Potential Hot Spots: The Venezuela Dissolve

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August 1, 2018: Government control in Venezuelan is collapsing along with the economy and much else. This will apparently not lead to another regional war, but it is a huge and disruptive mess for Venezuela and neighboring countries. What is replacing the government in Venezuela is a military dictatorship commanded by a small group of socialist politicians who have managed to maintain control over the major assets (oil production) while the rest if the economy collapses. Even with oil production increased there would still be a problem with the fact that the socialist government has destroyed the economy and

President Nicolas Maduro refuses to admit that his policies caused the mess. Maduro also refuses to enact known (to work) solutions for the current crises. An obvious case in point is inflation. This condition is caused by printing money that is not backed by taxes or loans (in stable currencies). Venezuela than uses this worthless money to pay government employees, or those who provide goods for the government. Anyone using this inflated currency finds that the value keeps dropping because there is no economic activity in the country to generate goods and cash to ensure that prices for scarce goods does not spiral upward (or inflate).

Now Venezuela has hyperinflation (an inflation rate of over a million percent a year.) Maduro got on TV recently and announced his solution: new bank notes with fewer more zeroes but worth the same. This is called redenomination and it does not work. For example, back in 2008, the Zimbabwe central bank dropped ten zeros from the currency. The 10,000,000,000 (ten billion) Zimbabwean dollar bill became one dollar. This did not work and inflation rate soared to more two million percent a year. Before the “big lop” a 100 billion Zimbabwean dollar had been issued. By the time it hit the streets, the ten billion dollar bill could not quite buy a loaf of bread. The only cure for hyperinflation is to base your currency on a stable foreign one (like the Chinese yuan) and live with the fact that you are broke. Maduro is not ready to accept reality yet. This despite the fact that he has been avoiding the inflation problem for years. Eighteen months ago inflation hit 800 percent a year. Now it is over 50,000 percent and accelerating. The government food rations, which are supposed to be sold at a fixed price often have additional “transportation and handling” charged added. Sometimes a bribe is demanded. Everyone realizes the Venezuelan currency is worthless except the Maduro (and some clueless aides)

The Cuban Example

Maduro feels he is safe from armed opposition because he has not tried to prevent emigration. He may have learned that from his Cuban security advisors who noted that when the communists took over in Cuba during the late 1950s they let the middle class and most of the professionals leave, mainly for the United States. That eliminated many of the people who could organize and lead a counterrevolution. But Venezuela today is different from Cuba back them. Some senior officials still believe they can turn it all around and do what Cuba did. But Cuba is an island and was able to create its stable dictatorship in a different time (the 1960s) because Russia was able to provide very professional and effective help in establishing a communist police state. Before the revolution, the Cuban market economy had made Cuba the wealthiest nation in the Caribbean. That was destroyed during the 1960s but the Russians provided large annual subsidies (oil, food and cash) to keep everyone fed. Venezuela has access to none of that and, despite the huge oil reserves, is facing a catastrophic collapse. Venezuela has no wealthy and heavily armed patron. What Venezuela does have is massive corruption, especially among the senior officials. There are a growing number of armed men (pro-government militias) and a growing number of criminal gangs that the government cannot afford to feed. If there is a war in Venezuela it will likely be between the armed haves and the armed have-nots. Venezuela already has the highest crime (and murder) rate in the region (and perhaps the world). While some of hungry gangsters and militiamen are migrating the neighbors are wise to this problem and violent migrants are not welcome and treated harshly when discovered. This is why Maduro is so obsessed with loyalty (even at the expense of competence).

The government refuses to deal with political opponents or acknowledge the fact that most Venezuelans would vote the current government out of office if they had the chance. The currency is worthless, most commercial enterprises have been driven out of business or simply shut down by the government. In GDP terms the economy is about a third of what it was in 2013 when the crises accelerated because of falling oil prices and the death of Hugo Chavez, the charismatic founder of the socialist state in Venezuela.

Follow The Stolen Money

Venezuela has not got enough cash to support a police state as well as feeding the population. Because of his 2017 coup against the democratic process, Maduro is facing economic sanctions by the United States (the largest customer for Venezuelan oil and largest supplier of all sorts of essentials) and most other nations in the Americas and the industrialized world. Sanctions include bans on obtaining equipment and technology for reviving the Venezuelan oil industry. But at the moment Maduro does not have the cash to pay for that and credit is all used up as well. American investigators are uncovering more evidence of the Maduro family and his cronies stealing Venezuelan cash and trying to launder it in the United States. As long as Maduro has a country to rule he is safe from prosecution but these indictments limit his options when it comes to exile. Cuba is always there but it is not a popular place for wealthy former dictators. What these corruption investigations do accomplish is deprive Maduro of cash he needs to assure the loyalty of the people who run his police state.

The UN and all of the neighbors condemn Maduro but the international community is unwilling to do much more than that. Some South American nations have expressed a willingness to join in on sanctions. In part that is because it is no secret that millions of sick and hungry Venezuelans are preparing to flee to neighboring countries, mainly Colombia and Brazil. Many will find they cannot get to and across the border because of health or financial problems, but this demonstrates how desperate the situation has become.

International efforts to get the government to abide by the rules (of the original Venezuelan constitution and most of the voters) have failed. Late in 2017, Maduro had the Supreme Court (full of Maduro loyalists) ban any of the major candidates or their political parties from participating in the May presidential election. This would be the finale of several years of Maduro avoiding the will of the people. With the most popular opposition candidates unable to participate only 46 percent of registered voters (a record low) turned out to vote and Maduro won with 68 percent of the vote. The opposition accused the government of rigging the presidential election, and others as well. Foreign observers who have been able to witness the disputed elections tend to agree that the government cheated. One aspect of the rigged elections was the use of food to coerce voters to support the Maduro government. With the economy wrecked food is in short supply and the government controls most of what is available. In many parts of the country, the government supporters (mostly soldiers, police and members of pro-government militias) are sufficiently numerous to make this “food for votes” scam work. Most coerced voters would be willing to defy the government threats at least once if they knew that would get rid of the current government. But that did not happen because there is little popular trust in the Maduro government.

President Maduro hoped his manipulation the law and use a Supreme Court filled with his allies would be enough to obtain dictatorial powers. This, he soon learned, was not his primary problem while the collapsing economy was. Maduro hopes that oil income will somehow eventually bail him out. In theory that would be possible, but in practice Maduro fails to understand how the economy works.

Despite diverting most food and other consumer goods towards the security forces, that did not prevent a growing number of soldiers and policemen from complaining that their families were going hungry, often because one soldier or policemen was under pressure to help get food for his extended family and was unable to do so. Commanders are seeking solutions to this growing problem but there is no easy fix. What many commanders do is informally tolerate their subordinates stealing from any Venezuelans that can be seen as Maduro opponents, or simply having anything worth taking. This now includes most Venezuelans so there are plenty of potential victims. Commanders who are caught doing this often get away with it by explaining it is an effective way to reduce open opposition to the Maduro government. The new leadership of the security forces was selected mainly for loyalty not competence in military police work. The government is aware that a growing number of its military units are unreliable and is having a hard time keeping track of who can be trusted, who can be accommodated (make a deal with in an emergency) and who is becoming more of a liability. Disbanding disloyal units is difficult and can be devastating for the morale of the loyal troops who have to do the dirty work. So that sort of thing is avoided and untrustworthy units are slowly dismantled by starving them of resources. With more criminals and shrinking and less reliable security forces, Venezuela now has one of the highest crime rates in the world.

What with all the hunger and brutal treatment of protestors the military has tried to counter the bad effect of this on morale with media stories backing the government lies about the bad behavior being the work of foreign agents or criminals. But the military represents a larger and less well-off segment of the population and the average soldier cannot ignore the growing poverty and crime throughout the country. More and more commanders report that they are not sure most of their troops could be trusted to fire on angry civilians if there were widespread anti-government demonstrations the police could not handle. Since the economic problems went critical after 2014 thousands of people have been executed or killed during protests. Some commanders are apparently less willing to use that kind of force now, although it is increasingly difficult to get reliable data on such deaths. As long as Maduro can afford a secret police force to enforce discipline on the other security forces he is safe. That is why tracking down the cash Maduro and his supporters stole is so important. This is the real war but it is not the sort of thing mass media want to report. It is not exciting, forensic accounting never is unless you’re an accountant.

Legacy

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.

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 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.

Venezuelan oil production is unlikely to recover and the current management of the state oil company has made it worse by not paying key foreign suppliers of goods and services essential to keeping oil production going. The government is blaming former (often fired) managers for current problems and accusing many of these fired (and often indicted) managers of stealing billions of dollars from the state oil company. Many of the accused are outside the country and often willing to testify about conditions inside Venezuela and what they know about corruption. This sort of thing has already gotten several senior officials in trouble. A recently appointed head of the state-owned oil operations was an army general whose career prospered largely because of his loyalty to the socialist government, not his military or management skills.

As the overall economic situations get worse the government is replacing a growing number of key (because special skills are required) officials with unskilled loyalists. This is not helping deal with the massive foreign debut Venezuela has and is now unable to repay, nor the problems with economy and crumbling infrastructure. The impact of this is increasingly obvious. Back in February, a partial power outage hit the capital. In addition to lights, ten subway stations were blacked out and trains could not operate. The government blamed “saboteurs” saying that someone cut a cable which caused an explosion. This comes a month after an even larger blackout caused by a cable between a power plant and transmission lines failing. The blackouts kept happening. The most recent one, at the end of July, cut power to 80 percent of the capital and it took hours to restore power to most of the city. In the rest of the country, electricity is provided a few hours a day at most. The wealthy have generators. Everyone else suffers. Maduro blamed the power failure in the capital on sabotage by parties unnamed.

For oil wealth to somehow solve the problems oil prices must return to earlier levels and stay they for long enough for the Venezuelan oil facilities to be rehabilitated. That is urgent because oil production has fallen to 1.3 million BPD (barrels per day) a historic low and continues to fall. 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. In late 2016 production kept declining and hit 1.6 million BPD in December. It rose a bit to 1.8 million BDP in January but after that, the declines returned and accelerated.

Production averaged 2.373 million BPD in 2016 and 2.654 million BPD in 2015. The production decline accelerated in 2017 and at the start of the year was expected to fall to an average of 1.6 million BPD or less in 2018. It turned out to be less and given the accelerating collapse of the economy oil production could easily fall below a million BPD by the end of the year, and keep going down. In contrast, Venezuelan oil production hit a peak of 3.5 million BPD in 1999, when the current socialist government took power. Subsequent government corruption and mismanagement has devastated the Venezuelan oil industry and caused a decline in oil production that has reached unprecedented low levels. This was made worse by socialist economic policies that destroyed the non-oil economy and eventually crippled the oil industry and made it more difficult to revive production. Then the world oil price fell by half in 2013 stayed recovered somewhat in the last few years, in part because Venezuelan production is declining. If production does recover that would cause oil prices to decline. The oil industry is a mess with much maintenance way behind schedule and equipment failures becoming more common.

The China Card

China is the only country willing to put up cash and personnel to fix the problem but that is mainly because Venezuela owes China $30 billion and most of it is supposed to be repaid in oil. China is not optimistic but apparently believes Maduro is desperate enough to give the Chinese a free hand to bring in their own engineers, management and skilled workers. Maduro may not agree with all the Chinese terms (like priority in paying off Chinese debt via increased production and giving China a percentage of Venezuelan oil assets), but he has to realize that no one else is willing to do the job and there are few countries that can.

In early July China agreed to invest as much as $5 billion in an effort to repair and restore oil production but has only delivered $250 million so far and more cash is dependent on how cooperative Maduro and his associates are. Apparently, China is not optimistic but sees the situation as worth a try. China has worked with a lot of dysfunctional governments and rulers worldwide and knows how to measure the odds. Venezuela appears to be a longshot, even though it has the largest oil reserves in the world.

Meanwhile, the production decline continues not so much because the government refuses to clean up the mess in the national oil company and production facilities but because it cannot figure out how to do it. To make matters worse the Venezuelan oil is exceptionally expensive to process for local or export use because it is “sour” and tar-like. That makes it more expensive to refine and Venezuela must blend its sour crude with imported “light” crude or other diluents (like naphtha) to make their crude oil suitable for foreign refineries. Venezuela is so short of cash that it is not paying for these diluent imports and suppliers are refusing to ship anymore unless they get paid. Same with many other essential services for the oil industry.

This became critical by 2017 because the Venezuelan refineries, also state-owned, have suffered more accidents and received less adequate maintenance over the last decade. As a result, domestic refining capability fell to about a quarter of normal and have been getting worse. Shipping sub-standard crude is a violation of the sale agreement and customers are running out of patience. At the moment the largest source of cash sales for Venezuelan crude is Americans. Those buyers have invested heavily in U.S. based refineries modified to handle Venezuelan crude. If the U.S. customers give up on Venezuela they will reconfigure their equipment, at great expense, to handle crude from other sources and Venezuela will have to find new buyers and that will mean selling their sour crude at an even larger discount to more distant and less reliable customers. Currently, most of the oil exports go to barter customers (like China) that made large loans that are repaid with oil. These customers are also not getting their oil on time or to the specified quality. Except for China, no foreign investors are willing to commit the billions needed to update and revive the Venezuelan oil operations, mainly because of the massive corruption and the sense that the government is not rational nor dependable. The collapse of the Venezuelan oil industry is doing long-term damage to the ability of Venezuela to process and sell its sour crude.

No Choice At All

Venezuelans face unpleasant choices; submit to a Maduro dictatorship, support a civil war or flee the country. It is unclear how many Venezuelans would fight and Maduro and his followers are betting on being able to suppress whatever armed opposition develops. Aside from the desperate poverty, the Venezuelan gangs are more numerous in part because the government armed many groups considered pro-government militias. But when shortages, especially of food, reached the point where even the pro-government gangs (and family members) were going hungry many of these pro-government militias went outlaw. Adding to this is low morale in the military, where troops are still fed but are getting less food and their pay is worthless to buy food for their families. Desertions are increasing and this was noticed when some 2,000 active-duty troops did not return from Christmas leave and are believed to have fled the country with their families. Another cause of falling morale in the military is the bad behavior of the secret police and special army units, which has been killing prominent government opponents. And going after anyone suspected of bad behavior.

If there is going to be any organized armed opposition it will happen with most of the people with skills having fled the country. These exiles see the situation as getting worse and not likely to recover any time soon with or without a revolution. That’s why the opposition political leaders still in the country are trying to keep a political opposition intact because another option Maduro has is to admit Venezuela is in trouble and offer to make political reforms in return for aid. That appears to be a longshot because Maduro appears to be living his fantasy that all the problems are caused by foreign interference (especially the United States) and only a true socialist and revolutionary can get the country back on its feet. As long as Maduro can feed the security forces he can live his dream while the rest of the country crumbles.

There is a larger problem along the borders, especially the Colombian border. Smuggling is a big business. The government still sells fuel inside the country at subsidized prices and a lot of that fuel is “diverted” by criminals (many of them also government or military officials) so that it can be smuggled to an adjacent country and sold for several times what it costs in Venezuela.

The most dangerous smuggling operation involves cocaine coming into Venezuela to be shipped to international markets. Soldiers, including officers, in some units actually belong to a smuggling gang and will provide military weapons and other equipment to those who can afford it. The government is faced with bad options.

 

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