So far 2017 has been marked by worrisome levels of political confrontations in Venezuela. The South American nation is by far the region's worst performing economy. Venezuela's GDP is expected to continue to contract in 2017. Inflation is expected to top 700% this year. The country's economy remains hamstrung by a nonsensical system of currency controls. Maduro has so far been unable to do much of anything to try and get Venezuela's economy back on track. Aside from a massive state-owned oil company Venezuela's economy has few major employers. Maduro's government has exacerbated the problems it faces by seizing a factory operated by GM. (Other major companies such as Pepsi, Coca-Cola, Ford, and Colgate have also faced major problems in Venezuela.) Venezuela's insane currency controls mean that political insiders can get access to dollars at a criminally low official exchange rate but ordinary citizens and companies can't trade in their nearly worthless Bolivars for dollars to import basic goods. According to one estimate, Venezuela's black market dollar exchange rate now sits at over 5383 to one.
President Maduro has proved to be an inept but surprisingly (and scarily) stubborn leader. Rather than acknowledge growing opposition to his government he has tried to entrench his position. Maduro has called for a new constitution, brought protestors in for trials in military courts, and made wild accusations that he's facing down a coup. Over 40 people have been killed in clashes with riot police over the last few weeks. Meanwhile, Maduro has jailed one leading opposition leader and banned another from running. Maduro now lacks popular support but is trying to consolidate power by undermining Venezuela's democracy and establishing autocratic control.
For now Maduro still enjoys the backing of key military leaders and a swath of the country's poor. As the economy continues to collapse, however, Maduro may find himself with fewer and fewer friends. To get a sense of what may unfold over the next few months in Venezuela I reached out to Nicholas Watson, a senior Latin America analyst at Teneo Intelligence, a boutique political risk consultancy.
Nathaniel Parish Flannery: We've seen a lot of disturbing reports coming out of Venezuela over the past few weeks. Are we seeing Venezuela's slow-burning political crisis start to explode into something more serious?
Nicholas Watson: Venezuela has been in a slow-burn crisis for some time: the signs were present well before Chavez’s death in 2013. However, what we are seeing represents a new – and very possibly terminal — phase of the crisis. The violence is certainly worse than in the previous bout of major unrest in 2014. Since then, the economy has gone into free-fall, with shortages of food staples and medicines now at severe levels, and inflation out of control. Also, Maduro has blocked off every other means of constitutionally-mandated change, so there is really little else left for the opposition other than to take to the streets. By blocking the recall referendum process in October 2016, using the subsequent Vatican-mediated dialogue to buy time without making any concessions, and barring opposition leader Henrique Capriles Radonski from holding public office, the government has actually helped unite the opposition. Capriles, a moderate who previously did not back direct action, now supports protests.
The current unrest is also different because the fissures within Chavismo — always latent — have increasingly come to the surface since the beginning of April. The most prominent figure to break with the government has been Attorney-General Luisa Ortega, but she is not alone. Ortega has not been fired, probably because the government knows it cannot do so without triggering more defections. The move to re-write the Chavez-era constitution is also controversial among some Chavistas, and could precipitate further internal ructions.
On the international front, broader shifts in the region have helped erode regional support for Maduro. Argentina, Brazil and Peru now have leaders who are not pre-disposed to Chavismo, and the region has moved slowly to adopt a more robust stance towards Venezuela; to avoid sanction by the Organization of American States (OAS), Maduro has moved to withdraw Venezuela from the bloc. For its part, the U.S. — despite the recent change in administration — continues to recognize the risk that unilateral action towards Venezuela can be counter-productive. External pressure on Maduro is important, but the most significant actors in any solution to the current impasse are likely to be domestic.
Parish Flannery: At this point what is holding Maduro in place? Who are his allies and how likely do you think it is that he'll be able to fend off calls to resign or hold new elections this year?
Watson: Fear is part of the glue that is enabling Maduro to hang on. Large numbers of senior government officials all the way up to vice-president Tareck El-Aissami are accused of involvement in drugs-trafficking and massive corruption. If the government were to collapse, they could face extradition to the US. The armed forces have important vested interests in the status quo, and are involved in multiple aspects of the economy, both legitimate and more shadowy. Meanwhile, brute force remains key to the government’s survival. The National Guard [GNB] together with armed gangs called colectivos that are loyal to Chavismo represent the government’s coercive arm, and these groups have so far been able to deter demonstrators and violently repress protests from reaching downtown Caracas, where the presidential palace and ministries are located.
There is also a residual loyalty to Chavez’s legacy. In this respect, it is important to note that Maduro still retains some, albeit fast dwindling, capital because he was personally chosen by Chavez to carry on the Bolivarian revolution. It also helps Maduro that there is also no clear alternative leader from within Chavismo with sufficient political capital or personal popularity who could plausibly take the Revolution down a different path and ensure Chavismo’s survival. By the same token, opposition unity has tended to be fragile, and until recently, there were considerable divisions over strategy. The opposition has also had difficulty in extending its appeal beyond the middle-class to disenchanted chavistas from lower-income sectors; this remains a challenge for the MUD coalition. Many low-income sectors are disillusioned with the government, but have not joined the protests, either because they have been forcibly dissuaded by the GNB, or because many are occupied by the daily struggle for survival.
In theory, the government can withstand the drip-feed of protests for weeks more if there are no major shifts in the pattern we are currently in; that’s to say, no large loss of life or particularly egregious case of brutality that prompts total societal outrage or very serious looting that cannot be controlled by the GNB alone. But if the crisis shows no sign of abating and the death toll is still mounting on an almost daily basis, it is difficult to see how the government can survive amid further defections, barracks protests, acute shortages, and a possible refugee crisis.
Even if the government manages to tame or reduce the protest movement to an increasingly violent rump, leaving the opposition totally demoralized, and causing an exodus of refugees, it is difficult to see an openly authoritarian regime in the region surviving for long, given that the new constitution, if it materializes, would lack legitimacy, and Maduro’s position would essentially rely on the support of the armed forces.
Parish Flannery: A lot of Venezuela's economic problems seem to be caused by the country's insane system of currency controls. Floating the currency might remove a lot of distortions and allow Venezuela's economy to stay on track. Do you think there's any chance Maduro will work to dismantle currency controls?
Watson: Maduro has had plenty of opportunity to alter the course of economic policy but his political weakness prevented him from doing so. Now that his position is so fragile, it is extremely difficult to see the administration making any meaningful reforms. What’s more, the institutional framework is now in such an advanced state of decay and the government’s capacity to formulate coherent policies so doubtful that reform looks almost impossible. Currency and price controls will likely persist alongside other chronic distortions. If anything, Maduro’s inclination will be to double down on the failed policies of the past, while hoping for an oil price rebound. The constitutional re-write appears set to advance plans to implement a communal state built along Cuban lines.
The risk of default will remain high — markets will get nervous again in the run-up to this year’s October/November payment spike — but the government recognizes that a failure to meets its debt obligations would block oil sales and choke off the only thing keeping the economy afloat.
