas, March 5, 2009. Venezuelan President Hugo Chavez ordered the nationalization of a local unit of the U.S. food giant, ramping up a battle with the private sector over rice production.

CARACAS (Reuters) - Venezuelan President Hugo Chavez's aggressive moves against the food industry show the socialist leader will respond to growing economic woes in the OPEC nation with takeovers and tighter controls on business.

Chavez has in the last week sent troops to temporarily occupy several rice mills and nationalized another one run by U.S. food giant Cargill after complaining they were not producing enough at government regulated prices.

The socialist stalwart appears set to continue increasing state control over the economy in response to tumbling oil revenues, galloping inflation and the possibility of a slump in productivity by a weakened private sector.

Emboldened by a February referendum win that lets him run for re-election in 2012, Chavez is again looking for show-downs with private industry that may further cut GDP growth -- which slowed to 4.8 percent in 2008 compared to 8.4 percent in 2007.

"His name is confrontation, and there are not many tricks left in that bag," said Riordan Roett of the Latin America program at Johns Hopkins School of Advanced International Studies in Washington.

"We will likely see more aggressive behavior as we head into mid-year with no bounce in oil prices."

Chavez said on Thursday night his government took over a timber farm run by Irish paper company Smurfit Kappa (SKG.I) and earlier this week he also threatened to take over Venezuela's top food producer, Empresas Polar.

Venezuela's heavy dependence on imported food means it could struggle this year to ensure supplies at subsidized prices as currency reserves shrink, possibly sparking shortages of staple foods.

Shortages two years ago hurt Chavez's popularity, forcing him to spend more on food imports and set up a state-run food distribution network.

WARY OF BUSINESS

Chavez's mistrust of business -- often justified because of political meddling and unscrupulous practices -- means he almost always blames merchants for product shortages or price increases even as inflation soared to 31 percent last year.

Chavez last year decreed laws vastly expanding government power to regulate the production and distribution of food, but still food prices overall rose a staggering 40 percent in the last 12 months.

"The government has laid out a clear strategy to tighten the screws on the private sector in a failed bid to control inflation," said Patrick Esteruelas, an analyst with the Eurasia Group in New York.

The oil services sector is particularly vulnerable. Dozens of small oil services firms are teetering on the edge of bankruptcy because state oil company PDVSA -- short on cash -- has run up at least $8 billion in outstanding bills.

Unpaid for months, angry workers have threatened to take over service companies that try to shut down, creating conditions similar to Chavez's nationalization last year of the country's largest steelmaker amid labor disputes.

Chavez had an easier row to hoe with his 2007 nationalizations because state coffers were full, giving him the option to pay compensation for some takeovers and reduce the risk of legal conflicts.

But in recent days, with Venezuela's cash flow already stretched thin, Chavez has mentioned paying out compensation in the form of government bonds.

"I can't say I'm surprised by this move, he is politically bolstered and is not wasting any time tightening his grip on the country's economy," said Michael Shifter of the Inter-American Dialogue think tank in Washington. "For Chavez, the economic consequences of another wave of nationalizations are secondary."

(Editing by Kieran Murray)