The Power and the Money

The Bolivarian Revolution starts to consume itself

The Boston bombings  have understandably sucked the oxygen out of foreign news coverage. (The mother of one of the victims works at my university. A friend and colleague of mine finished the race shortly before the blasts, but was thankfully already headed home on the T when they happened.) To compensate, in my own small way, I will post a short update about the violent post-election confusion in Venezuela.

Violence broke out after the elections. I cannot say who was responsible, although government supporters seem to be responsible for much. President Maduro has withdrawn his offer to recount the votes; the Supreme Court has now ruled that out. Justice Luisa Morales stated, “In Venezuela the system is absolutely automatic, in such a way that manual recounts don’t exist.”

That is bizarre, since one of the great things about Venezuelan elections is that absolutely the system is set up to allow manual recounts.

Even more bizarrely, the government issued and then suspended arrest warrants for opposition leaders, including Henrique Capriles. In the face of government threats, Capriles wisely called off demonstrations. 

I do not think that Venezuela is headed towards civil unrest. I do think that the Maduro government is in the process of destroying its own legitimacy. This will not end explosively, thank the Lord, but it will not end well.

Why I would not want to be the next president of the Bolivarian Republic

Reader Shah8 asks about the problems is Venezuela’s economy. It’s a good question.What are the time bombs waiting to go off?

Before I start, let me present the case for the defense. The linked paper argues that Venezuela’s economic expansion is sustainable. The linked paper, however, is incorrect.

First, the authors sustain that payments on Venezuela’s foreign debts are manageble. They are correct. (Figures 3 and 4.) The problem is that the interest burden is not the problem. The problem is that government of the Bolivarian Republic requires capital inflows around $15 billion every year to stay in balance. If those inflows drop, then BLAM ... sudden stop.

(The authors are convinced that China would not allow Venezuela to collapse. I am unclear as to why they believe that.)

Second, the authors argue that the bolívar is not overvalued. They base this on a scatterplot of countries. On the Y-axis they put the ratio between the official (or market) exchange rate and the exchange rate at which a basket of goods and service would cost the same as in the United States. Venezuela is not out of the pack.

The problem is that this measure has a lousy track record of predicting currency movement.

There is better measure of the bolívar’s overvaluation: the difference between the official rate and the black market rate. (The black market rate is tracked, more or less, at this website.) The gap has now approached three-to-one. It hard to see how Venezuela can sustain that without worsening shortages of imported goods or a major devaluation.

The only other country in the hemisphere in a similar situation is Argentina. When I was in Argentina in May and June of 2012, I was very tempted to blog about the controls despite a lack of time. (I wish I had; perhaps I still will.) Pesos were pegged at 4.5 per dollar, but while I was there the “blue market” rate hit 6.15.  A Brazilian couple was arrested by dog-using police teams practically in front of me; they were carrying several thousand dollars. (The papers reported that they were acquitted.) That was legal, but the dollar-sniffing dogs were hunting black marketeers. The controls made (and make) life difficult for small manufacturers, which often find it difficult to buy the dollars they needed to import specialized goods.

But Venezuela’s exchange controls are in a whole different level from Argentina’s. The Argentine blue rate is around 60% above the official rate; the Venezuelan parallel rate is almost three times the official rate. Argentine controls hurt some importers who cannot get dollars, but they are not noticeable in the shops and streets. Venezuelan controls, on the other hand, cause cooking oil, margarine, and toothpaste to disappear. Venezuela has been plagued by periodic shortages for years, but they are now becoming pervasive.

That is not sustainable. Well, it is ... but at the cost of ever-worsening import shortages. Either Venezuela will develop an extensive set of import-substituting industries (a la Mexico circa 1980) or most Venezuelans will lose access to manufactured goods. There is no sign of the first thing happening.

Both these problems — a dependence on foreign borrowing and unsustainable capital controls — come together in the electricity crisis. I blogged about it in 2009: it is not getting better. Other countries have experienced temporary shortages (Ecuador in 2009) but none have suffered ever-more-erratic service for four years. (Ecuador has resolved its problems.) Installing thermal generators requires the government to borrow to get the dollars, and the refusal to charge market prices for energy drives up the budget deficit. Then, to make things worse, the exchange controls drive up construction costs. (I explain why that happens here.)

In other words, there are three ticking time bombs waiting to hit the next Venezuelan administration. First, capital inflows could slow; at some point they will slow. Venezuela is not in a position to handle that without a severe recession. Second, at some point either the shortages will become unsupportable or the bolívar will be devalued. Shortages will not be good for the party in power. A devaluation is equally problematic. With inflation already running north of 20%, it could (oh, heck, almost certainly will) cause large price spikes with all the ensuing damage to living standards. Third, the electricity crisis shows no sign of abating. Maduro blamed the blackouts on gringo sabotage; I do not think that is an effective political strategy.

There is a fourth time bomb: crime. Hugo Chávez was seemingly immune to criticism on the topic; the next administration will not be.

And there is a fifth: Chavista foreign policy. More on that in a future post.

I make no predictions about which will blow up first or how badly. But at least one of them almost certainly will. The next administration will have to fix the problems or deal with the aftermath ... but there are no painless fixes.

How Venezuelan voting operates

 

I said yesterday that Venezuela had an excellent voting system. I did not explain how or why. So here is Caracas Chronicles with a great explanation! From them:

1. You vote at an electronic machine;
2. The machine prints a voucher, which you drop in a ballot box;
3. The machines prints a tally of the votes at the end of the day;
4. The machine sends the tallies to Caracas;
5. 54% of tables are tallied on the spot, with hand-counts of the vouchers in front of witnesses.

You end with three tallies: the electronic record, the machine print-outs, and the vouchers. Hard to cheat, and easy to recount. (There are rumors of vouchers found dumped in the trash. We will see. I am skeptical.)

Voting is one thing that the Bolivarian Republic does very well, much better than its predecessors.

Florida should be so lucky.

Maduro wins in Venezuela by a razor-thin and doubtful margin ... but Capriles should accept it

Holy cow! I just fired up ye olde web browser, to discover that Nicolás Maduro was still the President of the Bolivarian Republic of Venezuela ... by a margin of 1.59%. He eked out a bare majority of 50.66% of the vote.

That’s not a good result. It may even be the second-worst possible result. (A narrow win by the opposition, under Henrique Capriles, would have been the worst possible result, albeit an extremely unlikely one.) Capriles as already fired a salvo: “We alert the country and the world of the intention to try and change the will expressed by the people.” (The tweet no longer seems to be up.)

The bad side is that the result will be challenged. Venezuela actually has a rather good voting system. The electronic machines record a paper ballot, which is saved, so manual recounts are possible. I get worried, however, when the president of the electoral commission declares a close result to be “irreversible.”

This second-worst result can be turned into the best possible result, however. All Capriles has to do is accept it and admit defeat.

Simply put, the Venezuelan economy is full of ticking time bombs. Why be in office as they start to go off? Let the Socialist Party take the responsibility for the mess they have caused.

The Alaskan way in Venezuela?

 The great state of Alaska has a fairly unique way of handling hydrocarbon revenues. According to Article 9, Section 15 of the constitution of Alaska, “at least 25 percent of all mineral lease rentals, royalties, royalty sales proceeds, federal mineral revenue-sharing payments and bonuses received by the state be placed in a permanent fund, the principal of which may only be used for income-producing investments.” In 1980, the legislature set the actual pay-in requirement at 50% of the above revenues.

The Alaska Permanent Fund Corporation (APFC) then invests the proceeds. For reference, in 2012 the Fund received $915 million from the state, up $28 million from 2011. (APFC annual reports can be found here.) The APFC is more-or-less free to do what it wants; it is fairly conservative but not as much as some other sovereign wealth funds.

Roughly 53% of the investment income earned by the APFC is then paid out in dividends (calculated here) to citizens of Alaska, i.e., any U.S. citizen resident for at least six months. (Alaskan law previously favored longstanding residents, but the U.S. Supreme Court threw that out in 1982.) Dividends are based on a five-year rolling average, so it is unlikely that a crash (like, say, 2008) would axe dividends although. That said, it is possible. Last year the APFC transferred over $605 million; in 2011 it transferred $801 million. (The link will take you to the web page of the organization that distributes the dividends, called the Permanent Fund Dividend Division; that is different from the APFC.) Historical data on dividends can be found here.  

You got it: every man, woman, and child in the State of Alaska gets a check ($1,174 in 2011) cut to them by the state government from the proceeds derived from the state’s titular ownership of all subsoil resources. Which is why, obviously, Alaskans hate socialism. 

Could this system work in Venezuela? Pedro Rodríguez, José Morales, and Francisco Monaldi suggest that the answer is yes. Oil has been a net benefit to Venezuela, but the country has clearly wasted most of the income; giving cash to citizens could solve that issue. Still, there are a couple of rubs. They address all of them in their paper, but not in sufficient detail:

1. How much is needed to keep the Venezuelan state running? Alaska set up the Permanent Fund fairly close to the beginning of the oil boom. Venezuela, on the other hand, will be doing so after a decade of high oil rents and almost a century of oil dependence. The authors are probably correct to argue that a new government could shut down most of the “misiones” without too much trouble. The authors are certainly correct to argue that the country would be better off getting rid of its idiotic fuel subsidies. It is less clear to me, however, that starving the rest of the bureaucracy would be wise, regardless of how bloated it may be. Venezuela right now suffers from too little governance in some very big fields (police, courts, schools and infrastructure, just for a start) and fixing the mess left over from President Chávez and his feckless Punto Fijo predecessors could easily require more money, not less;
2. How do you deal with disincentive effects? The amounts that would be distributed under the Venezuelan plan are a much larger share of income for the median (let alone poor) Venezuelan than for the median Alaskan. Alaska in 2011 had a median income of $67,825 per household, against an average APF check of ($1,174 × 2.65 people per household) $3,111. Call it 5% of per capita income. In Venezuela, though, similar numbers would have in 2008 represented “31% of per capita income for those at the bottom 25% of the income distribution, 15% for the next quartile and 8% and 3% for the top two quartiles respectively” at official exchange rates. Unofficial exchange rates could as much as triple those figures;
3. The volatility problem follows. Alaskans just have 5% of their income tied to swings in oil prices plus financial markets. (To be frank, the Alaskans have not solved that problem despite using the mechanisms proposed by the authors to do so.) In Venezuela, it will be much higher; 
4. How do you get past the unpopularity of the plan? The Venezuelan opposition proposed such a thing in 2006. The authors have evidence that a lot depends on how the proposal is phrased, but those results do not take into account the inevitable opposition campaign;
5. If you solve problems (1) and (2) by allocating only a relatively small percentage of the oil money, what exactly is it that you have solved? I am honestly unclear. Is it the management of the hydrocarbon sector? Well, lots of countries have more-or-less solved at problem in various ways: Brazil and Algeria come to mind. Is it to weaken political machines? OK, but populists could still play with payouts, no? Is it to insure that benefits flow to the poorest? I am with them on that one, but it might be hard to sell.

In short, the authors make a compelling case, but I think the devil really is in the details. I would like to see a more detailed proposal.

Around the Revolution again

Hugo Chávez just won re-election by a convincing margin in Venezuela. If I may, my friend Francisco Rodríguez at Bank of America called it correctly. To be honest, although Capriles did have a few good poll results, most of them showed a Chávez win. Anyway, the Bolivarian Revolution will go on until 2019 , even if the President passes away in office in the meantime. His successor probably won’t be Vice-president Elías Jaua. If something happens to Chávez between now and January 10, 2017, a new election will be held within 30 days. If he passes away after that date, then the vice-president will take over, but the Veep serves at the pleasure of the President and there is no guarantee that the person in the office will be the person in the office then.

In Ecuador, meanwhile, the big news concerns Assange and Occidental. With the former, not a whole lot is likely to happen. The Ecuadorians are settling in for the long haul: it is an easy way for Correa to take an anti-imperialist posture and distract attention from press measures at home. Correa is ahead in the polls for the 2013 election, but there is a while yet.

What I love is that Rafael Correa is going to advise Tunisia about dealing with debt! That is awesome.

Bolivia is having a rougher time. Two different groups are in conflict over the mining industry: unionized employees and cooperative independent miners. Until June, the government could play a conciliatory role, with Glencore as the foreign villian. But by nationalizing the mines, Evo has lost his cat’s paw. Now he is smack in the middle of a fight between the union and the small independent miners, which is a bad place to be. Moreover, his nationalization fights are starting to go bad. He just told a Canadian silver mining firm to go hang, no compensation. Legal recourse is not the problem, since the investment happened after Bolivia left ICSID (although there are other options, see next paragraph). Rather, the problem is that the nationalization, like earlier ones, has put the government smack in the middle of a conflict between different local interests. This is trouble.

President Morales has made a habit of nationalizing something every May Day, usually with compensation, but Rurelec has taken Bolivia to arbitration over a 2010 electricity nationalization. Since ICSID is no longer available, the arbitration will be held under looser U.N. rules. The nationalization beat the hell out of Rurelec: it lost 80% of its revenues and its share price crashed from 16p to 9p (U.K.). So it wants its money. It is less clear if it can collect, although the new nationalizations are making its life a little easier. The company sounds confident.

Finally, all-quiet on the Nicaraguan front, including a giant sigh of relief that President Chávez won re-election, what with this project getting underway. We think.

Burying the lede

The New York Times had a story today about the changing geographic location of U.S. oil imports. We’re importing more oil from Saudi Arabia.

The problem with the story is that it began with an argument that makes no sense at all. “This reversal is driven in part by the battle over Iran’s nuclear program. The United States tightened sanctions that hampered Iran’s ability to sell crude, the lifeline of its troubled economy, and Saudi Arabia agreed to increase production to help guarantee that the price did not skyrocket.”

Huh? The U.S. didn’t buy Iranian oil. So having Saudi make up for a boycott of Iranian oil shouldn’t increase U.S. imports from Saudi Arabia. That is just a seriously dumb pair of sentences.

Later on there is another nonsensical statement: “Domestic oil production has been surging the last three years and is up 10 percent this year. But most of the new production is coming from shale oil fields in North Dakota and Texas that produce high-quality sweet grades. Many of the refineries on the Gulf of Mexico coast are designed to refine the heavier oils that the United States has traditionally imported from Venezuela, Mexico and Canada.”

Uh ... nothing in that paragraph is false, but Saudi oil isn’t heavy either. Why then would refineries prefer Saudi crude over American? Surging production in the United States is not going to suddenly cause refineries to import oil from Saudi Arabia. That is another weird statement.

So if it isn’t the Iranian situation, and it isn’t surging U.S. production, why are we importing more Saudi oil? Well, the answer is buried down in the story: Mexican and Venezuelan exports are dropping, and the pipelines don’t exist to move U.S. and Canadian crude to the Gulf refineries. “Mexican and Venezuelan production has been sliding the last few years, and much of that oil has been replaced by Canadian oil from oil sands. While Canadian production has been increasing rapidly in recent years, there is not enough pipeline capacity.” (They didn’t mention U.S. crude, it’s true, but the point still holds.)

In fact, when you look at the numbers (which the article in fact does), it is entirely driven by a fall in imports from Mexico. Refineries are buying Saudi crude (over U.S. production in faraway North Dakota) to make up for Mexican shortfalls.

I am not sure that there is a big national security impact from this, given that as long as North America is a net importer, there is not a whole lot that will protect us from price fluctuations. But it does highlight Mexico’s problem.

Reforms are afoot ... but it is unclear if they will work. More on that eventually. The point for this post is that the Times buried the main part of the story in a fog of words.

And now Venezuela annoys Russia!

 All right, so this story is neither unpredictable nor surprising. But it seems ironic. Hugo Chávez, you see, has made a deliberate policy of attracting investment from countries like Russia and China in order to displace the evil companies from the Empire. He would be free from the Empire without losing access to foreign capital and technology. The foreign companies, meanwhile, would get good deals from the Bolivarian Republic, and be protected by diplomatic ties.

How’s that working out? Um, not so great. On September 16, 2011, the government nationalized the gold industry. (The link goes to the text of the decree, for those who are interested in the gory details.) The decree was not, it seems, expected. On April 3rd, the Venezuelan government took over Rusoro, a Russian-owned (and Canadian-listed) gold mining company.

Rusoro says that it’s invested a billion dollars in its operations, and holds title to $3 billion in gold reserves. (In 2010, it had a book value of roughly $590 million.) The market does not agree. At the end of 2010 it was worth only $182 million. Moreover, it had to sell 60% of its output to the Banco Central de Venezuela at an exchange rate of 4.30 bolívares per dollar, at a time when the black market rate was around 8.3.

But Venezuela has gone ahead and nationalized it anyway, for reasons that are beyond me. The company currently has a market cap of $34 million and loses money. The Russian connection meant nothing. So now the owners have put a limit: come to an agreement by June 15th, or go to ICSID. I have no idea what they will get; I will bet it has an NPV above $34 million.

My money is on a settlement. I wish I understood why President Chávez wants to bother, though.

Is Venezuelan heavy oil less risky than French nuclear power?

 So I’ve been looking through the ICC decision against Venezuela. A few things are different from my back-of-the-envelop analysis. As I expected, they did not consider the change in royalty rates to be a taking. On the other hand, they did decide that ExxonMobil deserved compensation for the income tax hike. The panel included only lifting costs of $3.84 per barrel, not including depreciation. (I’m still trying to work out why they did not include upgrading costs.) These things, of course, raise the value of the project.

So what drove the value of compensation back down? The answer is that the tribunal selected a discount rate of 18%. How did they arrive at that number? First, they received expert testimony (provided by the Venezuelan side) that the “hypothetical return that could be gained if a willing buyer were found for the project prior to any events giving rise to the indemnity” would be 19.8% This was backed up by a report from Gaffney, Cline & Associates stating that an 18% return would be reasonable. Finally, the tribunal noted that the average long-term historical return for ExxonMobil shareholders was 18.4%, while the shareholders of the five larges companies earned 17.1%. (Page 428 of the decision. It’s a long decision.)

Is that a reasonable number? Well, EDF builds nuclear power plants in France. When the cost estimate for the Flamanville plant rose from €3.3 billion to €4.0 billion, EDF announced that the cost of electricity from the plant would rise from €46 per megawatt-hour to €54. From those numbers (plus data on the typical capacity utilization rate of a nuclear reactor in France) it is pretty easy to calculate the company’s cost of capital:

 

(This estimate is actually a bit low, since Flamanville is on the sea, and will therefore probably have a higher capacity utilization rate than the average for the French reactor fleet.)

It seems to me that if a French state-owned company uses 13% to evaluate big energy projects in France, then 18% is a reasonable rate to apply to an American private company evaluating a big energy project in Venezuela.

The ongoing ICSID arbitration is not bound by the ICC decision, of course. But the fact that the ICC included the income tax in its decision makes it less likely that ICSID will decide to give ExxonMobil more money. Unless they decide that the royalty changes were a taking, which I still very much doubt, the fight will all come down to the discount rate.

I should add here that it seems that Exxon spent $24.9 million to pursue the arbitration. (Page 459.) I am sure that it’s spending at least as much at ICSID. This stuff ain’t cheap, but I do think it beats calling in the gunboats or the CIA.

Revolution update: not much has changed

 There was a time when this blog gave Hugo Chávez some credit. I wrote that he was building a pretty effective political machine;  I went so far as to call it “Daleyismo,” after the way this guy ran Chicago. I also gave him credit for raising domestic non-oil tax collection. And when the electricity shortages broke out, I pointed out that Chavista policy hadn’t been a complete failure: there had been a lot of investment in generation, but the country was hit by a really terrible drought.

Sadly, it looks as though the Bolivarian Republic isn’t following through even on its successes. The electricity piece, for example, praised the country’s investment in generation capacity, but lambasted the Bolivarian Republic for letting the transmission grid fall apart and encouraging massive wastage. Not a whole lot has changed: Venezuela has brought a lot of new thermal generation capacity on-line, but blackouts continue. Even more embarrassing, Venezuela has been unable to raise natural gas production, forcing it import gas from Colombia, gas produced by one of the oil companies that the Bolivarian Republic is fighting at ICSID. (As Setty reports, the problem was that Venezuela insisted on paying low prices for domestic gas.)

Housing doesn’t look much better. There’s a conflict over how many houses were built in 2011, but the statistics through the third quarter of 2011 don’t look that encouraging:

And, of course, the tax reforms have gone nowhere. Estimated non-oil tax collection will be 12.4% and 12.8% of GDP in 2011 and 2012, respectively, about what it was in 2008. 

I should take the opportunity to add this report about Maracaibo’s metro to nowhere. Although the cable cars in Caracas are a pretty good idea, albeit taken from Colombia.

We won’t talk about crime. It’s too depressing. If you must, here is a report on the situation. The President has said that he shouldn’t be held responsible for the crime rate, and who am I to argue?

Not terribly much to show for all the noise.

Financing the Revolution

 In an earlier post, I marvelled at Hugo Chávez’s mishandling of PDVSA. The same applies, however, to the fellow’s handling of the Bolivarian Republic’s fiscal accounts. There is something truly amazing about watching an oil-rich republic run into severe budget problems at a time of record oil prices. The upshot is that Venezuela might be even less able to thumb its nose at ICSID than people currently believe.

How bad are Venezuela’s budget problems? Francisco Rodríguez, whose work has been mentioned three times before on this blog, has done the dirty work of digging into the Bolivarian Republic’s accounting. That isn’t easy, because Venezuela has increasingly resorted to off-budget accounts, which now account for about a fifth of all public spending.

Let’s take them in turn. The first is Fonden. Fonden is ... well, it’s hard to say. The “National Development Fund” gets part of its money from PDVSA and part from the Central Bank. The Central Bank turns over “excess reserves” to Fonden. What does that mean? Answer: a sneaky way of financing the government by printing money. Consider: the Venezuela central bank prints bolívares and exchanges them for dollars. It then hands the dollars over to Fonden. If Fonden uses the money to import stuff, then the process ends. But if Fonden buys domestic goods and services, then it has to hand the dollars back to the central bank in exchange for bolívares. As of the end of 2009, $30.1 billion of Fonden $58.1 billion has come from the Central Bank. (See page 121.) This is, in effect, borrowing.

The second are the Chinese funds, financed by loans from ... duh ... China. Venezuela has borrowed $12 billion from China, going through PDVSA, and an additional $30 billion that is entirely obscure. (The $30 billion is a 10-year financing facility; it does not seem that the Bolivarian Republic has yet drawn any money from it.) It pays back interest and principal on the $12 billion by shipping back oil. How much oil? Well, PDVSA makes it impossible to tell, by mixing fuel oil and crude in the statistics. (See page 127.) You gotta love that.

On page 9, Rodríguez estimates that the country ships about 89 million barrels to China every year in loan payments. At $97 per barrel, that will be $8.6 billion, so either Venezuela is going to pay that debt off very quickly or China is charging an insanely high interest rate. (Inasmuch as PDVSA is shipping fuel oil instead of crude, the loan will paid off even faster.) Private sources estimate  the rate is LIBOR plus 2.85%, about 4.0% at the moment. That is a very low rate, consistent with a very short payback period for the loans. Nonetheless, I would not discount the possibility that China may be, in fact, running away with the store.

Finally, PDVSA has taken over many state functions directly, and the Bolivarian government carries out a lot of functions outside the official bureaucracy. That increases both spending and revenues.

The upshot, as a % of GDP:

That’s a pretty phenominal level of mismanagement for a country in the middle of an oil boom. The estimate is that the deficit was 7.9% in 2011, and will be 10.9% in 2012. The government will have access to $10.9 billion of central bank reserves (e.g., printed money), $7.7 billion of new Chinese lending, $15 billion of internal debt, and at least $15 billion of external debt. The reason I say at least is because Venezuela does not issue external debt solely to finance the government; Venezuela also issues external debt to prop up its exchange rate. For example, in the first half of 2011, the government needed only $12 billion, but tapped external financing sources totaling $24 billion.

Venezuelan debt financing:

The result is that at least until the country devalues (which would solve a lot of the financing problems, by raising the bolívar value of oil exports) Venezuela will need access to foreign financing. If that is going to come from private markets, then ExxonMobil will be able to attach it in order to pay any ICSID judgments. If that is going to come from multilateral lending institutions, then Venezuela will need to satisfy the U.S. government: Argentina is the only country to have ignored an ICSID judgment, and the Obama administration has declared that it will oppose new lending to that country. (The relevant testimony comes in this video at minute 41:40; more details here.) Venezuela will likely face even greater opposition. Lastly, if the money is going to come from the Chinese government, then China is going to attach strings (or charge quite a bit) ... and it is far from clear that China would want to weaken the existing system of investor-state arbitration.

Either way, Venezuela’s fiscal problems are a bit stunning to behold. It’s an impressive accomplishment, in its own strange way.

Old evil vendepatria PDVSA saves new socialist PDVSA!

 On the turn of the New Year, the International Chamber of Commerce (ICC) awarded ExxonMobil $907.6 million in its dispute with PDVSA over the Venezuelan government’s nationalization of its interest in the Cerro Negro project in the Orinoco oil belt. The press has been pretty quick to call it a victory for PDVSA, considering that the company initially claimed that its investment was worth $12 billion. Exxon, they say, received only book value for its investment, and Chávez has run away with the store.

Is that true? My job here is to argue that it’s not. Exxon received from PDVSA what it was contractually entitled to get. The standard used by the ICC was the market value of the assets, not book value. The assumptions used to calculate that market value, however — chief among them estimates of the expected future price of oil — were limited by a clause in ExxonMobil’s 1998 association contract that effectively put a ceiling on the value of the company’s investment.

In the words of Steven Bodzin: “So for all the rhetoric about how the Old PDVSA sold out the patria etc. etc., the only reason the New PDVSA was able to do so well in arbitration was because of clever bargaining by the Old PDVSA?”

I’m going to briefly walk through the Orinoco value chain. Then I’ll briefly describe some key features of the Cerro Negro contract. Finally, we’ll run some numbers.

Let’s start with Cerro Negro. The project is in the Orinoco oil belt — but keep in mind that until 1956 it was actually called the Orinoco tar belt. (The “faja bituminosa del Orinoco.”) The crude oil there is “extra heavy,” meaning that its specific gravity exceeds that of water. At room temperature, the stuff is gunky and practically solid. Put it into a beaker and turn it upside down; the oil will stick.

That creates a bit of problem in terms of transporting the stuff. There are three solutions. The first is to heat it up and sent it out in special ships. That’s expensive and really only done for oil intended to be made into asphalt. The second is to mix the extra-heavy gunk with lighter crudes and export it. Venezuela’s “Merey” blend is a mix of 61.8% gunk and 38.2% lighter “Mesa” crude. (That’s nice, because it means you can calculate a market price for the gunk.) The third is to build an “upgrader,” where you partially refine the gunk, mix it with a diluent and then export the resulting “synthetic crude.”

The Cerro Negro project covers 115 square miles and includes an upgrader. Its costs, therefore, are not low. The cost to get the extra-heavy crude out the ground isn’t that high. Wikileaks documents indicate that it is around $4 per barrel, but it isn’t as though that number is top secret: Bernard Mommer, formerly the People’s Vice-Minister for Hydrocarbons and currently the Bolivarian Republic’s representative on OPEC’s Board of Governors, estimated them at $3.60. Upgrading costs, on the other hand, are significantly more expensive: Mommer reported them to be $9 per barrel. That comes to a total production cost of $12.60 per barrel of syncrude.

Production costs aren’t the only costs, of course. In 2002, the Bolivarian Republic hiked royalties from 1% to 17%. In 2006, it hiked them again, this time to 33%. That same year, it raised the income tax rate from 34% to 50%. Taxes and royalties, therefore, are very substantial.

When Hugo Chávez converted the Cerro Negro oil extraction project into a majority-PDVSA joint venture in May 2007, ExxonMobil rejected Venezuela’s (undisclosed) compensation offer and went to arbitration. It went to arbitration in two forums: the ICC and ICSID. The ICC arbitration was based on ExxonMobil’s association agreement, which established the Cerro Negro venture between ExxonMobil (41.67%), PDVSA (41.67%), and BP (16.66%). Article 15, “Consequences of Certain Governmental Actions,” stated that Exxon could take PDVSA to arbitration if PDVSA refused to “restore the economic benefit that the foreign party would have received had the discriminatory action(s) not occurred.”

What were the lost economic benefits? Well, at the prevailing oil price for Venezuelan blends in 2007 (and assuming a 9% nominal discount rate and 2% inflation) Exxon would have earned an average of $325 million per year (nominal), with a net present value of $3.0 billion. That’s a lot more than $907.6 million! So was Exxon robbed?

Well, no. The first (and minor) point is that in 2007 it was far from clear that high oil prices were going to last. When ExxonMobil signed the contract in the late 1990s, Venezuelan oil was bouncing around $16 per barrel. So it is possible that Venezuelan lawyers might have persuaded the arbitration panel to use a lower oil price, under the assumption that prices might have crashed. If that had been the case, I would unhesitatingly call the $907 million result a victory for the Revolution.

The nice thing, however, is that we don’t need to resort to hair-splitting. Article 15 of the association agreement tells us the price the arbiters had to use:

… after the first period of six consecutive months during which the price of Brent crude oil is in excess of the threshold price [$27 in inflation-adjusted 1996 dollars], Lagoven CN [PDSVA’s subsidiary in the Cerro Negro venture] will not be required to compensate any foreign party for any discriminatory action(s) with respect to any fiscal year in which the average price of Brent crude oil is in excess of the threshold price, and such foreign party received net cash flow commensurate, after taking into account the effect of the discriminatory action(s), with a reference price for the production produced by the parties that bears at least a reasonable relationship, adjusted for quality and transportation differences, to the threshold cash flow for such fiscal year.

Translation: the highest possible oil price that can be used to value damages in the event of expropriation is $27 per barrel in 1996 dollars, or $37.50 in 2007 dollars. Moreover, that’s the highest price — Venezuela, after all, doesn’t sell Brent but rather lower-priced blends. That price can be marked down to adjust “for quality and transportation differences.” E.g., the arbiters can pick a lower one.

Ah hah! Brilliant! When Brent traded at $37.50, Mesa crude traded at around $32. At $32 per barrel (adjusted for 2% inflation), Exxon would have expected to earn an average of $95 million per year through 2035. At a nominal discount rate of 9%, that would value ExxonMobil’s investment at $865.8 million. It only takes a little tweaking of the discount rate or oil price to get us to the figure that the ICC finally came up with. 

What does this imply for the results of the upcoming ICSID arbitration? Damned if I know. That arbitration is against the Bolivarian Republic, not PDVSA. So Article 15 doesn’t apply. Rather, the relevant document is the bilateral investment treaty that defines what the Venezuelan government can and cannot do. Moreover, it is possible that ExxonMobil will be able to argue not only that the 2007 expropriation was illegal, but that the big royalty and tax hikes the year before were also illegal under the Netherlands-Venezuela bilateral investment treaty. My gut feeling is that Venezuela is going to win, but I’m not sure why exactly I suspect that will be the case.

To sum up, then, this case was not a victory for the Bolivarian Republic. Rather, it was a victory for the PDVSA negotiators who wrote Article 15 of the association agreement back when the plain old Republic of Venezuela invited foreign companies in to develop the Orinoco oil belt. ExxonMobil got basically the maximum that it could have expected to get. So what was that initial $12 billion claim all about? Well, as Michele Bachmann would mispronounce, nothing but chutzpah.

Whose empire is this, anyway?

 A little while back, I argued that information that China may have received oil from Venezuela for $5 a barrel does not represent growing Chinese influence in Latin America, but rather lousy negotiating tactics on the part of PDVSA officials. Lifted from comments (with minor edits), Setty argues that the sales likely represent (if they even happened) corruption inside Venezuela:

I hope you’ve now seen the unredacted text of that embassy memo.

In it, you can see that the embassy itself had doubts about PDVSA board member Fadi Kabboul, its source for this $5 a barrel information. The embassy people’s experience with him was identical to mine. He offers meetings and information and never comes through. He revises history. We don’t know anything about his motives.

Hence, I am loath to trust him on that $5 a barrel figure. Especially since there is evidence contradicting the $5 a barrel figure — it’s pretty clear from the contracts that China was supposed to pay more than that.

It is possible that PDVSA received only $5 a barrel for some shipments. But if that happened, I would bet that the gap between market price and $5 a barrel ended up in someone’s pocket. I think it’s a very long stretch to say that this price shows China has an imperial subject in South America.

Indeed, the most telling item in that memo is the hearsay about George Kabboul. George was at the time head of the shipping department of Venezuela’s state oil company. Previously, he headed its food division, an agency called PDVAL. A 2009 U.S. federal lawsuit named him as having demanded a $2 million bribe to let a ship land and deliver perishable food. Around the same time, pro-Chavez Venezuelans also denounced him for corruption. I don’t have independent information about him, and he isn’t here to defend himself, so please take all this with a grain of salt.

Which is why it’s amusing to read that when the U.S. invited him to come and chat with their information-gathering team, he was worried that he might be “in trouble.” Would any Venezuelan worry that the Chinese embassy had called him in because he was “in trouble”?

Whose empire is this, anyway?

I love that last line! Same as it ever was, perhaps.

Perhaps the strangest thing about the Bolivarian Revolution is how it has mishandled PDVSA, which is, after all, the ultimate source of the regime’s resources. Above is a time series of our best estimates of Venezuelan crude production. New estimates from the International Energy Agency show that the country’s oil production has recovered from the 2002 strike ... but even so, the company has done little other than tread water. To be fair, the company’s 2001 goal of increasing oil production to 5.5 million barrels per day (bpd) by 2006 never looked particularly realistic, at least not in that time frame, but it should be doing much better than it is.

There is, of course, a debate about exactly how much PDVSA produces, and how big its decline has been. A good overview of the state of the debate can be found here. Everything, however, points in the direction of decline: the question is about how much.

In fact, there is indirect evidence from the company that it is in trouble. PDVSA recently cut its 2015 production goal from 4.46 million bpd to 4.0 million. The company regularly abandons its production targets. As Setty said on his blog: we may as well autoprogram the headline “PDVSA cuts production goals” to reappear around this time every year.

In short, China has no influence in Venezuela, the U.S. does, and PDVSA is a wreck all on its own.

China doesn’t have an empire, except maybe in one unexpected country and only if you squint hard

 Empire is one of those ill-defined terms. Problem is, define it too narrowly—say, formal sovereignty over a subordinate political community—and you deny the existence of, say, the Soviet empire in Eastern Europe, or the American one in the Caribbean. That’s not a useful definition. Define it too loosely, however, and every power imbalance becomes an example of “empire.” That’s not helpful either.

One useful way to define empire is through the threat of sanctions. If one political community enforces its writ over another by the threat of sanction (active painful sanctions), then you’ve got an empire. Might be strong, might be weak, but it’s imperial. A corollary, of course, is that the stronger political community will extract either political control or economic benefits from the weaker one. (China gets no visible non-commercial benefit from its presence in the Bahamas, for example.)

Chinese energy policy is often accused of being imperialistic, especially in Africa. The evidence comes in three flavors. First, “equity oil”: the tendency of Chinese state-owned companies to buy equity stakes in foreign oilfields and oil producers. Second, the way China ties state-financed loans to oil agreements. If countries want the cheap finance, they need to give China cheap oil. Finally, the long-term nature of such agreements, putatively locking the producing nations into providing China with oil at a discount.

The most famous of these deals, with Russia, turned out to be a lot less when examined it up close. China lent Russia money at market rates to build a pipeline that would deliver hydrocarbons to China at market prices. It’s hard to see the imperialism. Where was the threat? Where was the benefit?

OK, but that’s with the Russian Federation, you say. Russia is a great power, sort of, and not subject to Chinese pressure the way that smaller and poorer places might be. Okay. To test that, we can go over the universe of loans-for-hydrocarbons deals signed by China since the beginning of 2009. How many of them involved the delivery of oil at less than market price? Not Angola, not Brazil, not Bolivia, not Kazakhstan, not Ecuador, not Turkmenistan.

Has China managed to get a price discount anywhere? Yes, once. In February 2009 the People’s Republic inked an agreement with the Bolivarian Republic which provided a $4 billion loan from the China Development Bank in return for 200,000 barrels of oil per day at a $2.00 per barrel off the market price, invoiced monthly. Now, to be fair, a discount in that range is fairly standard. The problem is that Venezuela’s “market price” is completely opaque. Venezuelan crude trades at rather less than WTI or Brent simply because it costs much much more to refine. Only PDVSA is, shall we say, rather opaque at providing information about the prices that it charges. So how to benchmark against the market price, when the market price (while existant) is hard to find?

You would have to go all James Bond to get the answer. Fortunately, the State Department did so in 2009. Venezuelan sources told State that PDVSA supplied China with oil as low as $5 per barrel. That’s a not a discount of $5 per barrel (which would already be above the $1-$3 norm for such agreements); that’s a price of $5 per barrel.

Wow! Now that’s imperialism!

Only ... well ... imperialism is not defined by a smart bunch of Chinese companies taking advantage of the administrative wreck that is Petróleos de Venezuela. Rather, it is defined as the use of sanctions or the threat of sanctions to alter the governing policies of a subordinate political community. I suppose that maybe you could define the possibility that China would withhold its capital as a form of sanction ... except that the only reason Venezuela has trouble raising capital at much better terms elsewhere is the mismanagement of the Hugo Chávez. (For what it’s worth, which isn’t very much, Venezuela now insists, “We don’t cut prices in any of our international agreements.” Except to the Bolivarian Alliance countries. And Spain. But other than that, we should believe Minister Rafael Ramírez. I mean, he said it below portraits of Che and Fidel!)

I suppose you can call it crafty Chinese imperialism, or you can say, “The people now charged with reaching international supply agreements on PDVSA’s behalf couldn’t negotiate their way out of a wet paper bag.”

Ghana, I should add, appears to be doing a much better job. For all the Ghanian deals’ faults, and there are many, Ghana hasn’t even given the Chinese preference for oil contracts in exchange for their money, let alone a price discount.

In short, Chinese hydrocarbon companies are going abroad ... because that’s where the oil is! Other than in cases of truly gross local incompetence they haven’t gotten particularly good deals, despite widespread bribery on their part.

Uranium, of course, is a different story.

The aftermath of expropriation in the Bolivarian Republic

 One of the reasons why my Boliblogging has fallen by the wayside is that there is an excellent new blog covering (largely but not entirely) Venezuelan issues: Setty’s Notebook. Setty is a journalist, a very good one in fact, with whom I am working on a case about the energy industry in the Bolivarian Republic. If I had a blogroll (Typepad’s fault, not mine) it would only have two entries: his and Ganchoblog. 

Today he reports a stunning report about the collapse of Maracaibo’s economy following the nationalization of the oil services industry. I have a report detailing all the nationalizations (I got it in a very cloak-and-dagger way) and if I ever get the time I will say more. But right now, go read Setty.

Why Venezuelan lights are going out

 Courtesy of Will Baird, here is dramatic evidence of the drought that’s shellacking the Bolivarian Republic and causing power outages.

Awesome. As long as you don’t live somewhere without power. But Will still hasn’t answered my question! What’s with that? 

Inflation-fighting credibility!

 So the Bolivarian Republic recently devalued the bolívar. As you might expect, there were some fears that the move might cause inflation as import prices rose.  IMHO, those fears are simultaneously unfounded and irrelevant. “Unfounded” because the difficulty of getting foreign exchange at the old official price of 2.15 bolívares per dollar meant that imported goods were relatively scarce, and their domestic price correspondingly high. “Irrelevant” because inflation in Venezuela is accelerating regardless of the exchange rate, so who cares?

Anyway, the government worried that the devaluation might cause inflation. So what do they do?  Nationalize a supermarket chain for raising prices!  The President announced the bold move during a seven hour episode of his television variety show, Aló Presidente. The chain will join the other stores of the wonderfully-named Socialist Market Corporation.

That’s inflation-fighting credibility!  Richard Nixon, eat yer heart out.

In housing-related news, the President also gave out 175 socialist apartments, which cannot be rented or sold by their occupants, because that would be capitalism.

Finally! The bolívar falls

  So he did it.  Finally.  When I was last in Venezuela, everyone was puzzled as to why the Chávez government hadn’t already devalued.  What was the political gain?  What was the economic rationale?  The consensus seemed to be that the reason was a combination of an ill-thought-out attempt to repress inflation by subsidizing imports and the ability to give rewards to favored political groups by granting access to foreign exchange at the official rate.  After all, it is a hella big reward to be able to buy a dollar for only 2.15 bolívares instead of 5.6. 

Now it looks like the country will have three exchange rates:  2.6 for “essential items,” 4.3 at the new official rate, and something like 6.0 (for now) at the exchange rate that must not be named.  No, seriously.  It is illegal to discuss the parallel market, let alone trade in it.  (Scroll down to “Conversion and Transfer Policies” at the link.)   

Anyway, the move is long overdue, but the continuation of the parallel rates will continue to give the government a nice tool with which to reward its friends and punish its enemies.  Daleyismo, indeed.

The Chávez boom

 Back in the comments on the post about Venezuela’s electricity crisis, Scott expressed surprise at the claim that the Venezuelan economy has grown like gangbusters since 2002.  “Has growth really been that dramatic?” he asked.  “It doesn't square with a lot of what you read about Venezuela.” 

In point of fact, growth really has been that dramatic.  Last year, there was a back-and-forth between Francisco Rodríguez and Mark Weisbrot about the accomplishments of the Bolivarian Revolution.  There was an slight pin-angel quality to their dispute.  Rodríguez’s data on spending shares and literacy changes were fairly incontrovertible. Their dispute over inequality hinged over the treatment of zero-income households, but even if you throw them out of the sample you get generally stagnant inequality, which is less than revolutionary. 

Similarly, the two argued about the extent of poverty reduction, but Rodríguez’s point was that the Bolivarian Republic had done a lousy job of reducing poverty given the extent of economic growth, not that it had failed to reduce poverty.  In short, the dispute hinged on whether the country deserved a mulligan for the oil boom.   Rodríguez wanted to grade the government on a curve, Weisbrot didn’t. 

So how big was the oil boom?  Big.  Real GDP doubled between its nadir in the first quarter of 2003 (when the national oil company tried to overthrow the government) and the second quarter of 2008.  From a base of 100 in 2003, real private consumption leapt to 115 in 2004, 133 in ’05, 157 in ’06, 187 in ’07, and 202 in 2008.  Even the inequality measures that include zero-income households remained basically unchanged over this period (with a weird spike in 2005), indicating that the consumption boom was pretty well spread.  Poverty dropped from a peak of 55% in the second half of 2003 to 26% by the beginning of 2008; extreme poverty fell from 25% to 7% over the same period.  To be fair, the reduction in 2007 is really hard to measure, since the poverty basket uses official prices, and most staples have been rationed at the official price since then.  (Although Mickey-D’s has not been affected, as best as anyone can tell me.  Ditto most private markets.  Weird sort of socialism, that.  But I digress.)

There is some evidence that the boom bypassed the poorest of the poor:  The percentage of underweight babies born in Venezuela, for example, increased from 8.4 percent to 9.1 percent between 1999 and 2006. During the same period, the percentage of households without access to running water rose from 7.2 percent to 9.4 percent, and the percentage of families living in dwellings with earthen floors multiplied almost threefold, from 2.5 percent to 6.8 percent.  On the other side of the ledger, infant mortality dropped from 21.4 per 1000 live births in 1998 to 18.5 in 2003 and 14.2 in 2006, while the number of primary care physicians in the public sector rose twelvefold.  That said, the above is a red herring for the purposes of this post:  the point is not that the Bolivarian Revolution has been less than revolutionary; the point is that the country underwent a huge boom in 2002-08, and that boom trickled down to the bulk of the population, if not necessarily the poorest. 

The boom certainly translated into jobs.  Formal-sector employment grew 42% from 4.53 million in 2003 to 6.45 million in 2008; informal employment stayed basically unchanged, drifting up from 4.99 million to 5.02 million.  Public employment outpaced private, growing from 11.6% of total employment (formal and informal) to 16.6%, but since my readers are smarter than Michael Steele, they recognize that a job is in fact a job.

So, jobs, incomes, consumption, all way up.  Not as far up as in places that handled the hydrocarbon boom better, like Alberta or Trinidad or Bahrain, but still way up.  Which leaves me curious.  Scott, what did you read that left you with a different impression of economic conditions in Venezuela over the last half-decade?

Housing the Revolution

  One place where the Chávez administration superficially appears to have fallen down on the job is housing construction.  Building residences is one of the easiest ways that I can think of to translate oil money into political support, while at the same time building a class of people dependent on your party’s patronage.  Less cynically, it is also one of the easiest ways to translate an oil boom into a lasting increase in well-being.

 
Yet the actual amount of housing construction has been pretty low.  Cabdrivers (I seem to get a lot of opposition cab drivers) love to point out the above clump of houses on the road to the airport, the orderly red-roofed ones towards the bottom of the picture.  “Look at that!  Big deal!  New face of Venezuela!” they say, sarcasm knife-thick.  Of course, absence of evidence is not evidence of absence; the lack of massive building along the airport road indicates only a (rather sensible) lack of massive building along the airport road.  (Here is a 2005 look at another public housing project.)  Rather, evidence of absence comes from the government’s statistics on the number of new housing units constructed every year:

 

Public construction hasn’t returned to the halcyon days before Chávez, let alone reached new heights.  Now, to be fair, you don’t need to construct a whole lot of public housing to create an effective political machine.  Mexico’s PRI managed to use access to housing as a very effective tool of political support in the 1970s while building only 57,000 houses a year.  Of course, the flip side of that is when the Mexican economy collapsed in the subsequent decade and the PRI needed more support, the Mexican government churned out more houses, building 253,000 per year during the 1980s.  In other words, the Mexico of Miguel de la Madrid and Carlos Salinas managed to churn out six times as many houses every year as the current Venezuela of Hugo Chávez.

The private boom looks interesting, but really isn’t.  It is exactly what you’d expect to happen in a country undergoing an oil boom.  In point of fact, it is a little hard to distinguish public and private homebuilding in Venezuela, since most private housing is financed via a public program called “Ahorro habitacional,” a subsidized lending program.  The program predates the Bolivarian Republic, although it has been changed.  The old program financed mortgages via a forced savings scheme in which employees contributed roughly 3% of their wages into a common pool, from which they could then borrow once they could come up with a down payment worth 3% of the property’s value.  The new program is more complex and involves direct subsidies, but essentially works similarly. 

The bottom line is that the government has not built a whole lot of houses.  In a sense, it doesn’t have to.  The Socialist Party has enough support without a massive homebuilding program.  And such a program, while technically straightforward, would get the government involved in a mass of planning and siting issues that it might prefer to avoid.  But in another sense, it is a puzzling failure, a chance to spend oil money for a threefer:  (1) improve living standards; (2) reward the government’s friends; and (3) put a long-lasting stamp on the built environment, show the Revolution in bricks and mortar. 

The government of Trinidad and Tobago has managed to win re-election besides completely botching up law & order partially on the fact that it used the hydrocarbon boom to fundamentally transform life on the island via the construction of massive tropical Levittowns ... at least massive by the scale of a small country.  So what does the People’s National Movement understand that the United Socialist Party does not? 

Maybe I am missing something.  I only study political machines, I’ve never run one.  Thoughts? 

The Bolivarian military

  Another cat-like day spent sleeping yesterday.  17 hours!  Damn.  I’ve also been craving football, so far as to watch replays of old games on Channel 265.  Strange.

 
Venezuela recently reinstated national military service.  This is only the latest in a series of military reforms.  Taken together, the reforms have fundamentally reshaped the military establishment ... although with so much of the Bolivarian Revolution, its hard to know how well the changes have been executed, or how deeply they run.
 
The reforms started in 2004, when the Army replaced its old woodland camo with a solid olive drab uniform called the “Patriota.”  It was deliberately intended to evoke Cuban revolutionary garb. In 2005, a new National Reserve and Territorial Guard replaced the traditional reserve system.  The National Reserve fulfilled the functions of a traditional reserve, at least at first.  The Territorial Guard went beyond that, establishing a new military branch.  New recruits were trained over 20 consecutive Saturdays, during which they earned 16 bolívares.  By 2006 the government claimed to have trained up 110,000 reservists with a further 800,000 on the waiting lists.  The distinction between the two branches of the reserves, however, had by then blurred.

Those of you have served in a national military will understand that 20 days spread over as many weeks is a rather ineffective way to train soldiers ... whether that was the purpose is left as an exercise for the reader.

The “26 laws” that I marched against in 2008 further extended the reforms.  Superficially, they renamed the National Armed Forces the Bolivarian National Armed Forces.  More profoundly, they put more heft on the Bolivarian National Militia’s bones, constituting it as an official fifth branch of the military, after the Army, Navy, Miltiary Aviation, and National Guard.  (The Guard is oriented towards maintaining domestic order.)  The law also established links between the Militia and the “communal councils” that the government had earlier established.  Communal councils could now go down to the local Bolivarian Militia office and declare themselves an official unit, after which they would receive “advice, adequate training, and all actions pertainining to social questions, the solution of problems.” 

The latest reform took place last month, when the government issued an updated conscription law, replacing the old one from 1978.  The new law strengthens most of the current system of selective service registration, even though the Constitution of 1999 technically bans conscription.  In fact, the government will increase the fines for failing to register, and the new law requires that military documents be presented from anyone desiring to work for the government. 

In theory, now, every Venezuelan now owes a year of military service.  In practice, who knows?

It’s hard to tell what it all adds up to.  The Bolivarian Militia is badly trained, barely uniformed, and generally disorganized.  It might be an attempt to use state resources to train up the “Bolivarian Circles” that used weapons to defend Chávez back in 2002.  In September, the BBC reported that Socialist Party “patrols” were fusing with the militia, but the evidence was pretty half-assed, and it was monumentally unclear what such a fusion would get the government.  After all, the militia thus far seems not a whole lot better than what a devoted political party with government support could do by itself, without the bureaucratic bother.  I understand Rocío San Miguel’s fears, but they seem a bit premature.  The Bolivarian National Militia is still pretty far from a parallel military. 

Conversely, turning the Army into a large-scale conscription machine would be a fairly effective way to implement social change:  the Bolivarian Republic would be far from the first government to use military service in such a way.  Problem is, the Venezuelan military isn’t set up to train the 550,000 people who reach military age every year.  It isn’t even set up to train half of them. 

Of course, we haven’t reached the end-state yet — perhaps the goal is to eventually get to a point where the armed forces are omnipresent enough to serve as a means of social control, and where universal conscription serves as a way to reshape society.  In that view, we are simply not there yet.  Or maybe the goal is just to build up a legal body of Socialist Party thugs capable of breaking heads.  In that view, the mission has been accomplished with just enough socialist rhetoric to hold some weak margin of support that an open program of partisan militia-building would lose.  Or ... and this would be my guess ... it’s a way to give an ideological dressing to a scheme designed to plonk eight dollars into the hands of happy supporters in return for a fun Saturday afternoon playing soldier. 

The military reforms are like so much else about the Bolivarian Revolution over the past year:  too serious to be just window-dressing on a political machine, but not serious enough to be a real attempt to remake the country.  (Rephrased for Chávez’s foreign policy adventures:  too serious to be costless domestic posturing, not serious enough to actually extend Venezuelan power.)  At some point, you’re left scratching your head.  At least I am.

Thoughts?

Immigration and assimilation in Venezuela

  Still beat down under the weather.  Ugh.  This is awful.  The congestion.  The congestion.  This is not a recent picture.

 
But Randy McDonald asked me about immigration to Venezuela, so I’ll talk a little about immigration to Venezuela.  Venezuela has experienced several waves of immigration, but the big ones from Europe came in the 1950s and the 1970s.  In the 1950s, Europeans migrated because of the oil boom.  Roughly 450,000 people acquired legal permanent residence during this wave.  The new democratic government in 1958 restricted migration (not unsurprisingly) and net migration turned negative during the period.  Then in 1973, with the second oil boom, immigration again spiked upwards.  By 1976, Venezuela had 270,000 resident Spaniards, 223,000 Italians, and 107,000 Portuguese.  Now, these numbers have to be interpreted carefully:  they also include, for example, 79,672 Americans, most of whom did not settle down permanently.  Nor are the figures comparable with the permanent residency figures also presented above.  But they are what we have. 

In 1976, at its peak, the various European nationalities (counting only those born overseas, not their Venezuelan-born children) made up about 3 percent of Venezuela’s then-population of 13.1 million.  It was a large migration, but it wasn’t transformative.  On the other hand, it did transform the nature of the country’s elites.  The European migrants were remarkably successful, going on to found myriads of small businesses.  In fact, it has been the descendents of those migrants, mostly Italian, who suffered the most from the government’s recent nationalization of the oil service companies.  (More on that in another post, when I’m feeling better.) 

One interesting question about immigration is:  how quickly (if at all) do the children of immigrants lose the cultural predilections of their parents?  Jewish-Americans, for example, continue to vote Democratic at far higher numbers than their income or occupational status would predict.  Does this apply to Venezuelans? 

Francisco Rodríguez of Wesleyan and Rodrigo Wagner, a grad student here at Harvard, have used the Maisanta list to ask just that question.  Maisanta, you’ll recall, was a list published by the Venezuelan government containing the names of everyone who had signed a 2004 recall petition against Hugo Chávez.  The list contained ID numbers, which can be cross-referenced against income data in the Venezuelan Social Security Institute database.  They then used people’s surnames to trace them back to various Italian regions.  They had to eliminate non-regionally-specific surnbames like Rossi, Russo, Ferrari, Esposito, Bianchi, Romano, and Colombo.  So, given all the potential objections to the methodology, what did they find?

Nothing.  There is no relationship between the political predilections of their parents’ region-of-origin in Italy and the predilections of Italian-Venezuelan voters today.  Inasmuch as Italian-Venezuelans have overwhelmingly achieved middle and upper-class status in Venezuela, they have also assimilated to the political predilections of those groups. 

Above the clouds, or Venezuela’s electricity crisis

   No, it’s pretty clearly the flu.  I’m completely laid up.  Ugh.  Misery, compounded by the Broncos piling up 16-0 lead.  Yes, I’m a Patriots fan, in my one sporting concession to my new home town.  But I retain a little bit of love of for the Giants and Jets.  Not being returned so far.  Still, hearing that series of curses from the Bronco’s coach was awesome.

But Stephen Rogers wants to know about Venezuelan electricity, so I dig around to find out about Venezuelan electricity.  Why is an energy-rich country experiencing periodic blackouts?  I mean, there are a lot of things about the Bolivarian Republic which are in cloud-cuckoo land, not least the place where I was in the above photo.  But generating power should not be one of them, should it?

The immediate reason for the shortages is:  a really bad drought this year.  Venezuela, sensibly, does not burn exportable hydrocarbons for electricity.  The country has been slow in exploiting its natural gas resources, but given its immense hydro capacity, that is far from a disaster.  (Venezuela’s natural gas reserves are “associated,” which means that they require larger up-front investments to extract.)  In fact, the country has ramped up an almost-astounding amount of hydropower in recent years. 

Unfortunately, this year the rains have almost dried up.  (Ecuador has also been hit.)  This has caused hydro production to dip on the national level ... but Guayana, the big industrial province, only has one 15 megawatt diesel generator at Puerto Ayacucho as a backup. 

 

(Data comes from Venezuela's system operator, called Opsis.) 

That’s a problem, but it wouldn’t be a huge problem if it weren’t for the fact that Venezuela's grid is in worse shape than America’s.  In 2006, Venezuelan transmission and distribution losses ran 22%, against 7% in the United States.  That’s a crappy grid.  With a crappy grid, it is not easy to get electricity from where it is to where it is needed when the baseload capacity declines.  Blackouts result.  In October, Opsis carried out 48 planned outages and suffered 66 unplanned ones, even with all the diesel and gas peakers run way above their normal capacity. 

In fact, there is a second constraint on the grid.  Venezuela has managed to produce a lot more thermal electricity by running its thermal peakers at their maximum for more time ... but what it cannot do is get them to produce more power than their rated maximum at any given moment.  According to Opsis, peak demand is running 7.0% higher this year than in 2008, which was up 5.1% on 2007.  Overall load factors are down, but on those days when power spikes, there is nothing to be done.  Especially in Guayana.

Of course, one has to ask:  if Venezuela has succeeded in its heroic efforts to increase hydro capacity, why did demand outstrip supply this year?  Well, that’s easy to answer ... the government froze electricity rates in 2002.  Given the awesome scale of economic growth since then, and the even more awesome scale of consumption growth, and galloping inflation, what would you expect to happen?  Exactly. 

A lot of very poor people bought lamps and satellite dishes, a lot of slightly less poor people bought refridgerators and air conditioners, a lot of not-really-poor people got dishwashers and giant plasma screens, and a lot of not-poor-at-all people stopped caring and began to run their air conditioners with the balcony doors open.  If you aren’t going to ration by price, you've got to ration by other means, blackouts being one.  After all, in 2006, Chile was hit by a perfect storm when Argentina cut off the gas, a drought shellacked the dams, and oil prices spiked.  Was a lousy year for consumers and a lousier year for energy-company shareholders, but there were no blackouts. 

In short:

(1) Investment in generation has been just short of heroic.  ¡Viva la revolución Bolivariana!

(2) Investment in the not-as-sexy business of getting the stuff from where it’s generated to where it’s consumed has not been quite as heroic.  In fact, it’s been bloody awful.  ¡Malditos chavistas!

(3) Demand has quite deliberately been allowed, nay encouraged, to explode. 

Problems (2) and (3) were eventually going to outrun advantage (1).  This happened to be the year.

The government faces three long-term choices.  First, direct more-and-more-and-more investment into generation, first hydropower, then CCGT, maybe even nuclear.  Of course, that means burning associated gas instead of exporting it to (say) Trinidad’s industrial sector.  It also means diverting limited resources away from other things that might have much larger economic or political payoffs.  And it would force the government to have to show a level of execution that it hasn’t quite demonstrated, massive investment notwithstanding.

Second, cut demand.  Which means raising rates.  Won’t that be popular!

Third, get used to blackouts.  Hey, the Philippines lived with ‘em for a very long time, so have many other countries.  In fact, if Corpoelec can get good enough at directing where the power will go out, selective outages could be a win-win for the Socialist Party. 

Stephen, that answer your question?

De base en beis

  Apologies for the lack of posting. I’ve been hit hard by something that isn’t quite the flu, and certainly isn’t H1N1, but is one of the worst colds that I’ve had in a very long time.  Not as bad as that thing that hit me in Columbus, Georgia, back in 2002, but bad. 

Anyway, before I get down to business, let me talk about recreation. You can’t visit Caracas and not go to baseball game, especially if the Magallanes are in town.  Leones’ fans hate the Magallanes, which means that there was no way that I was gonna say no when Francisco Sanánez, the head of Venezuela’s IESA business school, invited me to the game.

It’s a surprisingly small stadium, maybe 16,000 seats.  In fact, it’s a university ballpark, rather than a true professional stadium.   Nothing like the Foro Sol in Mexico, not even as big as the old Seguro Social.  That said, the streets around the park manage to be so badly designed that resulting traffic jams make you feel like you’re headed to a much larger forum. The wandering mobs wearing Leones and Magallanes colors add to that feeling.

I couldn’t bring myself to tell my hosts that the raucous atmosphere inside the ballpark really wasn’t all that out-of-line with what you’d find in Yankee Stadium.  The cops ejected somebody from the bleachers, but that happens in the Bronx with some regularity.  The outside was lined with more and less-formal food and clothing stands than you’d find in the States (or even, as may surprise you, Mexico City) but still, nothing to write home about. 

This is not to say that the atmosphere is the same as at home.  Oh no.  This is Venezuela, my friends.  First sign of that happens before the game, where these pneumatic women in very tight jeans stand around flanking home plate.  They’re the Magallanes cheerleaders, who won’t cheer; their job is simply to intimidate the opposition fans.  And they do that quite well.

Of course, the home team also has its cheerleaders, who come out about three times over the course of the game.  Does anyone remember the XFL?  They’re like that.  Mexican professional ball games also feature cheerleaders, but they’re wholesome in comparison.  These, well, could probably get you arrested in some states, although I’m told from that the scenes in those cheerleading movies that I will never ever admit to having seen are about as risqué. 

Madrugada roja

  Venezuela.  What a country!  In the name of cheese, I hope that the producers of Red Dawn manage to work in some sympathetic Bolivarians.  Outside government offices in Chacao, the Socialist Party has put up these red posters of revolutionary heroes.  It kinda sorta looks like something outta the last post, no?

 
They also, of course, warn against the empire.  The below mural reads, “The Empire’s new toy:  easy to use, totally manipulable.” Made me proud to be an American!

More revolutionary art below the fold.

Is the madre patria scamming the Républica Bolivariana? Probably not.

  Over at Caracas Chronicles, they’re perplexed by a deal just signed to build a combined-cycle gas turbine power plant in Cumaná, Venezuela.  The Spanish contractors, Iberdrola and Elecnor, want to charge €1.45 billion to build two 500-MW plants.  The cronologistas caraqueños have done some digging, and found that €1,450 per megawatt is a lot to charge for a CCGT installation.  The closest was a €1,225/megawatt project in Algeria.  The highest that I knew of before they started investigating was a UAE project that came in around €890. 

They conclude corruption.  Are they correct?

Well … maybe.  But to be fair, I suspect not.

Venezuela, you see, maintains exchange controls.  Official transactions need to be made at the approved exchange rate.  On the one hand, this shouldn’t bother the contractors all that much:  they’re getting paid in euros, and the price of imported equipment is the price of imported equipment regardless of the denomination.  The problem, however, is that the relative price of all of their domestically-sourced inputs will be much higher.

Think of it this way.  Imagine you imported €1000 worth of machinery to Venezuela in 2004, after paying Venezuelan tariffs (around 20 percent) and taxes.  In that same year, a manufacturing worker cost €7,388 to employ for a year at the official exchange rate.  You could buy a worker-year for 7 units of machinery.  By the middle of 2009, after several years of high inflation in Venezuela, that same worker cost €12,720 to employ — a worker-year now cost you the equivalent of 13 units of machinery.  Unless you figured out a way to use half as much labor as you did in 2004, your labor costs (in euros) have just doubled.  (All data comes from the Banco Central de Venezuela.)

In fact, the same problem applies for all domestic inputs.  According to the Venezuela central bank, the bolívar cost of construction materials (including taxes) rose 230% between 2004 and the middle of 2009, while the official exchange rate remained the same.  That’s going to further drive up your costs.  

If it turns out that the Bolivarian Republic has agreed to let the contractors use the parallel exchange rate to purchase bolívares, then this analysis goes out the window.  But if the contractors have to use the same exchange rate as everyone else when buying local inputs, then the price that they are charging for the plant seems entirely reasonable ... even without taking into account the political and economic risk.  (Will PDVSA pay everything up-front?  Will inflation in Venezuela accelerate?  Will there be labor trouble?)   

In other words, unless the contract exempts the Spanish companies from exchange controls, then I doubt that there is much corruption to be seen in this case.  Bad economic management yes, corruption no.   

Does anyone have more details about the contracts?

Brazil annexes Venezuela

 OK, not quite.  But our friend Chávez just did something that will put meat on the bones of his somewhat jokey promise not to expropriate Brazilian investments in his country.  What did he do?  He agreed to plonk around $4 billion into a refinery located in the Brazilian state of Pernambuco. 

Refineries are notoriously hard to liquidate.  The market is thin; prices for similar installations in the United States have jumped around by a factor of ten.  This is part of the reason why the big international oil companies continue to operate them, despite low margins and big liabilities.  It's also why PDVSA has been unable to unload Citgo for a reasonable price, despite the fact that President Chávez would clearly like to do so.  Add in the fact that PDVSA will be a minority shareholder with Petrobras, and there's no way it's going to get out of this investment easily.

Which means that the Bolivarian Republic just gave the Brazilians a big fat $4 billion hostage.  More so since (1) the only other reasonable outlet for Venezuelan crude is in the United States; (2) civil law, unlike common law, allows Brazilian companies to sign contracts that spell out a predesignated list of damages to be paid should the government take certain actions; and (3) Brazil is basically independent of foreign oil, and therefore well-positioned to exercise a threat to embargo Venezuela.  Viva the not-empire!

It is quite brilliant.  I stand in awe.  How did he sucker Hugo in that one?  Is the prize of Mercosur really enough?  Then again, our Bolivarian friend seems to have just signed a contract paying a Spanish company a ridiculous amount of money to build a CCGT plant, so who knows?

This movie looks really bad

  Well, I guess I'm not really all that much of a lefty, all things considered.  This movie looks really really bad.  Although what Raúl Castro says in the below clip is true.

Caray.  I am not sure that Stone is doing Lula or Lugo any favors with this film.  And I find it sort of amusing that he lumps President Fernández in as a Venezuelan ally.  Very ironic portrayal, considering her government's reaction to Venezuela's nationalization of Argentine-owned assets. 

Revolutionary comrades-in-arms they are not.

Menos vegetariano que antes

  As some of you may remember, about a year ago I took part in an opposition rally in Caracas.  I left pessimistic that they would succeed in slowing Chávez down as he constructed a political machine.  The marchers seemed dispirited, and the hecklers very confident, while the police just watched, amused.

A few days ago, another opposition march ended with tear gas.  The story in English is here.

I think it is very easy to exaggerate Venezuela's slide towards authoritarianism.  The upper classes are too powerful, the middle class is too large (in absolute terms), and the government itself is too disorganized to pull off a full Cuba.  (In Mexico I met Cuban doctors who claimed to have worked in Venezuela; they had nothing but disdain for the Venezuelans they worked with.  Assuming, of course, that the stories are true; a few details didn't seem right.)  The PSUV will be lucky to cement as much control over the country as the PRI used to wield over Mexico. 

But there are worrying movements ... and as the popularity of the government's policies drops, one might see more incidents like the above.  Or worse. 

Anyway, as long as this website is up, Venezuela isn't a dictatorship.  Check it out; it's the Onion of Venezuela.  My favorite has to be “La Reelección indefinida llega al Miss Universo.”

A different perspective

  I haven't been to Mérida, Venezuela, in decades.  (I haven't been to the one in Yucatán for about as long, either.)  I used to have an aunt who lived nearby.  She's long gone, and last I heard both her grown children (and their families) lived in Houston and Miami.  

Anyway, Gringa Diary is by an Australian socialist fervently working to further the triumph of the Bolivarian Revolution and turn back to the forces of imperialism.  I believe her name is Tamara Pearson.  It's a fascinating look into the Revolution, up-close-and-personal. 

Of course, her perspectives on the value of Mr. Chávez or the long-term impact of his policies on the poor of Venezuela are quite different from my own.  But she's so earnest about it.  Which is sort of touching, in a way.  More importantly, the true-believer tone infuses the blog with this sense of reading something for a parallel universe.  You read her stories, and more often than not find yourself scratching your head at her emotional reaction or logical analysis, so different from your own. 

But you can't get angry; she's so enthusiastic about it all.  Recommended. 

The fear of populism and populism to fear, or at least chuckle at

  I am at a bit of a loss to understand why the congressional Democrats are afraid of GOP populism on the Guantánamo issue.  We all know that the U.S. is perfectly capable of locking up dangerous individuals at no risk to the surrounding community.  We are, in fact, quite good at it.  Now, there are issues that can be demogogued, regardless of the facts, but the idea that there are any dangers in moving the detaineers in Cuba to the continental United States does not seem to be one of them.  Neither polls nor my general sense of the public atmosphere (judging from, well, crappy bars in Norfolk, Philly, and the greater Miami area) indicate that the demogoguery would have any tangible effect.  So why are the congressional Democrats running scared?  It makes no sense.

On the other hand, if you want some real populism, you go to Venezuela.  I'm telling you, a subsidized electric car called the “M----------r” would be a big hit in the United States, and get anybody re-elected.

Gotta be a marketing case in there somewhere.

There is no bloody resource curse already

  So there are these people out there, notably the Oracle of Flat, talking about how high oil prices lead countries to do all sorts of crazy things, like take stuff or invade their neighbors or build weird shit. Which is a problem, see, because except for the building of the weird shit the real world just doesn't fit the model. 

Above you’ve got an example of weird shit.  Ditto to the right.  But what about the neighbor-invading or stuff-taking?  Well, I don’t have a whole lot to say about neighbor-invading at the moment, but there is some stuff-taking in the news: the Bolivarian Republic just cancelled all its oil service contracts.  That’s a form of stuff-taking, yet, as the great and immortal Onyx once said, but wait it gets worse!   The government also intends to nationalize the contractors’ assets.  That is stuff-taking of the purest form, which the “resource curse” models predict isn’t supposed to happen when oil prices are low.  After all, the government is supposed to need the service companies to keep production up.  And yet, here we are.

“Oil service companies” are at-their-simplest basically oil companies that extract petroleum for a fixed price on behalf the owner ... in Venezuela’s case, the government.   With nationalization of the oil services, the government gets a threefer:  the assets, the value of future payments, and the value of all unpaid bills.  But it loses the companies’ ability to run and maintain the assets and opens itself up to arbitration and lawsuits.  It also loses future investment.  Oil companies will tolerate expropriations-that-weren’t, like the Bolivarian Republics’s so-called “nationalizations” up until now.  They have less patience over the real thing.  It’s a particular problem for Venezuela because its wells tend to have a half-life around three years.  Without continual new investment, production will decline.

I’m not sure what Chávez’s motivation is, although I can speculate.  I am sure, though, that this is another sign that the whole petropolitics idea is worth a lot less than a gallon of crude, even at current prices.  Sure, it might be possible to take the political resource curse theories and mash them to fit recent events in Venezuela, but then you would wind up with a theory that predicted that governments nationalize when prices go up and they nationalize when prices go down; or that they nationalize when they don't need foreign technology and they nationalize when they do.  In other words, you would get a theory that predicted that the governments of oil producing states should always nationalize at all times. 

The proper word for such a theory?  Worthless. 

Venezuela cede

  The Bolivarian Republic just settled with the Argentine owners of Ternium over Sidor, its Venezuelan steel unit.  The Venezuelan government nationalized Sidor in 2008.  Chávez offered $800 million.  Ternium scoffed and asked for $4 billion.  They just decided upon $1.97 billion.  Is that a fair price?

Ternium bought Sidor for $1.79 billion in 1997 and subsequently invested a lot of money, but that doesn't really tell you anything.  On the other hand, Sidor enjoyed revenues of $2.4 billion in 2007.  At a discount rate of 10 percent, the agreed-upon price implies a Sidor profit margin of 8 percent, which is consistent with the steel industry's average margin during the 2001 recession.  Conversely, at a profit margin of 16 percent, about what the industry earns in a boom, the implied discount rate is 19 percent ... which seems reasonable for a high-risk area like Venezuela.  (Bernard?) 

Upon announcement of the deal, the price of Ternium shares jumped 49 percent, to $15.67.  That said, the stock peaked at $45.18 on July 2, 2008, before sliding to $34.01 on August 8, and then collapsing to $4.65 by November 20.  The problem with interpreting that price collapse as evidence that the offered price isn't fair?  President Chávez announced the nationalization in April. 

In other words, the price appears to be fair.  Another demonstration of the power of ICSID?  Perhaps. We don't know if the Venezuelan government offered more money out of fear of an adverse arbitration result, or if it offered more money at the urging of the “semi-dictator” of Argentina, or it offered more money because the President of the Bolivarian Republic decided that it was simply the right thing to do. 

But we do know that the foreign oil companies can go to ICSID, and that Caracas seems to be a bit worried about the prospect.  We also know that Cemex is pursuing the ICSID route.  So we will see if the empire strikes back at the Revolution.

P.S.  FWIW, Argentine embassy accounts in France remain frozen.

Bolivarianism and Mercosur

 The Bolivarian Republic is seeking to join Mercosur.  Brazil's government supports the idea, but the Congress is a bit wary.  Foreign secretary Celso Amorim defended Venezuela's accession in a stormy committee meeting the day before yesterday.  In it, Amorim had to point out, loudly, that there is no evidence that the Venezuelan government stole elections.  A few days earlier Amorim was in Caracas attempting to persuade President Chávez to eliminate Venezuelan tariffs on 500-odd products before the Brazilian senate votes on the accession treaty, so as to reduce opposition. 

The thing is, I'm having trouble understanding how any of this matters.  Mercosur has a parliament, with members appointed from national Congresses, but it doesn't do anything.  (Which isn't surprising, but Brazil hedged its bets anyway:  as of 2011, Brazil will appoint 75 of the parliament's 154 members.  That kinda makes it unlikely that the other members will want to give it any serious power.)  Mercosur has a tribunal, but it doesn't do anything either.  Private individuals, unlike in Europe, can only bring suits by acting through their national governments.    Anyway, its decisions are regularly ignored.  In fact, its first decision was ignored.  And it failed its really big test, the Argentine blockades against an Uruguayan paper mill.  There's really nothing about investor protection or property rights in the founding treaties; the decision against Argentina rested on the fact that the blockades were in fact blocking trade.

In short, Mercosur is neither much of a confederation nor an effective tool for an informal Brazilian empire.  Which explains why Chávez wants in.  Why not?  But does not fully explain why Brazil wants him in, or why Brasilia insists on effective control over a powerless parliament. 

There is something going on here that I don't understand.

UPDATE:  The picture comes from Jussi in comments.  It had to be posted.

Oh no he di’n’t

  Well.  One of the leaders of the Republican party, a former Speaker of the House, and a plausible presidential candidate, goes to the Bronx and calls Cristina Fernández a “semi-dictator.”   

No, seriously.  Chávez, though, got to be a full dictator, while poor Danny Ortega got lumped in with Cristina among the “semis.” 

Now that is funny.  Ortega, who unlike the other two has in fact engaged in election fraud, becomes the same as Fernández.  Now, it is true that about a year ago she tried and failed to make an end-run around Congress in order to impose an agricultural export tax.  But our last president tried and succeeded to make an end-run around Congress in order to detain suspects indefinitely and monitor all communications crossing the country's border ... and while George Bush the Younger was many things, a “semi-dictator” was not one of them. 

Meanwhile, I really do need to repeat that Venezuela is not a dictatorship.  Most of the anti-Chavista opposition recognizes that.  And even should Chávez turn it into one, Venezuela poses no threat to the United States.  Let him slosh money around!  He gets nothing for it.   

Still, I can understand how he makes a useful foil for American conservatives.  I've heard lefties say stupider things about President Uribe ... although never anyone as prominent as Newt Gingrich.  But making Argentina into an enemy of the United States?  Huh?  Argentina??

So I've really got to wonder.  Can somebody explain what's going on with the GOP and the crazy pills?  I'm at a loss.

I guess I must reluctantly come around to the position that it is time to eliminate the filibuster. 

Bandwagoning on the catblogging

  This was one aggressive little dude, not at all put off by cigar smoke.  I almost took him home, but he certainly seemed well-fed enough to belong to somebody.

I got nothin'.

The other Castro

  Cipriano Castro managed to make a bit of a hash of Venezuela during his brief regime.  He gained power in 1899, at the head of a revolutionary army.  His army mobilized resources by confiscating property; sometimes of opponents, sometimes not.  Eventually he provoked a bunch of European navies into blockading him.  The resulting diplomatic mess eventually dragged in the United States, who was worried that Germany intended to, say, scarfle off some Venezuelan islands and establish a naval base.  Or something.

So it isn't really clear to me why Hugo Chávez would want to replace a bust of Rómulo Gallegos with one of Cipriano Castro in the presidential palace. 

And then Leticia Arroyo sent me this speech by Castro made on December 9th, 1902, just as the European navies started sinking Venezuelan ships in the harbor of La Guaira:

Venezuelans!

The insolent foot of the foreigner has profaned the sacred soil of the Fatherland!  An extraordinary act in the history of the civilized nations, without precedent, without possible justification, a barbarous act because it is an attack on the most rudimentary principles of international law, an ignoble act because it is the fruit of an immoral and cowardly collusion of force and betrayal, it is something that the English and German squadrons have just done in the harbor of La Guaira just a few moments ago:  in a simultaneous and coordinated action they surprised and captured three undefended ships of our navy that had entered dock for repairs. 

The battle is unequal because two of the most powerful nations of Europe have conducted an attack against our country, which has barely made it out of a  long and painful convalescence ... But justice is on our side, as is the God of the Nations who inspired Bolívar and the constellation of heroes who accompanied him in the great work of bringing us, at the cost of great sacrifice, our Fatherland free and independent ... For my part I am prepared to sacrifice everything on the altar of the Fatherland, everything, including what one might call my anguish over our internal differences.  I have no memory of what disagreements may have occurred in the past.  Erased in my thoughts are the politics and fighting of all who were opposed to my aims, of all who have been able to leave a trace of pain in my heart.  In front of me lies no less than the luminous vision of the Fatherland, of which Bolívar dreamed, of which I dream.

... I open the doors of the Republic’s jails for the political prisoners who still remain in them; I also open the doors of the Fatherland for those Venezuelans who remain abroad for similar reasons and return to them under the constitution the properties of all the revolutionaries who lost them for reasons of public order.  Further still, if I survive these events ... I am prepared to return to private life, leaving behind my sword, of course, at the service of the Republic, and you can be sure that I will retire sans nostalgia for power, because my greatest aspiration is to see my great Fatherland prosperous and happy.

Now I see exactly what Hugo sees in this guy.  I can imagine him giving this speech on Aló Presidente, word for word.  Some things never change indeed.

¡Hasta la reelección siempre!

  I am starting to miss Anonymous.  He was obnoxious, abrasive, and arrogant, but I am now realizing that this blog is lesser sans his commentaries. 

But anyway, great news from Venezuela!  It looks like we just might have Hugo Chávez to kick around for a while more.  And I'll admit that I am in fact generally opposed to term limits.  What have they ever gotten the United States?  Eisenhower and Reagan were unlikely to have run again for health reasons, and a third Clinton term would have spared us ... you know.  All the stuff. 

Of course, Hugo isn't Ike, Ron, or Bill.  And there are circumstances under which term limits might make sense, especially in countries with histories of patronage politics.  But still.  In addition, the Bolivarian republic placed term limits on all elected offices, which is why Venezuelans voted on the following somewhat turgid question to change five different constitutional articles:

Do you approve the amendment of articles 160, 162, 174, 192 and 230 of the Constitution of the Republic, as approved by the National Assembly, that increases the political rights of the people by allowing any citizen holding elected office to be nominated as candidate for the same office for the constitutionally-established period of time, depending upon his or her possible election, exclusively by popular vote?

I like the “increases the political rights of the people” part.  Clever framing.  And, well, true. 

In short, as unenthused as I am with President Chávez, I can't view the outcome of this election as some sort of great loss for Venezuelan democracy. 

Plus, I'd bet against his victory in the next election.

Schoolhouse rock, Venezuelan-campaign style

 A friend of mine (who works for the government ... shhhh!) sent me this Venezuelan television commercial.  It's about the referendum on abolishing presidential term limits. 

Kinda catchy, I think.  Can the Sí-side match it?

The expropriation that wasn't

  Kevin Drum and Dan Drezner wonder why the oil companies would get back into Venezuela after the way Hugo Chávez treated them the first time around.  The answer is simple:  Chávez didn’t treat them badly.  When oil prices head back up, they’ll do fine even if he plays the same movie all over again. 

“What???” you say?  How can that be?  Simple.  Between 2004 and 2006, the Bolivarian Republic of Venezuela expropriated the marginal surplus generated by the run-up in oil prices.  It did not, however, reduce the revenues of the oil companies.  They took home about $10 a barrel when the contracts were signed in the late 1990s, and they took home about $10 a barrel in 2008.  In fact, some of the companies that had signed service contracts under the old regime received more money under the Bolivarian regime than they would have under the original rules.

So why not get back in?  It isn’t like there are a whole lot of places around the world for the oil companies to invest in, especially not on-shore.  Most oil reserves are closed to the majors, and political risk is everywhere, including Alaska under its radical socialist governor.   The companies have little chance of enjoying the upside from a return to high prices, but with estimated costs of $6-$7 a barrel, Venezuela is still a good bet. 

Details and money graph below the fold.

Around the Revolution

  “You know, I’ve always wondered what South America would look like if no one gave a damn about coca or Communism.  It’s always impressed me the way you boys have carved this place up.”

“I’ll take that as a compliment, coming from a Brit.” 

Now that the U.S. election is over and James Bond is officially a friend of Evo Morales, it's time to take a trip around the Bolivarian Revolution.  How is the red banner faring around the continent? 

Yankee go home

Human Rights Watch published an unflattering report about civil liberty under President Chávez.  As these things go, the report isn't all that damning.  It basically accuses him of, well, setting up a political machine:  (1) using the executive power of the state to go after political opponents; (2) undercutting the independence of the judiciary; and (3) denying resources to independent or opposition organizations.  It doesn't accuse him of tossing opponents in jail or ending freedom of expression. 

The reaction of the Bolivarian Republic?  Expel the authors.  The irony needs no comment.

Here is an English-language response to the report from the Venezuela government.  Here is an explanation of the expulsion.  Let me point out that the expulsion is entirely legal under Venezuelan law, and that many fully-democratic nations have similar (if seldom used) provisions. 

The HRW report is an interesting read, if you have the time.   

Reason to fear

I worry about Venezuelan government spending.  I just don't believe that oil prices are going to stay this high for long.

I could be wrong, but one of the things I learned in Venezuela was that Belize started producing oil in 2006.  They quite literally found oil on some dude's farm.  Production is now up to 3,000 barrels per day.  That's about 15 trips per day for a typical tanker truck.

Even more strangely, Venezuela gives Belize money through Petrocaribe.  Chávez, I would think, gets even less out of his spending there than in the rest of the Caribbean. He is, in essence, giving away money to up global oil production with only a very small claim on the corresponding returns. 

So, nothing in the global scheme.  But when prices are so high that Belize gets into the oil industry, you've got a tidal wave of other producers waiting in the wings.  They'll be high-cost, of course, so given the increase in global demand the days of $20-per-barrel oil are over.  In fact, I'd bet that the days of $40 oil are over.  But I wouldn't bet on triple-digit prices being with us for much longer.

Strangely enough, I'd like to be wrong.  For the planet.   

Daleyismo en Venezuela

I argued that President Chávez is building a political machine in Venezuela, not unlike the machines that used to riddle American politics.  Since Venezuela is obviously not a communist country, or even heading that way, I called it “Daleyism.” 

Anonymous responded:  “This is an absolutely retarded phrase. There is not a shred of evidence that this is happening in Venezuela. I’ve lived here for over three years, and know all kinds of families that do not belong to the PSUV, that absolutely hate Chavez, and have voted against him repeatedly, and they still have full access to ALL the benefits of the government, including state health care, education, subsidized food, pensions, etc. etc.” 

Anonymous, however, is wrong. 

How do I know that?  Simply put, because the Venezuelan government provided us with the data we need to see Daleyism in action.  In 2003, the opposition collected 3.5 million signatures calling for a recall election under the 1999 constitution.  In 2004, the government put all 3.5 million names on the web, including birthdates and addresses.  Chang-Tai Hsieh, Ted Miguel, Daniel Ortega (not this one, another Daniel Ortega), and Francisco Rodríguez realized that they could take the government’s list and check it against the Venezuelan household and industrial surveys.  The surveys follow 150,000 people twice a year, and include birthdates, gender, and residence, enough to match 87,100 of them against the list.  The industrial surveys track firms, but the identity of the firms’ board members is public.  Access to this data, then, let them see what, if anything, happened to the incomes and employment of signers versus non-signers. 

People who signed the recall petition saw a 4% drop in their incomes relative to non-signers.  Why?  Easy:  there is a big relative drop in public-sector employment of signers (4.3%), and signers who lost their jobs were more likely to have to move into the informal (and badly-paid) sector.  Now, Venezuela is a politicized society:  government supporters (ID’d as the signers of a counterpetition) saw an even bigger relative drop in their private-sector employment (5.9%), but they didn’t see a drop in their income, because they moved into the public sector.

Richard Joseph Daley would be impressed.

But Hugo Chávez is better than Richard Daley; no, he’s almost as good as Richard Nixon.  Remember my last post about Venezuela?  How Chávez has improved tax collection?  Well, as any American who remembers the Nixon administration knows quite well, a politicized and effective tax authority can be a very useful part of a machine.  Turns out that companies whose board members signed anti-government petitions saw a 33% relative increase in their assessed taxes.  (US$305,360 versus US$229,020.)  That’s the “ugly” part of Venezuela’s better tax administration.

They also received 51% less subsidized foreign exchange.  In a country where the government rations foreign exchange at subsidized prices, that’s one hella competitive disadvantage.

Brilliant machine politics!  Part of me can’t help but be impressed, although I suspect, given my general humorlessness about legal corruption here at home, that feeling would go away right quick were I in fact Venezuelan. 

More later on the misiones and PDVSA’s social spending.  But right now, back over to you, Anonymous.

Taxes and revolution

President Chávez has accomplished one big thing over the last few years:  he's significantly raised non-oil tax revenues.  Venezuela, like most Latin American countries, needs public spending on public goods.  For that, you need revenue ... preferably revenue that isn't directly tied to commodity prices.  For all the other mishandling of the Bolivarian Revolution, one necessary thing that the government has done right was bring on the fisc.

   

Of course, I had some doubts about this at the airport, where the first thing you see at customs is a big poster exhorting you not to cheat on your taxes.  That kind of thing is rarely a good sign.

But numbers are numbers.  The yellow vertical line shows the date of Chávez's inauguration; the vertical axis is the percentage of GDP collected by these other taxes.  The dotted blue line shows a continuation of previous policy.  Underlying numbers come from Seniat, the Venezuelan tax authority.

So how did he do it?  Ah, that's a good story, below the fold.

Building a machine

Chávez is building a very sophisticated political machine.  And I do mean machine.  The idea is to make key aspects of everyday life dependent on support for the United Socialist Party of Venezuela (PSUV).  It's not Communism; rather, it's Daleyism, put in charge of a country.  Do it right, and there will be no need for secret police or election stealing.  Do it wrong, and your government will eventually (if you're unlucky) start breaking heads or (if you're lucky) become like Mexico.

(Photo courtesy of oilwars.blogspot.com.)

The least machine-like part of the emerging PSUV machine involves the Mercal stores.  The Bolivarian Republic imports food and other basic products (or purchases them from approved suppliers) at market prices, and then resells them to the public through the Mercales.  I visited several; except for the one in a high-priced part of Chacao, there were always lines.  This should not be unexpected, of course.  If the idea is to get basic products into people's hands at subsidized prices, then lines are what should result, if the prices really are subsidized.

The problems?  Well, the first general issue is that it's never clear whether blanket subsidies are an effective poverty-fighting program.  It's also even unclear whether they are an effective vote-getting policy.  After all, Mexico's elected governments (see Chapter Six) have switched to targeted programs, as have Brazil's ... and politicos in both countries are very good at fighting for votes.  Mexico's IMSS and ISSSTE tiendas are no longer subsidized, or crowded, and the Conasupo stores are long gone. 

The second, Venezuela-specific issue is below the fold.   

Vaqueros contra llaneros

Longtime readers of TPTM (all three of you) will note that Cemex has attracted some small controversy in these great United States as well as Venezuela.  But since Puerto Rico seems to have reconciled itself to vasty plumes of tire smoke floating across its southern shore, Venezuela is where the Cemex action is at these days.

So, how much are Cemex's assets in Venezuela worth?  Priceless, if this publicity still from El Economista is to be believed:

More seriously, according to today's El Economista, Venezuelan operations generated about 4% of Cemex's earnings before interest, taxes, depreciation and amortization.  In 2007, Cemex earned US$ 4.6 billion before interest, taxes, depreciation and amortization.    Four percent of that number is US$ 183 million. 

Cemex as a whole earned US$ 3.22 per ADR.  It's price/earnings ratio varied between 8 and 13 over the course of 2007; it's 12-month P/E is currently down to 6.2.

In other words, a simply back-of-the-envelope calculation puts the value of Cemex's operations in Venezuela between 183m × 6.2 = US$ 1.14 billion, and 183m × 13 = US$ 2.38 billion.

Since that 6.2 measure already embodies market belief in rising political risk and the recent run-up in input costs, I'd have to say that the US$ 1.3 billion value claimed by Cemex sounds pretty conservative.

Caracas probably shouldn't have taken on Monterrey so cavalierly.  Nobody should take on Monterrey so cavalierly.  Monterrey is a tough town, and businesses from Monterrey are tough businesses.  They've seen this sort of thing before, and they've come out ahead.

In this particular fight between the cowboys of the northern deserts and the cowboys of the southern plains, my money is on the regiomontanos of the northern desert. 

ICSID v Chávez

So, President Chávez nationalized the cement industry the other day.  Venezuela agreed to buy 89 per cent of Lafarge for $267m and 85 per cent of Holcim for $552m, but Cemex requested $1,300m.  Venezuela sent in troops to take over Cemex's installation, and then offered $650m.  Chávez called the Mexicans “disrespectful.”  After accusing Cemex of tax evasion and excessive pollution, he went on say, “They're as Latin as we are, but they feel closer to el Norte.”  President Calderón of Mexico was not happy, but there was not a lot that Mexico could do about it. 

But there is someone who can ... ICSID.  I've mentioned it before.  ICSID is powerful.  When lefties blather on about "empire" or whatever, things like ICSID are what they mean, even if they don't know it.  ICSID can cause pain.  In fact, Venezuela's nationalizations have consistently (so far Exxon and Conoco are the only exceptions) given the nationalized companies everything that they want. 

Of course, it costs a lot to go to ICSID, and it costs even more to get national courts to actually order attachments after a ruling, so companies usually don't start an arbitration unless they think that they can win.

Cemex appears to think it can win.

And it seems that the Venezuelan government agrees with Cemex.  Right after Cemex announced that it was going to take the Bolivarian Republic to ICSID, Venezuelan officials announced that hey, yo, don't get all upset about the troops thing, let's talk.  Sixty more days, okay?  At which point President Chávez told the world that he has a secret letter from President Calderón that will help resolve everything.  “We asked the Mexican government to give us one more chance with Cemex's executives to see if we can come to a mutual understanding,” he said. 

My money is on Cemex getting something close to the $1.3 billion that it wants.  But it will be interesting to watch.  Even if you're a Cemex shareholder.

    

Hasta que canta la gorda

Well, I still think I was correct in saying, “The United States is probably the only other country on the planet in which you might find an eatería,” but I don't seem to be as right as I thought I was.

This had me laughing.  Yes, the American influence here runs very deep.  Here's to you, Mr. Danger!

A special bond

On August 8th, my third day in Venezuela, the Bolivarian Republic announced that it would be buying another tranche of Argentine bonds, worth US$1.5 billion.  So what happened?  Something unexpected:  the price of Argentine bonds tanked, and the gap between the yield on Argentine bonds and U.S. Treasuries spiked above 7 percentage points.

The vertical white line is August 8th.

Now why would a bond purchase by a flush buyer cause investors to worry?  It’s not that Argentina overissued.  The country had only sold $7.46 billion of bonds to Venezuela, all of which involved refinancing existing debt, since the country is still running a budget surplus.  Nor is it the country’s recent default and repudiation:  that risk was already priced in. 

Well, the Bolivarian Republic bought the bonds from Argentina, but it sold them on to Venezuelan banks instead of holding on to them.  Why?  To soak up bolívares held by the banks before the banks lent them out.  It turns out the banks didn't hold on to these issues, but dumped them that very day “at practically whatever price,” in the words of La Nación’s business page.   

Moody’s downgrade from “positive” to “stable” followed along on August 14th, like clockwork. 

Of course, as you can see, the Bolivarian Republic’s own bonds aren’t doing too well either.  Strange, for a country in the midst of an oil boom, and supposedly known for its prudent budgeting ... no, really.

This is not going to end well.  More on that later, after a brief diversion into Bolivia’s gas nationalization.

At some point I really am going to have to start making those AFOE posts that I’ve been promising.  Too much real work, that’s my excuse.  Say ... are there any topics that I promised to blog about and never got around to?