Overview
Political instability is set to rise as opposition to the Chavez
administration increases, largely in pace with rising inflation and the
contracting economy. The government maintains significant support, however, and
is unlikely to concede power over the near term. The administration has not
relented from its policy of interventions and nationalisations, and the threat
of expropriation, confiscation and contract frustration is high. The economy
remains heavily dependent on oil revenues and exports, which subsidise very
high levels of spending on social programmes. The crime rate, particularly for
violent crime, is among the highest in the world, and criminal gangs are
pervasive. Kidnapping is an increasingly serious problem, while police are
overstretched, underfunded and frequently corrupt. The country is also a major
transit point for drug smugglers, particularly along the coast and in the
region bordering Colombia. There are latent but heated political and
territorial disputes with Colombia, and the countries have occasionally
threatened the use of military force.
SECURITY RISK
Areas of
Concern
Zulia and western border areas, rural Apure
and Barinas, Central Caracas and slum areas
Projections
The militarisation of the Colombian
border continues after the government announced it would build five additional
bases along the Sierra de Perija range dividing the countries. President Chavez
asserts the measures are being taken to crack down on rebels and smugglers that
find sanctuary in the region.
There is an increased risk of violence toward
media members and prominent anti-government figures following the murder of a
journalist in Caracas.
Violent crime generally is on the rise around the
country, but high-profile killings with a political motive have thus far been
rare. That may change as the opposition becomes emboldened by popular anger at
President Chavez's increasingly combative measures.
Western rural areas and farmland will be under
increasing threat of government takeover and although this is unlikely to
involve excessive use of force, there will be altercations between landowners
and the army as the Venezuelan government is not adverse to using coercion.
There will also be increased instances of landowners hiring armed men to push
"squatters" off of lands that are currently in contention.
Security risks in Caracas continue to climb as
violent crime reaches an all time high. Current estimates suggest Caracas has
the highest murder rate in the world, at 132 murders for every 100,000
residents, and the rate of kidnappings will continue to rival that of Colombia
and Mexico.
Security Risk Assessment
Security risk varies throughout the
country. Venezuela’s capital and largest city Caracas posing threats mostly
from criminal risks (robbery and kidnap) and protests.
Protests and strikes can also pose security risks
throughout the country, and along the border of Colombia there are also risks
posed by paramilitary group activity. The country is very susceptible to internal
strife and civil unrest due to President Chavez’s often-controversial socialist
reforms and a deeply divided public.
External Risks
Venezuela has some external tensions with
neighbouring countries Colombia and Guyana, as well as problems with illegal
activities occurring along the Colombian border to the West.
The activities of the Colombian
"autodefensas" in the Venezuelan border areas have been known to be
on the increase for some time, and there have been accusations of these groups
assisting anti-Chavez factions in the border region. Rhetoric accusing
Colombian elements of destabilising Venezuela is not unusual.
The overspill of the Colombian guerrilla war (of
both guerrilla and paramilitary units) poses important security threats to the
assets and personnel of companies operating in Zulia. The Fuerzas Armadas
Revolucionarias de Colombia (FARC), Colombia's most active guerrilla
organisation, is known to target foreigners and frequently it has been known to
kidnap for extortion
It is unlikely that the security risk associated
with the infiltration of FARC units into the Venezuelan border states will be
reduced in the short or medium terms. President Chavez has continually refused
to co-operate with the government of President Uribe of Colombia over the
eradication of the FARC and implicitly supports the refuge of this left-wing
guerrilla group in Venezuela borderlands. These suspicions would seem bolstered
by the evidence presented by Interpol indicating direct monetary assistance to
the group by the Chavez administration, as well as FARC's declared willingness
to fight on behalf of President Chavez.
Relations with Guyana are complicated by
Venezuela's claim to roughly three-quarters of Guyana's territory, claiming all
of the area west of the Essequibo River in Guyana. In late 2007 and early 2008
there were accusations of raids in the region around the Cuyuni River, a
mineral rich area rife with illegal mining from both nations. Guyana claimed
Venezuelan soldiers used C-4 to blow up several mining dredges. These tensions
have helped to impede discussion of any maritime boundary between the two
nations. Since 1987, the two countries have held exchanges on the boundary
under the "good offices" of the United Nations, but with no lasting
results.
Internal Tensions
Within Venezuela internal tensions have continued
to amplify since 2006. This is due largely to the adverse political climate and
class struggles within the country as well as different revolutionary and
insurgent groups.
There is an increasingly organised and politically
astute middle class in Venezuela that will increase its efforts to defeat Hugo
Chavez's centralising agenda. That being said, the September 2008 gunning down
of Julio Soto, a student body president and active opposition organizer, in
what appeared to be an orchestrated and targeted attack has led to speculation
the government has assumed a more aggressive approach toward dissidents.
Tens of thousands of Venezuelans marched in May
2007 against the government's refusal to renew the operating license of 'Radio
Caracas de Television', or RCTV. The TV station was allegedly aligned with
opponents of President Hugo Chavez and often critical of the Chavez government
(see Civil Unrest section).
As President Hugo Chavez advances his land reform
program he will continue to aggravate land-owning middle classes. Particularly
problematic in this regard are the states of Apure and Barinas. On 25 March
2007 in an effort to enforce the promises of the 1999 constitution, President
Chavez sent government forces to seize farms from 16 landowners in Barinas. One
attempt to resist the seizures by landowners was put down heavily by government
forces. Although no one was injured, the incident signals that middle-class
Venezuelans throughout the country may respond in a similar way and it affirms
that the Chavez administration is willing to respond with coercion. Two million
hectares have been redistributed since 2007, with plans for another 6 million
in the coming years. These policies will in all likelihood lead to even more
frequent clashes between landowners and "squatters" (the poor who are
either being granted parcels of land or who are occupying land in attempts to
gain ownership through these policies) and between landowners and government
forces.
In a separate incident in March 2007, in the
neighbouring state of Apure, an attack on a government military unit by what
the government has termed "right-wing paramilitaries" is likely to
have been related to President Chavez's land seizures. However, the land
seizures should not be exaggerated in their likely impact: at least not in the
short term.
Terrorism
Both the Revolutionary Armed Forces of Colombia
(FARC) and the National Liberation Army (ELN) are classified by the US Department
of State as terrorist organisations operating in Venezuela, primarily along the
western border states of along Colombia.
They regard the area as a safe area to conduct
cross-border incursions, traffic arms and drugs, as well as to commit
kidnappings and extortion for profit.
Venezuela does little in terms of combating these
two groups.
For the most part international terrorist networks
pose little serious threat; nevertheless, in an April 2007 country report on
terrorism, the US State Department reported that a perpetrator claiming to be
part of an Islamic extremist group in Venezuela placed two pipe bombs outside
the American Embassy in Valle Arriba, south-east. However, this was an
unsuccessful attack; Venezuelan police safely disposed of the bombs and
immediately made an arrest. Venezuelan authorities also made a later arrest of
the alleged ideological leader of the group.
In February 2007 the US-based Search for
International Terrorist Entities (SITE) research group released a translation
of a message posted on a Saudi-based Islamist website (Sawt al-Jihad or Voice
of Jihad), which called for attacks upon oil and natural gas facilities in
Canada, Mexico and Venezuela in an effort to destabilize the US economy. The
Islamist statement identified attractive targets as, "oil wells, export
pipelines, loading platforms and tankers and all that could reduce US access to
oil." The threat was apparently posted by the al-Qaeda Organisation in the
Arabian Peninsula, which has previously claimed responsibility for the February
2006 attack on the Abqaiq oil installation in the Kingdom.
Assuming that the call to arms was credible, the
risk to oil facilities in Venezuela (along with Mexico and Canada) actually
changed very little. The criticality of the assets has not altered nor has
their vulnerability; indeed their vulnerability may have been lessened as the
warning has at least prompted those involved in the industry to reconsider or
review their security measures. Terrorist capability or opportunity to conduct attacks
in any of the three countries has not changed (it remains difficult albeit not
impossible). Even with regards to their intent, that Islamists have identified
the criticality of the energy industry to the US' economy is no surprise. No
reported terrorist activity has materialised from this event.
Crime
Crime remains a considerable risk in Venezuela.
Street crime and kidnapping are the largest threats posed to foreign personnel
in country. The crime rate has risen dramatically in many areas of Caracas, the
city now has the highest murder rate in the world. Again, Central, Satana
Grande, Calvario, La Paz, La Vegia, San Bernadino, Barrios, Matanvan, Carapa
Carapita, and the west of Caracas in general, should be considered high risk.
Armed robbery and "express kidnappings"
(taking the victim to cash machines during one night and releasing them in the
morning) are common in Caracas. In 2006 alone, more than 1,000 kidnappings were
reported. Even figures from the notoriously upbeat statistics department of the
National Police Force suggest that the rate of kidnapping in Venezuela has
risen four-fold in the past seven years. While middle and upper class
Venezuelans are most commonly targeted, foreign personnel are also at risk and
should take the necessary precautions.
According to UN statistics in 2006, gun-related
crime in Venezuela was higher than anywhere else in the world. The poor
neighbourhoods that cover the hills around Caracas are extremely dangerous and
should be avoided. The more dangerous areas are in the west of the city, the
east having been better provided for by the authorities in the past.
In order to deter thieves, it is wise to remove
all attractive items of jewellery and good watches when moving around the
poorer areas of Venezuelan cities. Theft from hotel rooms and safe deposit
boxes is a problem. Using a guarded garage or locked trunk is not a guarantee
against theft, either. Pickpockets generally operate in and around crowded bus
stops and subway stations in downtown Caracas. "Bump and rob" petty
thefts often occur on subway escalators by roving bands of young criminals.
Cash machine data has also been hacked and used to make unauthorized
withdrawals from user's accounts.
It is important to be cautious while driving.
There have been incidents at night and early mornings where cars have been
forced off the La Guaira highway leading from Caracas to the Maquetia
International Airport, and the "Regional del Centro" highway leading
from Caracas to Maracay/Valencia, at which point the victims are robbed.
Criminal gangs have also been known to use the ploy of fake police checkpoints
as a means to extort money.
An incident in the Avila National Park, north of
Caracas, in January 2007, demonstrates the increased need for vigilance by
foreign nationals, particularly US personnel and travellers. Hikers in the park
were tied up and kept in their tents while being robbed by an organised gang.
The gang went on to try and rob Venezuelan hikers later on that day. This
particular gang is not thought to be the only one operating in the park.
The growing number of incidents of piracy off the
coast of Venezuela is of increasing concern and precautions should be taken in
this area.
Civil Unrest
Presently, the Venezuelan political and security
environment is dominated by civil unrest, which has grown up around political
opposition to president Hugo Chávez. Very broadly speaking, the current crisis
is related to the political orientation of the Chávez administration (the
president is pursuing what he terms a 'Bolivarian revolution', centred on
social re-organisation and reform).
Over the coming months, there is an increasing
risk that security will be threatened in Venezuela - particularly in the
western states - as President Chavez advances his land reform program and
aggravates land-owning middle classes. Land invasions have occurred
sporadically over the course of a number of years, however seemingly spurred on
by government attention on the issue, the number of squatters moving on to
private property has increased of late. While foreign companies whose land is
invaded tend to take a low-key and often submissive approach to the incidents,
Venezuelan land owners have been prone to violent reactions. The organisation
of militias is not uncommon and such incidents may well worsen as the land
reform programme approaches the ranching border areas of Apure and Tachira
where the nascent Autodefensas Unidas de Venezuela (United Armed forces of
Venezuela or AUV) has operated.
Since the start of May, there has been massive
civil unrest with nearly 100 protests in reaction to President Hugo Chavez's
failure to renew Radio Caracas Television's (RCTV) broadcast license, thereby
forcing Venezuela's longest-running television channel (54 years) off the air.
President Chavez claimed the channel was part of an opposition movement and had
conspired to foment the failed 2002 coup attempt. There have also been
demonstrations in support of the closing by pro-Chavez groups which have lead
to violent clashes and the deployment of riot police for purposes of crowd
control.
With polls showing that the vast majority of
Venezuelans oppose the government's interference with their choice of
television viewing, it is likely that protests will continue and possibly
escalate, in the short to medium term.
Although political marches and demonstrations can
be frequent in Caracas and often pass without violence, foreign personnel
should be aware that violence, including gunfire, has occurred at political
demonstrations in the past. Demonstrations are more likely to take place at or
near university campuses, business centers, and gathering places such as public
squares and plazas. Marches may also have a significant impact on traffic.
Some elements of the population have been known to
express varying degrees of anti-American sentiment.
Media personnel should be wary of the growing
government hostility towards unfavourable media reports. It would also do well
to note that supporters of the government opposition take the attitude that
'you're either with us, or against us', which in the past has translated into
hostile action towards members of the international media who have attempted to
paint an objective picture of the crisis.
To some extent this has been exploited by the
authorities, and on several occasions they have openly courted foreign media in
order to instigate opposition anger against them.
Physical violence at rallies is not uncommon, and
most often takes place at the point at which the two factions meet. Elements on
both sides will be carrying firearms and shootings have also taken place - the
most widely-known events of this nature took place in April 2002 and
precipitated the short-lived coup against Chávez. Gun or bomb attacks are most
likely to take place either at rallies that pass through shanty towns
(tugurios), or at choke points that have vantage points nearby (from which the
violent elements will watch their targets).
At rallies and political marches there is a danger
of being shot, gassed or hit by rubber bullets fired by the security forces.
This has happened to a number of foreign personnel who have been 'close to the
action'. Harassment by the crowd may also be experienced, and is often
committed by rally organisers and their thugs, who move around the rallies on
mopeds or bicycles inciting trouble.
Workers' strikes can also occur on occasion and
are not uncommon.
At and around foreign assets, there is a medium to
high risk of protests, which could be cause for heightened security levels. It
is important to note that strikes against foreign companies in Venezuela are
likely to be supported by the Chavez government.
POLITICAL RISK
Overview
Political instability is set to rise as
opposition to the Chavez administration increases, largely in pace with rising
inflation and the contracting economy. The government maintains significant
support, however, and is unlikely to concede power over the near term. The
administration has not relented from its policy of interventions and
nationalisations, and the threat of expropriation, confiscation and contract
frustration is high. The economy remains heavily dependent on oil revenues and
exports, which subsidise very high levels of spending on social programmes. The
crime rate, particularly for violent crime, is among the highest in the world,
and criminal gangs are pervasive. Kidnapping is an increasingly serious
problem, while police are overstretched, underfunded and frequently corrupt.
The country is also a major transit point for drug smugglers, particularly
along the coast and in the region bordering Colombia. There are latent but heated
political and territorial disputes with Colombia, and the countries have
occasionally threatened the use of military force.
Areas Of Concern
High risk of expropriation, price and
foreign exchange controls, state monopolies, high inflation, corruption, opaque
regulatory system, political polarisation
Projections
President Chávez will capitalise on his
victory in February 2009’s referendum on presidential term limits to increase
state control and push ahead with reforms expanding the influence of ‘21st
century socialism’ in Venezuela. Whilst economic recession may dent the
government’s popularity, President Chávez will remain unchallenged by a
fragmented opposition whose chances in the 2010 legislative elections have been
and may continue to be weakened by the flight of opposition leaders. Clampdown
on critical media may increase.
Venezuela’s economic position is far weaker than
the government makes out, and the country is not well prepared for a looming
and drawn out recession. The downturn will be exacerbated by mismanagement of
the economy during recent boom years. A predicted drop in the price of oil will
significantly erode Venezuela’s current account surplus in 2009, preventing – in
combination with high inflation – the adoption of effective stimulus policies.
This will heavily impact upon Venezuela’s terms of trade, as the country relies
on oil for 90 per cent of its export revenue. Declining oil production, due in
part to underinvestment in the energy sector, will also curb the benefits
afforded by a forecast increase in the price of oil in 2010.
The government’s adjustments to fiscal policy are
unlikely to mitigate the effects of recession. President Chávez is likely to
blame the slowdown on the private sector and fiscal losses will encourage him
to increase “temporary takeovers” and expropriations in strategic industries.
This will further disincentivise FDI, which has already markedly declined, and
may force the government to increase the price of staple foodstuffs. This will
add to inflation, which will remain high; private consumption will drop by five
per cent in 2009. However, social spending will increase in 2009-10 in the run
up to the forthcoming elections. Although the government has sought to put off
devaluing the fixed exchange rate (which has remained at Bs2.15:$1 since 2005),
social expenditure will require liquidity; a devaluation will therefore become
unavoidable at some point. The government is also likely to borrow to fill its
fiscal shortfall. Forex reserves are predicted to decline from US$42 billion in
2008 to US$21 billion by the end of 2009.
Current Analysis
Government Intervention and Tax
Discrimination
The risk of expropriation, nationalisation and
confiscation is high. Nationalisation has been a keystone of President Chávez’s
presidency; as the economic crisis begins to bite and the government struggles
to maintain fiscal liquidity it is unlikely to be able or willing to reimburse
expropriated holdings in full or, for that matter, in cash. Since 2006 the
government has negotiated a controlling interest in the telecommunications, oil
and electricity sectors (previously considered the most promising areas for
foreign investment in Venezuela). In 2008 the government took over steel giant
Sidor and Mexico’s Cemex, and announced plans to nationalise Venezuela’s
largest goldmine and diamond mines in the Guanimo region. In February 2009
President Chávez won a referendum enabling him to occupy office indefinitely,
provided he wins elections. The administration has a history of increasing
state interventions following electoral successes and this victory has proved
no exception.
In April 2009 there were central government
seizures of ports and airports controlled by local authorities. Moreover, food
shortages and rising inflation encouraged President Chávez to intervene
repeatedly in Venezuela’s agricultural sector in 2009. In 2003 the Chávez
government introduced price controls designed to curb inflation and provide
affordable foodstuffs. This caused shortages and disincentives to investment
(in some cases price controls have driven companies out of business). In 2007
the government instituted a law against hoarding, speculation, boycott and
other activities affecting the consumption of price-controlled foods and in
March 2009 it set minimum production quotas for regulated food products. In
late March 2009 the government accused US agribusiness firm Cargill and
Empresas Polar, Venezuela’s largest food producer, of evading price controls by
producing varieties of rice not subject to regulation. Government troops seized
rice plants in Portuguesa and Guarico states, despite Polar’s claims that the
period for compliance with the new law had not expired. President Chávez warned
of similar actions for further infringements of grain supply. In May 2009 the
government ‘temporarily’ seized a Cargill pasta production factory. Such
‘temporary’ measures usually indicate an impending expropriation.
Venezuela’s land law, modified in 2005, stipulates
the redistribution of “unproductive” land. Since 1998 the government has seized
roughly 5 million acres of land, some of which was expropriated without
compensation. In March 2009 the government seized a 3,700-acre plantation owned
by Smurfit Kappa Group, and ordered Coca-Cola Femsa to vacate land in Caracas
to make way for low-income housing. This has substantially discouraged
investment in key agricultural subsectors.
In May 2009 the government nationalised over 60
oil service providers, following the passage of a law facilitating
expropriation. This increased the risks of investor flight and labour unrest as
roughly 22,000 jobs were threatened by the takeover. The government,
recognising it can ill afford a drop in production, quickly took steps to mitigate
the impact of such a disruption; the National Assembly gave swift approval to a
law that would simplify the expropriation process, raising the prospect the
state will seize assets taken off-line by unpaid contractors and suppliers. The
move may prove self-defeating if it exacerbates the downturn in oil production
and export income and discourages foreign investment. The government is banking
on the fact that the size of the Orinoco oil reserves and relative paucity of
development opportunities elsewhere will encourage foreign companies to invest
in the face of high taxes and legal insecurity. In May 2009 the government also
announced that PdVSA will reduce executive salaries by 20 per cent and freeze
workers’ salaries in 2009-10, unnerving creditors. Helmeric & Payne, a
major contractor, has publicly doubted it will receive an estimated US$116
million in outstanding debt and has threatened to move its rigs to storage as
contracts expire over the next four months. PdVSA owed US$13.8 billion at the
end of 2008.
Nationalisations and expropriations are likely to
continue whilst uncertainty surrounds the Venezuelan economy. Food prices have
risen due to plummeting domestic agricultural production and inflation hovers
at 31 per cent, the highest in Latin America. Economists have expressed concern
about Venezuela’s excessive dependence on oil and overly expansionist monetary
policy. Following previous nationalisations FDI levels plummeted from US$2.5
billion in 2005 to US$640 million in 2007. Continued commitment to
expropriation will further shake investor confidence in the country.
Although Venezuela’s corporate tax burden compares
favourably with that in the rest of Latin America, and although foreign firms
are offered the same tax treatment as domestic companies (except in the
non-associated natural gas sector where foreign investors are given
preferential tax rates), Venezuela is in many ways not business-friendly.
According to its constitution Venezuela employs international standards for the
treatment of private capital, offering equal treatment to foreign and domestic
companies. Full repatriation of profits and capital are constitutionally
guaranteed, subject to the exchange control regime, as is the unrestricted
reinvestment of profits. Venezuela may offer advantages to investors with a
long-term perspective, such as a surfeit of inexpensive raw materials and
energy supply, a developed road infrastructure and a strategic location for
trade with the US, Europe and Latin America. Foreign investors are also offered
a range of investment incentives such as special-credit financing, export
incentives and debt-equity swaps. Nevertheless, economic and political
uncertainties, a recent history of expropriations and increasing state
interventions in the economy make Venezuela’s investment climate more hostile
than its fairly liberal legal framework suggests.
In areas of economic activity restricted to
national companies, predominated by professional services such as engineering,
medicine and public accounting, foreign capital is restricted to a maximum of
19.9 per cent. Investment in the hydrocarbons, mining, telecommunications,
banking and insurance sectors is highly restricted. High windfall-profits taxes
are levied on liquid hydrocarbons. President Chávez is a populist leader who
took office in 1998 on a platform of radical social reform and the
nationalisation of strategic sectors, and state control of the economy is a
government priority. Whilst President Chávez narrowly lost a bid to introduce
constitutional reforms in 2007 that would have defined Venezuela as a socialist
state and significantly weakened private property protections, the president
has stated his intention to continue to pursue these goals. Furthermore,
President Chávez’s February 2009 referendum victory has enabled him to increase
his power over the national legislature and judiciary and further radicalise
policy. The government has made several changes to tax policies and contracts
that have elevated uncertainty for foreign firms operating in Venezuela.
Legal and Regulatory Environment
Venezuela’s legal system provides recourse to
foreign businesses seeking to resolve investment disputes and pursue property
claims, and has tended not to be discriminatory. However, the judiciary is
slow, inefficient and frequently accused of being corrupt. Venezuela is a
member of the International Center for the Settlement of Investment Disputes
(ICSID) and the New York Convention of 1958; however, there are special
regulations that define which arbitration body Venezuelan state-owned companies
can use. For instance, the 2001 Hydrocarbon Law prohibits the state-owned oil
company PdVSA from entering into agreements that provide for international
arbitration. Government action, such as the dismissal of a ruling by the
American Arbitration Association in Miami in favour of Haagen-Dazs, suggests
that other sectors may also be at risk of having international arbitrations
overruled.
Venezuela has consistently ranked poorly in
international corruption indices and in 2008 was positioned 158th in an
evaluation of corruption levels in 180 countries, making it the most corrupt
country in Latin America. Its regulatory system is un-transparent and the vast
majority of contracts are awarded without open competition, which exacerbates
the potential for corruption, as does the politicised nature of the judicial
system and the current regime of price and forex controls. These ban domestic
financial institutions from offering foreign-currency accounts unless
officially authorised and stipulate not only that all foreign currency bank
transactions in Venezuela are prohibited but that foreign currency obtained
from the export of goods and services must be sold to the central bank, except
for 10 per cent that may be retained to cover export-related expenses.
Moreover, co-ordination between government agencies and between the government
and private sector in ratifying new laws is ineffective and in some cases
non-existent, creating a labyrinthine regulatory framework that complicates
doing business in Venezuela.
Compared to regional averages, starting a business
and obtaining business licences in Venezuela can be extremely time-consuming.
It takes an average of 141 days and 16 procedures to start a company. However,
the process is relatively inexpensive and no minimum capital is required.
Economic Stability
Venezuela will be badly affected by the global
economic downturn. Its GDP growth dropped to 0.3 per cent year on year in the
first quarter of 2009, its worst performance in nearly six years. Its economy
is expected to contract by 5.5 per cent in 2009 and continue to weaken despite
a predicted rise in the price of oil in 2010. A sharp contraction in oil prices
in 2009 and slowly declining domestic oil output will be compounded by
profligate public expenditure and unorthodox economic policies. Exports dropped
16.6 per cent in the first quarter of 2009 as demand for oil contracted. A 4.8
per cent drop in petroleum sector output in the first quarter of 2009 due to
underinvestment in energy, cashflow troubles at PdVSA and OPEC’s cuts to its
production quota exacerbated this trend. Although it will not fall into
deficit, Venezuela’s current account surplus is predicted to drop to US$1.1
billion in 2009 – 0.4 per cent of GDP – before rising slightly in 2010. Forex
reserves are set to fall from US$42 billion to US$21 billion year on year by
December 2009 as the government continues to spend. Venezuela’s weakening
economic situation is underscored by the declining presence of anti-American
rhetoric in President Chávez’s speeches; past broadsides were a sign of a government
emboldened by economic plenty.
In comparison to stable prices and even
deflationary pressures in many parts of the world, the bolivar is still
appreciating in real terms, sitting officially at Bs2.15 to the dollar.
However, unofficially inflation is spiralling; in April 2009 it reached a
record high of Bs7:$1. Mean inflation was over 30 per cent in 2008 and will be
higher in 2009. Government restrictions on the availability of dollars to
private sector importers have contributed to inflating the unofficial exchange
rate, and there is fierce competition to gain access to hard currency at the
official rate. Capacity constraints generated by underinvestment will
contribute to inflation, causing private consumption to contract and real
incomes to decline even further. The resulting drop in demand, leading to
declining import volumes, will be compounded by continuing problems at Cadivi,
the official exchange body. Reduced imports available at the official rate will
widen the premium between the official and parallel rates, as greater numbers
of people are forced to procure dollars on the black market. Shortages will
continue. Declining fiscal revenues will make the current fixed exchange rate
unsustainable. A devaluation of the bolivar – although not by the amount
suggested by the bolivar’s current overvaluation – is therefore likely by 2010,
in preference to cutting expenditure. A transfer of US$12 billion from central
reserves in January 2009 to finance social spending indicates the likelihood of
such a trend, as does the proximity of legislative elections in 2010. The
government may also raise the local-currency value of oil income and borrow
from the local banking sector in order to improve its liquidity. Whatever its
sources of funding, government expenditure is predicted to increase by five per
cent in 2009-10 and will remain the sole aspect of GDP in positive territory.
After protracted inaction the government made
slight adjustments to spending and taxes and announced its intention to sell
US$10.2 billion in public sector debt in 2009, all measures designed to
mitigate the impact of the global economic crisis. However, these measures are
unlikely to have great positive impact, and since the government has done
nothing to boost investment private sector interest in the Venezuelan economy
is likely to remain weak. Fixed investment has plummeted, contracting by 3.2
per cent in the fourth quarter of 2008 compared to growth of 20-30 per cent in
2007 – a sign of Venezuela’s increasingly hostile business climate. FDI in
Venezuela is much lower than in most Latin American countries due to the
government’s interventionism. The banking sector also witnessed an 11.7 per
cent dip in profits in the first two months of 2009, year on year. Venezuela’s
economy is unlikely to show signs of recovery until oil prices rise
significantly or the government alters policy direction. Neither of these is
likely in the outlook period.
Political Stability
The Chávez regime and its policies are moderately
stable, largely due to the government’s centralisation of power and
marginalisation of opposition voices, and it is likely that President Chávez
will retain power and even be re-elected in 2012. However, the political
polarisation engendered by the government’s marginalisation of dissent will
heighten social discontent and even increase the risk of an abrupt end to
President Chávez’s rule. The president already suffered one attempted coup
d’etat in 2002, although it was quickly impeded by the Presidential Guard.
President Chávez has intensified efforts to
institutionalise his political supremacy since February’s referendum victory.
The government has passed laws limiting democratic resistance through the media
and trade unions and implemented measures to curb the powers of regional
authorities, many controlled by the opposition. It will continue to erode the
authority of opposition governors and local authorities. Corruption charges
have been levelled at several opposition leaders, causing some to flee the
country. Manuel Rosales, mayor of Maracaibo, sought political asylum in Peru
after the government accused him of illicit enrichment. Raúl Isaías Baduel, a
former Chavista who broke with the government in 2007, was arrested at gunpoint
in April 2009 for alleged theft from the Ministry of Defence. In the same month
the mayor of Caracas, Antonio Ledezma, marched to protest the inauguration of
an unelected head of Caracas, to be chosen by President Chávez and to assume
control of Mr Ledezma’s budget, authority and assets. The march was dispersed
by riot police with tear gas. The opposition is also divided and may fragment
even more profoundly in the face of increasing government oppression, further
consolidating President Chávez’ position.
The state’s determination to control all areas of
government by radicalising its policies may trigger unrest in the medium to
long term, especially against the background of a protracted recession.
President Chávez’s orders to use tear gas and incarcerate those responsible for
student manifestations against the referendum in February 2009 were a sign of
significant government unease. Politcal polarisation in Venezuela resulted in
several periods of political protest and mild civil unrest in 2007, after the
closure of television station RCTV and in the run up to the constitutional
referendum. Incidents of political violence directed towards foreign firms were
not recorded, however. In April 2009 delays to the payments of state workers
led employees of government health centres to protest outside the Labour
Ministry. In March 2009 Venezuela’s two biggest labour organisations united
against the government, despite one having been founded as a pro-Chávez outlet.
General Operating Environment
The Venezuelan population is made up of
Spanish, Italian, Portuguese, Arab, German, African and indigenous peoples. The
religious breakdown is ninety-six percent Catholic, two percent Protestant and
two percent other religions.
History
Following its discovery in 1498, the
territory which became Venezuela took the Spanish over a century to subdue and
conquer, due in part to the intense hatred, resentment and low level war of
resistance inspired in the local population by the Spanish slave raids of the
early sixteenth century. For the next two centuries Venezuela grew in
importance to the Spanish, largely due to its geographic position, and the
resulting trading activity – particularly in cocoa and slaves. However, this
was all to end in the early nineteenth century, when the country found itself
at the heart of the Latin American independence movement, led to a large extent
by Simón Bolívar. For two decades from 1810, Bolívar and his compatriots fought
the royalists for Venezuelan independence. After finally achieving this in
1821, Bolívar set about realising his dream of a ‘Gran Colombia’ (a
Colombian-Venezuelan union), but this was dashed in 1829 when Venezuelan
nationalists separated from the union. What followed was the century of the
caudillos – strong, individual leaders who headed the struggle between various
factions in Venezuelan society to control the Caracas-based bureaucracy that
oversaw trade from the country – particularly in coffee. This era was marked by
chaotic civil wars and culminated in a military dictatorship, under President
Juan Vicente Gomez, between 1908 and 1935. The transition period that followed
corresponded very broadly with the discovery of oil, and Venezuela’s entry into
world oil markets.
In the 1940s the Acción Democrática (AD) party was
founded, and it tried to democratically reform Venezuelan political
institutions, but the following decade still saw rule by a military junta. The
triumph of AD under Rómulo Betancourt in 1959 ushered in a long period of
democracy (the longest to date). AD ruled until 1978, formulating a national
oil policy, but also attracting the ire of armed leftist opposition groups, as
a result of its conservative policies and liberal economics. AD lost the 1978
elections to the Christian Democrat COPEI (Comité de Organización Política
Electoral Independiente – Committee of the Independent Organisation of Electoral
Policy), a loss which was due largely to AD’s free-spending populist style of
government having led to a large national debt – however, before long COPEI’s
economic policies were leading to high inflation. With the 1983 general
election entrenching the dominance of the two main parties (AD and COPEI), some
sectors of Venezuelan society started to question the validity of the
democratic rule that had struggled to emerge for half a century. This recent
history has some part to play in the emergence (and acceptance, at least early
on) of the more authoritarian style of government currently being pursued in
Venezuela.
The Roots of the Political Crisis
Presently, the Venezuelan political and
security environment is dominated by civil unrest, which has grown up around
political opposition to President Hugo Chávez. Very broadly speaking, the
current crisis is related to the political orientation of the Chávez
administration (the President is pursuing what he terms a ‘Bolivarian
revolution’, centred on social re-organisation and reform), and its poor
handling of the economy, particularly the oil industry.
A new constitution approved in 1999 extended the
presidential term from five years to six, and allows for one period of
presidential re-election, which the previous constitution barred. The
Vice-President, whose post was created in the new constitution, takes over
during temporary presidential absences. The President of the National Assembly
(legislature) assumes the Presidency if the President dies in office, in which
case new presidential elections must be held within thirty days.
The government of former President Carlos Andrés
Perez (1989-93) became a target of popular dissatisfaction following the
emergence of what was perceived as government corruption. Perez and his AD
party had been pursuing free-market economic reform, but this programme was
damaged by nationwide riots in 1989, two failed military uprisings in 1992 (in
one of which Chávez was deeply involved), and Perez’ impeachment on corruption
charges in 1993. The 1994 elections were won by Rafael Caldera under the banner
of the independent Convergencia Nacional (National Convergence - NC) party.
However, Caldera’s independent credentials were not all that they might have
been, and he generally ruled with AD’s tacit support – adding to the popular
belief that the ‘old guard’ had not really changed, and that Venezuela was
still being run by the elite that had ruled for much of the preceding forty
years.
The groundswell of public opinion was demonstrated
in the November 1998 congressional elections, December 1998 presidential
elections, and July 1999 Constituent Assembly elections, through which Chávez’s
Poste Patriótico (Patriotic Pole - PP) came to prominence, on a populist
platform preaching the end of corruption and economic reform (notably the
repudiation of Venezuela’s external debts). Having altered the constitution in
1999, Chávez was re-elected as President in general elections in July 2000, in
which he gained a large majority of 59 percent, establishing himself and the PP
as the dominant force at municipal government level.
Chavez and the Bolivarian Revolution
Chávez claimed to be planning the
creation of various new forms of governance. His ‘Bolivarian revolution’
(itself a shamelessly populist concept, named after the 19th century Latin
American revolutionary who helped sweep aside Spanish domination in much of the
continent) was based on left-wing political and economic policies. Chávez
started by reversing many of the free market reforms of previous governments,
enacting trade tariffs, and restructuring Venezuela’s debt repayments. On the
political front he moved Venezuela closer to Cuba (Fidel Castro has been a
long-time ally of his) and attempted to insert into government a civic-military
alliance of leftist intellectuals and radical former armed forces personnel.
During his first couple of years in office, Chávez
was able to link the economic crisis and high levels of unemployment to the
failed policies of his predecessors. However, four years into his mandate, it
has become difficult to blame the absence of policy and economic progress on a
legacy of misrule. The President’s popularity rating began to fall, even within
the lower classes, from where he has traditionally drawn his greatest support.
The drop in Chávez’ public opinion ratings allowed the emergence of a powerful
(but at times fractious) opposition composed of business groups, trades unions,
disgruntled military officers and the Catholic Church, all of whom have an
interest in his removal from office. At the centre of the struggle between the
opposition and Chávez is the state oil firm, Petróleos de Venezuela (PDVSA),
which since the oil industry is vital to Venezuela’s economy (it makes up 27
percent of GDP) is coveted by the administration, but whose workforce make up
one of the nuclei of the opposition.
Referendum
The opposition attempted to force
Chávez from power by calling a referendum on his deposition. They collected the
sufficient number of signatures to allow a non-binding ‘consultative’
referendum to go ahead in February 2003. However, this was only meant to be an
indicator of public opinion – a binding referendum was planned to go ahead in
the spring of 2004. After much political wrangling concerning the validity of
signatures collected in a petition drive for the referendum, and a 'respero'
process by which hundreds of thousands of people had to return to validate
their signatures, the recall referendum took place on 15 August 2004. In the
months leading up to the vote the opposition steadily lost ground in the polls,
finding itself unable to put forward an energetic or cohesive policy position (or
even an inspiring campaign as a whole) to challenge an increasinly bouyant
President Chavez. Ultimately Chavez won by a considerable margin with 59
percent of the vote.
It has become clear that Venezuelan political
institutions are now damaged beyond repair, and will need to be reconstructed
from the ground up. Unfortunately, no one is delivering, or even looks like
they will deliver, democratic change and economic reform. The opposition groups
are not as popular as they are being made out to be by both themselves and the
international press – in part because of the personal and political histories
of key members, but mainly because of their links to the administrations that
came before Chávez. The ‘old regime’ (particularly the AD) politicised state
institutions. Chávez promised to reform them, but hasn’t – he simply replaced
the old guard with his own people and continued Venezuela’s long tradition of
non-meritocratic bureaucratic appointments. However in the post-referendum
atmosphere, following at least three years of serious political upheaval, many
western companies and states are starting to accept that they will have to deal
with the current administration well beyond the 2006 re-election year. In
secret some organisations acknowledge that Chavez' continued tenure may well be
preferable to a period of unrest that would have most likely followed an
opposition win.
The post-referendum environment has seen a major
fracturing of the opposition, a resurgence in control of state institutions and
a consolidation of power by Chavez. The president has conducted further
reshuffles, expanded the number of Supreme Court judges (in his favour) and
re-initiated the land reform campaign that had been neglected for the previous
two years. It is likely that such moves signal a medium to long-term intention
to increase government interference in the economy and with foreign investors.
The land reform campaign in particular may signal an increase in rural unrest
as squatters occupy the land of private landowners and ranchers (already
overwhelmingly anti-Chavez).
The Military
Another of Chávez’s most important
blocs of support lies with the loyal military – but the military is effectively
in crisis. Similar to many other state institutions, the military has been
politicised – in effect Chávez has tried to incorporate it into his personal
political project through the ‘civic-military alliance’. Personnel have also
been moved around and removed from the chain of command, and its constitutional
status has been changed – leaving it in some confusion over part of its role.
Consequent to these factors, the military suffers from a lack of direction and
purpose, and a corresponding lack of morale. Despite the widespread
demonstrations and the crippling national strike, the Venezuelan armed forces
appear solidly behind President Chávez. Only a handful of military officers
have defected to the anti-Chávez ranks since the general strike, and a coup is
thought to be unlikely without considerable violence or an economic collapse.
However, given the changeable nature of Venezuelan politics (witness the
three-day turnaround of the April coup) neither of these eventualities should
be ruled out. Many members of the opposition would clearly like the military to
openly side with their campaign.
In the pre-referendum period coup rumours abounded
- some undoubtedly placed by the government, others quite possibly related to
genuine actions by militant factions in the opposition - however under current
conditions evidence has yet to emerge concerning widespread or well-organised
subversion in Venezuela.
External Relations
With regard to external relations, the
Venezuelan situation cannot be seen to be progressing within a vacuum, however
it is certainly true that a more hands-off approach has been taken by the usual
interested states. Cuba, at present, seems content to give diplomatic and moral
support to Chávez, and to receive large quantities of oil at a significantly
reduced rate (opposition claims that pro-Chávez militias have been trained by
the Cuban Armed Forces have yet to be substantiated). The US has found it
necessary to adopt a more ‘light-footed’ approach to dealing with the
Venezuelan President, since a number of State Department officials were seen to
welcome the short-lived coup against him in April 2002. Washington is said to
be able to put pressure on Chávez because the US provides such a large market
for oil, but it is uncertain how true this really is. The thinking in the US administration
may well be hampered by elements that subscribe to the belief that Latin
America is taking a leftist stance, with left-wing administrations now in
Ecuador, Brazil and Venezuela. The Organisation of American States (OAS) has
been and remains heavily involved in mediating between the opposition and the
administration. However, while this crisis is crucial to the reputation of the
OAS as an institution capable of conflict resolution, the organisation appears
to be making little real headway. Venezuela’s relations with Colombia have
soured, due in part to former Colombian President Pastrana’s welcoming of the
April 2002 coup, but more importantly due to the increasing evidence of FARC
guerrilla sanctuaries in Venezuela, and suggestions of Venezuelan military
complicity with the rebels. Relations with China appear to be progressing well
with China in the economic sphere and it is more than likely that President
Chavez plans to use the eastern power as a bulwark against pressure from the US
(although the structure of China’s petrochemicals industry militates against
its use as a replacement for the US oil market).
levels of brutality