Cantillon: Headache for Smurfit Kappa in Venezuela

The developing world is full of opportunities for buccaneering multinationals, but operating in exotic locations with unstable political environments is not without risk. Just ask Smurfit Kappa, which has just sparked the ire of the Venezuelan government over the price of cardboard.

Smurfit Kappa, which runs the biggest paper and packaging operation in Venezuela, was visited last week by a posse of government officials. The headlines afterwards claimed the socialist government has "seized" Smurfit's operations, after accusing it of using its dominant position to hike the price of container boards used for food packaging.

The company only acknowledges an “intervention”, which it says is a audit “covering areas such as tax, costs, pricing and employment practices”.

Either way, the government is sticking its oar in to the running of a private business.

Venezuela has been a double-edged sword for Smurfit Kappa. It has given the company a strong foothold in Latin America, a region that it hopes will drive future growth as the global economy recovers. But it has had plenty of trouble there, even before now.

In 2009, former president Hugo Chavez (pictured) seized a huge tract of land belonging to Smurfit Kappa, on the pretext that it was needed to grow food. He continued to sabre-rattle against the company throughout the following two years, threatening even more seizures.

Shortly before his death earlier this year, Chavez devalued the bolivar, costing Smurfit Kappa €16 million overnight and sparking a €142 million writedown in its assets.

It now appears that Chavez’s successor, Nicolás Maduro, has adopted a similar populist strategy of dumping on foreign investors.

It’s probably all just a publicity game ahead of Venezuela’s municipal election later this week. But when an unpredictable government start interfering with a company’s assets, investors should always be worried.