To make it through 2015 without going into crippling default, Venezuela must break promises that made it possible for late-President Hugo Chavez to build a strong relationship with Latin American and Caribbean nations largely forgotten by the Obama Administration.
And for the US, this an opportunity to get back in the game.
The fundamental promise Venezuela must break is a program called Petrocaribe.
The initiative sold Venezuelan oil to countries like Jamaica and the Dominican Republic at rock-bottom prices with almost no interest. It’s part of what led countries that don’t share the ideals of Venezuela’s unique brand of socialism to call Hugo Chavez and current President Nicolas Maduro friends.
Venezuela can’t afford this anymore. The country’s inflation rate has soared to over 60%, people wait in line for days to find basic goods like milk and toilet paper, President Maduro’s approval rating has collapsed to below 30%, and his opposition — though fragmented — is still taking to the streets.
The culprit for Venezuela’s woes is economic mismanagement as much as it is falling oil prices.
Shuffling cash from here to there
While oil makes up 95% of the country’s exports and over 60% of its revenue, Venezuela has done nothing to solve these problems.
What it has done, however, is delay disaster by moving some money around and asking for a little help from the friends Chavez made. For example, the Dominican Republic managed to throw Venezuela some cash by selling debt it owed Venezuela to Goldman Sachs.
“Venezuela has managed to increase reserves year-to-date despite the collapse in oil prices,” Barclays bank wrote in a recent report. “Considering the average oil price of about $US55/b (Brent) in the first two months of the year, we estimate that Venezuela could have registered a deficit on its cash flow close to $US2.0bn per month.
“Reserves have increased $US2.2bn YTD, due to the payment of the debt that the Dominican Republic had with Venezuela under the Petrocaribe agreement ($US1.9bn) and the issuance of Citgo debt ($US2.5bn).”
Now Venezuela only needs $US22.6 billion to keep everything going in 2015, down from $US33 billion. Consequently, Wall Street traders are now measuring Venezuela’s default risk at a mere 55% rather than 85%.
Of course, the money Venezuela raised was supposed to be used to pay for other debt coming due later this year, Barclays pointed out. So come October/November there will be another fire sale — that is, another round of broken promises.
Not the best timing for Maduro
That’s unfortunate timing for Maduro and his party, who face nail-biter elections this fall (the date has not yet been set).
“The available polls show that the opposition coalition MUD is ahead by a wide margin… This could place the
National Assembly under the control of the opposition,” say analysts at HSBC. “In fact, with all the rising social tension, the date of the election is not even clear, and it might even be postponed.”
If that happens, Venezuela’s opposition will almost certainly take to the streets again. And since Maduro has shorn up his support in the army by paying soldiers more than anyone else, the horrific images that have been beaming around the world since the winter of 2014 are likely to filter out of the country at a steady clip.
These are the images that led the Obama administration to make the (arguable) mistake of naming 7 high level security officials threats to the US. Maduro took that and ran with it, calling it a direct attack on Venezuela’s sovereignty — never mind that no more sanctions have been placed on the state.
Now we have Maduro in full anti US imperialism mode — a mode that can only help him in his own country where anti-US sentiment is high. This is when you see Venezuelan Kindergartners drawing anti-Obama pictures in classrooms (you gotta start them young on the Bolivaran Revolution). Maduro has also used this as a excuse to spend dwindling state funds on weapons of Russia and China.
It’s time for Obama to be very charming
The US opportunity in all of this starts on April 10th, when President Obama will travel to the Summit of the Americas in Panama.
There, he could do two things.
First, he should issue a big clarification, according to former US ambassador to Venezuela Patrick Duddy.
“The United States should remind regional governments that the current U.S. sanctions target individuals, not the country as a whole,” Duddy wrote for the Council of Foreign Relations. “US officials should stress that the United States remains the largest market for Venezuelan oil and has sought to avoid measures that would impose greater hardship on the Venezuelan people.”
Then he should make some friends himself. Back in January, Vice President Joe Biden led a meeting of the Caribbean Energy Security Initiative, where he laid a bit of groundwork for that while discussing energy Independence.
“The… combination of…low oil prices, plus the plummeting costs of renewable energy gives us a moment, a window here where we will get significant support from the American public because we are doing better to invest more overseas and overseas is just across the water into the Caribbean,” said Biden. “We are in a position that I think we should understand there’s a sense of urgency that we take advantage of the opportunities.”
It was urgent then. and it’s even more urgent now.