Hugo’s Revenge

The current political and economic situation in the Bolivarian Republic of Venezuela has reached a precipitous point. The possibility of a catastrophic state collapse is a threat that the United States Government must prepare for in the near-term. Instability in Venezuela threatens American interests in the region and could lead to further unrest throughout the Western Hemisphere. American policymakers cannot afford to ignore an unfolding crisis right in its backyard. In March 2015, President Obama issued an executive order declaring a national emergency “with respect to the unusual and extraordinary threat to the national security and foreign policy of the United States posed by the situation in Venezuela”.

The United States and Venezuela have not had full diplomatic representation since 2008 when U.S. Ambassador Patrick Duddy was expelled, with Washington in turn expelling the Venezuelan envoy. In response to President Obama’s March 2015 executive order and sanctions against key government individuals, Venezuela has demanded reduction of the U.S. Embassy to 17 staff members, from 100 at the facility. Despite the political bickering, commercial ties between the two states remain important. The U.S. is Venezuela’s top trading partner and Venezuela is the fourth largest supplier of crude oil to the U.S. The current political and economic crisis puts this commercial relationship in jeopardy. Additionally, the foreign policy of the United States places the highest importance in the promotion of democracy and the defense of human rights. Both of these ideals are suffering in Venezuela. This estimate predicts that these foreign policy objectives will be challenged in three primary areas: Civil Unrest, Leadership Change, and Regional Instability.

A number of factors have combined to produce a “perfect storm” that has the potential to inundate the Venezuelan state into a period of crisis not seen since the 1980’s oil glut:

Political Developments:

• Following the death of President Hugo Chavez, President Nicholas Maduro has attempted to continue the tradition of “Chavismo”, a domestic brand of Socialism, which entails financing a range of social programs with the intent to reduce poverty and inequality. These programs depend on Venezuela’s vast oil reserves, which account for greater than 90% of the country’s export revenue. President Maduro has also continued the legacy of his predecessor by imprisoning vocal opposition leaders, arresting thousands of protesters and blaming Venezuela’s problems on “economic war” conducted by an “imperialist” United States and domestic “parasitic bourgeoisie”.

• In the December 2015 elections, a coalition of opposition parties won a majority of the seats in the National Assembly for the first time since 1999. This victory sets the stage for a political showdown between the legislative and executive branches of government. The opposition parties in control of the National Assembly have vowed to enact a sweeping agenda of reform, which have been met by disapproval from President Maduro and his supporters. Hardline members of the National Assembly have proposed a presidential recall referendum that is likely to gain traction through 2016.

Key Economic Factors:

• The Venezuelan economy is currently suffering from a severe recession. The IMF forecasts the economy will contract by at least 8% in 2016. Despite having the world’s largest proven oil reserves, plunging oil prices have severely damaged the Venezuelan economy. Venezuela needs petroleum prices of $111 a barrel in order to balance its budget. The price of benchmark Brent Crude is hovering at just above $30 at the time of writing. It is difficult to predict future price fluctuations, but it is unlikely that any near-term price increase could alleviate the damage that has already been done.

Inflation in the last quarter of 2015 reportedly leapt to more than 140% and continues to rise. The government is not forthcoming with key economic data and the rate of inflation is likely much higher than publicly available information states. A high rate of inflation not only deters foreign investment, but exacerbates domestic social problems. Currency and price controls have led to severe shortages in consumer goods, from staple food items to pharmaceuticals. Basic services in urban areas such as trash collection, electricity and water have broken down.

• It is expected that Venezuela will default on its debt. The country is essentially bankrupt. This will be the biggest sovereign debt default in Latin America since Argentina defaulted in 2001. Due to low oil prices, Venezuela would need to use 90% of oil export revenue to meet debt obligations to local and foreign creditors. The government will be unable to maintain its generous social programs, fund necessary services, and pay government wages, causing further deterioration to civil society. According to Forbes, the Venezuelan government has been increasing taxes on foreign firms to help bolster this shortfall. American companies with significant investments in Venezuela, such as Goodyear Tire & Rubber, American Airlines, Ford and Pepsi have been unable to repatriate their profits and are beginning to close operations and leave the country.

Blueprint for the Collapse

Civil Unrest — Despite being blocked by the National Assembly, the Venezuelan Supreme Court granted President Maduro’s January 14, 2016 decree declaring a state of economic emergency. The President now has 60 days to enact policy to stabilize the economy.

The full extent of Maduro’s plan is currently unknown; however it is unlikely that even the most extreme measures will do much to set the economy in the right direction. It is believed that Maduro’s policy will involve more government control and is likely to be unpopular among the population. One of the first actions taken was to reduce subsidies on domestic fuel consumption. Similar actions in February 1989 were a primary cause of the “Caracazo” riots.

The situation in 1989 is remarkably similar to the crisis currently unfolding in Venezuela. A fall in oil prices and a debt crisis caused the government to reduce social spending and state-sponsored subsidies. The resulting protests soon spiraled into riots and a severe crackdown by security forces. Hundreds were reportedly killed. Civil unrest is boiling just under the surface in 2016 and the possibility of another occurrence of mass rioting is likely should economic prospects not improve in the next few months.

In addition to economic troubles, numerous other social factors are further exacerbating the populations’ anger. In urban areas, crime and murder rates are the highest in the world. Rural areas are experiencing severe drought conditions due to this year’s strong El Nino weather pattern. The population is also being tested by fears of an outbreak of the Zika virus, blaming the government for a lack of transparency regarding the number of people being infected and a lack of proper medical services. All of these factors combined, present a formula that could cause civil society to explode with violence, mainly directed at the government. It is expected that the government will respond in kind, with further repressive measures and human rights abuses. Government supporters may be called to action with inflammatory declarations intended to blame the crisis on “imperialist” subversion thus placing American business interests and diplomatic facilities in the line of fire during the unrest.

Leadership Change — Throughout all of this, it is unclear if President Maduro will be able to hold on to power. The National Assembly may fast-track the presidential recall referendum. Should the opposition play this card, it can be expected that President Maduro will incite the support of radical members of the population to action, and furthermore, become unpredictable in ordering executive decisions that could create further instability.

Behind the scenes, Venezuelan politics is heavily dominated by the military. General Vladimir Padrino Lopez, Venezuela’s defense minister and armed forces chief, recently declared his loyalty to Maduro, stating that the military was unwavering in its support for the President. Many top military officers have grown wealthy during the Chavez era, while the majority of the armed forces faces the same economic troubles as the rest of the population. It is within the realm of possibility that factionalism may develop within the armed forces, as top officers try to advantageously position themselves as capital begins to dry up in the “political marketplace”. Analysts, such as those at Stratfor, believe that a military coup is unlikely at this point, but cannot be ruled out. Regardless of the method of leadership change, there is potential that the transition will not be seamless and violence will play a role as factions position themselves within the new regime.

Regional Instability — As the situation in Venezuela deteriorates, it is likely that neighboring states in the region may experience fallout from the crisis. If internal security conditions become unstable, citizens of Venezuela may attempt to flee to neighboring states, creating a refugee and humanitarian crisis much like what is currently underway in Europe. The Venezuelan government may attempt to close its borders to prevent mass migration, or to stop what they may perceive as “foreign conspirators” from entering their territory.

Venezuela has played a major role in peace negotiations between the Colombian government and the rebel group, FARC. A stable Venezuela is an essential element to bringing Colombia’s internal conflict to an end. Should these diplomatic efforts fail, renewed violence in Colombia may be a result. This would lead to the failure of a major foreign policy goal of the United States Government. Venezuela is already a major transshipment point for illicit narcotics trafficking. Instability within Venezuela is to the advantage of drug cartels who may find increased complicity with members of the Venezuelan military and security forces who may wish to supplement their income, or lack thereof, if the government can no longer pay salaries.

In the longer term, should President Maduro hold on to power, or be replaced by a junta, there is a potential threat that Venezuela may act out aggressively in order to show that they are still a significant regional military power. In May 2015, Exxon Mobil along with the Guyanese government announced the discovery of a large reserve of oil in waters off the coast of a territory disputed with Venezuela. The territory, known as Guayana Esquiba, is also rich in minerals such as gold and is a valuable site for hydroelectric projects. Venezuela has previously been accused of positioning military forces along the Guyanese border. For similar reasons to the Iraqi invasion of Kuwait in 1990, Venezuela may attempt to seize or create instability in this territory. It is unclear if the Venezuelan armed forces are capable of attacking and holding the territory on a conventional level, however a hybrid style of warfare may pose an easier option, with the promotion of paramilitary forces to harass foreign development projects who have been granted concessions by the Guyanese government to exploit the territories resources.

Recommendations

The United States Government must act now if it is interested in containing the crisis in Venezuela. Policymakers should take into consideration the rapid intensification of this crisis and its implications to American business interests and foreign policy goals should the situation become out of control. The following recommendations should be considered in order to prevent such a surprise:

• Despite demands to reduce the staff at the American embassy, operations should be maintained at their current level or increased if possible. Diplomatic outreach to members of the new majority coalition in the National Assembly should be a priority. It is unknown if President Maduro will hold on to power until the end of his term, but a plan should be developed to lessen the impact should this occur prematurely. In the event of the installation of a new government, allies within the National Assembly would be crucial to further American interests. Military attaches at the embassy should nurture relationships with their Venezuelan counterparts who will be essential during any transitional phase.

• Develop a plan to account for the loss of oil imports from Venezuela for a period of time. As the crisis in Venezuela intensifies in tandem with the ongoing crisis in the Middle East, the United States must be prepared for a period in which oil imports from all sources may be constrained due to unstable situations in these oil producing countries.

• Plans should also be developed with American businesses operating in Venezuela in non-oil sectors; in order to ensure the safety of their personnel, investments and assets should the situation deteriorate further.

• Work with regional allies such as Colombia, Brazil and Guyana, to ensure that the crisis does not spill over into their territories. Increased participation in the Colombia peace talks would be necessary to guarantee they do not fall off track. Increased tempo in drug interdiction operating in the Caribbean region will also be necessary, should a power vacuum in Venezuela contribute to an increase in narcotics trafficking.

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