Presidential standoff may worsen Venezuela's economy; alternative government could block Nicolas Maduro’s access to oil revenue

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

The Associated Press January 28, 2019 12:48:04 IST
Presidential standoff may worsen Venezuela's economy; alternative government could block Nicolas Maduro’s access to oil revenue
  • Economists agree that the longer the standoff between the US-backed Guaido and Maduro drags on, the more regular Venezuelans are likely to suffer

  • Nicolas Maduro has accused the US of orchestrating a coup by encouraging Juan Guaido to declare himself interim president

  • Recognising an alternative government that doesn’t already have de facto power is tantamount to blocking Nicolas Maduro’s access to Venezuela’s all-important oil revenue, with enormous legal and financial entanglements

Caracas: 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. But as Elizabeth Pineda was stocking up on staples on Sunday at a sidewalk market near a Caracas slum, she was bracing for things to get a lot worse, not better.

A retired secretary, Pineda survives on a monthly pension of just 18,000 bolivars, or about $6. She supplements her income working as an astrologer, and although the stars have been telling her Venezuelans are on the road to ridding themselves of socialist President Nicolas Maduro, she doesn’t expect him to go quickly or quietly.

Presidential standoff may worsen Venezuelas economy alternative government could block Nicolas Maduros access to oil revenue

Venezuela's self-declared interim leader Juan Guaido in Caracas. AP

“The government is going to strangle us even more with their bad decisions and shamelessness,” Pineda said while sharing a bowl of beef soup with two friends, none of whom can afford the $1.50 meal on their own.

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 have de facto power is tantamount to blocking Maduro’s access to Venezuela’s all-important oil revenue, with enormous legal and financial entanglements.

Directives sent on 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 $1.2 billion in gold reserves — 15 percent of Venezuela’s foreign currency reserves — stored in the vaults of the Bank of England.

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 anemic 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 more than 70 percent.

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 U.N. Security Council.

Presidential standoff may worsen Venezuelas economy alternative government could block Nicolas Maduros access to oil revenue

A cardboard life-size cut out of Venezuelan president Nicolas Maduro at the entrance of a public park in Caracas. AP

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.

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 $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 percent 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 percent 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 Chavez 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 percent in 2019. He forecasts inflation will reach around 23 million percent 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.

Orlando Ochoa, a Caracas-based economist, said the US will have to play a major role marshalling the support of international financial institutions, lifting sanctions and providing a debt shield to protect Venezuela from creditor lawsuits while the country gets back on its financial feet.

Such concepts of high finance make little sense to Pineda, who nonetheless said she is willing to eke out a meager existence if that is what it takes to get rid of Maduro.

“We’re ready to eat bread and water if we have to,” she said. “Getting out of this will be our reward.”

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