April 17, 2014


Tuesday, December 3, 2013

Oil diplomacy dries up

By Joshua Goodman
Bloomberg news

CARACAS — Hugo Chávez’s dream of leveraging Venezuela’s oil wealth to spread revolution across Latin America is crumbling under the weight of an economic crisis that is forcing his hand-picked successor to cut back on generous foreign aid.

Signs of the country’s waning influence are becoming more apparent. In early November, Guatemala withdrew from the Petrocaribe oil alliance launched by Chávez, saying it didn’t receive the ultra-low financing rates it had been promised by Venezuela when it first sought to join the 18-nation pact in 2008. Also in recent weeks, representatives of Brazil and Colombia have held meetings with their Venezuelan counterparts to collect overdue payment for food, goods and other imports.

While Venezuela has fallen behind on payments before, the latest cash crunch is more severe.

The reason is a dependence on oil, which accounts for 95 percent of exports. Although Venezuela sits atop the world’s largest reserves, production has steadily declined in recent years. Global prices for crude are also lower as hydraulic fracturing technology boosts supplies in the US at a time that Europe’s economic woes and weaker growth in China limit global demand. The result is a haemorrhaging of Venezuela’s foreign currency reserves, which are down 27 percent this year.

To meet its obligations, the government is quietly scaling back the subsidies, investments and aid programmes that were the cornerstone of Chávez’s plan to curb the influence of the US “empire” in Latin America and that total an estimated US$100 billion since 1999.

While President Nicolás Maduro’s government has yet to acknowledge the shift toward austerity, central bank data show that foreign trade credits, consisting mainly of loans and subsidies under Petrocaribe, fell to US$1.7 billion in the first nine months of this year, compared with more than triple that amount for the same period last year.

“It’s a lot easier to reduce foreign aid than cut wages or fire workers,” said Bank of America-Merrill Lynch economist Francisco Rodriguez, .

The country most hurt by the pullback is Nicaragua, which receives US$600 million in annual transfers from Caracas. Starting next year, Daniel Ortega’s government will begin funding monthly US$30 “socialist” cash transfers to poor Nicaraguans that until now have been paid for by Venezuela. Construction of Central America’s largest oil refinery has also stalled as Venezuelan investment dries up.

Analysts said Venezuelans are now feeling the financial stresses that worsened seven months ago, after Maduro defeated Henrique Capriles by a razor-thin margin to succeed Chávez following his death from cancer. Faced with growing spending demands spurred by 54 percent inflation, the state agency that administers the nation’s dollars has been restricting access to hard currency to pay suppliers overseas. That’s pushed the value of the dollar in the black market to 10 times its official rate and led to record shortages of everything, even toilet paper.

Trading partners grew more concerned after the government proposed paying for imports with bonds issued by state-run oil company PDVSA. In October, Brazilian Trade Minister Fernando Pimentel met with Maduro to discuss the unpaid bills, according to an official who insisted on speaking anonymously.

The delays pose a much bigger risk for Panama and Colombia. Business in the Colon Free Zone adjacent to the Panama Canal is down about 10 percent this year, due to declining Venezuelan purchases, said Severo Sousa, who represents exporters in talks with the Venezuelan government. Sousa estimates Venezuela owes Panamanian companies about US$1 billion, of which only 10 percent has been recovered.

“The results of talks have been very limited,” said Sousa.

It’s not just less economic muscle that is freezing Venezuela’s outreach, said Carlos Romero, an international relations expert at the Central University of Venezuela. Maduro’s inability to replicate Chávez’s charisma and a rapprochement with the West by Iran and Syria are undermining the politics of confrontation that the late Venezuelan leader relished, Romero said.

Interventionist policies, like Maduro’s seizure of appliance stores last month, are also on the decline in much of Latin America. Even Communist Cuba, its staunchest ally, is opening up to more private investment.

Maduro’s conduct came as a big surprise to activists, academics and many in the international media who had sympathized with Chávez and were expecting moderation,” Romero said. “There’s greater scrutiny of his human rights record and economic policies, and that has repercussions on Venezuela’s international reputation.”

But Venezuela isn’t retreating into a hole. Maduro last month ordered the creation of a medical university in Venezuela to turn out doctors from around Latin America. He’ll present the proposal at this month’s summit in Caracas of the Bolivarian Alliance of nine leftist nations that includes Bolivia, Cuba and Ecuador.

And Maduro may have some reasons for hope. Oil production declines may soon bottom out as the government gives foreign companies a freer hand.

Last week, the government secured a US$1 billion loan from Russia’s Gazprom, bringing to almost US$10 billion the amount it has raised this year from foreign partners. Economists also expect Maduro to devalue the bolivar after this weekend’s mayoral elections, a move that would substantially reduce a deficit estimated by Bank of America at 11.5 percent of GDP.

A debt crisis also seems unlikely with Wall Street banks lining up to lend money. Even as Maduro accuses the US of conspiring to destabilize his government, the central bank is reportedly negotiating with Goldman Sachs a credit line using its sizeable gold reserves as collateral. The government has an extra cash cushion in an off-budget fund known as well as a strong lender in China, which in September wrote Maduro a check for $5 billion.

Still, the days of geopolitical chest thumping are a fast-fading memory. A sign of the times: Brazil’s Petrobras last month officially pulled the plug on a joint oil refinery with PDVSA after Venezuela failed to pay for its share of the project.

“It would be very difficult for Maduro to attempt anything as audacious again,” said Juan Gabriel Tokatlian, director of international relations at the Universidad Torcuato Di Tella in Buenos Aires, Argentina. “Latin America’s strategic options are changing rapidly, and they no longer pass through Caracas.”

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