COMMENT & ANALYSIS President Hugo Chavez’s forays outside of Venezuela’s borders and his policies at home have incited a great deal of interest among the readers of the Financial Times, both as a matter of regional curiosity and as a means to determine what political direction will Venezuela and Latin America be heading towards in the medium to long term. The large majority of the contributions to the debate dealt with both Chavez’s influence abroad and the domestic underpinnings of his political agenda. Given that Chavez’s regional integration platform is a direct offspring of his domestic social revolution, my answers will specifically address both.
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M. Alvarez suggested that we run the risk of minimizing the effects of Chavez’s foreign policy outside of Latin America. Venezuela’s budding partnerships with China and Russia provide, in Mr. Alvarez’s view, a clear indication of Chavez’s far-reaching influence.
Chavez’s influence however is as limited outside of Latin America as it is within the region, confined to specific commercial deals that have little hope of making much diplomatic headway. Chavez’s attempt to diversify exports away from the US and turn to China as the future primary destination of Venezuela’s crude exports perfectly illustrates this point. Venezuela has so far only just begun to export a mere 30,000 barrels per day of its cheaper trademark Orimulsion boiler fuel to China a full six months after a first memorandum of understanding was signed by both President Chavez and Chinese Premier Hu Jintao in January of this year.
Venezuela’s lack of direct access to the Pacific will make it extremely difficult for Venezuela to ramp up crude or derivative exports to China in a cost effective manner, forcing Chavez into selling crude at a heavy discount for China to later trade to any interested third parties at a profit. More importantly, China does not have the refining capabilities in place to process Venezuela’s sulphur-rich heavy crude, forcing Venezuela into a dependent relationship with the US until China or Venezuela build an adequate refining infrastructure. China is more likely using the possibility of establishing a long term trading arrangement as a means to gain preferential bidding access in Venezuela, capitalizing on Chavez’s desire to bring in friendly state national oil companies to help ramp up Venezuelan crude production in the future.
China’s presence in Venezuela is however limited so far, and informed purely by commercial interests. The chances that an imperfect commercial partnership could turn into a full-fledged diplomatic alliance are for the moment quite remote.
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Alexander Harper asked if Chavez could be looking to profit from Bolivia’s power vacuum and gain access to Bolivia’s vast natural gas reserves for further leverage in the region. If so, should foreign gas dependent nations like Argentina and Chile be concerned?
While much has been made of President Chavez’s efforts to support and counsel radical Bolivian leader Evo Morales and his Socialist Movement (MAS), Venezuela has little or no incentive to tap and exploit Bolivia’s natural gas reserves. Venezuela’s proven natural gas reserves, estimated at 148.9 trillion cubic feet, far outweigh Bolivia’s at 31.4 trillion cubic feet. Instead of looking abroad for natural gas, Venezuela has offered added incentives for oil companies to develop Venezuela’s own offshore natural gas fields in Plataforma Deltana and Rafael Urdaneta for the best part of last year. Furthermore, state oil company PDVSA has very few funds with which to invest abroad after diverting the large majority of its revenue base to sustain flagging production and finance Chavez’s infrastructure and social projects.
As Mr. Harper accurately indicated in his question, many of Bolivia’s erstwhile partners have already begun to look elsewhere for natural gas. Brazil, which traditionally imports up to 20 million cubic meters a day from Bolivia to satisfy internal demand, is looking to develop its shallow-water gas fields in the Santos Basin as an alternative supply source. Chile, which has recently been denied gas from Bolivia and Argentina, is looking to the Pacific for much needed liquefied natural gas (LNG). Despite its struggle to attract further investment and a general reluctance to raise gas tariffs, Argentina has been making every effort to ramp up domestic gas production. Several oil companies in Bolivia have also begun to look to Peru’s Camisea natural gas fields as a potential alternative investment destination, raising the possibility of partnering with Hunt Oil in a consortium to develop existing gas reserves and supply the regional and US LNG markets. Bolivia therefore risks losing relevance in the natural gas sector as pressures build to nationalize the hydrocarbons sector and drive out foreign investment.
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Moving on to Chavez’s domestic political agenda, Alberto Mejia questioned my decision to describe Chavez’s recent practices at home as “increasingly anti-democratic.” According to Mr. Mejia, Chavez is a legitimately elected leader confirmed in his post by former US President Jimmy Carter and the Organization of American States, who were invited to Caracas in August 2004 to monitor a controversial recall vote.
Chavez’s government is indeed a democratically elected government, with very little evidence to support that fraud was committed to win the recall referendum in August 2004.
However, his government has since the beginning of the year introduced measures that put into question President Chavez’s current democratic credentials. First among these is an ongoing judicial purge that has seen several dozen lower court judges disbarred all over the country with the help of the secret police (Disip). Venezuela’s judicial workers have been complaining again and again that no evaluation has been carried out to enforce these dismissals, which are set to continue until -- in the words of Supreme Court President Omar Mora Diez -- 80 percent of Venezuela’s provisional judges are disbarred.
Most recently, with the help of a new media law that bans any violent content or government slander from being disseminated in all media outlets, the government has effectively cut all coverage of anti-government demonstrations that could be considered violent and dramatically reduced the number of political shows that used to dominate TV programming in the morning. Several media commentators have been sentenced to time in prison for criticizing the government, and program sponsors face hefty bans for supporting these programs, effectively starving these programs of any funding. The only relative survivor has been Radio Caracas Television, which will reportedly risk a media ban thanks to the revenues its soap opera productions generate outside Venezuela. While the opposition-controlled media giants showed a strong bias against the government before the referendum, the government has corrected this bias by pushing the envelope of a free and democratic media.
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Manuel Wally suggested that many of President Hugo Chavez’s social programs set positive benchmarks and expectations for Latin America’s more “modest” governments and therefore should not be negatively branded.
While an effective, responsible social platform is more than welcome in a region plagued by chronic poverty and inequality, Chavez has gone about it in a very irresponsible way. Fiscal spending has increased by 39% over the last four years, and currently accounts for an estimated 30% of GDP. While record oil prices have permitted Venezuela to accumulate over $28bn in international reserves (equivalent to Venezuela’s external debt) and debt servicing costs are currently 20% of exports, fiscal spending growth has exceeded oil revenues and threatens to make the current situation unsustainable. Given that many of Venezuela’s present social spending commitments are locked in and bound to grow further as the government begins to tackle high-cost infrastructure projects, Venezuela’s negative fiscal balance is set to grow further as state oil company PDVSA struggles to ramp up oil production and foreign oil companies question their commitments in a scenario of creeping fiscal expropriation down the road. Given Venezuela’s new baseline level of social expectations, Chavez’s struggle to finance an aggressive social platform in the future could generate further instability in Venezuela.
Secondly, many of these programs have been financed through parastatal organizations known as “missions,” bypassing the government’s ministerial structure and producing no fiscal accounts to speak of. As a result, we don’t know the true value of these missions nor do we know where or how these resources have been allocated. Bar the announcement of symbolically strong literacy programs and rural mobile health care units, their overall impact has been questionable. Venezuela’s latest poverty indices in fact show a 10 percent increase in Venezuela’s poverty rate over the last 6 years.
Social programs can bring much needed benefits provided they are well structured, transparent and responsible.
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Kevin Murphy would like to know if Chavez is liable to expropriate assets, ramp up oil taxes and make further land grabs should oil prices fall substantially.
Oil prices, as Mr. Murphy is quick to point out, will determine how far Chavez will be willing to push his revolutionary agenda. With oil sales accounting for over 50% of the government’s income and production stagnant at 2.65 million barrels per day, the government will only be able to ramp up revenues through high prices and fiscal earnings.
Government officials in Caracas have already made a consistent effort to generate more fiscal revenues through tax hikes and hostile expropriations. Foreign oil companies are being pressured to convert all existing operating agreements to new joint ventures where PDVSA will hold a majority-controlling stake by the end of the year or face the risk of seeing their contracts revoked. Both service operators and investors in the heavy crude Orinoco belt reserves, which together account for 1.1 million barrels per day or 40% of total production, are facing higher royalties and income tax rates as the oil and energy ministry makes every effort to extract a more favourable deal. Non-metal mining companies and landholdings in the radical eastern states of Cojedes and Carabobo have also seen their titles revoked and will be replaced by state run cooperatives.
In a scenario of declining oil prices and shrinking government resources, the Chavez administration is more likely to continue squeezing the private sector for funding and consider more radical measures. Oil prices however should not necessarily collapse to trigger a radical response. As fiscal spending continues to increase at the present rate, oil prices only need to fall slightly for Venezuela to start facing a financing shortfall.
