Strategic Insights
February 26, 2019

The Venezuela Crisis Continues

• Maduro remains despite the growing humanitarian crisis, mounting debt, surprise formation of a coherent opposition, increased international pressure led by the United States, and growing defections from Venezuela’s military.
• Given the delicate situation in the country, non-diplomatic escalation by those seeking Maduro’s exit likely would worsen the humanitarian crisis or even risk civil war.
• But as the crisis stretches on, the risks increase to the country’s people, its neighbors, its creditors, and global oil markets.

• The United States and about 50 other countries recognized President of the National Assembly Juan Guaido as the interim president of Venezuela in late January, but strongman Maduro has maintained the backing of Havana, Moscow, Beijing, Tehran, and Ankara.
• This “axis of autocrats” profits from the chaos, from Turkish Airlines’ new direct flights to Caracas to trade food and medicine for gold, to Russian military contractors providing security for Maduro in exchange for crude oil and exploration rights for its national company Rosneft, to Cuban military “observers” rooting out Venezuelan military dissidents in exchange for oil.

• As profligate spending, corruption, and poor governance took their toll, the poverty rate increased from 27 percent in 2007 to 87 percent in 2019. The average Venezuelan lost 24 pounds in 2017 alone, and the country faces severe medicine, food, electricity, and water shortages.
• The Venezuelan exodus is projected to accelerate by 76 percent in 2019. By the end of the year, up to 5.4 million Venezuelans—1 out of every 6 citizens—will be living outside the country.

• The Trump administration certainly gets attention in the region whether declaring all options on the table or the infamous “5,000 troops to Colombia” notebook scrawl of John Bolton.
• But to Pentagon planners, Venezuela looks like Syria or Iraq, not Panama or Grenada. Maduro still maintains overall control over the 350,000-strong military, and worse, claims to have 1.6 million paramilitary fighters under arms, not to mention Cuban and military observers and Russian mercenaries.
• Guaido and his allies have lately backed off their late February calls for international military support, which Maduro had turned to his advantage in labeling the opposition as U.S. puppets.

• Moises Rendon: “Venezuela is a full-blown kleptocratic mafia state. The regime is involved in a wide range of illicit activities, including drug trafficking, massive corruption, and money laundering.”
• Maduro has fostered relationships with dissident FARC and National Liberation Army militants, narcotic traffickers, armed colectivos, and wildcat gold-miners devastating the environment—all of which operate along the Colombia-Venezuela border area.
• This instability could fuel and equip militants, narco-traffickers, and modern-day pirates throughout Latin America for decades to come. This imperils the ongoing Colombian peace process, concerns Brazil, and even could threaten development of the newfound offshore energy fields of Guyana.

• The January 25 sanctions targeting PDVSA were highly effective in eroding Maduro’s ability to buy allies in the military and abroad, but these same sanctions could push Venezuela’s economy over the edge in coming months. GDP has already dropped by half over four years, and inflation will hit 10 million percent in 2019.
• CSIS’s Moises Rendon: “The National Assembly is the only legitimate institution left. The amnesty law that it is considering will be critical for what happens next. Those around Maduro are worried about what happens the day after he leaves the scene.”
• Russia and China are into Venezuela for about $25B and $65B respectively, and they may be growing uneasy about loan repayment. China has met with those around Guiado in recent weeks, and over the weekend Russia offered to sit down with the United States to discuss Venezuela.

• According to analysis from CSIS’s Frank Verrastro and Andrew Stanley, Venezuela is trying to redirect the 40 percent of the heavy crude exports it previously shipped to the United States to other buyers to limited success. Venezuela can store crude for only about a month before it has to cut production.
• In the short term, PDVSA’s (and subsequently Venezuela’s) cash flows are down as it must sell at a steep discount, ship crude to Asia, and import more expensive diluents than previously sourced from the United States.
• Andrew Stanley warns, “Transactions to purchase petroleum from PDVSA that involve the U.S. financial system are set to be barred come late April. This will come at the same time as the U.S. reviews Iran sanctions waivers, and seasonally stronger demand creating a bullish outlook for prices.”
• Already, U.S. sanctions are keeping most Europeans away, and while Indian imports have doubled, it has refining capacity restrictions and receives imports via Russia’s Rosneft, which brokers the deal to help repay Russian loans.
• Plagued with corruption and mismanagement, PDVSA now must struggle to pay its remaining skilled workers, maintain basic infrastructure, and stock basic supplies and equipment.
• Frank Verrastro cautions, “An attempt to quickly restore Venezuela’s production levels (though going substantially above/beyond recent pre-sanctions levels will likely take years) may be possible but expensive and not the most optimal strategy given safety and operational issues … And while substantial oil related expertise resides in the Venezuelan diaspora, populating PDVSA with skilled personnel while rooting out decades of corruption will not be easy, cheap or quick.”    

Breaking news to watch:

• Maduro’s paramilitary forces successfully repulsed aid convoys at the border last month, and the opposition’s momentum began to dissipate with Guaido outside the country.
• Guaido’s return yesterday (March 4) without immediate arrest and with outspoken support from the United States and like-minded democracies was a positive step.
• But if his calls for mass protests on Saturday go unanswered, Maduro may see the opening to make good on his threat to arrest Guaido. That would effectively smother the political opposition once more while the world looks on.