TIME Venezuela

Venezuela Is Slowly Coming Apart—and President Nicolas Maduro May Pay the Price

A boy with blood on his chest kneels in front of police after 14-year-old student Kluiver Roa died during a protest in San Cristobal, Venezuela, Feb. 24, 2015.
Carlos Eduardo Ramirez—Reuters A boy with blood on his chest kneels in front of police after 14-year-old student Kluiver Roa died during a protest in San Cristobal, Venezuela, Feb. 24, 2015.

Hyperinflation and shortages of basic goods have Venezuelans angry—and looking for new leadership

CARACAS – Amid the death of a 14-year-old boy killed by a policeman during anti-government unrest, the arrest of a key opposition mayor by armed government intelligence agents and talk of a coup plot against the government spearheaded by Washington, this last week also saw another another turn in Venezuela’s growing crisis. At DolarToday, a website little known outside of Venezuela that has become a key indicator of the country’s black market exchange rate, the bolívar local currency passed the psychological barrier of 200 per greenback. Four years ago, the dollar cost eight bolívares per dollar; five months ago it was 100; now it is already at 221 and counting. This rapid deterioration in the value of the local currency, 61% drop against the dollar over the last year, is one of the best indicators of just how much trouble Venezuela—and President Nicolas Maduro—is in.

While many in Venezuela have little direct engagement with the dollar—the country’s foreign exchange is strictly controlled—the currency crisis pervades everyday life. It means many doctors and engineers earn the equivalent of just a dollar a day and prefer instead to drive taxis or smuggle pasta or gas across the border to Colombia. It means that those who want to buy basic goods for their families must line up for hours every day due to shortages, and hoping all the time that shelves won’t be empty. It means that stealing is more valuable than working, fueling one of the world’s highest crime rates and the murder of one police officer nearly every day.

It means that people like Yormina Alguilera, a street cleaner earning the same as the minimum wage of doctor or engineer, are giving up. “We’re in crisis,” she said, taking a break from the sun at a fruit stall in the square at Caracas’ 23 de enero barrio, as murals of Che Guevara and Hugo Chávez loom over. Alguilera voted for Maduro and his predecessor Chávez, “but never again,” she said. “At least under Chávez I could get things. It’s a mess with Maduro and there’s no end in sight. Things are getting worse every day.”

Maduro, who was elected after the death of Chávez in 2013, is in serious trouble. His approval ratings are in the low twenties, according to Datanálisis, a respected local pollster. This time last year, the president faced down Venezuela’s biggest anti-government protests in more than a decade, and now they appear to be starting up again. In San Cristóbal, on the country’s border with Colombia and where unrest was sparked last February by similar though less severe economic problems, 14-year-old Kluiberth Roa was killed with a rubber bullet by police. That tragedy has only sparked further public anger.

Supermarket lines often run into the hundreds if not thousands due to shortages of the most basic goods, from shampoo to condoms. Inflation last year was near 70%. The economy, which has long been propped up by high crude prices, is crumbling as oil has tumbled over the last few months. (A barrel of Venezuela oil sells for half what it did a year ago; the country obtains 96% of foreign currency from oil.) Maduro has blamed this on an “economic war” being waged by the opposition with a hand from the United States, but many ordinary Venezuelans don’t believe that. “They talk about an economic war but we’re certainly not winning it,” said Aida Guedez Álvarez, a 61-year-old housewife buying a watermelon in 23 de enero. “I voted for Maduro but I’ve been deceived, like everybody else.”

Maduro’s government faces tough legislative elections later this year. “The government isn’t necessarily falling but it is weak and losing its leadership,” said Reinaldo Manrique, 24, an accounting student and student leader who was one of the very first detained for protesting in San Cristóbal, last year, sparking nationwide unrest. “But you know what? The leaders of the opposition are even more weak.”

Though former Chavistas are much angrier than they were a year ago, they do not see the opposition, led loosely by two-time presidential candidate Henrique Capriles, as a viable alternative. “Of course I’d never vote for Capriles,” said Alguilera, the street cleaner. “I give up. No one will change things.” Rather than protest, students are talking of finishing their studies and leaving the country. Many who took to the streets last year have left. “I’m studying to become a primary teacher,” said Leonardo Díaz, 25, in Caracas’ Plaza Altamira, a bastion of protest. “But as soon as I graduate, I’ll leave. All my friends at university are the same.”

Capriles, who stood against both Chávez and Maduro in presidential elections, is the more moderate face of the opposition. He continues to govern the state of Miranda and at least on paper lead the opposition. The government has cracked down on its more hardline critics. Leopoldo López, a major opposition heavyweight, has remained behind bars for more than a year for his role in inciting last year’s protests. “The government is working in a barbaric way to steal from public funds, destroy the country, rob the country’s oil while it says it’s constructing a homeland!” López’s father, also called Leopoldo, told TIME. Antonio Ledezma, Caracas’ mayor, was arrested and charged earlier this month in a conspiracy to overthrow Maduro.

María Corina Machado, another more radical leader, was charged in December with involvement in a plot to assassinate Maduro. “With Maduro there is more persecution than ever,” she told TIME. Next on the government’s list appears to be Julio Borges, an opposition party coordinator. The government requested a probe into his alleged conspiracies against Maduro this week. “Every year there are elections but this is the first time the government is up with a political crisis of this magnitude,” Borges told TIME. “In Venezuela everyone is scared—including the government.”

Maduro has remained tough. “Every fascist has his day,” the president said on Ledezma’s arrest. And he still has some support. As he completed a crossword on a park bench in the wealthy La Castellana area of Caracas, Emilio Neumann backed the government’s stance. “Lopez and Ledezma are exactly where they deserve to be, behind bars,” said the 69-year-old public administrator. “After calling so many people to the streets and committing who knows how many murders.”

President Maduro must hope, if he is to see out the next couple of years, that he can persuade people like Neumann to stay on side. To do this he must turn the country’s economy around, though with three official exchange rates as well as a black market on the dollar — with a spread between the highest and lowest of them of some 3,400 per cent — it is becoming increasingly difficult to do so. Pragmatic moves such as consolidating those exchange rates or raising the price of gas, currently the world’s lowest at just a few cents per tank, are politically dangerous especially when Chavistas are turning away from Maduro.

TIME energy

Paranoia and Purges For Venezuela As Oil Misery Continues

A man waves a Venezuelan flag during a protest against the government of President Nicolas Maduro in San Cristobal, Venezuela, on Feb. 22, 2014.
Luis Robayo—Getty Images A man waves a Venezuelan flag during a protest against the government of President Nicolas Maduro in San Cristobal, Venezuela, on Feb. 22, 2014.

Rather than using its earnings to develop more fields, the state-owned PDVSA has been diverting money for political and social projects

As the finances of Venezuela continue to deteriorate under the collapse of crude oil prices, the government of President Nicolas Maduro is becoming more paranoid and vindictive.

Venezuela derives the vast majority of its export earnings from sending oil overseas. With the largest endowment of crude oil reserves in the world, the oil-driven economy worked well for the late Hugo Chavez: he provided generous support for the poor, and built allies in the western hemisphere by dispensing cash and cheap oil in exchange for political allegiance.

But state-owned PDVSA has struggled to keep production up. Rather than using its earnings to develop more fields, much of its earnings have been diverted for political and social projects. Chavez also purged PDVSA of thousands of experienced workers, leaving the company short of well-trained staff.

Chavez could paper over the decay of PDVSA’s production base because oil prices were so high in his final years. And for the first year or so of Maduro’s tenure, while the economy began showing worse signs of stress, he too didn’t feel any urgency to solve PDVSA’s problems.

Read more: Oil Price Crash: Top 5 At-Risk Countries

However, the utter bust in oil markets pulled the rug out from beneath the Venezuelan economy. Inflation is running at an annual rate of 68 percent. Shortages of food and medical supplies are common. Shoppers at grocery stores need to submit finger prints to ensure they are not purchasing more than their allotted amount of basic goods. A confusing set of varying exchange rates and currency controls are doing very little to slow capital flight.

Maduro is cracking down on political opponents as the country deals with the economic crisis. Antonio Ledezma, the Mayor of Caracas, was arrested on Feb. 20 on charges of conspiracy and working with the U.S. to stage a coup, touching off a wave of protest. Last year, in the wake of the unprecedented riots facing the “Bolivarian” regime, Leopoldo Lopez was also tossed in jail. Dozens of other perceived political enemies remain locked up. A teenager was shot and killed at an anti-government rally on Feb. 24. Maduro’s government was quick to blame the police officer – as if security forces have not been encouraged from above to take a hard line with opposition protests over the last few years.

Maduro’s pronouncements have become more paranoid as the economy has worsened. He has accused Vice President Joe Biden of being the mastermind behind a plot to oust him from power, and questioned whether President Obama was aware of that fact. On Feb. 2 President Maduro had the head of a major retail chain arrested for conspiring against the state by creating long lines at store locations that Maduro said was “irritating the people.”

Read more: Could Venezuela Become World’s Next Energy Giant?

Maduro continues to rely on assertions that food shortages, economic hardships, and even violence are the result of American plots, a claim that has worked in the past but is becoming an increasingly tired line of argument for many Venezuelans.

The only hope for Maduro is a dramatic rise in oil prices, which could provide a reprieve from the economic crisis he finds himself in. He has pled with Saudi Arabia and other OPEC members to slash production to boost prices, but to no avail. He even went hat in hand to China for financial assistance, with only modest pledges from Chinese President Xi Jingping.

The economic situation may only grow worse. The government’s budget breaks even with oil prices at an estimated $117.50 per barrel. Inflation could rise to an eye-popping 100 percent in 2015, and GDP could fall by as much as 7 percent. The government will likely see a shortage of foreign exchange of at least $7 to $8 billion this year. Gauging the credit default swap market, investors are betting that the chances of a default over the next five years are a near certainty.

With no imminent rebound in sight for oil prices, Maduro is resorting to state-sponsored repression to quell growing opposition.

This article originally appeared on Oilprice.com.

More from Oilprice.com:

TIME

Here Are the Absurd Prices of 9 Items That Help Explain the Venezuela Crisis

People line up outside a state-run Bicentenario supermarket in Caracas, Jan. 9, 2015.
Jorge Silva—Reuters People line up outside a state-run Bicentenario supermarket in Caracas, Jan. 9, 2015.

From $800 sneakers to $31 Value Meals, here's a compilation of some of the most exorbitant prices.

Nowhere else has the collapse of oil prices has taken a higher toll than on Venezuela, where crude provides 95 percent of the country’s export revenue. Already facing recession, Venezuela is on the brink of economic collapse.

As that revenue dried up, the country has been thrown deeper into economic turmoil under President Nicolas Maduro. The economy is expected to contract by 7 percent this year, inflation soared to 69 percent—the highest in the world—and shortages of goods have forced shoppers to line up for hours at supermarkets to buy basic foods and products. The situation descended into the surreal earlier this week when the Prime Minister of neighboring Trinidad & Tobago proposed exchanging Venezuelan oil for Trinidadian tissue paper.

Meanwhile, the confluence of short supplies and government currency restrictions has distorted prices so much that some items are entirely inaccessible for Venezuelans who don’t have access to dollars—which is most of the country. Earlier this month, Bloomberg News reported that a 36-pack of Trojan condoms was available for 4,700 bolivars on the auction website, MercadoLibre, used by Venezuelans to obtain scarce good. According to the official exchange rate, that would amount to roughly $755. (According to the black-market rate for people with dollars, it would be closer to $25, Bloomberg reported.)

To check up on prices, TIME scanned the MercadoLibre auction site and and the crowd-sourced website Expatistan.com, which lists costs of various goods in stores. Here’s a compilation of some of the most exorbitant prices when converted into dollars according to the official exchange rate:

iPhone 5, in original box: $11,433

Rawlings Baseball Glove: $1,809

Nike Free: $796

Dog Food (3 KG): $288

Levi’s 501 Jeans: $405

Nescafe (170 grams): $232

Fast Food Combo Meal: $31

Laundry Detergent (100 Ounces): $31

12 Eggs: $10

TIME Venezuela

Opposition Mayor of Caracas Apparently Arrested

Venezuela Mayor Arrested
Ariana Cubillos—AP Mitzy Capriles de Ledezma, the wife of Caracas Mayor Antonio Ledezma, chants for the release of her husband in Caracas, Venezuela, Thursday, Feb. 19, 2015.

Reports of the arrest set off protests around the city

(CARACAS, Venezuela) — Men in camouflage uniforms smashed into the office of Caracas Mayor Antonio Ledezma on Thursday and carried the opposition figure away. An aide said some of the officers wore the uniform of the national intelligence service police.

Reports of the arrest set off protests around the city, where people spontaneously banged pots from their windows or tapped rhythms on their car horns amid rush hour traffic. Hundreds gathered in front of the headquarters of the intelligence service police to vent their anger.

The government did not respond to calls seeking confirmation of the arrest and it was unclear what the mayor would be charged with. Last week, President Nicolas Maduro named Ledezma among a laundry list of government critics and Western powers he accused of plotting a coup to bring down the South American country’s socialist government.

Tensions have been running high in Venezuela this week, with the one-year anniversary of anti-government street protests that rocked the country and resulted in more than 40 deaths. The government arrested several other mayors and former mayors during last year’s unrest, including Leopoldo Lopez, who is considered by human rights groups as Latin America’s most high-profile political prisoner.

Ledezma has long opposed the socialist leadership and a hunger strike he staged after federal authorities stripped his office of most duties made him a symbol for what the opposition calls the government’s efforts to punish elected officials who do not fall in line.

His arrest was captured on surveillance video. Men in black and gray camouflage can be seen pushing the middle-aged politician from the building.

A member of Ledezma’s security team, who was not authorized to give his name, said 10 men wearing the uniform of Venezuela’s national intelligence service entered the building carrying guns and a hatchet. They used their weapons to break the door to Ledezma’s office, and then a dozen other men, wearing masks, came in and dragged the mayor away, he said.

Members of the 59 year-old mayor’s team gave statements Thursday night amid the shattered glass of the office’s front door. The rest of the office looked untouched.

Hector Urgelles, a spokesman for Ledezma’s party, the Fearless People’s Alliance, told The Associated Press that the uniformed men did not identify themselves or give a reason for the arrest.

Urgelles said the party assumed Ledezma was being held by the national intelligence service in Caracas, but had no way to know for sure.

A tweet posted on Ledezma’s Twitter account earlier said his office was full of government police. An hour later, Assemblyman Ismael Garcia wrote on Twitter that Ledezma was carried off “like a dog.”

Ledezma won election in 2008, beating a member of the socialist party led by the late President Hugo Chavez.

The ruling party subsequently transferred nearly all of Ledezma’s powers, including control of police and schools, to a newly created government entity. Ledezma responded by accusing the government of marginalizing elected officials and staged a hunger strike that drew international attention.

TIME Venezuela

Dangerous Work, Low Pay for Venezuela Bodyguards

In this Sept. 17, 2014 photo, Julio Delgado instructs fellow bodyguards in a training session in Maracay, Venezuela
Ariana Cubillos—AP Julio Delgado instructs fellow bodyguards in a training session in Maracay, Venezuela, Sept. 17, 2014

“This is an ungrateful profession that leaves you with scars”

(CARACAS) — Julio Delgado spends his days in his employer’s armored SUVs and fortified mansion. Each night, he returns to his concrete home outside the capital, where he lives exposed to Venezuela’s stew of violence.

Delgado, who directs security for the family of a powerful automobile importer, is among the private bodyguards who are becoming more common — and increasingly targeted — as Venezuela is hit by an epidemic of crime.

With the country’s oil-based economy crumbling, the number of poor is growing, as is the gap between those barely scraping by and the wealthy who hire guards to protect themselves from thieves and kidnappers.

Guards like Delgado make a precarious living. Both on the job and off, bodyguards now are forced to take greater risks to guard their employers and also to protect themselves from bandits who covet their weapons and vehicles.

In 2014, more than 100 government-affiliated bodyguards were killed in Caracas, according to a tally kept by a major newspaper. The dead included at least six members of Venezuela’s presidential guard, most slain in apparent robberies gone wrong. The bodyguard of Venezuela’s first lady was among them. Many more bodyguards already have been killed in 2015, including the men guarding a governor, a minister and a mayor.

“This is an ungrateful profession that leaves you with scars,” he said.

The 36-year-old Delgado came close to being among last year’s fatalities. One night while riding his motorcycle home, he got into a rolling gun battle with bandits eager to grab his gun and means of transportation. He escaped, but was badly injured in the fight.

Guards with steady jobs, albeit modest salaries, are seen as relatively well-off by thieves.

Delgado, for one, earns $250 a month, twice what an average bodyguard might earn and six times more than a Venezuelan working for minimum wage. The salary enabled him to leave the hillside shantytown where he grew up and move with his wife into a concrete home in the village below. His neighborhood of steep, broken streets is dotted with makeshift shacks. The threat of robbery is pervasive; iron bars guard windows even on the third stories.

He tells no one he’s a security guard. Neighbors, he said, believe he’s a hairdresser with a salon in Caracas. Training is done in private, sparring with an old pair of car tires where no one can see.

“There’s a price for coming down from the slums,” says Delgados’ wife, Yurmi. “People are envious.”

Soaring crime has given Venezuela the second-highest homicide rate in the world, outside of a warzone, according to the United Nations. It’s also increased the demand for guards like Delgado, and helped them gain legitimacy.

Venezuela’s wealthy increasingly have turned to private guards as public police forces have proven to be inept or corrupt. Venezuelan officials have said publicly that 20 percent of the country’s crimes are committed by police.

When he started out 15 years ago, guards were called “lavaperros,” or dog washers, after the menial chores they were expected to perform. Delgado says nearly all of his bosses have been “vagabundos” — deadbeats, ordering him to clean the pool, scrub the patio or run to the pharmacy.

Delgado has been an advocate for his profession. He teaches classes for fellow bodyguards, and a few years ago, helped found an association of security workers that lobbies for improving their standing and protections, mostly their right to bear arms. Venezuela banned the sale of guns for everyone but police and some security companies in 2012.

But problems within the guard ranks remain. Delgado estimates a quarter of his colleagues commit violent crimes in their off hours to make up for their meager salaries. In October, the country was scandalized when a young congressman was found slain in his home, allegedly by his own bodyguards.

Meanwhile, crimes against guards have become so common one of Venezuela’s most popular websites dedicated a section to cataloguing the slayings of high-profile bodyguards.

As the risk of his profession has grown, Delgado has come to rely on the fatalism that reigns in this country where virtually everyone has been touched by violence. Matter-of-factly, he recalled the many colleagues who have been killed, leaving their wives as widows.

“I’ve always told myself, ‘When the moment comes, I’ll go with Papa Dios,'” he said, referring to God. “That’s helped me be brave.”

As he spoke, his wife sat on their couch, staring off into a painting of a colonial landscape, pressing her teal-colored plastic fingernails into her palms.

“Living like this uses you up,” she said. “Maybe, one day, God will guide him into another kind of work.”

TIME Economy

5 Plunging Numbers That Explain the World This Week

Greek Prime Minister Alexis Tsipras looks on before swearing in ceremony of the new deputies that were elected in the January 25 national polls, in Athens, Feb. 5,2015.
Yannis Behrakis—EPA Greek Prime Minister Alexis Tsipras in Athens, Feb. 5,2015.

From Greek bond rates to Indonesian approval numbers, these figures tell the story of an unstable world

With spiraling oil prices, crumbling economies, weakened leaders, and intensifying violence in Ukraine and the Middle East, we’re experiencing unusual volatility in markets and geopolitics. Here are five falling numbers that have broad-reaching implications.

1. Down to 1.38%

There’s a huge difference between the current Greek crisis and previous cycles of panic: today bond markets are treating the Greek economy as an isolated patient, swatting away notions of contagion risk to other periphery countries. The numbers tell the story. In the wake of the anti-austerity party Syriza’s victory in Greek elections last month, Spain’s 10-year yield fell to new record-breaking lows, closing at a staggering 1.38% at one point last week. That means Spain can borrow at better rates than the thriving United States. Compare that to Greece’s 10-year yield, which shot above 11% in the days after Syriza took office.

(Source: Eurasia Group, Bloomberg Business: Spain, Greece)

2. -30% Approval

Expectations for Indonesia’s new president Joko Widodo were sky-high when he was elected last summer. (He even graced the cover of this publication in October with the headline “A New Hope.”) But his recent nominee for police chief is a former aide to party powerbroker and ex-president Megawati Sukarnoputri, raising concerns about her influence over the supposedly independent Joko. Just days after the announcement, police chief nominee was named as a suspect in a corruption probe. Joko’s decision to trim fuel subsidies in November was lauded by investors; after all, between 2009 and 2013, Indonesia spent more on such subsidies than it did on social welfare programs and infrastructure put together. But it’s no surprise that a hike in fuel prices didn’t go over as well with the general population. According to an opinion poll by LSI, Joko’s approval rating has dropped 30 points—from 72% in August to just 42% in January.

(Source: Wall Street Journal, The Economist, Financial Times)

3. -$58 per barrel

The price of Venezuelan oil collapsed from $96 in September to $38 last month. That’s not a good thing in a country where oil exports provide more than 95% of foreign exchange. Venezuela needs that hard currency—more than 70% of its consumer goods are imported. Things are getting bleaker. The International Monetary Fund predicts an economic contraction this year of as much as 7% of GDP. Inflation is over 60%. And an economic perk is coming under threat: Venezuelans enjoy the world’s cheapest gasoline, paying the heavily subsidized rate of roughly $0.06 per gallon. This provision costs the government more than $12 billion a year. In a recent speech, President Nicolas Maduro declared, “You can crucify me if you want, but there’s a need for us to go to a balanced price.” Given all the economic woes and the President’s tanking approval ratings, it’s definitely not the easiest time to rake back this subsidy.

(Brookings, New York Times, Wall Street Journal, Bloomberg, International Business Times)

4. -$500,000,000 in military aid

With ISIS rampaging across Iraq and Syria—and Houthi rebels seizing the capital of Yemen and pushing that country into civil war—Saudi Arabia is accelerating its plans to wall itself off from volatile neighbors. In September, the Saudis began construction on a 600-mile wall along the border with Iraq. To the south, they are strengthening fortifications to keep unwanted visitors from breaching the 1,060-mile border with Yemen. Border guards told a CNN correspondent that in just the last three months, they have stopped 42,000 people from crossing a 500-mile section of the border. It’s not just about security—it’s also economic. As of 2013, Saudi citizens represented just 43% of the country’s workers—and only some 15% of the private sector—with the rest consisting of foreign workers. With youth unemployment at around 40% in Yemen, many try to cross in search of work. But even as the spending spree on security continues, the Saudi Kingdom is halting most of its financial aid for Yemen, fearful it could fall into Houthi hands. According to a Yemeni official, the Saudis recently refused to pay $500 million earmarked for military aid.

(Newsweek, Reuters, Bloomberg, CNN, Al Arabiya News, Reuters, Wall Street Journal)

5. -$61,000,000,000 … and -16%

They’re the group of Russians best equipped to weather hard times, but that doesn’t mean they aren’t feeling the burn. In 2014, the 21 wealthiest people in Russia lost a combined $61 billion—a quarter of their net fortune. Those who aren’t losing money are removing it: 2014’s net outflows by companies and banks topped $150 billion. That’s more than double the 2013 figure, and shatters the old record from ’08, amidst the financial crisis. The IMF expects the Russian economy to contract 3.5% in 2015. At least Russians can express their dismay while drinking more affordable liquor: this week, Moscow passed a new measure cutting the minimum price of a bottle of vodka by 16%.

(Reuters, Businessweek, IMF, Washington Post)

 

TIME Venezuela

A 36-Pack of Condoms In Venezuela Now Costs $755 at Official Rates

Because of a near-defaulting economy, consumer goods such as condoms are scarce and hugely marked up

In Venezuela, a 36-pack of Trojan condoms now costs $755 at the official exchange rate. That’s the price being asked on the MercadoLibre website, where Venezuelans go to buy goods in short supply.

Compare that to a box in the U.S., which goes for $21.

The huge markup is due to the collapse in oil prices, which has had disastrous consequences in Venezuela, Bloomberg reports.

The South American country relies on crude-oil exports for 95% of its foreign-currency earnings and has seen a 60% fall in those exports over the past seven months.

As a result of the government’s policy of slashing imports to make up for the deficit, consumer goods have become scarce and expensive, and people are forced to queue for hours to get basic products such as meat, sugar, medicine and now contraceptives.

For those with access to American dollars, condoms can be bought on the black market for around $25. But this is only the lucky few.

The lack of access to contraceptives could deepen the country’s social problems. Venezuela has one of South America’s highest rates of HIV infection and teenage pregnancy. Because abortion is illegal, the disappearance of condoms and other forms of birth control like the pill may force more women to clandestine abortion clinics, increasing the risk of maternal deaths.

[Bloomberg]

TIME energy

Low Oil Prices Pushing Venezuela Towards Default

Venezuelan Foreign Minister Rafael Ramirez speaks to journalists ahead of the Organization of the Petroleum Exporting Countries in Vienna, Austria on Nov. 27, 2014.
SAMUEL KUBANI—AFP/Getty Images Venezuelan Foreign Minister Rafael Ramirez speaks to journalists ahead of the Organization of the Petroleum Exporting Countries in Vienna, Austria on Nov. 27, 2014.

Venezuela is particularly vulnerable as its economy depends on oil for 95 percent of its export revenue

Low oil prices are putting major oil producers in a squeeze. The Russian central bank has been forced to cough up foreign exchange in order to defend itself from a currency crisis. But it may be Venezuela that is the least prepared and most in danger of an economic freefall because of the dramatic decline in oil prices.

Venezuela is particularly vulnerable as its economy depends on oil for 95 percent of its export revenue. The economy was stagnant even when oil prices were in triple digit territory. In fact, the violent protests that broke out in Caracas in February 2014 occurred when oil prices were well over $100 per barrel. But mismanagement of the economy is not a new phenomenon – inflation-adjusted per capita GDP in Venezuela is 2 percent lower today compared to what it was in 1970.

However, the South American OPEC member saw its fortunes go from bad to worse when oil prices started to decline. In October, prominent Harvard economists Carmen Reinhart and Kenneth Rogoff predicted that Venezuela would most likely default on its bonds as a result of oil prices. And that was when Brent crude was trading above $80 per barrel. Since then, it has tumbled another 25 percent to $60 per barrel.

MORE Battered By Low Oil Prices, Venezuela Seeks Foreign Aid

The clouds are darkening around Caracas. According to the Wall Street Journal, credit-default swap prices indicate that Venezuela is facing a 61 percent chance of default within the next year. Even if they can avoid the worst in the short-term, the Venezuelan government has a 90 percent chance of defaulting over the next five years. Bloomberg pegs the chance of default at a much higher 97 percent by the end of 2015. These projections are significantly worse than the 50-50 chance the markets figured only two months ago.

Venezuela is in a much tougher position than some of its oil producing peers because its foreign reserves have fallen to dangerously low levels. Russia has had to sell off $80 billion in foreign exchange so far this year in order to keep the ruble from collapsing, but it still holds somewhere on the order of $400 billion in reserves that it can draw upon to weather the downturn. Venezuela, by comparison, may only have around $21 billion, the lowest level in years.

That leaves Venezuelan President Nicolas Maduro with very little firepower to stave off a bond market onslaught. Venezuelan bonds fell to their lowest level in 16 years in mid-December after Maduro ruled out a scrap of fuel subsidies. They now trade at less than 40 cents on the dollar.

Maduro says credit rating agencies – Fitch slashed Venezuela’s credit to CCC in mid-December – are waging a “vulgar, immoral blockade” on the country. But without a rebound in oil prices, Maduro has few options left to avoid an economic crisis.

Nevertheless, many market analysts think that default will be an option of last resort since doing so will inflict more pain than its worth. “The cost of defaulting is still too high relative to the benefits,” Carl Ross, an analyst at Grantham Mayo Van Otterloo & Co., told the Wall Street Journal in an interview. “Investors are expecting some sort of positive policy response that allows Venezuela to muddle through.”

MORE OPEC Calls For Widespread Production Cuts

Still, while Maduro may successfully steer the ship away from external default, that may be of little solace to the average Venezuelan. As economists Reinhart and Rogoff note, the Venezuelan government is “defaulting in numerous ways on its domestic residents already,” including failing to pay for pharmaceutical imports, food, and unpaid bills to airline companies.

Such domestic defaults also result in “deeper and longer-lasting recessions and much higher inflation” than from just external defaults alone, Reinhart and Rogoff say. In other words, Venezuela is already facing an economic crisis, it is now just a question of how bad it gets.

This is why Venezuela was pressing OPEC members – Saudi Arabia in particular – to cut oil production so that prices would rise. But, on December 21, OPEC affirmed once again that it will not cut production and will instead let the market sort itself out. That, no doubt, is not welcome news in Caracas.

This post originally appeared on OilPrice.com.

Read more from Oilprice.com:

TIME Cuba

How Venezuela’s Collapse Helped Thaw Cuban-American Relations

Cuba's President Raul Castro shakes hands with Venezuela's President Nicolas Maduro during the opening session of the 10th ALBA alliance summit in Havana
© Enrique de la Osa / Reuters—REUTERS From Left: Cuba's President Raul Castro shakes hands with Venezuela's President Nicolas Maduro during the opening session of the 10th ALBA alliance summit in Havana on Dec. 14, 2014.

The late Venezuelan President Hugo Chavez helped keep the Cuban regime propped up, but that's not possible in an era of low oil prices

“We have two presidents: Fidel Castro and Hugo Chávez,” declared Cuba’s then Vice President Carlos Lage in a visit to Caracas just under a decade ago. A couple of years later, in Havana, then Venezuelan President Hugo Chávez added, “At heart, we are just one government.”

It is likely not a coincidence that talks between the United States and Cuba—which culminated yesterday in an announcement that the two countries would begin to resume full diplomatic relations—began just after the death the former Venezuelan president who had bankrolled Cuba’s Revolution.

Today a beleaguered Venezuela no longer has the spare cash to fund the island’s beleaguered economy. The Castros likely realized this as Chávez’s presidency was coming to an end and were not keen for a return to the scarcity of the euphemistically titled Special Period of the 1990s, after the collapse of Cuba’s first patron, the Soviet Union. “We had nothing, no food and no money,” one elderly man told me in Havana not long ago. The Cuban economy contracted 35 percent between 1989 and 1993, and oil imports decreased 90 percent. Cuba was in desperate need of money.

Chávez, then a nascent politician on the make in Venezuela, saw Castro as a political mentor, a simpatico ally against the elites and imperialists who he blamed for the world’s ills. Chávez also oversaw some of the world’s largest oil reserves. Venezuela currently sends almost 100,000 barrels per day of oil to the island—more than half of Cuba’s consumption—as well as aid thought to be worth in total between $5 billion and $15 billion a year, or some 15% of Cuba’s GDP. (More precise figures are hard to come by given the opacity of both governments.)

But Chávez is dead, and today Venezuela’s economy is in tatters, exacerbated by a fall in the price of oil, which provides 96% of Venezuela’s foreign revenue. The country’s local currency on the black market has fallen 35% in the last month; annual inflation is at more than 60% and there is serious talk of default on Wall Street. Many economists are talking of a “perfect storm” brewing for current Venezuelan President Nicolas Maduro, whose approval ratings have fallen to the mid-twenties.

The lack of guaranteed support from Caracas would have made Cuban President Raúl Castro “much more eager to negotiate and given the U.S. leverage,” said Ted Henken, President of the Association for the Study of the Cuban Economy and author of several books on Cuba.

As Havana makes peace with Washington, Venezuelan authorities are left increasingly isolated. While Cuba and Venezuela held onto leftist principles, other countries in the region have in recent years taken more pragmatic policy decisions. “Obama has pulled the rug out from under Maduro,” said Christopher Sabatini, Senior Director of Policy at the Council of the Americas. “It’s going to be a lot easier for other U.S. allies in the region to swing away from Venezuela.”

In the last couple of weeks, in response to sanctions by Washington on top Venezuelan officials for alleged human rights abuses, Maduro has rallied against the U.S. “It shows a lack of respect!” boomed the mustachioed president to a few thousand supporters in Caracas on Dec. 15. “They can shove their US visas.” On Wednesday, though, Maduro praised Obama’s “gesture” towards Cuba. “How sad it is to have a government who 72 hours ago launched an anti-imperialist diatribe against Obama and now describes him as ‘courageous,’” said Jesús Torrealba, head of Venezuela’s opposition coalition.

Cuba learned its lessons from the Special Period and in recent years began to diversify. On the ground, rules have been loosened on private restaurants, guesthouses and the buying and selling of property. Cubans are even allowed Internet access, though only about 5 percent of the country can reach the Web. On a more global scale, international investors have come in; the Scarabeo 9 oil rig sailed into the Florida Straits in January 2012. It was Chinese-built, Italian-owned, and was to be used by Spanish, Norwegian and Indian firms, among others.

Cuba was likely well aware those small reforms would not be enough in the long run. There are a mixture of elements that have come together to allow this historic moment: from Obama and Cuban President Raúl Castro themselves to mediators in the Vatican and Canada. Yet, the unwitting spur for the restoration of relations between the U.S. and Cuba may be Hugo Chávez himself, and the inability of his successors to manage Venezuela’s economy.

TIME Venezuela

Venezuelan President Calls Obama’s Outreach to Cuba ‘Courageous’

Venezuela's President Nicolas Maduro gestures during the Southern Common Market (MERCOSUR) trade bloc annual presidential 47th summit in Parana
Enrique Marcarian—Reuters Venezuela's President Nicolás Maduro, right, gestures during the Southern Common Market trade bloc's annual presidential 47th summit in Paraná, Argentina, on Dec. 17, 2014

Cuba’s staunch Latin American ally approves of the renewal of diplomatic relations between the old foes

U.S. President Barack Obama’s decision to normalize relations with Cuba was nothing short of “courageous,” according to Venezuelan President Nicolás Maduro.

Following dual announcements in Washington and Havana on Wednesday, the Venezuelan head of state openly lauded the new chapter in American-Cuba relations during a trade summit in Argentina’s southern city of Paraná.

“You have to recognize the gesture of Barack Obama, a gesture that is courageous and necessary,” said Maduro, according to Reuters.

Caracas has been one of the most outspoken supporters of Cuba since late President Hugo Chávez first rose to power in the country during the late 1990s.

[Reuters]

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