Venezuela: The Implications of Possible Regime Change

Courtesy of STRATFOR, a look at how a potential change in leadership could transform Venezuela and its regional role, possibly to the extent that Cuba could seek reconciliation with the United States:

The run-up to the election has been tumultuous. A little more than a year ago, Chavez was diagnosed with cancer, for which he received several surgeries. The past year has been rife with rumors of his impending death and although questions about his health remain, Chavez insists he is strong enough to stand for another six-year term amid collapsing infrastructure and increasing unrest.

Puerto Cabello, Venezuela

Chavez’s opponent, Capriles, is the young governor from Miranda state. Capriles’ campaign relies on emphasizing Chavez-like redistributive policies while promising reforms designed to attract foreign investment, increase oil production and solve Venezuela’s profound economic problems.

Though it is not accurate to say that governance in Venezuela is synonymous with “Chavismo” — Chavez’s political ideology — the Venezuelan president has decisively changed the nature of Venezuelan politics. Chavez is deeply influential in every aspect of government. Moreover, he has set a precedent that will force future Venezuelan politicians to prioritize populism and income redistribution.

When Chavez came to power in 1999, it was in the wake of more than a decade of profound public dissatisfaction with a shaky economy amid regional economic instability. Despite decades of exorbitant oil profits flowing into Venezuela, the management of that wealth by two main parties who took turns in power — the Democratic Action Party and the Christian Democratic Party — left millions of Venezuelans in poverty and created stark socioeconomic divisions.

Chavez’s populist policies were predictable. Venezuela’s political and economic elite maintained power by controlling oil resources and the government. Chavez came to power by promising to address the country’s poverty and to use the government to give Venezuelans a share of the country’s oil wealth. With enormous popular support, Chavez uprooted the elite and established his own inner circle. In 2002, when a coup attempt supported by the managerial staff of Petroleos de Venezuela attempted to unseat Chavez, the president cut the national oil company’s staff and took control of the country and its many resources. In doing so, Chavez crippled Petroleos de Venezuela’s production capacity. By breaking the national oil company, Chavez also broke the country’s elite — the kind of populist policy that was a natural evolution of Venezuelan politics.

Since then, his management style — ad hoc consolidation of the economy — has led to rising inefficiencies across numerous sectors. The electricity sector that was aged when he came to office is now falling apart. Transportation infrastructure is literally collapsing, and prisons are overcrowded with heavily armed gangs, many of whose members have been incarcerated for years without ever being tried.

These problems would face Capriles just as they have faced Chavez. Capriles will be able to make some changes, but he will encounter profound difficulties. Open questions remain about the loyalties of the military, which is deeply involved in the drug trade. Moreover, Capriles will not be able to drastically reduce social spending without facing significant social unrest, which means that large portions of the central government and Petroleos de Venezuela budgets will be locked in place, reducing fiscal flexibility. His main policy and key hope will be attracting foreign investment to increase oil production and national revenues.

Venezuela’s International Reputation

During Chavez’s presidency, Venezuela’s external influence has expanded greatly, and international relations have become more important to the administration. Because of suspicions that the United States was at least peripherally involved in the 2002 coup attempt, that event was for Chavez what the failed Bay of Pigs invasion was for Cuban leader Fidel Castro: a trigger for a strategic repositioning away from the United States. But where Castro was able to form an alliance with the Soviet Union, Chavez has spent the past decade building a foreign policy around establishing piecemeal relationships with countries whose relationships with the United States are strained. Without a clear global power to serve as a political ally, Chavez has established himself as a symbol of international resistance to U.S. global domination.

Nevertheless, Venezuela’s independence has largely remained in the realm of symbolism and rhetoric. The United States is still far and away Venezuela’s largest trading partner. Efforts to diversify away from the United States as an oil export market have resulted in a complex trade and financing relationship with China that has almost certainly required Venezuela to accept a lower market price for its oil — a likely factor in domestic cash flow problems.

However, in its immediate region, Venezuela has found opportunities for partnership and some influence with many governments with similar aims. Countries like Ecuador and Nicaragua, whose leaders have pursued strategies largely independent of U.S. influence, have benefited from Venezuela’s oil expertise and oil exports. Argentina, though largely focused on its own domestic challenges, has found Venezuela to be a willing and convenient trade partner (Argentina has an advantage in food production, which has declined in Venezuela). For these countries, a change in leadership in Venezuela may mean cooler relations, but a change in Venezuela’s policy toward these countries will have a relatively limited impact.

Two Countries to Watch

The two most important relationships for Venezuela are with Colombia and Cuba. Venezuela and Colombia are strategic rivals and will remain so regardless of who holds power in Caracas. Nevertheless, a Venezuelan government that is more open to U.S. influence could benefit Colombia, whose fight against international drug trafficking groups is critical for economic development prospects. Venezuela’s lack of domestic enforcement hinders Colombia’s efforts, so a shift in Caracas’ domestic law enforcement priorities could help Bogota, which is betting on peace negotiations with the Revolutionary Armed Forces of Colombiato stabilize the volatile security environment and allow sustained economic growth in Colombia.

Cuba’s relationship with Venezuela has been a key element of both Venezuela’s role in the region and the geopolitical tensions in the Caribbean Basin. Venezuela’s deliveries of around 100,000 barrels per day of petroleum products to Cuba are a lifeline for the island nation. Outside of tourism, Cuba’s development prospects without significant reforms historically have been limited, and after the social and economic chaos of the 1990s that resulted from the collapse of the Soviet Union, Cuba turned to Venezuela to keep the island’s economy afloat.

A change in government in Caracas would not necessarily mean an immediate abrogation of that relationship. However, Capriles has made it clear that he will reconsider the relationship. Even if Chavez is re-elected, Cuba is vulnerable to any challenges to Venezuela’s economic stability. With this in mind, Cuban planners have been slowly implementing reforms to the domestic economy.

The big question is when Cuba will reconcile its relationship with the United States. If Capriles is elected, Caracas may accelerate these considerations, removing the guarantee of Venezuelan subsidies, pushing Havana to make the concessions necessary for the United States to lift the embargo and speeding up economic reforms. Depending on the results of the U.S. elections, political dynamics in Washington could evolve enough to make this move in tandem with Cuba.

This entry was posted on Friday, October 5th, 2012 at 8:27 am and is filed under Venezuela.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

Comments are closed.

Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.