How Venezuela Plunged into Crisis and Why It Concerns Other Countries

published Feb 11, 2019
3 min read

Nowadays, Venezuela is one of the most risk-focused countries in the world. Numerous errors of state policy, as well as the oil crisis of 2014, formed in the republic favourable conditions for economic, political and humanitarian collapse.

Over the past two years, none of the structural problems of the republic have moved forward. Most importantly, the state’s basis in the form of Venezuelan oil production continued to decline actively.The crisis in Venezuela is deep and structural. This state of affairs of the republic’s economy resulted from a 20-year state policy, in which there was a whole set of large-scale disproportions.

For almost 14 years, the country has been living Chavismo (named after the country’s then-leader, Hugo Chávez). Active growth of oil prices in 2000-2012 allowed the state to implement expensive social programs, abandon conservative fiscal policy, and nationalise most enterprises and companies. From 1999 to 2015, the country earned almost $ 1 trillion thanks to oil exports. More than half of this amount fell on the five-year period from 2007 to 2012.

The clear imbalance in the direction of populism left the country almost completely isolated from foreign capital, and, most importantly, omitted many technological advances. The personnel potential of Venezuela was critically undermined. Progressive people left the regime, and government had to bet on the indigenous population. Result of this policy was the autocratic power, supported by a vicious circle of military elites. The country’s economic growth was directly dependent on the export component. Such an approach has the right to exist, but specificity of the Bolivarian Republic lies in the fact that the petrodollar flow provided a lot of questionable, often illegal, operations of the ruling elites.

Nicolas Maduro coming to power in April 2013 did not change the paradigm of government. In fact, one authoritarian leader was replaced by another, only with less support from the population. So the republic entered 2014, which became a kind of “point of no return” for it.

Oil accounts for about 90% of all exports of Venezuela. All these years, it has been main driver supporting the country’s economic growth. The large-scale decline in oil prices in 2014–2016 (a collapse of more than 78% over three years) was translated into a sharp decline in the Venezuelan economy. It decreased by 35% from 2013 to 2017. Anti-crisis measures of the Maduro government were not crowned with success. The country’s authorities attempted to fight the deficit budget with money printing, which in the end resulted only in hyperinflation. The already miserable situation has been further exacerbated by the US sanctions pressure on the Maduro government.The sanctions substantially cut the range of possible sources of financing the Venezuelan economy. One of the few possible ways to maintain economic activity in the country was the debt-oil-for-loans paradigm, in which Russia, China and other countries took part.

On January 23, leader of the Venezuelan opposition, Juan Guaido, declared himself “acting” Venezuelan President. These statements have found almost instant support from the West, especially the United States. Besides, they turned this conflict inside the country into another round of fight with an authoritarian leader (this time it is Maduro) with the world’s main champion of democracy. Opposition acts as an “instrument” in this confrontation.

Of course, the economic and humanitarian situation in the republic requires the earliest possible changes, including changes in the political course. However, besides the noble intentions in the form of supporting the opposition, the States have their own interests.

The United States is now fully implementing an energy dominance policy. And there is no doubt that the States will not stop at the achieved successes in increasing oil production (at the end of 2018, the United States produced 11.8 million barrels per day, which puts the country in the first place in terms of world oil production). The United States will continue to strengthen its presence in the global oil export arena. However, the situation with the oil market poses a very difficult dilemma for the first economy of the world. In 2018, the United States returned sanctions restrictions on Iranian oil exports. The Middle East exporter responded to this pressure with an expected decline, which could continue in 2019. Having weakened Iran, the States thus advanced further in their geopolitical influence in the Middle East region. However, the price of these victories was the loss of Iranian supplies.

Venezuela remains one of the major exporters of heavy oil, on which the attention of the United States is now concentrated. One may wonder, why do you need such a massive pressure on Maduro, who, in fact, does not refuse to supply black gold to the States?

The answer may serve as a statistician Venezuelan oil production. From 2013 to 2018, production in Venezuela fell by almost 36%. That is, during the entire rule of Maduro, oil production in the country either stagnated or decreased. Given the above factors limiting US access to Iranian raw materials, the American oil industry really needs Venezuelan oil and, moreover, restoration of its production.

The US remains the largest importer of Venezuelan raw materials – about 40% of Venezuela’s oil exports are sent to the United States. It can be assumed that support of the opposition has a clear economic basis. If the current political regime collapses, the new government will open prospects for restoration of the national oil industry, and the Americans, therefore, will have reliable access to Venezuelan oil.

China and Russia are also interested in resolving the political crisis in Venezuela. China has invested in Venezuela to obtain cheap oil and, in general, has similar interests with the United States. Perhaps, China will be able to agree on continuing cooperation under the “oil for loans” scheme under almost all possible scenarios of further events (except for escalation of the conflict until a full-fledged civil war). Against this background, the risks for Chinese investors involved in Venezuelan projects and debt financing lines are limited.

For Russia, the situation looks more complicated. Its interests in Venezuela are largely at the political level, and support for the Maduro regime is a kind of counterbalance to the growth of American influence. The situation for Russia in Venezuela is that to abandon its position as a supporter of the current political regime is equivalent to losing political weight on the world stage. At that, intolerance towards the opposition threatens with a new aggravation of relations with the West and risks of non-payment on Venezuelan debts.