Venezuela’s presidential standoff triggers international tensions

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Venezuela’s presidential standoff triggers international tensions

Stéphane Monier - Chief Investment Officer<br/> Lombard Odier Private Bank

Stéphane Monier

Chief Investment Officer
Lombard Odier Private Bank

Key takeaways

  • Venezuela’s hyperinflation and food shortages have sparked a challenge to the incumbent president, Nicolás Maduro. Juan Guaidó, Chairman of Venezuela’s opposition-controlled national assembly, has called for fresh elections
  • Venezuela’s inflation hit 2.5 million percent in 2018 and is forecast to reach 10 million percent this year. The population lacks medicines and basic foods
  • Venezuela has the largest oil reserves in the world, yet has seen production plummet under Mr Maduro.
  • The US and Europe, Russia and China are supporting different sides, in line with their regional interests and investments
  • Russia has warned the US not to interfere in Venezuela, while the US says it’s examining “all options”
  • As Mr Maduro loses key sources of revenue and other governments increasingly recognise Mr Guaidó, a political transition becomes more likely.

Venezuela, suffering from hyperinflation and food shortages, now has two presidents. Nicolás Maduro, Hugo Chavez’s vice-president and successor, and a 35-year old newcomer, Juan Guaidó. The challenge has ignited a geopolitical clash as the US, Russia, China and the European Union choose sides and, for the first time, international support coincides with a rise in popular opposition.

Mr Maduro, who took office after Chavez’s death in 2013, began his second six-year term at the start of 2019 with the backing, for now, of the military. In the midst of opposition protests, Mr Guaidó declared himself interim president on 23 January, saying that the constitution allows the national assembly leader to assume caretaker power pending new elections, in the wake of what he calls an illegitimate election in May. Mr Guaidó’s rise to prominence started on 5 January when he became President of Venezuela’s opposition-controlled National Assembly. While there are more senior members of his party, they are either in exile, hiding or under arrest.

Health care has collapsed and diseases such as malaria, measles and diphtheria have returned, while 80% of the population are malnourished because they cannot afford the most basic food

The catalysts for public unrest in Venezuela are not hard to find. Health care has collapsed and diseases such as malaria, measles and diphtheria have returned, while 80% of the population are malnourished because they cannot afford the most basic food, according to the United Nations. One in ten of Venezuela’s 32 million people have fled the country in the last four years. In 2018, the country’s general government gross debt was equivalent to 159% of gross domestic product, compared with 38.9% a year earlier, according to the International Monetary Fund. In 2017 inflation reached 2,820%, leapt to 2.5 million percent last year and may reach 10 million percent in 2019, says the IMF.

This is not the first time that Mr Maduro has faced protests, including months of demonstrations in 2014 and 2017, in which hundreds died. The military is key to his hold on power. His predecessor, Chavez, was himself a former officer and bound the army to his presidency by placing them in positions of authority. The head of the national guard for example, Major General Manuel Quevedo, is also president of the state-owned oil company, Petróleos de Venezuela S.A. (PDVSA) since November 2017.

However, military support may depend on Mr Maduro being able to keep paying the army and his appointments in place. They fear reprisals if deposed. Mr Guaidó has offered amnesties and says he is in “clandestine” talks with the military. We have already seen a series of lower-ranking defections, including the country’s military attaché in Washington, throw their support behind Mr Guaidó.

Sanctions on USD7 billion of PDVSA assets imposed by the US last week effectively cut off Mr Maduro’s main source of revenue. The US has also handed control of Venezuela’s bank accounts to Mr Guaidó, who has said that he is in the process of trying to recover Venezuela’s assets held abroad.

Oil exports

Venezuela’s economy is overwhelmingly dependent on oil. The commodity accounts for 95% of the country’s exports and 25% of GDP. It has the world’s largest proven crude oil reserves with 24.9% of the total in 2017, according to the Organisation for Petroleum Exporting Countries. However, exports collapsed to 1.25 million barrels per day last year, their lowest level since 1990, from around 3 million bpd during Chavez’s presidency (1999-2013). Hyperinflation and economic recession have complicated existing crude storage problems and slowed repairs and maintenance to facilities. In addition, refineries, running at about one third of their capacity, have also been undermined by shortages of workers. Fitch ratings agency estimates that production may decline by another third this year.

More than 40% of Venezuela’s oil exports go to the US, with China and India buying roughly one quarter of production each, according to Bloomberg data. Venezuela is the third-biggest supplier of crude to the US, after Canada and Saudi Arabia.

Choosing sides

Mr Maduro, a former Caracas bus driver and trade unionist, has the support of China, Iran, Turkey, Mexico and Russia. Sergei Lavrov, Russia’s foreign minister, said his country will “do everything to support the legitimate government of President Maduro.”

China and Russia are Venezuela’s biggest creditors. Russia has handed an estimated USD17 billion in loans and investments to Venezuela and in December signed another USD6 billion deal investing in the gold and oil sectors. China loaned Venezuela around USD62 billion over the decade through 2016, to be repaid largely in oil.

Mr Guaidó, an engineering and public administration graduate elected to the Venezuelan parliament in 2010, has the backing of the US, Canada, the UK, as well as much of South America including Brazil’s President Jair Bolsonaro, Argentina, Colombia, Chile and Peru. The European Union has called for “free and credible elections” in the country to resolve the crisis while Spain, France and Germany have said they will support Mr Guaidó if there are no new elections within days.

Mr Maduro has said that he is prepared to talk with the opposition, in the presence of international mediators. “If the imperialists want new elections, let them wait until 2025” he told Russian news agency RIA Novosti in a 30 January interview. The US is working “to get their hands on our oil, just like they did in Iraq and Libya,” Mr Maduro said last week. 

The same day, Venezuela’s supreme court froze Mr Guaidó’s bank accounts and banned him from travelling. That followed a decision by Venezuela’s attorney general to open an investigation into the opposition leader.

with the financial reins directed out of Mr Maduro’s hands and more countries recognising Mr Guaidó, a political transition must be close

What next?

There is a chance that, with the continued support of the military, Mr Maduro can hold onto power. However, with the financial reins directed out of Mr Maduro’s hands and more countries recognising Mr Guaidó, a political transition must be close, unless Russia and China chose to provide more loans to prop up the existing regime. Unfortunately, Mr Maduro and his supporters have little to gain from giving up power through democratic means. Whatever the outcome, Venezuela’s population desperately needs a solution, and quickly, to its economic suffering.

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