Could Venezuela become the next global hot potato??
A bit long, but an interesting take on another possible S.American collapse.
Any opinions??
Regards,
Ron
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From: alert@stratfor.com
Date: Sun, 29 Nov 1998 16:31:46 -0600 (CST)
To: alert@stratfor.com
Subject: Weekly Analysis -- November 30, 1998
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Global Intelligence Update
Red Alert
November 30, 1998
Venezuelan Elections Hold Possibility of International Crisis
A potential crisis is brewing in Latin America, with global and
strategic implications. The crisis intersects with the future
development of two of the world's largest trade commodities, oil
and drugs. It can also have substantial implications for the
world's financial crisis. It has the potential to deeply affect
American interests, as well as to endanger substantial numbers of
American citizens, and thereby raises the possibility of U.S.
intervention. This crisis may never occur, but if it does, it
will take place in the next few weeks and will pose an intense
danger to many global interests. It bears very serious
attention.
The country we are speaking of is Venezuela, which is having an
election on December 6, 1998. The man leading the polls, and by
all accounts almost certain to win the election, is one Hugo
Chavez Frias. Chavez is a former Colonel in the Venezuelan Army.
He spent two years in prison following a failed coup attempt in
1992. Chavez is enormously popular with Venezuela's poor, and
his candidacy is showing growing support among intellectuals and
other sectors of Venezuelan society. During rallies, he wears a
red beret and can sound very much like Fidel Castro. At other
times, he puts on a suit and tie, and sounds like a moderate
reformer. No one is quite sure what Chavez believes in and it is
sometimes suspected that Chavez himself does not know what he
believes in. But whatever he believes, he believes with a fervor
that has endeared him to his followers, and has frightened his
opponents, some of whom are concerned with his militant, anti-
corruption stand. Among these opponents are: the traditional
parties in Venezuela; the United States government, which refused
to issue him a visa last spring because of his role in leading
the 1992 coup; and the major American banks that have lent
billions to Venezuela and are frightened by Chavez' threat of a
debt payment moratorium.
The real roots of Hugo Chavez are to be found in the collapse of
oil prices in 1998. The decline of oil prices undermined what
had been a growing economy, creating a vast pool of discontent in
Venezuela. Chavez' candidacy drew on this discontent, which
propelled him into the lead for the Presidency. Politically, the
decline in prices was coupled with the perception that Venezuela
had compounded the problem through mismanagement. Venezuela's
national oil company, Petroleos de Venezuela S.A., or PDVSA, had
undertaken massive oil development plans based on the publicly
stated assumption that oil prices would be rising in 1998. The
subsequent collapse of oil prices affected many countries, but
Venezuela, which derives about 80 percent of its foreign exports
from the sale of petroleum and related products, has been one of
those most effected.
The decline in oil prices has forced the Venezuelan government to
slash its budget, cutting social services and deeply affecting
the poor. The decline in exports has depressed the Venezuelan
bolivar, increasing the cost of imports. This, following the
massive devaluations earlier in the decade, has badly undermined
the position of the middle class. The perception of the two
major political parties -- Accion Democratica, a mildly left of
center party, and Copei, a Catholic, right of center party -- is
that they are both corrupt and irrelevant. Thus, the moment for
a charismatic political leader from outside the political
establishment is at hand.
Chavez' position is both nationalist and socialist. As a
nationalist, he has charged that PDVSA deliberately inflated the
expected price of oil in order to encourage massive foreign
investment in Venezuela under a program called "La Apertura" or
the opening. La Apertura was an opening to foreign oil
companies, backed by foreign banks, to invest in Venezuelan
energy resources, in order to increase Venezuelan production and
world market share. Foreign companies and banks did come into
Venezuela. As prices declined, the effective equity base of
these investments contracted, and with it, Venezuela's credit
ratings. As the cost of foreign money went up, national reserves
declined. Foreign banks gained, by default, greater influence
over Venezuela's internal affairs. In the classic model,
Venezuela's ability to borrow became increasingly dependent on
the IMF's evaluation of its financial position. This appalled
Chavez the nationalist just as much as the increased pressure on
the poor and middle classes offended Chavez the socialist.
Thus, Chavez is poised to win the December 6th elections, with
the swearing in as President occurring in February. And this
brings us to the crisis. There are those who feel deeply
threatened by a Chavez victory. The two major parties are far
behind. Accion Democratica is running an old political boss who
draws what strength he has from a still strong political machine.
Copei is running Irene Saez Conde, who looks good, given that she
was 1981's Miss Universe and has been treated kindly by time.
She has been a fairly effective mayor of a Caracas district and
has actually performed creditably as a politician. Neither of
these candidates have any chance of even coming close, with their
poll results mired in the single digits. Chavez' main opponent,
Salas Romer, a Yale educated technocrat is running an independent
candidacy, and is about 5-15 points behind, depending on which
poll you look at. The two traditional parties might have the
ability to elect Salas Romer if they throw their support to him.
But they can't seem to get a stop-Chavez movement organized and
it is not clear that they can actually deliver their voters to
Salas Romer.
It is therefore assumed that Chavez will win. Which is where
things start to get interesting. Caracas is being swept with
rumors of coups this weekend. Accion Democratica, which is
bitterly opposed to Chavez (and just a week ago was bitterly
opposed to Salas Romer as well), is said by some to have tried to
organize a military coup before the election to prevent a Chavez
election. The coups were apparently stopped cold by both Army
officers favoring Chavez (he has strong support in the Army) and
by the current President, Caldera, who is committed to a
democratic handover. However, as the week wears on, if no
coalition emerges to stop Chavez, the possibility of a coup
increases substantially. Most worrisome, of course, would be a
partial coup, in which elements of the armed forces find
themselves arrayed against each other.
A more dangerous situation would emerge should Salas Romer
suddenly and miraculously came from behind and win next Sunday's
elections. There is a long tradition in Venezuela, not unlike
Chicago's, of the spirits of the dead voting in close elections.
The polls clearly show Chavez ahead. He might well have some
legitimate slippage in the week before the election, but he has
already made it clear that if he loses, he would regard voter
fraud rather than shifts in public opinion to be the likely
cause. It is very clear that if the election were stolen, his
followers would go to the streets. It is also not clear to us
what the Army would do. At the very least, there would be chaos.
So what if Chavez wins and actually manages to take office? The
first response to a Chavez victory will be capital flight as
money pours out of Venezuela. If he responds with currency
controls, then the international lines of credit that are the
life-blood of Venezuela will disappear. He will be in the midst
of a financial crisis of monumental proportions. His political
support will dissolve rapidly, as the benefits he promised fail
to materialize. Chavez will not allow that to happen.
Therefore, in the two months between election and inauguration,
he will do everything possible to calm the financial markets. He
will leave intact the senior management of PDVSA. He will
continue talks with banks that he has already begun. He will
moderate his position, because he has few other options. But if,
and this is a big if, he does not take this prudent course, the
country will rapidly implode.
It should be remembered that there are some outside forces that
would be delighted at instability in Venezuela. OPEC just held a
disastrous meeting in Vienna last week, in which it became clear
that the organization is incapable of forging a policy designed
to stabilize oil prices. One of the major reasons for this is
Venezuela. Venezuela has been breaking its quota for years,
under the reasonable theory that the quotas were designed to
protect the interests of the Persian Gulf producers. Venezuela
has been committed to maintaining the price of the bolivar during
the weeks leading to the election. PDVSA has compensated for
falling prices with increased sales. This has not pleased Saudi
Arabia and other Persian Gulf producers. An internal crisis in
Venezuela that might disrupt production would not displease them
at all. They might help create it, given a safe opportunity.
There is one country that urgently doesn't want to see chaos in
Venezuela: the United States. There are several reasons for
this. First, Venezuela is the largest source of oil to the
United States. Washington does not want to see a disruption of
that supply. Anything that increases U.S. dependence on Persian
Gulf oil at this time is not in the American interest. In
addition, Venezuela's PDVSA owns one of the largest oil refiners
and distributors in the United States, CITGO, and short-run
disruptions in its operations would not be pleasant.
Second, there is the matter of drugs. The U.S. is involved in a
major military campaign in and around Colombia. This war has
occasionally spilled over into Venezuela. Venezuela's Orinoco
River has become a major outlet for Colombian drugs headed for
the East Coast of the United States via the Caribbean Island
route. Other drugs have been shipped through Maracaibo on
freighters and tankers heading to the States. A breakdown in the
Venezuelan military would throw open Colombia's frontiers with
Venezuela, creating a hemorrhage of drugs. Moreover, there have
been rumors alleging that Chavez is himself in contact with
Colombian guerrillas and drug lords and that, in the event he is
blocked from taking office, he will call on their support to
destabilize Venezuela.
Third, there is the international financial situation. The
United States has been working very hard to separate Latin
America's economic crisis from that of Asia, and to bring the
biggest problem, Brazil, under control. This process has been
pretty successful until now. Nothing could be worse at this
point than to have Venezuela, already a strategic economic
relationship because of oil, blow apart politically. The
financial support the U.S. Treasury has carefully cobbled
together for Brazil would very quickly come unglued. Financial
institutions massively exposed in Venezuela would find that their
appetite for Brazilian debt would not be nearly as large as the
IMF had planned.
Fourth, and not trivial, is the fact that there are tens of
thousands of Americans and other foreigners scattered throughout
Venezuela. It is U.S. policy to extract U.S. nationals from
areas where they might be in physical danger. If the situation
were to deteriorate into one in which the Venezuelan armed forces
become divided and the situation became unstable, the United
States might find itself forced by its own policies to act to
protect its nationals. Extracting these nationals would not be a
quick, 24-hour action. It is something the United States does
not want to see happen.
Thus, what would normally be a minor internal affair has major
potential international implications. There are those in the oil
industry who would be very glad to see Venezuela blow apart.
There are those in the drug trade who would also be delighted to
see Venezuela in chaos, decreasing the risks and costs of
transshipment through Maracaibo and the Orinoco route. Those
trying to stabilize the Latin American finances would be
appalled, seeing this as a major threat to Latin American
financial recovery. Finally, the United States, engineer of the
Brazilian bailout, primary buyer of Venezuelan oil, home of
CITGO, and guarantor of the physical safety of tens of thousands
of Americans in Venezuela, urgently wants to see a successful,
peaceful political transition.
Here is the paradox. The fate of Venezuela ought to be of major
international concern. There are important international
interests obviously concerned with events there but the general
awareness of the stakes is not widely understood. Even inside
Venezuela, the international significance of the elections is not
really appreciated. We expect that many outside forces are trying
eagerly to influence the outcome. At the center of this is the
enigma of Hugo Chavez. It is our view that he is an ambitious,
intelligent man who is as principled as most politicians. If he
is allowed to win what he has clearly earned, we expect that the
electoral outcome will be far less dangerous than if the prize is
stolen from him. If that happens, the consequences will be felt
far beyond Venezuela. International forces will close in on
Venezuela, looking to limit the damage that Venezuela's chaos
does to the rest of the world. This is one of those strange
crises that appear of little consequence to the rest of the world
but which have enormous implications. This affair could end very
badly for everyone, and should be closely monitored this week.
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