Venezuela: Persistent Economic Damage

Summary

The Bush administration and Venezuelan opposition groups hope President Hugo Chavez will lose a recall referendum that could be held sometime after Chavez passes the midpoint of his term and, therefore, be forced to resign. However, even if he is voted out, Venezuela's economy will be so wrecked that the interim government would not be able to manage the crisis.

Analysis

U.S. Ambassador to Venezuela Charles Shapiro warned recently that democracy is endangered in that country. There is a "real danger" of violence, and economic problems are affecting the interests of other countries, including the United States and Venezuela's neighbors, Shapiro told Caracas daily El Nacional.

Despite these expressions of concern, the Bush administration does not plan to intervene in the political crisis under President Hugo Chavez, Stratfor sources in Washington say. Given that the Bolivarian Constitution allows a recall referendum after the midpoint of a six-year term -- Aug. 19, 2003, for Chavez -- some U.S. policymakers hope that Venezuelans will vote him out of office before this year is over.

However, Chavez has disappointed his opponents and critics in the past, and he is working to do so again. It is possible that the recall referendum might not come until late 2003 or early 2004 if Chavez uses his majority in the National Assembly -- and his influence over about half of the Supreme Court -- to block opposition efforts to gather and certify the signatures needed.

Chavez also is trying to win control of the National Electoral Council, the entity that would count and certify millions of voter signatures and oversee the referendum.

From the Chavez regime's perspective, a referendum is something that might come nine months to a year from now. Meanwhile, the president is moving rapidly to crush opposition in the private sector and oil industry.

More than 18,000 people have been fired at Petroleos de Venezuela -- nearly all of them highly trained managers, engineers, technicians and other professionals who could endanger the regime's stability by paralyzing the country's oil industry. PDVSA's operational capabilities have been destroyed, but the company's managers no longer threaten Chavez.

Chavez also is using economic policy in attempts to crack down on opposition within the private sector. All foreign exchange trading was suspended more than two months ago because the strike at PDVSA was depriving the treasury of billions of dollars in revenues and the Central Bank's foreign exchange reserves were in danger of being depleted. However, the suspension also hammered private manufacturers that rely heavily on imported inputs to produce consumer goods sold mostly in Venezuela.

Without access to U.S. dollars and other hard currencies, Venezuelan companies cannot pay their foreign suppliers and other creditors. Companies also have been cut off from international credit as a result of the trading ban. This situation also affects multinationals such as General Motors, which shut down its production lines in Venezuela and laid off hundreds of workers because it couldn't get dollars to pay its suppliers in other countries.

In addition to prohibiting foreign currency trading -- and drafting a law that punishes such trading with prison sentences of five years or more -- the regime has imposed price controls on an array of food and other consumer products, in some cases setting new retail prices that are lower than factory production costs. As a result, many manufacturers now lose money on every unit they produce and sell. As for newspapers, having no access to dollars means they will soon run out of newsprint and be forced to stop their presses.

Chavez also is leading a campaign to pressure the Central Bank to reduce interest rates, claiming that current lending rates -- which can range as high as 50 percent for some types of debt instruments such as credit cards -- are "unjustified and immoral." However, the regime has a practical reason for wanting reduced rates. The government plans to refinance the equivalent of more than $3 billion in domestic debt in 2003, and it wants to pay lower interest rates to get cheaper payment terms with banks. Planning Minister Felipe Perez suggested recently that a 25 percent interest rate on new government debt bonds was a fair rate that banks should accept.

The banks are over a barrel. Collectively, government debt bonds represent more than 30 percent of the banking system's loan portfolios at a time when private lending has dried up and outstanding loans are being collected only with great difficulty because of the economy's acute recession. If banks refuse to refinance the government's debt, one of two things easily could happen: either the government would force the banks to accept a lower rate and threaten them with intervention if they refuse, or the government would simply default and the country's private financial system would collapse.

Foreign creditors might not be spared either. Chavez recently said that the country's external debt, while low compared to that of other countries in the region, still was too heavy and would have to be restructured under more favorable terms.

The government has not approached its international creditors yet, and finance officials hastened to assure that the president's use of the word "restructure" in reference to the country's external debt had been misinterpreted. However, as the economic crisis worsens and PDVSA's revenues remain depressed, it's likely that the government will seek to open restructuring talks sometime in the next year.

A two-month national strike -- a failed attempt to oust Chavez -- cost the economy $7.3 billion, the National Assembly's Office of Economic Studies reported recently. Private economists in Caracas claim that the true costs of the strike could easily top $10 billion to date and that the tally continues to grow as Chavez seeks to rein in the opposition.

Venezuela's economy contracted nearly 9 percent in 2002, according to the Central Bank. The International Monetary Fund predicted last week that the economy likely would shrink another 15 percent in 2003, for a cumulative contraction of 25 percent in two consecutive years.

Unemployment estimates now range from the government's official estimate of 16 percent to high-end private sector estimates of 23 percent. However, government and private economists in Caracas do agree that more than 500,000 workers lost their jobs between December 2002 and mid-March 2003. Eight in 10 Venezuelans are living in poverty, and 40 percent of the populace lives in "extreme poverty" -- described as living on less than $1 a day and being unable to afford one meal a day.

Ultimately, the economic crisis is so severe, and likely to be so much more so within a year, that even if Chavez loses the referendum and is forced to resign, the interim president would not be able to manage the country's crisis.

Moreover, Chavez would not be barred from running in presidential elections at the end of 2006, which means that he likely would become a leading opposition critic of the interim government -- heapingblame upon an administration for failing to contain a crisis over which his own regime presided.

This scenario might seem unviable except for one thing: Venezuela's divided and leaderless political opposition has failed twice to oust Chavez: once in April 2002 when a military rebellion collapsed as its architects squabbled over power, and again when a national strike that began on Dec. 2, 2002, fizzled at the end of January.

As the political opposition looks toward the future, its various factions already are squabbling over whom they should choose and support as a presidential candidate in new elections. It is likely these rifts will persist and that many candidates will compete for the presidency, making it possible for Chavez to win again with less then 50 percent of the popular vote. After all, even the most recent polls show that Chavez individually is still more popular with some voters than any other potential rival.

Today I got an incredible e-mail with a letter to Exxon blasting them for helping Hugo Chávez and his régime. Here it is:

April 8, 2003

Dr. Lee Raymond
Chairman

ExxonMobil Corporation

225 E. John Carpenter Freeway

Irving, Texas 75062 Open Letter

Dear Dr. Raymond:

It has come to my attention that ExxonMobil Corporation is quietly sending in technicians to Venezuela, to help the government of Hugo Chavez

put the Amuay refinery back into full production. You have done this so quietly, that at this writing very few in Venezuela are aware of your efforts.

It is hard to believe that you would willingly do business with Ali Rodriguez, now president of Petroleos de Chavez, when in the 1960s he and his Cuban friends were blowing up oil pipelines in Venezuela --Creole Petroleum pipelines? Exxon is doing business with a company that under Chavez and Rodriguez has no transparency, is run by people with little knowledge of this complex industry, or education in petroleum industry standards or ethics. The only needed credential to work at Petroleos, now, is to be a Chavista. You would do well to visit PDVSA headquarters in Caracas, to see how the Military and the Chavistas have turned this once proud industry into a rabble of the uneducated, selling their wares in the halls of once spotless passageways. Pray tell, what do you hope to gain dealing with these people? Cash flow?

And if you thought you found an outlet to enter Venezuela under the radar screen, i.e., the old Technical Assistance contracts, I offer the following bit of history. In April 1975, a professional group of Venezuelan oilmen (trained in the traditions of Creole, Shell, Gulf and Mobil) delivered to the Energy Minister, The Diagnosis of the Transfer of Technology in the Petroleum Industry, 239 pages, with the longest chapter on refining, with Amuay representing nearly half of the total capacity. A direct result of the Diagnosis was the creation of Intevep in 1976 -- to help solve the problem of the expensive Technical Assistance Contracts (CATs) with former concessionaires: with Exxon, for example. Intevep, with its dedicated research team, established a premier oil research center in Los Teques, Venezuela, and as a result of their accomplishments, Petroleos de Venezuela (PDVSA) was able to terminate those expensive technical assistance contracts.

Tragically, Chavez has now destroyed Intevep, fired hundreds of Ph.D. and M.A. researchers; and under the guise of your old CAT, Exxon is now sending technicians back to Venezuela to restart your old, now highly upgraded by PDVSA, Amuay refinery. The irony here is mind-boggling!

Gente de Petroleo, trained in the traditions of the foreign oil companies that were in Venezuela, risked imprisonment, their lives, and their careers to support the Opposition -- the over 17,000 fired PDVSA employees -- are losing their homes, cannot pay their children's tuition, and have to accept charity from friends, in order to feed their families! They apparently

risked their all, so that Exxon and other foreign oil companies could de-nationalize Venezuela's petroleum industry!! Exxon's actions in the face of their valiant efforts is shocking.

Past Creole (Standard of Venezuela) presidents like Henry Linam, Art Proudfit, and Duke Haight, respected and loved in Venezuela, would surely be embarrassed and angry at Exxon's support of the Chavez regime. Your support should be known, and opposed, for helping an enemy of the U.S. and of Venezuelans. Chavez is an enemy, who daily becomes more bellicose in his denouncements of the United States; and every day is stronger in his support of Fidel Castro, and the Colombian FARC and ELN guerrillas.

Sincerely,

Emma Brossard, Ph.D.

Juno Beach, Fl.

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