Caracas Connect: February 2014

Caracas Connect, February 2014 Report 
By: Dan Hellinger
  • Opposition turns violent
  • Oil and Economy Deepen Crisis
  • Crisis without Resolution?

So far, 2014 has brought little more than a further deterioration of the center in Venezuelan politics.  The weekend of February 12 saw the eruption of the most serious political violence in the country since the short-lived coup against Hugo Chávez in 2002.  Two student demonstrators and a prominent pro-government activist died.While it is always difficult to allocate responsibility, the immediate catalyst for this outbreak seems to be the decision by a faction of the opposition to return to the tactics that led to the coup.  In other words, making the country ungovernable seems to be the strategy.

But, in analyzing the deeper causes of the gathering political instability, we should not overlook two legacies left behind by the deceased President Chávez: the void in governance left by the disappearance of his highly centralized, personalist style of rule, and the growing shortage of petrodollars to fill the gap between consumption and domestic production. These two factors have emboldened the opposition to call for Maduro’s “exit.”  The opposition agrees on its desire to see Maduro leave office; but, the most extreme, reactionary wing seems to have decided it is once again time to try the 2002 strategy.

An Opposition “Divided but not Disunited”

There is little doubt that the violence has mostly been provoked by some sectors of the opposition. Certainly, there have always been sectors of Chavismo that have provoked or carried out violent actions; but, as both David Smilde and Steve Ellner (academic specialists on Venezuela) note, the government has little interest in destabilizing the political scene.  While inflation, shortages, and the crime rate have sapped Maduro’s popularity, the majority of Venezuelans view his government as legitimate. While Henrique Capriles attempted to discredit Maduro’s April 2013 victory with protests that turned violent, the strong national showing by the (Chavista) United Socialist Party of Venezuela (PSUV) in local elections in December removed any doubt that the strategy of discrediting had failed.

Facing no new elections until legislative contests in 2015, Maduro and the Chavistas have the upper hand.  Under Venezuela’s Constitution, any attempt to remove Maduro through a national recall referendum must wait until 2017. The recently-arrested Leopoldo López, a former rival of Capriles for the opposition presidential nomination, who has been at the forefront of the street protests, is gambling that recent confrontations will garner enough support to allow him to displace Capriles, who has taken a more moderate and pragmatic approach in recent months.

In his February 5 blog posting, Nicmer Evans, a political scientist at the Central University, called the opposition “divided but not disunited” (a translation can be found here).  Like several other political analysts, Evans, who openly aligns with Chavismo but often serves as a gadfly to the government, was taking note of the opposition’s increasing frustration, having lost several elections under Capriles’ leadership.  As the prospect of defeating Chavismo through the ballot box has faded, the extreme, reactionary wing of the opposition, which had lost influence after the failed 2002 coup, the shut-down of the state oil company later that year, and then defeat in the recall referendum of August 2004, has begun to reassert itself.

Besides López, the former mayor of a Caracas municipality who lost an opposition presidential primary to Capriles in 2011, the most prominent voice in the opposition protests is that of María Corina Machado, former head of SUMATE, the opposition alliance that spearheaded the series of attempts to remove Chávez between 2001 and 2004. After the government issued an arrest warrant for López on late Thursday night, February 13, he surrendered to the authorities during an opposition rally on February 18. López’s public statements have been limited to calling for people to go into the street, but moderate opposition figures have recognized that this call would provoke clashes. Justified or not, the arrest of López and raids on the headquarters of the opposition Popular Will party may prove clumsy, enhancing López’s image as a living martyr and tarnishing the government’s international reputation.

López calls for the immediate “exit” not only of Maduro but all Chavistas, and he has called for the protests’ continuation despite the violence.  Capriles suddenly finds himself the voice of moderation in the opposition, despite himself having called protests that turned violent after the April 2013 election. In December, he accepted Maduro’s invitation to dialogue later in the year. López and others in the extreme camp have stopped just short of accusing Capriles of treason.  A third faction of the opposition is led by Caracas metropolitan mayor, Antonio Ledezma, who is trying to position himself between the two factions, calling for “unity in the streets.”

What all three factions agree upon – the point on which they are “not divided,” according to Evans – is seeking the “exit” of the current regime.  For Ledezma, Machado, and López, this is nothing less than Maduro’s resignation.  Capriles would like to see that as well, but he and more moderate parts of the opposition fear that the violent protests will strengthen rather than weaken Maduro’s hand, and they still hold out hope that eventually they could win electorally.

Divisions in the opposition have also been recognized by reporters hardly sympathetic to Chavismo. The Wall Street Journal’s Juan Forero told NPR’s Morning Edition, “I think the leadership is sort of shifting a bit. The opposition candidate who lost the election last year was Enrique Capriles, and he hasn’t been a wholehearted supporter of going to the streets. He thinks that that is a policy that has failed in the past.”

Evans has a warning for the Chavistas:  Don’t think about expelling the more moderate figures seeking compromise from the PSUV to appease more radical sectors.  Debate about radicalizing the Bolivarian Revolutionary path has led to divisions that the opposition seeks to widen and exploit. While not saying so explicitly, Evans also seems to be warning the Chavistas not to allow themselves to be baited into an extreme reaction. As long as they are united they retain a majority base; this is what frustrates the opposition, he claims.

In many respects, the attacks on government buildings, the fires and the street blockades resemble the “guarimba” protests that led up to the 48-hour coup of 2002.  On this occasion, more than earlier ones, many of the protestors are students, and they have been confronted by young Chavistas from both universities and also the barrios (poor neighborhoods).  The radical activists are based in grassroots collectives, some of which are armed.  They have long made it clear that although they support the government, they intend to operate independently, and will resist any attempt to disarm them.

Even as the protests raged, President Maduro announced a new initiative intended to disarm civilians and bring down the high rate of violent crime, a problem that has hurt the government in its own social base. In a speech to a mass rally of supporters on February 16, Maduro warned, “I want to say clearly: someone who puts on a red t-shirt with Chavez’s face and takes out a pistol to attack, isn’t a Chavista or a revolutionary. I don’t accept violent groups within the camp of Chavismo and the Bolivarian revolution.” Violent opposition protests, which have included street closings and attacks on government and PSUV installations, make it less likely that Maduro’s approach will prosper.

Capriles responded to the protests delivering a moderate message by calling for renunciation of “paramilitaries and violence.” No doubt Capriles had in mind the same sectors of the government side that Maduro called out in his speech, but his reference to “paramilitaries” probably also reflects his concern about extremists in the opposition who have been supported by Álvaro Uribe, the right-wing former president of Colombia.

Nonetheless, mainstream media coverage continues to place blame for violence almost exclusively on the government. Emblematic of the coverage were reports in early February about protests staged against the Cuban national baseball team, which was in Margarita Island (a Venezuelan resort area) for the Caribbean series baseball tournament. According to Europsport.com, Venezuelan authorities arrested seven protestors, charging that they had pelted the Cuban team bus at their hotel with objects, and that the demonstrators had physically attempted to prevent team members from entering the hotel. Not surprisingly, U.S. reports (e.g., Fox, Bloomberg, Reuters) omitted any reference to the Venezuelan government version of the protestors’ behavior.

The battle for hearts and minds is taking place on social media, not just the news media. The Venezuelan disturbances are occurring in the global context of conflict in Ukraine, Thailand, and Syria, and to some extent these conflicts shape the media lens. Some celebrities, including Rihanna and Jared Leto, have spoken out on social media and painted the conflict as yet another case of a violence-prone government repressing peaceful demonstrators.  In reality, the conflict is more like Thailand, where a minority middle class opposition, with a strong base among students, opposes a democratically-elected government, accusing it of corruption and economic mismanagement. In Venezuela, too, a middle class minority, including students, is demanding the “exit” of the elected government, which is backed by the poorer and historically neglected part of the population.

Both sides used social media to disseminate images of repression and violence allegedly carried out by the other.  Few of these are independently verified. Opposition videosallegedly show uniformed personnel firing at protestors. Pro-government images allegedly show opposition shooters and images of burning or damaged buildings.

There has been considerable criticism of media coverage of opposition protests and violence. Inevitably, the new crisis reminds people on both sides of media’s role in actively promoting the short-lived coup in 2002 in Venezuela. Margarita López Maya, a historian at the Central University, told the New York Times that in the intervening period the media has been tamed by the government and that the opposition feels hemmed in. The Times piece would lead one to believe that Venezuelans are being deprived of both physical and media space to protest. There is little doubt that the government has exercised censorship and pressure against media some media outlets, however, no one should think that Venezuelans face anything like a news blackout on the protests or casualties. For a good, balanced account of the media’s role, see the recent analysis by David Smilde.

Government in Disarray

Also, sectors of the opposition are counting on the economic deterioration of the country to generate popular pressure for a regime “exit.” There is no question that Maduro’s government has failed to perform effectively in any sense in dealing with the country’s economy.  Related to this ineffectiveness is the leadership void left by Chávez, a literally larger-than-life political leader.

Maduro insists that the shortages of basic goods and problems with electricity are the result of deliberate sabotage. As indicated in the December edition of CDA’s Caracas Connect, the notion of sabotage of the electrical grid or of wholesalers hoarding goods is not entirely fanciful. On February 17 the government claimed to have recovered over 3,000 tons of hoarded goods. But it is also increasingly clear that the government has no clear economic strategy for dealing with two inter-related problems: the overvalued exchange rate and the failure to meet production goals in the oil sector, which generates 95% of export earnings.

The official exchange rate is approximately 6.3 bolivars to the dollar.  The black market rate recently reached 70 to 1.  One year ago, it was 20 to one. So, those with dollars can buy bolivars on the street, and then, if they can manipulate the system, buy dollars at a ridiculously lower fraction of the street rate. Speculation as well as legal purchases of basic goods and even non-essential things, such as travel and automobiles, have steadily drained dollars from the Central Bank. In response, the government has tried to administer an unwieldy system of controls. The first controls were implemented in 2003, but the accelerating depletion of dollar reserves led the government to considerably restrict access at the 6.3 rate.

January brought adjustments to the exchange system that allow individuals and organizations to bid for dollars through auctions. This reform was intended to make it easier for Venezuelan wholesalers to gain access to dollars without having to resort to the black market. After one month, shortages of foodstuffs diminished, but other types of items, including durable consumer goods did not. Also, some relief from shortages is the result of the government directly importing goods – most conspicuously, toilet paper, the shortage of which provided notorious fodder for opposition media. On February 18, Maduro announced that the government would import nearly $1 billion in food and medicine to alleviate shortages further.

The government has often accused Polar, the massive Venezuelan agribusiness conglomerate, of hoarding to undermine the economy and threatened with nationalization.  For its part, Polar complains that the government has not provided $463 million it needs to pay international suppliers, and claims the suppliers will soon halt shipments of food and packing materials. Whatever the truth, the government’s capacity to administer such a complex business enterprise is clearly inadequate.

A similar problem has arisen with airlines, which are claiming to be owed $3 billion under the old compensation system. Flights have been drastically cut. In a recent online search, the cheapest economy seats booked four months in advance from Miami to Caracas were listed at $1,800. The country’s partners in oil exploration have also been demanding dollars to repatriate dividends and also to import goods needed to maintain production in the fields.

On February 17, Maduro ordered three US embassy staffers to leave the country, claiming that under the pretext of interviewing visa applicants, they were meeting with student protest leaders to encourage and aid them.  Through his spokeswoman Jen Psaki, Secretary of State John Kerry denied the charge.

Oil on a Slippery Slope

Venezuelans have reasons to be concerned about problems in the oil sector and PDVSA, the state oil company. This does not mean that we should believe the alarmist estimates of production declines that appear regularly in the U.S. media. Usually these claims are based on a survey of “experts,” some of whom are PDVSA executives sacked in 2003 after they shut down the industry in an attempt to overthrow the government.

PDVSA’s production figures – which include both exports and production of extra heavy oil – always differ from OPEC reports and other surveys whose statistics exclude them. However, it would be a major surprise if December production, when released, met the goal of producing 3.25 million barrels per day (bpd), set by PDVSA president Rafael Ramírez in June 2013.  Most likely, they will show a slight decline in production to about 2.9 million bpd.

Unfortunately, even holding steady is not good enough for PDVSA or for the government’s ability to manage the gathering economic storm. Already, according to Ramírez’s own estimates, Venezuela exports 310,000 bpd against loans, mainly from China, only some of which target boosting production. Others support PDVSA’s mission to support social and economic development projects. This may be an admirable goal, but it increasingly absorbs a considerable portion of production, and the oil company has little experience running, for example, supermarkets.  If the government were actually to nationalize Polar, which it periodically threatens to do, it would be taking on a massive, complex system of production, processing, transportation, and distribution.

To make matters worse, there is mounting tension between PDVSA and its partners in joint ventures and operating contracts.  The state owns at least 60% of joint ventures, but most of the fields are operated by the partners. The ventures have yet to declare dividends, which after payment will be repatriated by the partners. Both partners and service operators are also complaining that they have been denied access to dollars needed to maintain operations (e.g., spare parts, technical services).  The government has threatened to shut down production, but for various reasons it cannot afford to do so.

Historically, Venezuelan governments could rally popular anger at imperialismo petrolero because it took on the form of the major transnational companies.  However, most of its partners no longer fit the convenient profile of a giant, private member of, for example, the “Seven Sisters.”  Now, most of its partners are state oil companies, including those of Asian, European, Russian and Latin American origin.

A good example is ONGC Videsh Ltd, the overseas investment arm of state-owned Oil and Natural Gas Corp Ltd. an Indian company. India’s government claims its company has not been paid declared dividends since 2008 and is owed $421 million dollars.

Other projects that absorb some of the profits from oil are PetroCaribe and other international initiatives to support needy neighbors, including a number of poor communities in the United States through CITGO. PetroCaribe absorbs over 200,000 bpd including its parallel arrangement with Cuba.  Some revenue is recovered in barter trades and loan repayments, but PetroCaribe initiatives still represent exports that earn less than full value on the world market.

Venezuela gains geopolitical advantage and good will with these programs.  They alleviate poverty and offer recipient countries greater room to direct resources toward development and welfare. Furthermore, they do not really represent an absolute loss for Venezuela. In its 2012 annual report (available here), PDVSA listed production costs at approximately $11 per barrel.  With prices remaining well over $90 per barrel, Venezuela can offer deep discounts without actually forgoing full recovery of its costs plus a reasonable profit.

We cannot say the same, unfortunately, about growing oil consumption in Venezuela. Domestic consumption has crept close to 750,000 bpd, all produced at a loss. Most economists calculate Venezuela’s “subsidy” to domestic production by simply subtracting the domestic price of oil from the global price. The real cost is considerably less. Based on company reports about costs, I estimate the real operating loss (including the normal profit rate in Venezuela, without which the company could not re-capitalize itself) to be around $1.8 billion.

The opposition always references the “loss” of discounted oil, especially to Cuba, in terms of what is really the opportunity cost incurred. Of course there is such a cost associated with the discounted exports, including the 100,000 barrels per day provided to Cuba.  However, domestic production is much more costly, and few politicians of any stripe have wanted to talk much about this. Ironically, Maduro did recognize the problem in a speech just before the opposition protests, but the recent political violence lessens the likelihood of quick action.

The goose that lays the golden eggs, then, is still producing, but it is looking noticeably wan these days. As long as global oil price remain high, the government has some room for maneuver. As Mark Weisbrot has pointed out, it still has considerable foreign reserves, and its overall level of indebtedness is still manageable. But, the unsustainable exchange rate, the cumbersome bureaucracy, and the failure to maintain, much less increase, production in accordance with borrowing all point toward things getting worse before they get better.  Devaluation would ease the flow of bolivars and slow the drain on dollar reserves, but it could also fuel inflation. Many of the present shortages hit the middle class, but devaluation would hit the poor sectors of the population, the base of Chavista support.

For whatever reason, however, the government has had a hard time meeting its obligations. And it does not appear that Maduro, his party (the United Socialist Party of Venezuela – PSUV), or government officials have a coordinated plan to rectify the problems. The PSUV and its allies will no doubt unite around supporting Maduro against the opposition protests, but they are rudderless on economic policy. And, the weaker the state becomes, the more the state oil company will operate as a state within a state. The temptation will be very strong to turn over more production and control of policy to foreign partners in order to ease the burden of paying the debt.  It’s a path that the country has followed before, and it contributed to the fall of the “Fourth Republic” and rise of Hugo Chávez.

By Way of Conclusion

Maduro faces serious economic and political dilemmas. If he seeks center ground with Capriles, he will alienate the radical social base. And López’s arrest is something that Capriles cannot support if he hopes to reunite the opposition. On the economic front, if Maduro devalues, he stems the flow of dollars but probably hurts the standard of living of the poor more than the middle class.  And while few analysts who are not specialists are paying attention, more petrodollars are being absorbed by debt and literally going up in smoke on the domestic market. If the price of oil were to fall even modestly, the recent violence may prove prologue to an even worse political crisis.

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