Potential Hot Spots: The Two Republics Of Venezuela

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February 13, 2019: After more than a decade of corruption, inept government and economic collapse most Venezuelans are done with the radical populist movement that promised to make everything better but instead made everything much worse. Until 2014 the Venezuelan socialists still had enough believers to win elections but then a majority of voters realized that the socialists were making the situation worse and tried to vote them out. There followed three years of increasingly blatant violations of the Venezuelan law and customs to keep the corrupt and self-destructive socialists in power. The last fair vote had elected a parliament (or National Assembly) in late 2015 that, despite efforts by the socialists to eliminate it, kept going. The socialists were determined to maintain the appearance of being the legitimate government of Venezuela and that effort suddenly unraveled in early January 2019 when Juan Guaidó, the newly elected (by fellow members of the National Assembly) head of the National Assembly was sworn in on January 5th. His assumption of that position was generally recognized as legal. But on January 10th Nicolás Maduro was sworn in as president of Venezuela after an election generally recognized (in and outside Venezuela) as rigged. On the 11th the National Assembly declares that, according to the constitution, the head of the National Assembly was the interim president until legitimate elections could be conducted.

A growing number of reformers (including many socialists) believe Guaidó is the legitimate interim president. Guaidó is a middle-class engineer who had been protesting socialist rule for a decade was new to electoral politics when he became a candidate for parliament. Guaidó was one of the few middle-class Venezuelans who did not flee the country or plan to do so. Yet, many of those who did leave kept in touch with those who did not and provided financial and other support as well as help in letting the world know what was really going on in Venezuela. The three million expatriate Venezuelans played a key role in keeping democracy, and resistance to the socialists, alive.

By the end of January 2019 Maduro was on the defensive, unsure who in his government, and especially the military, would stand by him. There were some public defections, including an embassy official (an army officer) in the United States and a growing number of others. There were regular mass pro- Guaidó demonstrations throughout the country and the government deliberately instructed the troops not to fire on the people. This seemed to confirm the reports that while many officers still supported Maduro many, if not most, of the troops (and police) did not. There were practical reasons for this as the food shortages had become so bad in the last year that even soldiers and their families were going hungry. This was largely due to corrupt officers because the military had control of the food distribution system since 2017 and a growing number of officers realized they could make a lot of money by diverting food supplies they controlled to the black market. Naturally many corrupt officers got greedy and not only were civilians going hungry but so were many troops. This reminded soldiers that the pervasive corruption of the military and government was. But the troops were still being fed and since the beginning of the year are receiving more food.

Guaidó and the National Assembly taking on Maduro so directly was not a spur of the moment decision. Discussions within the National Assembly and with expatriates had generated a lot of ideas and the declaration of a rival (and more legitimate) president of Venezuela was one of many. For that reason, by the end of the month, the United States has imposed sanctions on Venezuelan oil. Since the U.S. is the largest customer for this oil and the main supplier of chemicals needed to make the Venezuelan “heavy crude” usable these sanctions were a major blow to Maduro. But there was more. American prosecutors began seizing American properties purchased with billions of dollars in stolen Venezuelan oil money. The U.S. and Europe are the favorite places to try and launder and hide these stolen billions. But Maduro and his cronies failed to realize that chasing such dirty money had become increasingly popular throughout the West and it was much more difficult to get away with it these days. There were plenty of existing databases of banking activity to use in hunting down what Maduro associates were up to financially. Thus Maduro was blocked from selling off more than two billion dollars’ worth of Venezuelan gold reserves. Over a billion dollars of that gold in Britain was transferred to the control of Guaidó and the National Assembly. Also, the U.S. was seizing Venezuelan assets in the United States and transferring them to the National Assembly. One of the first things Guaidó did with this money was arrange for massive amounts of emergency food and medical supplies to be sent to Venezuela. Maduro ordered troops to block roads at border crossings where the food was to enter the country. His Russian media advisors recommended that the food and medical aid was blocked because it was contaminated. That backfired and is one reason Maduro is increasingly concerned about the reliability of his troops. At the same time, Guaidó is offering amnesty to officers and government officials who will abandon the Maduro government and work with the National Assembly. The mass demonstrations continue and now Maduro is concerned about the many criminal gangs he has on the payroll. These men do the dirty work at the local level and are much less disciplined than the security forces.

Maduro has few options and even fewer allies. While Venezuela has the largest oil reserves on the planet, firing the effective managers of the state oil company and replacing them with socialist loyalists (who often knew nothing about the oil business) proved disastrous. That had been going on for over a decade. Because of that production has declined (along with oil prices) and there is no way the socialist government can pump enough oil to finance its continued existence. Borrowing a lot of money from China backfired as well.

Earlier in government hired Cuba to provide technical advisors available to show the Venezuelan socialists how to establish and maintain a long-term dictatorship. That did not work out because there was no money for it. China, Cuba, Iran and Russia are all present in Venezuela and with all that oil as collateral the Venezuelan socialists thought they had a safety net that would keep them in business. That option is now gone and the Maduro government is not only bankrupt and but unable to pump and ship enough oil to pay for food and other essential imports. In theory, China could rapidly expand its current efforts to rebuild the oil production facilities and also lend more billions to Maduro for food and other supplies. But China is unlikely to bankroll a longshot option like that. Guaidó has offered to respect deals already made with China. In early February China made it clear that it was not taking sides in Venezuela and would cooperate with whoever was in charge. This came less than two weeks after Juan Guaido claimed he was the legal interim president of Venezuela. Most Western Hemisphere nations and many European ones backed Guaido (as did most Venezuelans). The United States and EU nations are assisting Guaido in taking control of billions of dollars in cash and other assets belonging to Venezuela that are located in the U.S. and Europe. On the basis of all this Guaido made it clear that he will respect current economic deals and is willing to work with Russia and China, currently Venezuela’s largest creditors. Maduro has the active support of Cuba, North Korea, Iran and perhaps Russia. With allies like that, you are in big trouble.

On January 28th the United States imposed oil sanctions on the Venezuelan state oil company, which is the only means China has to gets over $30 billion in Venezuelan loans paid back. This move encourages China to back Juan Guaido as the legitimate acting president of Venezuela. While Guaido has made it clear he is willing to work with China, it is only implied that the Americans will go along with this.

In December 2018 Chinese engineers and technicians in Venezuela had control of about ten percent of Venezuelan production. The Chinese have doubled production during 2018 in the areas they control and are hoping to expand that. Maduro was reluctant to go along with that because PDVSA (the state-owned oil company) has become a refuge for government supporters who are more interested in stealing oil (and remaining loyal to Maduro) than improving production. The Chinese have no police powers in Venezuela but have a lot of financial clout which they believe will prevail in the long term. China always felt that a more effective government would eventually emerge and allow businesses to operate efficiently (and profitably) once more. China has been openly positioning itself as a friend of Venezuela, not the deranged socialists currently in charge. China is still working on many development projects in Venezuela and has plenty of experience doing so in lawless regions (especially Africa and northern Burma) it currently operates in. The situation in Venezuela is familiar to the Chinese and they expect to come out of this with strong economic ties to the post-chaos Venezuela. The National Assembly appreciates that and is quietly trying to worth out arrangements with China to continue working with PDVSA once the Maduro supporters are replaced.

A few days after Guaido declared his claim to the presidency Russia agreed to extend payment of Venezuelan loans by ten years. Since 2017 Venezuela has been unable to repay most of its foreign debt. Starting in 2006 Russia has loaned Venezuela $17 billion, much of which (Russia won’t say how much) has not been repaid but since Venezuela has not got the cash and given the current state of its economy will not have any additional cash anytime soon Russia “extended” payments. In return Venezuela allowed Russia to invest $6 billion in oil and gold mining projects in Venezuela. These projects probably won’t begin until the Venezuela economy recovers, meaning not for a long time. Venezuela currently owes more than $120 billion to foreign lenders. Guaido is also negotiating with the Russians, who are inclined to follow the Chinese lead in all this.

The National Assembly is not talking to Cuba, the most dangerous ally of Maduro. Cubans comprise key elements of Maduro’s personal security team. Cuban advisors are still active in the Venezuelan intelligence and secret police operations. Cuba has much gain by helping Maduro stay in charge and eventually revive the economy. At one point the Venezuelan socialists were providing Cuba with financial aid that comprised about 20 percent of Cuban GDP. In return, Cuba supplied doctors and many other specialists. Since 2015 that aid to Cuba has largely disappeared because Maduro simply did not have the cash. With the Venezuelan income gone Cuba is going through a major economic depression. The same thing happened when Russia halted its economic aid after 1991. Cuba is still a communist dictatorship and attempting to revive its economy with free-market reforms is difficult and painful. But the Cuban communists have managed to keep their police state functioning for 60 years and doing it without any natural resources like huge oil deposits. This encourages Maduro, who ignores the fact that when the Cuban communists took over in the late 1950s Cuba had the most prosperous economy in the Caribbean. That soon disappeared. Moreover, Cuba is an island who had a stalwart nuclear ally (Russia) from the start. No one is willing to go nuclear in defense of Cuba anymore and Maduro has no such superpower backing. For China, Venezuela is a business opportunity and the Chinese are not pleased with the current management in Venezuela.

Since Hugo Chavez gained power in 1999 Venezuela, once the wealthiest country in the region has become one of the poorest. Less than twenty percent of the population are able to obtain adequate food and other commodities. This “fortunate fifth” of the population consists largely of government loyalists or outlaws. The “fortunate fifth” could easily be two-fifths of Venezuelans were it not for the massive corruption. Several families of senior leaders (especially Maduro and his mentor Chavez) have stolen billions of dollars in state funds. Meanwhile, Venezuela has become a police state with the major source of unrest food riots by starving Venezuelans. The government refuses to admit this is happening and blames any problems on other countries, especially Colombia and the United States. That approach doesn’t work as well as it used to because when Chavez came to power two decades ago Colombia was a mess economically and a scary place to live because of drug gangs and leftist rebels. Most of that has gone away and Colombia, with much less oil than Venezuela, is now the most prosperous nation in the region. Currently, Colombia has a GDP three times larger than Venezuela’s. That has never happened before and it was not long ago that Venezuela often had a GDP twice the size of Colombia's.

Prosperity and democracy died in Venezuela because of nearly two decades of corruption and inept government created by Hugo Chavez. This former soldier got elected in 1999 and died of cancer in March 2013. Along the way, Chavez trashed the Venezuelan economy and democracy. His handpicked replacement, Nicolas Maduro, was even worse. The old Chavez dream of Venezuela becoming a socialist dictatorship supported by oil revenue eventually faded along with cash reserves and the national credit rating. Venezuela currently owes over $50 billion for foreign lenders, mainly in China and Russia. Maduro has put a priority on making scheduled payments on that secured foreign debt because if they don’t the credit rating is damaged while China and Russia become less helpful. That strategy failed and Venezuela began to default on that debt in late 2017. The default continues making it nearly impossible to borrow money.

Venezuela has the largest oil reserves of any nation on the planet. But it also has one of the most corrupt, ineffective, lawless and clueless governments in the world. Venezuela has become a home base for drug cartels, Iranian Islamic terrorists and Chinese investors seeking a long term relationship. Drug gangs already exercise considerable power in Venezuela and leftist rebels from Colombia have moved in to exploit new opportunities. No one, not even major creditors (China and Russia) want to intervene directly. The neighbors do not want to intervene as that is not the accepted way of handling these things. However, the neighbors are faced with a choice of either intervening to deal with the chaos and violence or do nothing and wait for the chaos and violence to come visit at intolerable levels. For a while, it was believed there might be a military coup as there have already been minor outbreaks of violence or organized disobedience by the security forces. Whatever happens here during 2019 it is unlikely to be peaceful but Venezuelans hope the changes will be an improvement over the current mess.

Foreign and local economists agree that one of the key reasons for the economic crises in Venezuela is the epic levels of corruption. The 2018 international corruption ratings show the world that Venezuela not making much progress dealing with that. Currently, Venezuela ranks 168th out of 180 nations compared with 169th in 2017. Neighboring Colombia was 99 out of 180. In 2011 Venezuela was 162 out of 179 showing that the corruption was a cause, not a result, of the economic collapse.

Corruption in the Transparency International Corruption Perception Index is measured on a 1 (most corrupt) to 100 (not corrupt) scale. The most corrupt nations (usually North Korea/14, Yemen/14, Syria/13, South Sudan/13 and Somalia/10) have a rating of under 15 while of the least corrupt (New Zealand and Denmark) are over 85. The current Venezuelan score is 18 (same as in 2017) compared to 36 (37) for Colombia, 35 (37) for Brazil, 28 (29) for Mexico, 63 (61) for Taiwan, 40 (40) for India, 39 (41) for China, 29 (29) for Russia, 40 (39) for Argentina, 85 (84) for Singapore, 72 (73) for Japan, 67 (67) for Chile, 33 (32) for Pakistan, 34 (32) for Ecuador, 28 (30) for Iran, 16 (15) for Afghanistan, 35 (37) for Peru, 70 (71) for the UAE (United Arab Emirates), 62 (64) for Israel, 72 (75) for the United States, 27 (27) for Nigeria, 43 (43) for South Africa, 18 (18) for Iraq, 41 (40) for Turkey, 49 (49) for Saudi Arabia and 47 (47) for Cuba. A lower corruption score is common with nations in economic trouble and problems dealing with reality and crime in general. Venezuela was not this corrupt before Chavez took over but it took his socialist government over a decade to drive the corruption scores into the basement. Cuba, on the other hand, found it had to be reasonably lawful and incorrupt if it was to run any kind of free market economy. Maduro would have to do the same. The National Assembly members, who remember what it was like to do business back when Venezuela had a corruption score similar to its neighbors, are better equipped to clean the mess up.

 

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