Presidential stand-off may worsen Venezuelans’ misery

CARACAS (AP):

The US recognition of opposition leader Juan Guaido as Venezuela’s interim president is being touted by the Trump administration as the only way to restore the country’s democracy.

Economists agree that the longer the standoff between the US-backed Guaido and Maduro drags on, the more regular Venezuelans are likely to suffer.

Maduro, who so far appears to have the backing of the decisive military, has dug in, accusing the US of orchestrating a coup by encouraging Guaido to declare himself interim president and then leading a chorus of nations that immediately recognised his rule.

The high-risk and seldom-used strategy of recognising an alternative government that doesn’t already havede facto power is tantamount to blocking Maduro’s access to Venezuela’s all-important oil revenue, with enormous legal and financial entanglements.

Directives sent Friday to the US Federal Reserve will make it very hard for Maduro to access Venezuela’s overseas assets and earnings, including those from Houston-based Citgo, a subsidiary of state-owned oil giant PDVSA and the major source of revenue for the bankrupt government. Also at risk is US$1.2 billion in gold reserves – 15 per cent of Venezuela’s foreign currency reserves – stored in the vaults of the Bank of England.

Halt production

If the Trump administration’s confrontational approach is adopted by the European Union, some of whose members have threatened to recognise Guaido if Maduro doesn’t announce new elections in eight days, it could bring oil production to a standstill, heaping more hardships on the 29 million Venezuelans already struggling with hyperinflation, widespread food shortages and anaemic economic activity.

“If Maduro stays in power, Venezuela could suffer a humanitarian catastrophe,” said Francisco Rodriguez, chief economist of New York-based Torino Capital.

Rodriguez said the outlook is similar to what happened to Libya in 2011, after the Obama administration froze the government’s assets in retaliation for Moammar Gadhafi’s crackdown on protesters during the Arab Spring. In response, oil output in the North African country dropped by more than 70 per cent.

But unlike that asset freeze and the one imposed on Iraq after Saddam Hussein’s invasion of Kuwait, which were done in concert with the international community, Maduro still has important backers, most notably China and Russia, which would serve as a likely veto of any international sanctions at the UN Security Council.

If he’s not getting paid, Maduro will surely divert the roughly 500,000 barrels per day of oil currently being sold to Gulf Coast refineries in the US to more friendly markets, like creditors Russia or China, as well as India, Malaysia and Thailand.

But processing international financial transactions is very hard without going through the US or European banks. Transport costs would also jump because Venezuela’s ports aren’t well-equipped to load supertankers for transporting oil to such distant markets, said Russ Dallen, managing partner of Caracas Capital, a brokerage.

Severe recession

That means the country, which depends almost entirely on oil exports for hard currency, will be able to purchase even less food and other imports, exacerbating a severe recession that is already deeper than the US economic contraction during the Great Depression.

Then there’s the US$65 billion in Venezuela’s and state oil company PDVSA’s outstanding bonds, almost none of which are being paid and whose prices rallied 25 per cent on news of Guaido’s challenge to Maduro’s authority.

If the US were to hand control of Citgo to people selected by Guaido, as is expected, Maduro would almost certainly stop paying back loans to Russia’s Rosneft, which, in turn, would execute a lien giving it 49.9 per cent control of the Texas oil company.

“Maduro was already facing an incredibly complex situation,” Dallen said. “But the loss of fast cash from Citgo and the US market will further crush the country’s decimated oil production and cash flows, meaning more starvation and more people fleeing the country.”

To be sure, oil production – the lifeblood of the economy – has been collapsing for years. The OPEC nation currently pumps just a third of the 3.5 million barrels a day it did when the late Hugo Chávez took power in 1999, despite sitting atop the world’s largest reserves.

Rodriguez, who tried to persuade the government to moderate its policies as part of a failed Vatican-sponsored mediation between Maduro and the opposition in 2016, said that if the showdown between Guaido and Maduro continues, the economy would contract around 30 per cent in 2019. He forecasts inflation will reach around 23 million per cent from the 1.6 million it was in 2018.

Should the opposition prevail, there will be numerous benefits from an improved investment outlook – although perhaps not immediately.