- March 31, 2018
- Posted by: Marc Babel
- Category: Business Risk, Economics, Latin America, Venezuela
Lynx Fellow Jon Vreede
By any standard, the conditions in Venezuela are catastrophic. An economic downturn caused by low oil prices has led to astronomical hyperinflation that the IMF predicts will surpass 2300% in 2018. This has led to widespread shortages of food, medicine and other basic goods, and prompted 500,000 Venezuelans to flee their country since 2016 alone. Meanwhile President Nicolas Maduro continues to consolidate power in his own hands, sideling the opposition-controlled legislature with a supranational National Constituent Assembly (Asamblea Nacional Constituyente or ANC) dominated by his supporters that can overrule laws and alter the constitution at will, and compliant judicial and electoral authorities that can deliver favorable results in court and at the ballot box. The result has been a full-on crisis which has done irreparable harm to the average Venezuelan and encourages firms like Lynx Global Intelligence to advise its clients to avoid the country at all costs. Yet despite the clear peril and hardship, the situation continues unchanged; a pattern which will likely continue. So long as President Maduro and his loyalists retain control over the armed forces and continue to receive outside financial support, Venezuela will remain trapped in a grinding stalemate.
Maduro’s most powerful tool for maintaining the status quo is Venezeula’s military: the National Bolivarian Armed Forces (Fuerza Armada Nactional Bolivariana or FANB). True, Maduro has many options in his arsenal for maintaining power. However, none of these authorities have any really importance without the cooperation of the FANB, the police and other security forces; after all, the laws are only relevant if there is someone to enforce them. Both Maduro and the opposition are keenly aware of this fact, which is why the Speaker of the opposition-controlled National Assembly appealed to the military in 2017 to remove Maduro in the name of preserving the constitution. When it comes to winning over the military however, Maduro and his supporters clearly have the upper hand. Maduro and his predecessor, Hugo Chavez, both promoted an active role for the military in partnering with civil authorities to run the government; a trend which has only continued in the teeth of Venezuela’s severe economic crisis. Now, current and former military officers control half of the cabinet seats, as well as food distribution and the management of state-owned oil company PdVSA which provides about 95% of the hard currency in Venezuela. Control over these services provides ample opportunity for corruption, as well as access to scarce food and goods. As Phil Gunson with the non-governmental organization International Crisis Group put it, “If you are a general and play by the rules you can make a lot of money”. A mixture of corruption and careful selection of officers keeps the military loyal to Maduro, and as long this loyalty endures, Maduro can play games like continuously shuffling election dates and proposing a cryptocurrency to end inflation. These gimmicks do not solve the problem but do prolong his stay in power by dividing the opposition while not threatening military prerogatives.
Venezuela also does not operate in a vacuum; there are international players who support Maduro’s regime and allow him to delay the day of financial reckoning, which could spell the end of his rule. The Venezuelan government still needs money to operate, and historically this money came from debt which is largely held by Russia and China. In addition to these bonds, both countries also have significant investment in Venezuela and its valuable oil fields, and thus have a vested interest in keeping Maduro in place so that the subsequent regime does not threaten these investments. The most active financial supporter is Russia. In November 2017, after S&P declared Venezuela to be in “selective default” for failing to make payments on its debts, Russia prevented Venezuela from spiraling into a full-blown default by renegotiating the terms of those debts so Maduro need only “… make “minimal” payments to Moscow in the next six years”. While China’s patience for extending further loans to Caracas appears to be exhausted, Beijing provided providing more subtle support in staving off default in 2017 by declaring that “Venezuela was capable of handing the debt issue ‘appropriately’”. With this overt and rhetorical support, Maduro can avoid a default, which would deepen the hardships facing Venezuelans and provide a renewed boost to the opposition. Thus, Russia and China play a key role in allowing the status quo to continue.
Provided that the military continues to back the Maduro regime and Russia and China continue to provide international financial cover, the humanitarian crisis in Venezuela will continue. In the long-run, this situation could easily change. There are only so many inducements Maduro can offer the FANB before shortages of food and medicine begin to dent the military’s morale, and the patience of Moscow and Beijing is not inexhaustible. However, this tipping point may not be reached for years. In the meantime, the Venezuelan people will suffer, while the risks involved drive economic relief away.
 Chandran, Nyshka. “Venezuelan Refugee Crisis Could Eclipse Syria’s, Economist Predicts”. CNBC. February 19, 2018. https://www.cnbc.com/2018/02/19/venezuela-refugee-crisis-could-be-worse-than-syria-economist.html.