Venezuela, Into the Abyss

Plunging oil prices are particularly threatening for one of the most dysfunctional petro states.

By Keith Johnson, a senior staff writer at Foreign Policy.

Oil prices are flirting with yet another five-year low, which is straining plenty of governments from Tripoli to Tehran. But few countries are as fundamentally threatened as Venezuela, where the sudden collapse in crude prices is making a dire economy downright dismal.

That’s particularly worrisome, because for all the pain that other big oil producers such as Russia, Iran, and Iraq are feeling thanks to less oil revenue, those countries are facing mostly fiscal pressure–not the risk of total collapse.

“It’s more likely that this ends up like Libya” than a replay of orderly transitions, such as the one that led to the end of the dictatorship of Augusto Pinochet in Chile, said Pedro Burelli, a former board member of state oil firm Petroleos de Venezuela, or PdVSA, and an outspoken critic of the Chavez and Maduro governments.

“You take fragmentation of political power, a dire political situation, high social expectations, no cash, and a lot of people involved, and that to me is the recipe for a mess,” he said.

Crude prices continued their slide on Monday, falling to about $64 a barrel in New York and $67 in London. Global benchmark prices have now shed 40 percent since their June highs. For a country like Venezuela, which is dependent on oil for nearly all of its export earnings, the threat is becoming more urgent by the day.

Last week, Venezuela’s government announced a 20 percent spending cut. While President Nicolas Maduro vowed that the cuts won’t affect the country’s cherished social spending–a key to maintaining what little popular support the successor to Hugo Chavez still enjoys–it’s clear that Venezuela’s inability to drum up fresh sources of revenue is tearing at the sinews of an economy that was already reeling from rampant inflation, consumer shortages, and widespread (if underreported) unemployment.

Complicating everything is the country’s byzantine currency exchange rate, which officially values the local currency, the bolivar, at huge multiples of the black-market exchange rate, despite stealth devaluations over the past year. That means that even Venezuela’s oil earnings tend to evaporate when they are converted into artificially inflated local coin.

Although the country has vowed to repay its debt, traders are dumping Venezuela’s sovereign bonds and there are signs that the market is increasingly pricing in the possibility of a default. Venezuelan bonds are trading at 50 cents on the dollar and offering sky-high yields, while bond traders are preparing to cover themselves–with debt swaps–in the event that Caracas follows the path of other troubled Latin American countries such as Argentina.

There’s one telling indication of Maduro’s desperation to secure short-term cash, even at the cost of mortgaging the nation’s much-needed future revenues: The country is reportedly in talks with U.S. investment bank Goldman Sachs to sell it debt obligations owed by other countries, such as the Dominican Republic, at a hefty discount. Media reports suggest that Venezuela is mulling the sale of about $4 billion worth of IOUs from its Caribbean neighbor for less than half that amount.

Not all the dysfunction in Venezuela’s economy is caused by falling oil prices, of course: Toilet paper disappeared from store shelves even when crude was trading at $115 a barrel. Large protests rocked Caracas and other major cities earlier this year, a reflection of growing discontent with Maduro’s ability to keep the flame of “Chavismo” alive. Recent opinion polls show support for Maduro has cratered to about 25 percent.

What’s ominous about the latest oil-induced pressures is that it seems to be pushing the government to take even more desperate measures than it did earlier this year. Last week, the Venezuelan government charged opposition leader and member of Congress Maria Corina Machado with allegedly conspiring to assassinate Maduro, a charge that could put her behind bars for years. The U.S. State Department criticized Venezuela’s “arbitrary use of prosecutorial power to silence and punish government critics.”

At this point, the opposition movement is cowed and divided. But even if it were possible to replace the unpopular Maduro government with leaders from the opposition, it wouldn’t likely cure what ails the country, Burelli said. He likens Venezuela to a broken-down bus careening toward a cliff with no brakes, no gearshift, frozen steering, and a drunk driver: simply making a change behind the wheel won’t be enough to keep the bus from crashing sooner or later.

“We’ve confused the problem of, ‘who will run this country?’ with ‘what is the state of this country?'” Burelli said.


Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP