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Venezuela: The Faultline in Chavismo

(Law Student, Symbiosis Law School) 13 Feb 2019

2018 has been riddled with political and economic upheaval around the world. Venezuela has taken center stage on the international platform with the growing political and economic chaos within the country. It currently faces an alarming humanitarian crisis due to acute food and medicine shortages, violence borne from desperation, and a growing refugee exodus.

The Economics of Political Stability

Venezuela’s trouble started in 2014 when the current president Nicolas Maduro inherited both the Presidency and a growing economic crisis resulting from the crashing of oil prices in 2014. The mismanagement of this crisis and the systematic implementation of poor economic policies in the course of the last 4 years has brought Venezuela to its current state.

Venezuela was one of the largest oil exporters before the economic crisis took hold, and continues to have the largest untapped oil reserves in the world. Its oil producing company is the nationally held PDVSA, the largest oil producing entity in Latin America. This company was privately held until the 1990s when Hugo Chavez took power. He nationalized the company and expanded the workforce in order to create jobs for the Venezuelan economy. This increased production costs without a proportionate increase in investment as well as operational capacity, resulting in operational inefficiency and lack of facility upgrades.

Simultaneously, the government continued its expropriation drive, not sparing industry of any scale or size from nationalization. The Chavez administration was so intent on a government-controlled industry that its policies crippled all possibility of growth for even small and medium scale enterprises. This left the Venezuelan economy entirely oil-dependant with 95% of its export revenue comprising oil exports.

The oil revenue generated by PDVSA and its net worth were leveraged by the administration to fund ballooning public spending in the form of wages and social programs to cut poverty. Although this made for short-sighted economic policy sacrificed on the altar of political ideology, it continued to sustain the Venezuelan economy because of booming international oil trade.

However, the oil prices crashed in 2014, having a direct and immediate impact on the Venezuelan economy as well as on the government’s revenues. It was also in this year that Nicolas Maduro was sworn in as the new president. At this point, instead of assessing the economic situation and revising economic policies to meet the exigency, Maduro’s government continued with Chavez’s policy.

Furthermore, Maduro exacerbated the crisis by making fundamental and equally debilitating mistakes in managing the economic fallout. His solution to the growing government debt was to mint currency. The subsequent devaluation of the Bolivar caused inflation levels to explode, with the latest IMF projection pegging it at 10 million percent in 2019.

The situation, as it currently stands today, is a complete collapse of the economy, unparalleled levels of hyperinflation, a shrinking oil trade due to decreased capacity as well as rising cost of production making Venezuelan crude uncompetitive, and a government in default.

Political Crisis

The dire economic straits of the country have spilled over into the political arena in the last couple of years. Hyperinflation had begun to create food and medicine shortages with larger sections of the population sliding rapidly into poverty. This led to mass protests against the administration’s policies.

The turmoil caught international attention in 2016 when Maduro began to consolidate political power by declaring the National Assembly, the Venezuelan parliament, illegal due to the expanding influence of his political opponents therein. Not only did he essentially strip the National Assembly of its powers; he then formulated a Constituent Assembly, meant to draft a new constitution as per the provisions of the existing constitution, and bestowed on it illegitimate authority to legislate. This Constituent Assembly comprised primarily of party and government loyalists.

Thereafter, the Constituent Assembly called for elections in 2018, which Maduro won. These elections were viewed as fraudulent by the international community due to the illegitimacy of the Constituent Assembly, the ongoing imprisonment of political opponents, and the stifling of freedom of speech. Thus, a large part of the international community does not accept the consequent results and Maduro’s legitimacy.

In the meanwhile, Maduro also changed the Supreme Court filling it with loyalists, thereby effectively compromising the independence of the Venezuelan judiciary. Hence, by the end of 2018, Venezuela has become an authoritarian regime.

The political climate became even more chaotic in January of 2019 when a relatively unknown political opponent Juan Guaido swore himself in as the interim president of Venezuela.

Guaido contends that Maduro is constitutionally illegitimate. Maduro held fraudulent elections, declared the National Assembly illegitimate, before which he was constitutionally bound to take the oath, and then proceeded to take his oath before the newly formed Supreme Court of Justice. Thus, his swearing-in is unconstitutional and Venezuela does not, technically, have a head of state. Based on this chronology of facts, Guaido contends there is an absence of executive authority, allowing him to take the mantle of interim president and giving him the constitutional authority to call for fresh elections within 30 days.

It is on the basis of this contention, that many western democracies led by the United States and including Canada as well as Brazil, have recognized Guaido as the legitimate center of executive authority in Venezuela.

Leading experts speculate that Guaido may successfully force a regime change in the country if he is able to garner military and police support. The military and police force are currently declared in support of Maduro. However, that may change as foreign exchange reserves dwindle and the government runs out of money. This will also be compounded by the economic sanctions on government officials imposed by the United States, which continue to choke Venezuelan oil trade.

Global Interface: U.S, Russia, and China

On the international front, Venezuela has become a hotbed for foreign policy agendas of different countries, especially as a proxy ground for a confrontation between the United States, Russia, and China.

The United States has declared its support for Guaido. It has also curtailed economic investment in Venezuela while leaving a narrow window open for its own oil companies to continue business there. The Trump administration is also weighing the possibility of sending military aid to Guaido, although there has been no official announcement of such a strategy as yet. The reason for this interest is the American administration’s refusal to countenance a ‘socialist’ regime close to its southern borders, and an interest in further securing its hegemony in the global oil market.

Russian President Vladimir Putin has openly supported Maduro and his government. The reason behind this support is large-scale Russian investment in Venezuela, led by the national oil company Rosneft. The company has major assets in Venezuela and is owed a sizable debt. Russia is also eying a larger role in geopolitics with the systematic withdrawal of the United States leaving a power vacuum in the West.

China has also openly supported Maduro for similar reasons to Russia. It has already extended the embattled administration large loans. The sum total loaned by both China and Russia is in excess of $69 billion.

China has sought to barter money for oil with Venezuela. It has also taken control of 28% the PDVSA’s oil-producing capacity in repayment of debts owed. Chinese oil companies have also sued PDVSA for recovery of debts. However, the country continues to support this administration because Maduro remains the key person who can guarantee oil shipments to China. Moreover, experts also speculate that China may consider taking ownership of Venezuelan oil reserves in recompense for debts owed, thereby creating something of a neo-colonial relationship between the two. However, this remains mere speculation at this point, although China’s activities in Southeast Asia and Africa give it credence.

The Indian Equation

India’s bilateral relationship with Venezuela is largely driven by the oil trade. India is a key importer of Venezuelan crude. However, Venezuela doesn’t form the cornerstone of Indian energy security and is also removed from any regional sphere of influence.

The Venezuelan crisis has an effect on India to the extent that India is also owed debts. As Venezuela doesn’t have money to repay these debts, it covers them in oil barrels. This exchange is threatened by the clapping of American sanctions on the oil trade as it creates the risk of Indian companies being viewed in violation of those sanctions and being penalized. However, the relationship has not yet deteriorated to this extent and it remains to be seen if the Indian administration will need to take preventive measures based on the developments taking place on the ground in Venezuela.

In light of the complex economic and political situation in Venezuela, its path forward is mired in challenges with a limited number of options at its disposal. Nicolas Maduro shows no signs of relinquishing power easily although pressure is mounting on him and military support for him shows signs of weakening. Meanwhile, people are being driven beyond desperation. There are widespread starvation and a full-fledged refugee crisis. Even if Juan Guaido succeeds in a regime change, Venezuela is in for a long fight. It will have to rebuild its democratic institutions and revive its domestic economy in the backdrop of growing global political turmoil, a shifting of the known world order, an inexorable move away from oil-based energy, and a volatile global economy heading towards the next recession. How Venezuelans will overcome these odds and what shape they will give to the new post-Chavismo Venezuela remains to be seen.


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