Venezuela’s Downward Spiral

Xander Snyder: Hi and welcome to the Geopolitical Futures podcast, my name is Xander Snyder and I am an analyst here at Geopolitical Futures and joining me today is Allison Fedirka, a senior analyst also at Geopolitical Futures. And we are going to be talking to you today about what is going on in Venezuela. How are you doing today Allison?

Allison Fedirka: I am doing pretty good Xander, how are you?

XS: I’m great. So people have probably heard about Venezuela in terms of there’s some sort of crisis going on. The Maduro government has been cracking down on protestors and things probably seem pretty chaotic. Where does this situation stand right now Allison?

AF: So people have probably been hearing about Venezuela being in crisis, I would wager since 2012-2013. So in order to understand where we’re at now, it’s important to appreciate from where the country has come over the past five years or so. There are multiple problems making today’s situation more complex and straining and volatile than it was five years ago. The government was always based on a populist policy and as long as the government had money that they could spend on the population, it had support, it would do just fine. They also had a charismatic leader back then which was Chávez.

In 2013, we started seeing financial strain in the country in terms of spending more than it was receiving, declining oil production and capabilities, infrastructure problems and basically seeing the populist government catching up with the Venezuelan government. We also saw Hugo Chávez and die and have his predecessor take his place, which is Nicolás Maduro. He was never popular as Chávez.

So fast forward to 2014, we have the drop in oil prices. Venezuela depends heavily on oil. Ninety-six percent of its U.S. dollars comes from oil sales. So it basically has a decreased source of foreign currency, which was vital for importing food. Everybody needs to eat, and Venezuela does not produce nearly enough food on its own to feed its population. And you continue with the situation of low oil prices, cutting imports, dwindling food supplies and you get to where we are today. So the crisis were seeing did not happen overnight. And what we’re seeing is a long time coming. It’s not necessarily thinking of it as a spark but just something that has been fostered for years and years and years and this was inevitable.

XS: Now Geopolitical Futures’ forecast on Venezuela, if you go on our website you can check out our full year forecast for this year, we say that the Maduro government in its present form won’t survive 2017. So we’ve talked a little bit about how the situation has developed post-Chávez under Maduro over the last several years. What’s going to change this year that’s gonna force Venezuela over the tipping point? Are there alternatives or is there just going to be anarchy for a while?

AF: So the forecast was carefully worded because it is difficult to be precise with exactly how we foresee the government changing. At the beginning of the year and December when we wrote this forecast, there was several possible routes that this could take. One was a very last minute decision to hold a referendum that would trigger new elections. One was dialogue between the parties, one was military coup, one was outside intervention, one was popular uprising.

Since the beginning of the year, several things have occurred in terms of breakdown of institutions and political processes such that a referendum with elections are no longer a viable option. Dialogue seems pretty much impossible, we haven’t seen any moves for foreign intervention. We’ve seen some divide among the military.

Right now, what we’re seeing on the ground is anarchy and that seems to be the dominant force for change in the government right now. Whether or not the opposition can sustain that and also to an extent increases that, because right now it’s becoming the status quo, they need to push it a little bit further in order to get the change that they’re looking for because they’ve been doing that for a month now and so far the government has been able to resist. So that’s where we’re at. The people’s force seems to be the leading cause right now and it will most likely be a combination of those factors of either outside pressure joining the opposition leaders or perhaps factions of the military or dialogue under extreme duress that will take the Maduro government out.

But the point is, we always talk about constraints and imperatives. And we don’t see an out for Venezuela. Like we said, this has been a long time coming and there’s constraints of feeding your people, paying your people, being able to provide basic services, such as water and electricity and medicine. Those are all running out. And that’s when people get desperate and in our view that is when there will be the straw that breaks the camel’s back and that’s why we don’t see the Maduro government surviving 2017 from its current form at the beginning of the year to the end of the year.

XS: I think something that really plays a big part in just the current situation in Venezuela as you mentioned briefly was oil prices and just the finances of the state. I know we talk a lot internally about the debt service that Venezuela has to, well the debt that it has to service throughout the year. And as oil prices have come down, not in addition to just losing profitability from the state-run oil company, I believe Venezuela also subsidized oil prices for domestic consumption for political reasons. How much has oil prices contributed to the crisis versus just being one element of a bigger storm?

AF: So oil prices would be one of the most fundamental contributors to this crisis, in that the entire political system is based off of having money and spending it on people. And oil is the primary source of revenue for the Venezuelan government. So when you take away the primary source of your revenue and your entire government depends on revenue to govern, it’s a very huge contributing factor to the crisis that we’re seeing right now.

XS: So in a certain sense, the problems that Venezuela is facing being a petrostate parallels a lot of what we’re seeing in other parts of the world too, right? Low oil prices are having geopolitical impacts all around.

AF: I would say that the difference is that a lot of the states that we’re looking at, from the low oil prices that started in 2014, Venezuela’s problems were beginning to emerge well before then. So it is very closely tied to oil but the crisis predates the 2014 drop in oil prices by two or three years. So while it’s the same commodity that is the root cause of the problem in Venezuela, the crisis is different from what we’re seeing in countries from the 2014 crisis in that it’s a much more prolonged crisis. They have been dealing with this for two to three years more than any other country that we’re looking at now as a major victim of a drop in oil prices. Which also means they’re are a lot more desperate and a lot more advanced. So if you want to think about what countries suffering oil prices might look like two or three years from now if there is no rebound, look to Venezuela and you will have an idea of how bad things could get.

XS: If Venezuela descends further into anarchy, the direction that it’s been going, how does that impact its regional relations in South America and how does that influence any broader trends? What influence does the United States have in Venezuela for example? Who will this impact outside of Venezuela proper?

AF: So regionally, the neighbors of Venezuela have been impacted, specifically Colombia and to a lesser extent Brazil, in that individuals near the borders will consistently crossover into Colombia or Brazil to find basic goods, find a job, find sources of revenue, and either go back into Venezuela or in some cases just settle in new places.

So you see an economic crisis of sorts on the border areas, a fluidity of borders, Colombia has closed their borders with Venezuela on multiple occasions, and when it hasn’t been closed, strictly monitored it with Venezuela because of all the security concerns that come with massive amounts of people crossing back and forth over the border. It’s also hurt some of those local economies because of goods getting gutted from their system of people just hoarding things and trying to replace their domestic markets in Venezuela with goods from Brazil and Colombia. That’s the most local level.

At a regional level, we have lots of, South America and Central America and the Caribbean, they love to have their regional blocks. And so there’s many regional blocks in the Americas that have spoken out against this. The two larger outspoken groups would be Mercosur and then the OAS and to a lesser extent Unasur has also spoken out.

The effect that this has had on those countries is minimal depending on where you’re from. In some countries like Argentina or Brazil, you’ll see trade issues where there’s back payments on imported goods and that affects primarily the businesses, the exporters and the importers of those countries, rather than an actual state. Mercosur did suspend Venezuela from the bloc. But the thing is, just because you’re suspended from Mercosur doesn’t necessarily mean there’s trade ramifications.

When they suspended Paraguay, they did not cut off trade. They’ve suspended Venezuela, they did not cut off trade. And so that lack of concrete consequences means that those groups have very little impact on Venezuela and also creates a complicated scene because there’s not much they can do about it without greatly risking any type of backlash.

There’s a fear in the region of setting precedent for certain types of things. Dictatorships and things like that are still in the memory of the older generations in the region and so people are very cautious of what types of precedents they set for interfering with another nation. With telling them how to run their government, with telling them how to respect or revise their constitution because once you do it for one country, the concern is that it can be done to you. So they’re very outspoken with what they see as wrong, but they’re very hesitant and unwilling to do any concrete measures to intervene or take extreme consequences against Venezuela.

The United States has an interest in Venezuela in terms of oil production. It has an interest in terms of any type of oil operations and sales and companies that Venezuela has in the United States, like Citgo. And to a lesser extent just the regional stability. But Venezuela on its own cannot threaten fundamentally any of the U.S. interests. However, the U.S. still sees itself as the overseer, if you will, of the Americas in general. The U.S. has also been slow to act and I don’t think will do any type of intervention at this point in Venezuela either.

XS: Yeah, I think I’ve heard murmurings of some potential sanctions but talk is cheap. It remains to be seen if the U.S. will do anything.

AF: Exactly. So, there’s a group of senators that have asked for sanctions and they’ve also tried to talk about cracking down on drug trafficking and drug charges on these individuals or companies involved with drug trafficking in Venezuela and also some type of humanitarian aid. The problem with that is like you said, it looks great on paper, it sounds good.

In practice, the U.S. has already put sanctions on individuals and select people and places in Venezuela. They have already used the D.E.A. to pursue drug-related arrests and anti-drug operations in the country to help crack down on the government. I mean even the nephews of the first lady were victims of these type of D.E.A. operations. So what they’re proposing is essentially doing more of the same, and to what extent they would increase their efforts and if it was on a scale necessary to be effective, it remains to be seen. So while they may be talking about doing this, it’s unclear if it’s going to be any different from what’s already going on right now.

XS: Right. Now, in our longer term forecast, Geopolitical Futures’ longer term forecast, we like to describe or look at South America as a region where there will be a relative amount of stability. We say that in comparison to where other parts of the are going. We certainly don’t mean to say that there won’t be any degree of internal conflict in some of these South American countries that are still, like you said, struggling with certain narcotrafficking issues or vestiges of some of the guerilla warfare that existed over the last several decades.

How does what’s going in Venezuela fit in to that picture? And if this conflict escalates, if it becomes some degree of civil war, does that remain contained? Does it spill over across borders? Why do we think that this area is going to remain relatively stable despite what’s happening in Venezuela?

AF: So in terms of the broader regional picture of stability, Venezuela is by far and large the exception to this label of stability. And that is because in many of these other countries, you’ve seen drastic moves to cut down guerilla groups that used to exist and those guerilla groups have primarily become drug trafficking groups at this point or other types of black market and crime groups.

You’ll see labor protests, and those are the marks of instability if you will that we see on a daily basis in the region. Indigenous issues in certain countries, especially Andean countries, and those are the domestic issues that are primarily domestic in nature in terms of the impact on the countries that we think – they’re going on but it’s still relatively stable because we aren’t seeing interstate warfare. We’re not seeing genocide or anything of that nature.

Venezuela is very different in that we are seeing anarchy on the streets, violence daily, lack of basic living goods. That is not stable. So where it goes from here, people can close their borders. There are ways to keep this confined in Venezuela as possible. None of the issues in Venezuela, in terms of how the government is run, directly threaten other countries in the region save perhaps Bolivia, which is the last remaining left wing strong government in South America. Some people may argue Ecuador is too but even then they’ve started to take a step back from where they were say 10 years ago, at the height of the Chávista leftist government movement in the region.

Anarchy and chaos will not last forever. At some point, Venezuela will break. We have forecasted that will happen this year, and assuming that does happen, there will still be chaos afterwards because it’s unclear who will be in charge, how they will be in charge, how they plan to fix the problems. But in the long term, there’s no reason to believe that it won’t return to a form similar to that of its other regional neighbors in South America in terms of relative stability, where there are labor disputers, maybe some indigenous issues but nothing that fundamentally threatens the existence of the state or the government.

So Xander, since we have you here too, I know I’ve been talking a lot about some of the political aspects but we have your financial background and expertise. Earlier you mentioned this discussion of Venezuela’s debt and fears of default and whatnot. And so far, they have been able to evade any type of major default. Where did they stand now and what moves are they continuing to do to try avoid a default type of scenario?

XS: Right, the move has been to keep restructuring their debt, at least to this point. Venezuela has a lot of debt and the problem that governments face most immediately with debt is actually not the quantity of debt but rather their payments on it – so interest and any principal that they need to repay. Because as soon as a government, or any borrowing entity really, can’t service its debt, it faces a default and all the consequences that come along with that including new demands by lenders. Reaching any covenants can require stricter enforcement or new rules imposed upon the borrower.

What’s interesting in Venezuela obviously the rest of the world and capital markets are aware of what’s going on there, so they’ve had some difficulty restructuring their debt to date. But Russia has actually been involved. I’d have to go back and re-read the specifics but the Russian oil company Rosneft was involved in helping Venezuela restructure some of its debt and has been providing some degree of lending to keep the government and the Venezuelan state oil company solvent.

So there are some Russian interests in Venezuela and to the extent the Maduro government can keep servicing its debt, you know, it will do anything it can basically to keep servicing its debt. Whatever restructuring the capital markets allow for, they will keep doing until they run into a wall, and then they will face bigger problems.

AF: When you say run into a wall, what do you mean by that and are there any signs of that coming in the near future?

XS: Sure, well if the government can’t service its debt, if it runs into this one big payment, I know it has a couple scheduled later this year that it can’t pay, then essentially it starts running into this problem where it doesn’t have enough money to fund all the social activities that need to get taken care of internally. Because the state oil company essentially acts as the coffer for the government in order to fund whatever social obligations it still can. And if it starts running short on money, then lenders are going to be a lot less forgiving, in terms of presenting new terms that are amenable to Venezuela or extending any sort of new debt or rolling over existing debt.

So really, they just face the problem you mentioned earlier of running out of hard cash currency. I mean what happens if you can’t fund the ongoing activities of the state and the obligations that it’s incurred. That’s what I mean by running into a wall and it remains to be seen if they’re going to be able to keep restructuring successfully or if at some point, something will give.

AF: Gotcha. And we have yet to see from the opposition any concrete plans to solve the economic issues. We’ve seen some unity among them saying yes we all agree: the political system is broken, it needs to be fixed, the economic system is broken, it needs to be fixed, and we all agree that it needs to be fixed in some way shape or form. There have been no concrete plans put forth. From your view, what are the top one or two items that would need immediate attention to go about trying to normalize the Venezuelan economy? It’s a loaded question, I am sure there is more than one answer depending on who you talk to. But from your standpoint and a geopolitical point of view, where are some of these starting fundamental points that would need to be addressed from the very beginning?

XS: Sure. As I understand it, a big problem that the Venezuelan government has run into has been providing domestic oil subsidies, which is basically selling oil domestically to prices that are far below international market rates. And this has basically continued to just bleed the coffers dry because they are suppling this product for either at or below cost. So that’s not something that can continue. There are subsidies that are like that, that will need to be discontinued if Venezuela hopes to actually rightsize its budget in the long term.

On a more fundamental level, social conflict seems to arise more often when people can’t eat. That’s a really basic law of revolutions, right? I spent some time recently in Colombia where they’re, rightfully probably, more focused on some of the domestic issues there going on with the FARC demobilization and local corruption. But I’ve certainly met some Venezuelans and met some Colombians who have family in Venezuela and the thing that just keeps coming up time and time again is there’s nothing on the shelves here. There’s no food. There is no medicine, we have to go to Cúcuta across the border in Colombia just to get you know basic things to survive day to day.

And while that remains a challenge, while that situation continues to exist in Venezuela, it’s hard to imagine the social unrest really declining to any substantial degree. So, economically what that means in terms of fixing it is, whatever the government has to do to stabilize the situation enough to make investments look reasonable in Venezuela again to reassure markets internationally or just find whatever way they need to get food back on the shelves.

AF: That will be a very interesting move for them to do. I’ve seen some recent surveys and in the last year like you’ve said, it’s amazing how the immediate needs shift and change the pace and interests of individuals. In the last year, security you know 12 months ago, 18 months ago, was the primary concern of many Venezuelans. They felt unsafe, they felt like crime was everywhere. And now we are in a situation where people are getting killed almost on a daily basis. There’s tear gas bombs, there’s firehoses and protests and burning tires on any given street.

And the most recent surveys by private firms show that the vast majority are actually more concerned about where are they going to get their next meal as opposed to the security concerns that they had a year ago. So you make an excellent point and that is also one of the strong fundamental pillars of why we believe that something has to give. There’s a level of desperation that you will reach where when life no longer becomes livable, you need to do something about it. It’s a human instinct. Politically it manifests itself with the social demonstrations and so I look forward to being able to come back and discuss with you hopefully the results of our forecasts of nothing else to update later on too, how this all plays out.

XS: Me as well. So obviously, these protests are still ongoing. Something like 35 people have been killed over the last month and we will continue to follow these developments. If you would like to learn more about Geopolitical Futures’ perspective on Venezuela, be sure to check out our long-term forecast which is available to subscribers and we’ve also written a lot of Reality Checks – 1,000 to 1,500-word pieces – the most recent being “Venezuela’s Breaking Point” is what it’s called and it describes not only recent developments, but again why we think that these developments play into our forecast for 2017 and why the Maduro government will experience some sort of significant change by the end of the year. So thanks for taking the time to chat Allison.

AF: Thanks, and great talking to you.