By Kristopher Klein
The collapse of OPEC may have been averted, but look out for political turmoil across its struggling member states.
Venezuelan President Nicolas Maduro recently toured OPEC member states as well as Russia to urge a cut in output. His tenacity has waned, however, as Saudi Arabia remains staunchly in favor of maintaining production. With the cut in production off the table, Maduro has shifted focus to political repression and shying away from economic reforms.
A few weeks have gone by since I published an article on how the sudden decline in oil prices was making oil export-dependent governments nervous about their annual budgets. When governments of oil-dependent nations write their budgets for the year, they typically base these off of a predicted price for their oil exports. The decline in prices has shredded the budget of Venezuela specifically, which assumed a $60 per barrel price for the year.
It was expected that the national governments of OPEC member states might react to budgetary woes by demanding that OPEC cut output or threaten to leave the cartel. However, that was not to be and the politicians of Venezuela would now rather resort to temporary fixes and political distractions than real economic reform.
Last week I watched with both dismay and amazement at the sheer audacity of Venezuelan President Nicolas Maduro as he had a chief opposition politician, the mayor of Venezuela’s capital city Caracas, hauled away to prison under allegations of supporting an American plot to take over the government.
Venezuela’s socialist elite has accepted that they will most likely fail to convince OPEC to act in order to change the price of oil, and has instead opted to short-change the people of Venezuela. The regime’s strategy is to make do with what OPEC hands them and maintain power by limiting the political alternatives of Venezuelans in an attempt to distract them from the reality of Venezuela’s damaged economy.
The tactic of drumming up foreign policy woes to take attention away from a flailing domestic economy is alive and well in politics. Maduro suppresses social unrest by portraying himself as a fearless protector of the Bolivarian legacy against the evil North American machine, like his predecessor Hugo Chavez. By accusing an opposition politician of plotting to help Americans overthrow the regime, Maduro gets rid of a prominent political opponent and keeps the Venezuelan people checking over their shoulders for the gringo conspiracy.
Prospect of Needed Economic Reforms Fading
The real problem this political turmoil presents is the death of any possibility of real economic reform. The introduction of economic reforms requires the government to feel secure enough in its political and financial position to implement reforms. Also, some social willingness to sacrifice for the reforms in the short term is necessary. Furthermore, reforms take time so a country needs an opposition willing to sit on its hands for at least a short while rather than charging incompetency if reforms do not immediately produce noticeably positive results. Venezuela seems to meet none of these requirements.
Late last year Maduro removed Rafael Ramirez from office, president of Venezuela’s state-owned petroleum company PDVSA and vice president for the economy. Before his removal Ramirez advocated for unifying Venezuela’s multiple exchange rates into one.
In Venezuela, importers of essentials like food and medicine can buy U.S. dollars from the government at a rate of 6.3 bolivares fuertes (Bf.) per dollar. Importers of other goods can buy dollars at a rate of 11 Bf. per dollar. Private exchanges used to sell dollars for around 50 Bf. per dollar, but have now been replaced by a free-floating exchange rate that trades at around 175 Bf. per dollar. There is also a substantial black market for dollars that sells at around 79 Bf. per dollar.
Ramirez wanted to unify these multiple exchange rates into one exchange rate that would be free-floating and make some goods more expensive for Venezuelans to buy in the short term. This of course would have cost Maduro some political support with the Venezuelan people, so naturally Ramirez had to be removed from his politically powerful positions involving oil and the economy.
Maduro’s government seems to be quite anxious about its current situation, something that does not bode well for the prospect of endorsing bold economic reforms. Venezuela’s Parliamentary elections in December 2015 make the likelihood of the government producing reforms even less likely. In the meantime they will try to implement some moderate reforms like introducing one free-floating currency but leaving the others as is. As Venezuela runs out of foreign currency reserve, they will also have to seek money to keep the entire system running until after elections.
Cap-in-Hand to the Richest Strongman of Them All
Nicolas Maduro recently made a trip to Beijing to secure investment from who has become the world’s most magnanimous dictator, Xi Jinping. The investments made by China, in effect, prevent reform from occurring in Venezuela.
The Maduro government stands in the way of reforms that many economists see as necessary for Venezuela to unlock sustained economic growth. Perhaps it would be the universe’s way of demanding reforms if the Venezuelan government were to run out of cash. They would be forced to accept conditions of economic reform placed on loans from the IMF or World Bank or risk being replaced at the polls by a government willing to reform.
However this near-inevitability has been avoided by China’s political involvements in the region. In January, China agreed to invest $20 billion in Venezuela to help counteract the effects of the collapse in oil prices. The $20 billion in investment is a lifeline for the Maduro regime and possibly all it needed to avoid having to make politically painful reforms. By providing the Venezuelan government with investments without first stipulating conditions of reform, China has essentially nixed an opportunity to push the Venezuelan government toward economic reform. This is not, however, the first time China has prevented reform in Venezuela.
Since 2007, China has extended credit to the Venezuelan regime to the tune of $50 billion. The tactic of offering loans and investment to a Latin American regime struggling with Western countries over loan conditions seems to work for China politically. Loans and investments will help China cement its relationship with a nation strategically placed in the Western hemisphere. However, in the end, China’s strategy loses money that it could have made if those investments were enhanced by a better market climate, one that would also bring the Venezuelan people faster economic growth.
It is unlikely that the current regime will seriously tackle economic reform or begin to improve the tense political situation in the country. More moderate politics could help underpin global confidence in Venezuela’s legal system, a must for sustained economic growth in a country with a relatively small economic market. For now all the rest of the world, and the people of Venezuela, can do is to hope for a change of heart from the Maduro regime after this year’s parliamentary elections in December.
Image by Alex Lanz