November 14, 2017:
To the surprise of no one the government is having a difficult time reviving public services, including law and order in large areas of rural Colombia that were basically lawless regions dominated by drug gangs and FARC for decades. This was expected, but, as with most plans, not everything was anticipated. For example the drug gangs are resisting the return of government rule. The drug gangs are paying locals up to $35 to attend anti-government demonstrations and make a lot of noise. These are often little more than gang efforts to use civilians to block police and soldiers from shutting down drug operations. In any event this gang resistance is making it difficult to revive the rural economy and lower the crime rate which is already at record lows in urban areas that have remained under government control.
Then there are the rebels who want to apply their experience as rural outlaws in a legitimate fashion. When some 7,000 FARC gunmen ceased operations in November 2016 the areas they controlled became available for any outlaw group that was willing and able to take over. Many were. Now Rodrigo, the former leader of FARC is appealing to residents of these areas to vote for him in the 2018 presidential elections. FARC is now a political party and is pushing a political program that stresses how it will reduce corruption and rural poverty in areas it devastated and dominated for decades when it was a leftist rebel army and partner in the cocaine trade.
His platform would be populist and similar to what Hugo Chavez used in neighboring Venezuela to get elected in 1999. Londono, as part of the FARC peace deal, has amnesty and is free to run for office. He has tuned FARC into a legitimate political party. Cuba has been run by a communist government since the late 1950s and never allowed free elections but Londono is willing to give it a try. Polls show Londono and FARC are still very unpopular in Colombia but Londono is still a believer in a socialist form of government and believes he could achieve the electoral success of Hugo Chavez, and avoid the mistakes Chavez (and successor Nicolas Maduro) have made. Londono agrees with Chavez and Maduro that the problems in Venezuela are mainly the fault of the United States and the free (“capitalist”) market economy. Many FARC members back Londono in his bid to become president because if he did that would help to preserve the amnesty provisions of the FARC peace deal, which are still very unpopular with many Colombians. There are still efforts to pass laws to modify the amnesty provisions so that known criminals like Londono and his vice presidential candidate (who hid out in Sweden for two decades to avoid prosecution) could be brought to justice for the mayhem and death they created.
Venezuela
Yesterday Venezuela held a bondholders meeting in the capital. Only about a quarter of the 400-450 bondholders sent representatives and these appeared to show up more out of curiosity than anything else. Venezuela owes about $150 billion (most of it bonds) and most of the debt is held by banks and other financial institutions (mutual funds, pension funds and so on). The government sent out repeated invitations (via the Internet) for about a week in which it described a bondholders meeting that would feature government officials describing and discussing how Venezuela was going to restructure and refinance its huge debt. In the previous week significant fractions of that debt was declared in default and more is expected to follow. The bondholders meeting lasted about 30 minutes and largely consisted of the Venezuelan vice-president Tareck El Aissami blaming all the financial problems on the United States. Aissami has been accused of dealings with Hezbollah, Iran and drug gangs. He is a former interior minister who was appointed the successor to president Maduro in January. Since 2000 Iran and Hezbollah have been welcome in Venezuela and Aissami was part of that. The U.S. has sanctioned Aissami because of his drug smuggling activities. Aissami, or someone from the government, was supposed to show up and reassure bondholders but those who attended only left with gift bags containing samples of Venezuelan chocolate and coffee. President Maduro promised, as recently as the 12th, that Venezuela would never default on its debt and has offered to continue discussions in Venezuela with bondholder representatives. But at this point that is less likely than discussions among bondholders.
Defaults like this are not unique, especially in South America. Argentina defaulted on $82 billion in 2002 and it was handled without the chaos and suffering associated with the Venezuelan default. Moreover Argentina had not trashed its economy as thoroughly as the Chavez/Maduro government and Argentina did not depend on one resource (oil) for 95 percent of its exports as Venezuela does. Large defaults on foreign debt have been a feature of South American finance, politics and diplomacy since the early 19th century. In response the U.S. had established a policy of opposing foreign nations that wished to use force (“gunboat diplomacy”) to settle these debts. By 1850 that was called the Monroe Doctrine and generally enforced by the Americans in the Western Hemisphere ever since. The Monroe Doctrine evolved, especially as the United States became the world’s largest economy at the end of the 19th century. So while South American politicians still blame America for their financial mishaps they do so safe in the knowledge that everyone has quietly accepted the Monroe Doctrine and understands that these defaults get negotiated, not used as a cause of war.
For Venezuela the worst aspect of this is the prospect of the state oil company bonds defaulting. About half the bond debt is connected with the state oil company and if any of those are declared in default bondholders can go to foreign courts for authorization to seize overseas assets of the Venezuelan state oil company. That sort of thing tends to work. Once that happens Venezuelan oil revenue drops sharply and so does what is left of the Venezuelan economy. China and Russia are trying to come up with some way to help but so far they have no workable plan either.
Venezuela recently revealed that oil production had hit a historic low, falling beneath two million BPD (barrels per day). September production was 2.085 million BPD while in October it was 1.955 million BPD and headed lower. Production has not been this low since 1989. Production averaged 2.373 million BPD in 2016 and 2.654 million BPD in 2015. The production decline accelerated in 2017 and is expected to fall to 1.6 million BPD in 2018. This is down from a peak of 3.5 million BPD in 1999, when the current government took power. The subsequent government corruption and mismanagement has devastated the Venezuelan oil industry and caused a decline in oil production that is headed towards unprecedented low levels. The production decline is continuing, because the government refuses to clean up the mess in the national oil company and the oil production facilities.
China has been a major lender and has provided about $50 billion since 2007. Most of these loans are repaid with Venezuelan oil. The amount of oil owed China increases as the oil price declines, which means Venezuela has less oil to sell for current needs. Because the socialist economic policies have driven most manufacturing, and even agricultural enterprises out of business nearly everything has to be imported. China fears that they may not see a lot of their loans repaid and are demanding more oil instead. In 2014 China was receiving over a third of Venezuelan oil exports and now that is nearly half. Currently China is owed $28 billion and Russia $8 billion. In late 2016 China agreed to invest $2.2 billion to upgrade Venezuelan oil facilities. To pay for this Venezuela agreed to increase shipments of oil to China from the 550,000 BPD (most of which is paying for past loans) to 800,000 BPD. That upgrade program never got started because China discovered the state oil company was a chaotic and corrupt mess. China and Russia see opportunities in Venezuela but they are complicated by the growing list of sanctions on Venezuela because of many crimes the government has been accused of. The government is trying to deal with this by staging a highly publicized anti-corruption campaign but this effort does not involve going after many, if any, of those triggering the sanctions (for everything from drug smuggling and money laundering to murder of general abuse of political opponents. Russia and China can block UN sanctions but not those coming from the U.S. and EU (European Union).
The problem with the UN is that while Venezuela is obviously suffering from a serious food and medical emergency the Venezuelan government refuses to admit there is a problem and demands that the UN do something about American and Colombian actions to wreck the Venezuelan economy and disrupt life in general. Only a small minority of Venezuelans believe this but the UN has to respect the views of the recognized government. While most Venezuelans (and most UN members) see the Maduro government as illegal and out of control Maduro is still in control and has allies like China, Russia, Iran and Cuba. Most South American nations oppose Maduro but the UN bylaws are quite clear about how to determine and handle a government that is a UN member.
Desperate Measures
China and Russia have a major problem with their Venezuelan debt and that is the general inability of the current Venezuelan rulers to act in a rational fashion. For example negotiations for Venezuela to buy Russian submarines resumed in early October when the Venezuelan president visited Russia to make deals. Few details were released, except for the revival of the 2005 effort to buy four subs. Those negotiations fell apart but have been revived to use a billion dollar loan from Russia to buy two Kilo class subs. That was not the main item on the agenda; keeping a Russia-friendly government alive in Venezuela was. President Maduro, seeking to become president-for-life of Venezuela relies a lot on trading access to his mismanaged oil wealth with China and Russia in return for whatever it takes to keep Maduro in power. Russia and China have already obtained claims on Venezuelan oil as collateral for some of the more than $30 billion of Venezuelan debt. But that is useless if Maduro is overthrown so Russia, which long subsidized nearby Cuba, has a unique opportunity in oil-rich Venezuela. Cuba had few natural resources but Venezuela is another matter.
Meanwhile food is increasingly unavailable. Less is being imported and more of that is being stolen by the military, which is in charge of food distribution. Inflation has skyrocketed to the point where the Venezuelan minimum wage, the highest (at $372 a month) for the region in 2007 is now, because of inflation, worth less than $4 a month. The government offers a special food allowance, in recognition of the current food situation, but that only brings the minimum wage to about $9 a month. The government does not try to issue the food supplement in the form of food because it knows that food is more likely to be stolen by government employees while the national currency is worth less and less each day.
China and Russia are currently owned about $40 billion by Venezuela. Russia has about 30 percent of that and continues to show willingness to make loans while China is standing aside and allowing Russia to supervise the rescue effort. Iran and Cuba also provide special skills and are also negotiating their fee. That’s how a dictatorship works. You steal what you can and pay what you must to keep it. Since 2013 Venezuelan GDP has dropped 35 percent and per-capita GDP is down 40 percent. Things will get worse before they get better even with a police state. That’s because the new government must put priority on keeping the government employees, especially the ones with guns, satisfied and content to follow orders. You don’t need a Cuban advisor to point that out but the Cubans provide practical advice on how to get it done as quickly as possible. Russia and China are willing to provide the needed equipment on credit. What worries Russia and Cuba the most is that Venezuela is a major opportunity but success will be difficult because there are so many unusual features to the situation. Opportunity is fine, but not when accompanied by this much unpredictability.
November 13, 2017: Venezuela is acting on long-ignored corruption problems in the state oil company. Today police arrested a senior government official (a deputy minister) and nine executives of the state oil company and charged with corruption that cost the state oil company more than $1.1 billion. The charges were mainly about falsifying oil production and cost data to make the oil company appear more profitable than it actually was. There have been several similar investigations and mass arrests recently but no senior officials (like members of the Chavez or Maduro families, who are known to have acquired over $5 billion so far via corrupt practices) have been charged.
November 10, 2017: The long feared default of Venezuelan foreign debt officially began today as the state oil company was declared in default on $650 million borrowed (at 8.5 percent) in 2008 by a Venezuelan electrical power producer that is now owned by the state. The interest payment was due October 10th, was not made and despite a 30 day grace period is still not paid. Thus the default begins and debt holders agree that more of the $150 billion in debt will follow over the next few months and that will wreck the ability of Venezuela to pump, ship and sell its oil.
Neighbors Colombia and Brazil are lining up foreign help for the millions of Venezuelans who may try and flee the starvation and record crime rates in Venezuela. Colombia has counted at least half a million Venezuelans arriving (not all of them legally) in the last six months. Fewer have gone to Brazil but that is mainly because it is easier to get to the Colombian border. The UN is limited in what it can do because Russia and China continue to use their vetoes to block UN efforts to do anything the current Venezuelan government objects to.
November 8, 2017: In northwest Colombia (Antioquia province) police found and seized 12 tons of cocaine hidden near the Panama border. This was the largest single seizure of cocaine and was part of an international effort to disrupt the export of cocaine from Colombia to North America and more distant markets. The cocaine belonged to the Gulf Cartel, one of the drug gangs that gained a lot of new members when 30,000 anti-leftist militia members accepted amnesty and their militias disbanded in 2006. The same thing is happening now, on a smaller scale, with the 7,000 surviving FARC members who were recently demobilized.
November 1, 2017: Rodrigo Londono, the leader of the recently disbanded FARC announced that he would run for president of Colombia in 2018. The announcement was made in Cuba, where Londono is receiving medical treatment.
October 31, 2017: The armed forces were authorized to use air strikes against the thousand or so FARC members who refused to surrender as well as the drug cartels and other criminal gangs that have been eagerly recruiting former members of FARC. The armed forces had used similar tactics to persuade ELN (a third the size of FARC) to negotiate a peace deal. The government warned ELN that once the FARC peace deal was agreed to in 2016 and a ceasefire arranged the military would concentrate on ELN and that proved disastrous for ELN.
October 30, 2017: ELN admitted that some of its armed members in northern Colombia did indeed kill a tribal chief who was seized and brought to an ELN camp for questioning. ELN accused the tribal leader of working for the government and then killing him (either because he admitted it or because he would not talk). This is a violation of the ceasefire and ELN is trying to describe the killing as self-defense.
On October 1st ELN began its first joint (with the government) ceasefire. It will last until January 2018 with an option for renewal until a peace deal is worked out. The government wants ELN to deal with this incident, if only to prove ELN can carry out any peace terms it agrees to.
October 25, 2017: The government has updated its estimate of how may FARC members have refused to accept the peace deal and what these rebels are up to. The government now believes that at least 800 known FARC members refused to accept the peace deal and because of aggressive recruiting (including FARC members who accepted the amnesty and then changed their minds) there are now over a thousand of these rebels and most of them are still operating in over fifty organized groups and seem to be trying to establish themselves are new drug gangs by forming larger groups.