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Business Last Updated: Dec 6, 2018 - 11:55:11 AM


Potential Hot Spots: Chinese Republic Of Venezuela
By Strategy Page, December 4, 2018
Dec 6, 2018 - 11:54:08 AM

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Government control in Venezuelan is collapsing along with the economy and much else. At the end of 2018 GDP is down to about a third of what it was in 2013. It cannot fall much further because Chinese cash and technical assistance are keeping some oil production going. This is done because over 90 percent of oil produced goes to China or Russia to repay debts that were specifically made to be repaid with Venezuelan oil. China could take all of the oil production (Venezuela is currently several million barrels behind in repaying this debt) but China is aware that Venezuela requires some income so that the key government employees and security forces can be fed and otherwise compensated for their loyalty and service and encouraged to remain where they are.

Venezuela is literally falling apart. Many areas are being depopulated as over ten percent of the 2014 population has left and opinion surveys indicate over two-thirds of Venezuelans want to leave. Many more would leave if they had the means to reach the border. Those Venezuelans with education, skills and a little money have largely gone. The middle class and entrepreneurs were the first to go because they could. For most Venezuelans that is not an option and is even less so with the economic decline and the collapse of everything, including public transit, especially in rural areas.

President Maduro refuses to admit that his policies caused the mess. He blames it on foreign agents, saboteurs and agitators. Maduro also refuses to enact known (to work) solutions for the current crises. An obvious case in point is inflation. This condition is caused by printing money that is not backed by taxes or loans (in stable currencies). Venezuela then uses this worthless money to pay government employees, or those who provide goods for the government. Anyone using this inflated currency finds that the value keeps dropping because there is no economic activity in the country to generate goods and cash to ensure that prices for scarce goods do not spiral upward (or inflate).

Now Venezuela has hyperinflation (an inflation rate of over a million percent a year.) The only cure for hyperinflation is to base your currency on a stable foreign one (like the Chinese yuan) and live with the fact that you are broke and your currency is controlled by a foreign entity (the Bank of China). Maduro is not ready to accept reality yet. This despite the fact that he has been avoiding the inflation problem for years. The government food rations, which are supposed to be sold at a fixed price often have additional “transportation and handling” charged added. Sometimes a bribe is demanded. Everyone realizes the Venezuelan currency is worthless except Maduro (and some clueless aides) who have special stores that are kept well stocked. Even those special stores (something the Soviet Union adopted in the 1980s before the Soviet Union dissolved in 1991) are not enough because many senior officials see those stories as a sign of failure. A growing number of senior officials have already quietly sent their families overseas (usually to Spain where Spanish speaking South Americans can easily gain citizenship if they can prove their Spanish origins, which many upper-class Venezuelans can do). Now those senior officials are quietly joining their families overseas and doing so permanently.

The government finally changed its mind on accepting foreign aid in November and the UN is bringing in nine million dollars’ worth of aid to be administered by the UN (which does not want to be embarrassed by having most of the aid stolen. Many nations are willing to provide aid but the Venezuelan government insists there is no economic crises requiring such aid. The Venezuelan president continues to blame all the economic woes on the United States and corrupt Venezuelan business interests. There is no evidence for any of that but as long as Venezuela controls its borders aid is not getting in.

This has not prevented the Americans from sending a military hospital ship to a Colombian port near the Venezuelan border and a large refugee camp recently established for the flood of Venezuelans fleeing their own country. The hospital ship will stay into early 2019 and is treating thousands of Venezuelans a day. Venezuela has denounced this as a hostile act to hurt Venezuela. It does reflect poorly on the Venezuelan government but is much appreciated especially since most Venezuelans get daily reminders of how unhealthy their country has become. A major source of sickness in Venezuela is the lack of clean water. In the late 1990s 87 percent of Venezuelans had access to clean water, now 82 percent do not.

Senseless Violence Gets Organized

There has been an enormous increase in crime, both official (government employees demanding probes for any reason) and unofficial. Gangs are taking control of many areas, often despite opposition from the security forces. Some of these gangs are financed and controlled (or at least directed) by drug cartels moving cocaine to foreign markets via Venezuela (where access to commercial shipping and aviation is much easier if you can afford it).

The most disturbing development during 2018 was the quiet, but deliberate and aggressive move of Colombian leftist rebels (mainly the ELN) into southern Venezuela. The several thousand ELN invaders were well armed, combat experienced, wear uniforms, have a flag and are disciplined. Even the Venezuelan armed forces feared them, especially after several brutal demonstrations by ELN of who was more lethal. ELN was willing to make deals (in effect truces) with the Venezuelan security forces, who could go about their usual business (robbing the population in general and suppressing anti-government activity) while the ELN sought to take control over activities that were illegal but profitable (smuggling, illegal mines and anything drug related). So now two organized armed groups control southern Venezuela; the government security forces and the invading Colombian rebels. In normal times this would not happen but these are not normal times. For over a decade ELN and the much larger FARC had sanctuary agreements with Venezuela. As long as the Colombian rebels behaved, and made payments to Venezuelan officials, they were safe from the Colombian security forces. Over the last few years, the Venezuelan economy has collapsed and so has the ability of the security forces to deal with the invasion of a force like ELN. At the same time ELN had few options in Colombia and expanding into Venezuelan became a realistic plan.

In 2017 the Columbian armed forces had used the threat of ELN being the only target for air strikes (and increased ground efforts) to persuade ELN (a third the size of FARC) to negotiate a peace deal. The government had warned ELN that once the FARC peace deal was agreed to in 2016 and a ceasefire arranged the military would concentrate on ELN and that is what happened in 2018. This proved disastrous for ELN. Rather than risking such a continued confrontation ELN began its first joint (with the government) ceasefire in late 2017. Meanwhile, the FARC peace deal did work and FARC demobilized. But in early 2018 a newly elected Colombian president, who was more conservative than his predecessor (largely because many Colombians disagreed with the generous peace terms FARC got) took over and he had little patience for the ELN refusal to seriously negotiate. With the full attention of the Colombian security forces (who had, in fact, defeated the much larger FARC) the ELN found itself in big trouble. This was because ELN was always more “political” than FARC and many ELN leaders wanted to keep fighting the government. As 2018 went on it became obvious to ELN leaders that staying in Colombia and getting picked apart by the Colombian commandos, air power and the assistance of a largely anti-ELN Colombian population was not viable. Moving much of ELN to Venezuelan was a practical solution, so far.

The Feudal Solution

All the chaos in Venezuela will apparently not lead to another regional war, but it is a huge and disruptive mess for Venezuela and neighboring countries. What is replacing the government in Venezuela is a military dictatorship commanded by a small group of socialist politicians who have managed to maintain control over the major assets (oil production) while the rest of the economy collapses. Even with oil production increased there would still be a problem with the fact that the socialist government has destroyed the economy. That includes the oil industry, which was always state-owned (as PDVSA). For the last fifteen years, the government has fired most of the management and technical people in the oil industry and replaced them with loyal, but often unskilled (in running the oil company) socialists (or opportunists). In the first six months of 2018, production averaged about one million BPD (barrels per day) a historic low and continues to fall. In late 2016 production fell below two million BPD, a level not seen since 1989. From 1973 until 2017 production averaged over two million BPD and that level of production will not return until the state oil gets competent staff and lots of money for deferred maintenance and repairs.

The Oil production decline continues not so much because the government refuses to clean up the mess in the national oil company and production facilities but because it cannot figure out how to do it. To make matters worse the Venezuelan oil is exceptionally expensive to process for local or export use because it is “sour” and tar-like. That makes it more expensive to refine and Venezuela must blend its sour crude with imported “light” crude or other diluents (like naphtha) to make their crude oil suitable for foreign refineries. Venezuela is so short of cash that it is not paying for these diluent imports and suppliers are refusing to ship anymore unless they get paid. Same with many other essential services for the oil industry.

The Venezuelan government always believed that if they fix the damage they had done to the oil industry they could produce enough oil to solve all their economic problems. It’s not just being able to pump and ship oil that is needed. For oil wealth to somehow solve the problems oil prices must return to earlier (pre-2013) levels and stay there long enough for the Venezuelan oil facilities to be rehabilitated. That is urgent because oil production and shipping facilities are falling apart, mainly because technically competent managers and workers are not available. It has gotten so bad that more of the oil industry workers are dismantling the unused facilities and selling the parts on the black market or for scrap. The government has sent in lots of soldiers to protect the oil facilities (from external threats as well as dishonest employees) but many of the troops will take a bribe and the disintegration of the oil production infrastructure continues.

The well-run state oil company took nearly a decade of increasingly bad management to produce persistent declines in the ability to produce and ship oil. Venezuelan oil production hit a peak of 3.5 million BPD in 1999 when the current socialist government took power. By 2015 it was down 34 percent (to 2.654 million BPD) and by 2016 it fell to 2.373 million BPD. The production decline accelerated in 2017 and at the start of 2018 estimates were that production would fall to an average of 1.6 million BPD or less for all of 2018. It turned out to be less and given the accelerating collapse of the economy and PDVSA oil production could easily fall below a million BPD by the end of the year, and keep going down.

This reduction in oil income was made worse by socialist economic policies that destroyed the non-oil economy and eventually helped make it more difficult for the oil industry to revive production. The government has brought in some foreign contractors (mainly Chinese) to help repair the damage to the oil industry but the Chinese have discovered that the economic infrastructure, in general, is collapsing and operating in Venezuela is even more dangerous and difficult than in chaotic and violent parts of Africa, Southeast Asia and Afghanistan where the Chinese have succeeded (some of the time) to adapt to a violent neighborhood and minimal local infrastructure.

Compounding Venezuela’s production problems was the decline in oil prices. The world oil price for Venezuelan crude fell from $100 a barrel in 2010 to $35 a barrel in 2016. The price has recovered somewhat (to $50 a barrel in 2018), in part because Venezuelan production is declining and unreliable. If production does recover that would cause oil prices to decline unless other nations cut their shipments. The oil industry is a mess with much maintenance way behind schedule and equipment failures becoming more common. That means it costs more to get a barrel of oil out of the ground and onto a tanker. Worse Venezuelan oil sells for less because it is more expensive to refine. Oil profits (that all go to the government) are down to less than a quarter of what they were in 2010.

China is staying in Venezuela because its assistance for PDVSA operations gives China control of the main revenue producer in Venezuela. China feels that a more effective government will eventually emerge and allow businesses to operate efficiently (and profitably) once more. China is positioning itself as a friend of Venezuela, not the deranged socialist currently in charge. China is still working on many development projects in Venezuela and has plenty of experience doing so in lawless regions (especially Africa and northern Burma) it currently operates in. The situation in Venezuela is familiar to the Chinese and they expect to come out of this with strong economic ties to the post-chaos Venezuela.

Unwelcome But Likely Futures

Maduro feels he is safe from armed opposition because he has not tried to prevent emigration. He may have learned that from his Cuban security advisors who noted that when the communists took over in Cuba during the late 1950s they let the middle class and most of the professionals leave, mainly for the United States. That eliminated many of the people who could organize and lead a counterrevolution. But Venezuela today is different from Cuba back them. Some senior Maduro officials still believe they can turn it all around and do what Cuba did. But Cuba is an island and was able to create its stable dictatorship in a different time (the 1960s) because Russia was able to provide very professional and effective help in establishing a communist police state. Before the revolution, the Cuban market economy had made Cuba the wealthiest nation in the Caribbean. That was destroyed during the 1960s but the Russians provided large annual subsidies (oil, food and cash) to keep everyone fed and compliantly poor. Venezuela has access to none of that and, despite the huge oil reserves, is facing a catastrophic collapse. Venezuela has no wealthy and heavily armed patron. China has come, looked and said: “let’s talk.” Russia and Iran are broke and under heavy sanctions meaning that these two countries have their own problems obtaining needed equipment and tech to keep their oil exports going.

Given the success, Maduro had in suppressing any significant opposition he still has a problem with his senior officials and the thousands of “middle management” followers running the security forces and key state-owned enterprises (oil, power, communications and so on). A growing number of these people are quietly slipping away from Venezuela and Maduro. More worrisome are the Maduro officials who remain and quietly discuss their options. The most popular option is to replace Maduro with someone more effective in dealing with the economy and better able to make the most of the advice and experience Cuba, Russia, Iran and China have to offer. This would keep the “Bolivarian Socialist Republic” going using China as a model (a communist dictatorship with a complaint free market economy). The problem is Maduro and his cronies know about this and are still willing to kill to keep Maduro in power. The belief is that there is no other government (“Bolivarian”) official with the name recognition to pull off a coup. That is no accident because Maduro may be inept in many areas but so far his self-preservation skills have been up to the task. But as Venezuela slides more and more into mass starvation things will change and not for the better.

What Venezuela does have now is massive corruption, especially among the senior officials. There are a growing number of armed men (pro-government militias) and a growing number of criminal gangs that the government cannot afford to feed. Some of these gunmen are migrating and neighbors like Brazil and Colombia are noticing that and cracking down on illegal Venezuelan migrants in general. If there is a war in Venezuela it will likely be between the armed haves and the armed have-nots. Venezuela already has the highest crime (and murder) rate in the region (and perhaps the world). While some of the hungry gangsters and militiamen are migrating the neighbors are wise to this problem and violent migrants are not welcome and treated harshly when discovered. This is why Maduro is so obsessed with loyalty (even at the expense of competence). Over ten percent of Venezuelans had already left and Maduro plays down the extent of the migration. At the same time, he makes public appeals for skilled Venezuelans to “come home” and get a better job than “cleaning toilets” in a neighboring country. Few skilled migrants take Maduro up on that because the new out of Venezuela is that even having a good (well paying) job does not give you access to scarce basic goods.

The government refuses to deal with political opponents or acknowledge the fact that most Venezuelans would vote the current government out of office if they had the chance. The currency is worthless, most commercial enterprises have been driven out of business or simply shut down by the government. In GDP terms the economy is less than a third of what it was in 2013, when the crises accelerated because of falling oil prices and the death of Hugo Chavez, the charismatic founder of the Bolivarian Socialist state in Venezuela. The current GDP has most (about 90 percent of the population) with a smaller percentage share of GDP than in 2014. The government has do divert enough resources to the senior officials and the military to maintain control over the population. Maduro still refuses to accept foreign aid because he insists there is no need. Easy enough to say now that Maduro has eliminated elections and has a near monopoly on weapons.

The UN and all of the neighbors condemn Maduro but the international community is unwilling to do much more than that. Some South American nations have expressed a willingness to join in on sanctions. In part that is because it is no secret that millions of sick and hungry Venezuelans are preparing to flee to neighboring countries, mainly Colombia and Brazil. Many will find they cannot get to and across the border because of health or financial problems, but this demonstrates how desperate the situation has become.

International efforts to get the government to abide by the rules (of the original Venezuelan constitution and most of the voters) have failed. With the economy wrecked food is in short supply and the government controls most of what is available. In many parts of the country, the government supporters (mostly soldiers, police and members of pro-government militias) are sufficiently numerous to make locals do just about whatever Maduro wants.

Despite diverting most food and other consumer goods towards the security forces, that did not prevent a growing number of soldiers and policemen from complaining that their families were going hungry, often because one soldier or policemen was under pressure to help get food for his extended family and was unable to do so. Commanders are seeking solutions to this growing problem but there is no easy fix. What many commanders do is informally tolerate their subordinates stealing from any Venezuelans that can be seen as Maduro opponents, or simply having anything worth taking. This now includes most Venezuelans so there are plenty of potential victims. Commanders who are caught doing this often get away with it by explaining it is an effective way to reduce open opposition to the Maduro government. The new leadership of the security forces was selected mainly for loyalty not competence in military police work. The government is aware that a growing number of its military units are unreliable and is having a hard time keeping track of who can be trusted, who can be accommodated (make a deal with in an emergency) and who is becoming more of a liability. Disbanding disloyal units is difficult and can be devastating for the morale of the loyal troops who have to do the dirty work. So that sort of thing is avoided and untrustworthy units are slowly dismantled by starving them of resources. With more criminals and shrinking and less reliable security forces, Venezuela now has one of the highest crime rates in the world.

What with all the hunger and brutal treatment of protestors the military has tried to counter the bad effect of this on morale with media stories backing the government lies about the bad behavior being the work of foreign agents. But the military represents a larger and less well-off segment of the population and the average soldier cannot ignore the growing poverty and crime throughout the country. More and more commanders report that they are not sure most of their troops could be trusted to fire on angry civilians if there were widespread anti-government demonstrations the police could not handle. Since the economic problems went critical after 2014 thousands of people have been executed or killed during protests. Some commanders are apparently less willing to use that kind of force now, although it is increasingly difficult to get reliable data on such deaths. As long as Maduro can afford a secret police force to enforce discipline on the other security forces he is safe. That is why tracking down the cash Maduro and his supporters stole is so important. This is the real war but it is not the sort of thing mass media want to report. It is not exciting, forensic accounting never is unless you’re an accountant.

China Makes A Bet

China has approved a deal with Venezuela which allows a Chinese tech firm (ZDE) to develop an ID card that would include biometric information and also serve as a banking card (for private and government transactions.) Called the Venezuelan “Fatherland Card” it would be mandatory and essential for anyone working for the government or receiving government aid. China is the ideal supplier of the Fatherland Card because China has taken the lead in developing tech that provides a government with more intrusive and complete control of its citizens.

The details of Chinese financial dealings with Venezuela have become known because so many Venezuelan officials have left and provided information in return for sanctuary (and reducing or eliminating jail time for corruption and other crimes). China has paid several hundred million dollars in bribes to get the contracts for all these projects. China invests some of the money and much of the manpower required. Most of these investments have been energy (oil, gas and energy) related and even with the current economic collapse these are the projects that the government seeks to keep going. If anyone is going to keep the Venezuelan economy going it will be China. Losing over $30 billion in investments is seen as an acceptable risk given the potential payoff.

China is the only country willing to put up cash and personnel to fix the problem but that is mainly because Venezuela still owes China over billion dollars and most of it is supposed to be repaid in oil. China is not optimistic but apparently believes Maduro is desperate enough to give the Chinese a free hand to bring in their own engineers, management and skilled workers. Maduro may not agree with all the Chinese terms (like a priority in paying off Chinese debt via increased production and giving China a percentage of Venezuelan oil assets), but he has to realize that no one else is willing to do the job and there are few countries that can. China has already coerced Maduro to pay off most of the Chinese debt.

In mid-2018 China agreed to invest as much as $5 billion in an effort to repair and restore oil production but has only delivered about ten percent of that and more cash is dependent on how cooperative Maduro and his associates are. Apparently, China is not optimistic but sees the situation as worth a try. China has worked with a lot of dysfunctional governments and rulers worldwide and knows how to measure the odds. Venezuela appears to be a longshot, even though it has the largest oil reserves in the world.

Economists and those with experience in similar large-scale catastrophes in Africa note that what is left of the Venezuelan state could last another year or two. At that point, the country would dissolve into local fiefdoms who could ask for and receive foreign aid. But one unique thing about Venezuela is all that oil wealth, concentrated in the north, near the coast. That will also be up for grabs and that battle would involve a mélange of lawyers, bankers, diplomats and the risk that many of the oil facilities might literally go up in flames as chaos, no matter how brief, breaks out in areas where the oil and all the pumps, pipelines and port facilities are. However, this ends it won’t end well for Venezuelans. The Chinese Fatherland Card would make it easier for Maduro and China to control the key parts of Venezuela (the oilfields and the northern coast) and regulate who has access to the most valuable thing the country has.


Source:Ocnus.net 2018

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