The defect in Venezuelan economy led to its dependence on oil.
Venezuela is currently experiencing one of this century’s worst economic crises largely attributed to former President Hugo Chávez’s populist policies which led to hyperinflation, shortages and rampant crime. Beginning in late 90s, Chávez’s inept policies carried forward by his successor Nicolás Maduro has led to a crisis that is estimated to be worse than the Great Depression in US or of Russia and Cuba after the fall of the Soviet Union. The average person in Venezuela has lost 11 kilograms in body weight in the past year — and about 90% of the population live in acute poverty. The cause of this crisis can be traced to Venezuela’s highest traded commodity: oil.
Oil is the backbone of Venezuelan economy. It has the largest oil reserves on Earth. About 90% of its exports is comprised of oil and it could have produced 6-7 million barrels per day, more than 8 times it produces now, had it taken ample advantage of oil pricing in 2002-2014. Unfortunately, the country’s oil export declined largely due to oil policies of Hugo Chávez between 1999 and 2013. He also fired half of the employees of the government owned petroleum company Petróleos de Venezuela, SA (PDVSA).
He renegotiated deals with foreign companies which led to companies like ConocoPhillips and ExxonMobil withdrawing from the country. Due to Chávez’s strategies, the PDVSA ran into a massive debt. The defect in Venezuelan economy led to its dependence on oil — leading to the worst case of Dutch Disease in modern history.
Javier Corrales in Foreign Policy says that Dutch Disease occurs when a country that is excessively dependent on commodity exports experiences a price boom resulting in sudden inflow of foreign currency that raises the demand for local currency, yielding an noncompetitive exchange rate. This overvalued exchange rate, if unaddressed, can kill the country’s other exports as well as stimulating an avalanche of imports, which can hurt domestic producers.
While Dutch Disease in not new in the history of the county, the onset of this effect in the 2000s was catastrophic to the socio-economic conditions of the country. Chávez’s spending to social programmes did not leave enough reserves to absorb the shock of Dutch Disease leading to massive government debt and shortages.
This article discusses the importance of Venezuelan oil in terms of four key players; US, China, Russia and India. Putting emphasis on America’s quest to establish normalcy in the country, discussing stakes of China and Russia and understanding how India factors in.
Venezuela and Colombia oil production, 2013–18
Source: OPEC (2019), OPEC Secondary Sources; US Energy Information Administration (2018). Adapted from Rodríguez (2018).Referred to as the “silver bullet” of US foreign policy, the US government has been imposing economic sanctions on many countries and Venezuela is no different. US imposed financial sanctions on the country as well as PDVSA, effectively restraining the company from procuring long-term credit in the US and also restricting dividends from CITGO, the company’s refining subsidiary in the United States.
US further imposed targeted sanctions as Executive Order 13692 and Kingpin Act over 40 Venezuelan citizens including President Nicolás Maduro, Vice President Tareck Zaidan El Aissami Maddah holding them responsible for human rights violations, money laundering amongst other crimes. The European Union and Canada have followed US, imposing sanctions on 20 Venezuelans. The European Union has frozen the assets of Venezuelan officials accused of abuses during the anti-government protests in 2017.
The sanctions have had a disastrous effect on the quality of human life in Venezuela. The National Survery on Living Conditions (ENCOVI is its acronym in Spanish) stipulates that there has been a 31 per cent increase in mortality rate of the country implying that there have been 40,000 deaths that can be directly or indirectly be attributed to the economic sanctions. The sanctions imposed by the Trump administration’s sanctions violate articles of the OAS Charter with US directly interfering with Venezuela’s internal affairs.
In March 2019, Venezuela experienced mass blackouts which was caused by a major malfunction at Guri Dam. The Venezuelan Government held the US government responsible for these blackouts but the blame was largely put on Maduro and the lack of technical experts at the dam.
But, in 2010 Wiki Leaks released a memo which claimed that Srdja Popovic, the founder of an US funded pro-democracy soft power organisation Center for Applied Non-Violent Action and Strategies (CANVAS) stated that “a key to Chávez’s current weakness is the decline in the electricity sector.” He cited that the Guri Dam could play a crucial friction point in crippling the government. And in March 2019, Popovic’s vision came to life almost line by line. Juan Guaidó declared himself President of Venezuela after a call from Mike Pence the Vice-President of USA. Guaidó and his army of young activists were trained by CANVAS to overthrow the Venezuelan government. It is very evident that US is trying its level best immobilise Maduro and establish a Venezuelan government that suits its needs.
China and Russia can potentially save Venezuela with a lifeline. But as of now, both the countries are reluctant to do so. China has refused to extend credit exposure to Venezuela in the last couple of years but has shown pliability on repayments of debt. Venezuela debt to China amounts to almost $25 billion, to be repaid using oil shipments.
About 33,000 b/d shipments were sent to China in 2017, but only a fraction of this oil was used to repay the loans. China’s advertent gaze towards Latin America is twofold: to acquire market access and procure raw materials and the other is to expand the Chinese influence. Which is why China chose to stand by Maduro as opposed to other western nations who were quick to declare Juan Guaidó as the legitimate leader of Venezuela.
Russia’s foreign policy towards Venezuela is a model of Putin’s vision to create a multipolar and anti-US new world order. Russia’s relationship with Venezuela has witnessed precarious multi-million dollar investments and also vast corruption. They have financed PDVSA but it will be hard for the Russian government to continue divulging resources to Venezuela as it owes almost $3 billion dollars to Russia and additional $5 billion to Rosneft, the largest oil producing company in Russia. Russia and China may continually show interest in Venezuelan oil sector in the case of a full scale default or more sanctions.
Venezuela has been diverting its oil exports to India amidst the increasing number of sanctions being put on it. In the past, bilateral talks between the two nations have been held between Chávez and the then President of India, Dr. A.P.J. Abdul Kalam. Indian and Venezuelan officials have been meeting to sign MoUs and bilateral accords for the better part of the last decade.
According to Refinitiv Eikon data, Reliance Industries and Nayara Energy have been selling fuels to Venezuela from Europe and India to evade sanctions that US companies that prohibit companies based in US from doing business with PDVSA. India was in talks with Venezuela to discuss its proposition to use Rupee for trade payments in order to safeguard oil imports that are facing US sanctions.
India has continually refused to recognise Juan Guaidó as the legitimate leader of Venezuela. Spokesperson of Ministry of External Affairs Raveesh Kumar has stated: “We are of the view that it is for the people of Venezuela to find political solution to resolve their differences through constructive dialogue and discussion without resorting to violence.” He further commented: “We believe in democracy, peace and security in Venezuela are of paramount importance for the progress and prosperity of that country.” Venezuela was India’s 4th largest oil supplier before India decided to halt its oil import from Venezuela in March 2019 due to pressure from the US which has adversely affected the India economy.
US Secretary of State Mike Pompeo has extolled India for taking stand on Venezuela and ensures that India will continue to have sufficient supply of oil, redirecting its supply towards Tehran. But if US does not execute this promise, India’s economy could suffer a grave blow.
India has to step its policy up in the context of its relations and loyalty towards the US in a way that it does not harm its own national interest.
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