Jan 30, 2017
Sooner than expected, the Kremlin could be forced to reassess its economic cooperation with crisis-torn Venezuela as the situation there rapidly deteriorates.
An escalating political crisis in Venezuela at the same time as the nation is experiencing a profound economic crisis raises the question of whether Russia should continue to prop up this Latin American country. In the beginning of 2017, the country’s opposition-minded parliament, the National Assembly, announced the impeachment of Venezuelan President Nicolas Maduro and called for snap presidential elections.
According to Julio Borges, the new leader of the Venezuelan parliament, President Maduro “almost resigned his position” because he was not able to cope with the very severe social and economic crisis in the country. However, Venezuela’s constitution doesn’t allow impeaching the president based only on the fact that the nation’s leader failed to tackle the economic crisis. That’s why the country’s Supreme Court didn’t approve Maduro’s resignation.
However, the very fact that the parliament tried to impeach the president indicates that the political and economic crises are severe, with more than three-quarters of Venezuelans disapproving of Maduro’s tenure and 93.6 percent viewing the country’s situation negatively. At the same time, about 22 percent believe that Maduro should leave.
As a well-known proverb suggests, when it rains, it pours. Likewise, Venezuela is faced with a series of problems at once, including a food deficit, skyrocketing inflation of 720 percent, freefalling GDP and a severe cut in production.
For instance, in November 2016 Venezuela – a country with a population of 30 million – sold only 236 cars. Yet, ten years earlier, it produced 12,000 cars per month, according to Jose Manuel Puente, an economist from the Institute of Advanced Studies in Administration in Caracas.
Venezuela’s key economic sector — oil production, which accounts for 96 percent of the country’s exports — is also facing a great number of challenges during the current downturn in oil prices. Amidst the crisis, the country decreased its output in an attempt to influence the falling prices, but this move only affected the county’s budget even more.
In the beginning of 2014, Venezuela produced 2.9 million barrels per day, but by November 2016, it had decreased oil output to 2.3 million barrels. But even that may be taking an optimistic view of things – some independent pundits speculate that the country produced less than two million barrels per day.
Venezuela’s old oil field in the western part of the country has been depleted, while the richest oil region, known as the Orinoco belt in the eastern part of the country, consists of extra heavy crude oil. Refining this oil requires millions of dollars, which the crisis-torn country badly needs. As a result, Venezuela has to import light oil from Algeria to mix with its extra heavy oil and then export the resulting hybrid oil.
And the inability of the authorities to resolve the challenges has resulted in a lot of skepticism among Russian experts as well, because the crisis in Venezuela poses a threat to Russian business interests.
Emil Dabagyan, a senior fellow at the Institute of Latin America at the Russian Academy of Sciences, compares Venezuela’s economy with the sinking of the Titanic. According to him, the country needs sweeping reforms and a new economic model. The task is monumental for Venezuela – it has “to decrease pressure on business,” encourage small and medium-sized entrepreneurs, alleviate the dominance of the state in the economy and restore the dialogue with the opposition.
Russia’s business interests might be affected not only by the incompetence of the Venezuelan authorities, but also by the trial initiated by U.S. company ConocoPhillips against Rosneft Trading S.A., a Swiss company that belongs to Russia’s biggest oil giant, Rosneft. The company was accused of fraudulent transfer of assets owned by Venezuela’s state-run company Petróleos de Venezuela (PDVSA).
Last year Rosneft supported PDVSA financially by cutting a deal worth $20 billion and investing in Venezuela’s energy facilities despite a great deal of risks. And only now Russia starts understanding that the prospects of investment in the country, faced with a severe economic and political crisis and seen as a pariah in the world, are murky at best.
Today Venezuela, once one of the richest oil countries, is on the verge of default. Even China, with its insatiable hunger for energy, seems to be shying away from investing in Venezuela’s weakening economy, even though it has made $60 billion in loans since 2008.
However, the economic and political plight of Venezuela is not the only reason that can hamper the joint projects of Moscow and Caracas. Despite the fact that Venezuela’s Supreme Court ruled that the National Assembly’s impeachment proceedings against Maduro were unlawful, the sword of Damocles is hanging over the current Venezuelan president. This means that Maduro might resign before the end of his presidential term, at least because of obvious reasons – he cannot deal with the crisis in a proper and timely manner. This seems obvious to Venezuela’s parliament and citizens.
If this happens, it would lead to the change of power in the country, with Venezuelan Vice President Tareck El Aissami becoming the successor to Maduro. But the problem is that the U.S. authorities view El Aissami as one of the major players in Venezuela’s drug trafficking, according to the Wall Street Journal.
Moreover, in 2009 U.S. authorities accused El Aissami, then Venezuela’a Interior Minister, of issuing passports to members of Hamas and Hezbollah, which are seen as terrorist organizations. El Aissami allegedly recruited young Venezuelan Arabs to train in Hezbollah camps in southern Lebanon, as indicated by the investigation of the Center to Secure Free Society’s Joseph Humire.
Thus, experts are concerned that El Aissami might be even worse than Maduro – he might turn Venezuela into a narco-state supporting international terrorism. This would have grave implications not only for Russia-Venezuela ties and the oil market, but also for the world.
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.