Potential Hot Spots: Vanishing Venezuela

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September 30, 2019: President Maduro remains in control because he still has the support of military commanders. The security forces are first in line for any economic benefits available. Maduro does listen to his foreign advisors from Cuba, Russia and China. All three told him to allow some free enterprise because in small doses it boosts the economy without threatening Maduro’s rule. Maduro was also advised to let anyone leave the country if they wanted to but strictly control who could get back in. The basic advice was to remain in power because eventually the regional and international pressure would decline and ways around sanctions would be found. Iran had nothing encouraging to say about that approach. This was what Russia was doing and while Russia said they were doing fine in the face of continued sanctions, the average Russian described a different and less encouraging reality.

The Maduro dictatorship has agreed to allow UN investigators into the country to determine if abuses have taken place and to what extent. This agreement did not state when more UN investigators would be allowed in, but said sometime in the next two years. The few already in Venezuela cannot cover much of the country and must deal with dangerous paramilitaries who are used by the government for illegal (by international law) violence and general terror. While Venezuela stalls UN investigations more nations, including the EU (European Union) have imposed sanctions on Maduro officials accused of abusing Venezuelans in general as well as those openly opposing the Maduro government.

A growing number of individuals belonging to these paramilitary organizations and the regular security forces are being identified as outlaws and guilty of “crimes against humanity”. That includes many of the security personnel Maduro brought with him to the recent annual UN meeting. Maduro himself is untouchable at the UN because two members (Russia and China) with a permanent veto block any serious UN efforts to do anything about the mess in Venezuela. Other Maduro allies in the UN, like Iran, North Korea and Cuba, are much less useful.

The U.S. and most of Latin America and the West supports Juan Guaidó, the last legally elected Venezuelan official who qualifies as the legitimate leader of Venezuela. Maduro controls the security forces thanks to a secret police force trained and reinforced with Cuban security specialists. This has led to the arrest of many Guaido supporters in the government, despite not having committed a crime. After several months many of these prisoners were released because as prisoners these Guaido officials were hurting Maduro efforts to overcome sanctions and increasing foreign criticism. Maduro denies there are any political prisoners in Venezuela but opposition groups have documented about 500 currently being held, but not prosecuted because the prisoners have not violated any Venezuelan law. This is not an act of kindness because many of the prisoners are being offered benefits (bribes) to cooperate with Maduro rather than Guaido. By weakening support for Guaido, Maduro has more freedom to act inside Venezuela. Guaido has the law and the Venezuelan constitution on his side. The Guaido supporters are patriots who are willing to endure a lot of economic and other pain to remove Maduro. The Cuban and Russian political and security advisors have experience dealing with that sort of thing and that is making it difficult for Guaido and his patriots to survive. Guaido did not attend the annual UN meeting for fear of not being allowed back into Venezuela. But he had a large and active delegation at the UN, who attended as parts of delegations from other South American nations. The Guaido delegation included his wife who met with many foreign leaders to update them on the situation inside Venezuela. The response was a tripling of American financial support for Guaido and even more sanctions for Maduro including travel restrictions on thousands of Maduro civil and military officials, and their families. One thing most Latin American nations can agree with is that the region does not need another Cuba, especially an oil-rich one on the mainland. Since the end of the Cold War, Cuba has been generally regarded as a political and economic failure by other Latin American nations who were previously willing to support Cuba.

Crucial Cuban Connection

Maduro admires what other Latin American leaders dislike about Cuba. The Cubans are experts at monitoring the loyalty of the army and police. This is one achievement of Russian communism; a police state operation that relies on informants and reliable secret police monitoring army units, down to the company level, at all times. Telephones and other communications of senior officers are constantly monitored. Any indication of disloyalty leads to arrest and horrific torture. The effects of that torture are not hidden and video of some victims has been allowed in the state-controlled media. This was meant to demonstrate to all others in the armed forces, and Venezuela, what they were up against. Russia is not as eager to support Maduro and is mainly interested in getting their billions in Venezuelan debt repaid one way or another. Cuba is getting some cash from Venezuela but most of their reward is in Venezuelan oil. American sanctions have made it more difficult to get that oil delivered and Cuba now has a worsening fuel shortage.

Maduro and his mentor and predecessor Hugo Chavez, have paid well for these Cuban services. Since 2000 Venezuela has paid Cuba over $20 billion dollars in cash and oil. The Cubans quickly proved themselves by discovering and disrupting a 2002 coup attempt. In 2008 Chavez agreed to a Cuban proposal to introduce Cuban/Russian style surveillance to Venezuela in general and the security services in particular. This included sending key Venezuelan security officers to Cuba for evaluation (for loyalty and capability) and training. Some of these officers later fled Venezuela, appalled at what they had got themselves involved in. These officers provided details of the Cuban assistance. That assistance included thousands of Cuban security specialists, many of them working within the Venezuelan military to set up the informant system and detect untrustworthy Venezuelan officers. The “Cubans” soon became a feared presence in the Venezuelan military. By 2014, when oil prices collapsed (and have so far not recovered) the Venezuelan economy began to fall apart. That process had already started because Chavez, on the advice of his Cuban security experts, replaced key people in the state oil company. The replacements were Cuban-approved as far as loyalty went but failures when it came to managing the oil industry. The Cuban advisors also urged a crackdown on “disloyal” businesses and their managers. Thus began the destruction of the vibrant and productive free enterprise economy. Since then GDP has declined by over 60 percent, with 2019 heading for another 35 percent decline in an already shriveled economy.

GDP and Population Crises

The number of Venezuelans who have fled the economic collapse surpassed anything that ever happened after the communist takeover in Cuba. Yet Cuba remains a model many pro-Maduro Venezuelans admire. In the early 1960s, about five percent of Cubans fled their country, mainly to the United States. Castro encouraged that exodus because it consisted of  the entrepreneurs and business owners who had given Cuba the highest GDP in the Caribbean. Because of Russian subsidies Cuba was able to keep the economy going, but at the expense of infrastructure and growth. There was little new construction over the next 30 years. The primary economic priority was sustaining the police state. There was new housing for the communist party and security service leadership, and eventually special stores (stocking foreign goods). For most Cubans, there was enough to eat but not a lot of variety and little in the way of new housing or economic opportunity. There was plenty of education, which increased the literacy rate. The educational system contained a large amount of political indoctrination, which was partly an effort to explain the main failures of the new communist economy. Meanwhile, Venezuela was becoming the wealthiest country in Latin America. Cuba is still poor but Venezuela is tumbling towards the bottom because neighboring countries report (from Venezuelans they have received) that about 15 percent of the Venezuelan population has fled in the past few years. The migration is still heavy and the number of Venezuelans in exile is expected to double in two years if the current rates continue. Unlike Cuba, which is an island, Venezuela has large land borders and an extensive road network providing easy access to those borders. The problem is that several years of food shortages have left many Venezuelans physically unable to reach the borders and flee. The Venezuelan middle class was the first to go. In the last year, most of those leaving are former Chavez/Maduro supporters who have seen how Cuba works up close in their own neighborhoods and decided to flee while they could.

The rapid decline of the Venezuelan economy was something the Cubans had some experience with. That’s because after the Russian subsidies stopped in 1991, the already shabby Cuban economy got much worse. Cuba was forced to accept some market economy elements and that helped. But the Cubans knew that if their economy was too market-driven that would eventually make life very difficult, if not impossible, for the communist dictatorship. For Maduro, the situation is much worse. There is no easy fix for the mess he has made of Venezuela. As the GDP declines more of what cash he has goes to keeping him in power while making life more miserable for most Venezuelans. No one is willing to bail him out, even though Venezuela has the largest oil reserves in the world. Russia and Iran, two Maduro allies, are willing but broke. China is the largest creditor and working on restoring production, if only because their loans are being repaid with Venezuelan oil. China could afford to bail Maduro out but won’t because, unlike the Russians and Iranians, the Chinese have a more practical approach to such situations. In other words, as long as the Maduro government is running the country, economic rescue is not likely.

Even fixing the broken Venezuelan oil industry is beyond Chinese capabilities because too much of it is dependent on the United States. That’s because Venezuelan oil, while abundant, is of the lowest quality. It is more expensive to refine and requires special refineries to handle the job. Since the Americans were the largest and closest, oil importer in the Western Hemisphere, and it was possible to build specialized refineries for Venezuelan oil in the U.S., much key Venezuelan oil infrastructure is in the United States. Since Maduro has seized a lot of American assets recently, U.S. courts have allowed the owners of those seized assets to go after Venezuelan government property in the United States for compensation. This process has been underway for several years and Venezuela has run out of appeals and options. The Chinese are still in Venezuela as a “friend of Venezuela” not a Maduro supporter. Everyone else (Russians, Iranians and Cubans) are there for ideological as well as financial reasons. The Chinese have been frank with Maduro and are still there but there are limits to how much of the Venezuelan oil industry they can repair or even maintain. The Chinese cannot replace the U.S. based refineries or the American companies that are still operating some Venezuelan oil rigs. These Americans are likely to be gone soon and the Chinese don’t have the resources to replace them. There are also American sanctions on Venezuelan oil exports which limits who Venezuela can sell to. But given the extra cost of refining Venezuelan crude there are few customers willing to buy the stuff, even at the deep discounts being offered.

Oil Money And Cryptocurrency

In early 2018 Maduro declared the existence of a cryptocurrency called the Petro, based on oil assets and traded via a blockchain and cryptocurrency markets. So far the Petro has not worked to overcome the bad reputation of the Venezuelan government in manipulating its currency (the hyperinflated Bolivar) and mismanaging the economy, especially the oil industry and its own government. Maduro was able to create a blockchain and Internet presence for the Petro, but it has not gained any traction because of the hybrid nature of the Petro and the bad reputation of the Maduro government.

As of mid-2019, Venezuelan oil production for export was about 750,000 BPD (barrels per day), the lowest it has been in decades. Actual exports are lower and less profitable because sanctions have made it impossible to hire the largest tankers to move the oil to Asian customers. Sanctions put ship and cargo insurance at risk. Smaller but more expensive tankers are less vulnerable to sanctions impact but mean less money for Venezuela. Because of the difficulty in moving the oil to distant customers, Venezuela is cutting production still further. Chinese efforts to repair the damage two decades of poor management have done to Venezuelan oil facilities is having less impact than expected. Even with a major repair effort, it would take up to eight years to get Venezuelan production back to pre-socialist (Chavez/Maduro rule) levels.

This decline in oil production is a major component of the economic collapse. In the first six months of 2018 production averaged about one million BPD. In late 2016 production fell below two million BPD, a level not seen since 1989. From 1973 until 2017 production averaged over two million BPD and that level of production will not return until the state oil gets competent staff and lots of money for deferred maintenance and repairs. A more important problem is how to turn those oil sales into cash the government can use. Efforts to establish the Petro, an oil-based cryptocurrency as a medium exchange has failed, so far.

The formerly well run state oil company took nearly a decade of increasingly bad management to produce persistent declines in the ability to produce and ship oil. Venezuelan oil production hit a peak of 3.5 million BPD in 1999 when the current socialist government took power. By 2015 it was down 34 percent (to 2.654 million BPD) and by early 2018 estimates were that production would fall to an average of 1.6 million BPD or less for all of 2018. It turned out to be less and given the accelerating collapse of the economy and PDVSA oil production fell below a million BPD by the end of the year and kept going down. China and Russia said they would turn around this decline but so far the best they have been able to do is slow the decline a bit. China may stop importing Venezuelan oil because of the difficulties increased U.S. sanctions impose.

Present And Future

Many Venezuelans want Maduro and his murderous cronies prosecuted eventually and this encourages Maduro and his associates to hang on. Some kind of amnesty deal has been discussed but nothing came of it. The history of such amnesties in Latin America provides many examples of these deals later outlawed followed by prosecutions.  

The suffering of the Venezuelan people is impossible to ignore, especially since Venezuelans continue coming out, bringing with them first-hand accounts of how bad it is. These refugees often have cellphone pictures and video with them. That provides compelling evidence of the poverty and anarchy common throughout Venezuela. Crime is growing and the security forces are there to protect Maduro rule, not the Venezuelan people. The Cubans have succeeded in preventing an armed insurrection or civil war. But as the Cubans discovered in their own homeland, these communist control techniques cannot save a crumbling economy.

Cuba has much to 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. The only thing Venezuela pays Cuba for now is security assistance. That comes at another price; Cubans are now associated with the most horrific police state methods anyone can imagine. That is washing away all the goodwill the departed Cuban doctors provided.

The Fall Accelerates

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 becoming food riots by starving Venezuelans. The government refuses to admit this is happening and blames any problems in 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 four (soon to be five) times larger than Venezuela’s. That has never happened before and it was not long ago that Venezuela usually had a GDP twice the size of Colombia's.

Measuring the extent of the disaster is difficult. Venezuela stopped providing economic data over the last few years so now economists must estimate. The Venezuelan GDP peaked in 2008 when oil prices were high and the major damage to the vibrant Venezuelan free market economy had not yet hit. Now GDP is estimated at as little as 20 percent of the 2008 peak. Rarely has so prosperous an economy shrank so much so fast, and accompanied by massive inflation and rising unemployment and crime rates. The government disputes how many Venezuelans are still in the country. It appears to be closer to 25 million than 30 million. Over three million work for the government, make that about four million if you include the growing number of paramilitary groups that maintain order. There are about two million retirees from state jobs. One way or another these government employees are taken care of, usually with supplies of food and other essentials. The official currency, the Bolivar, is virtually useless and using dollars is technically illegal. The “fortunate tenth”, formerly the fortunate fifth of the population, are those who still have income and security, in walled and patrolled housing. These outposts of affluence are still visible enough to the unfortunate majority to stoke growing resentment and anger. Leaving the country without permission is considered a crime, especially if you belong to the minority working for the government. Get caught leaving without permission and you lose everything, quickly and painfully. Most of those leaving have nothing and the government does not try to stop them. Some neighboring countries do, although so far the most common destinations (Colombia and Brazil) are still willing to deal with the huge exodus.

 

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