The Power and the Money

Why are so many fleeing Venezuela? Famine

The Venezuelan crisis is massive. Millions of people are fleeing the country. Brookings scholars project that a third of the population may leave before the end of next year. The outflow could surpass Syria’s.

But why? Yes, there is a hyperinflation. But the world has had a lot of hyperinflations without mass refugee flows. Yes, there is a huge fall in GDP. But the world has seen similar falls in GDP without generating mass refugee flows. Yes, there is political tyranny, but the world has seen lots of terrible tyrannies, and there isn’t a civil war.

Well, the root cause is simple. Famine. An accelerating famine. An honest-to-God 21st-century famine.

Venezuela doesn’t produce enough food to sustain its population. That means that it needs to import food. But with oil production in free-fall and foreign borrowing cut off, the country has no way to buy the food that it needs. The Confederation of Associations of Agricultural Producers of Venezuela (Fedeagro) estimates that the country produces less than a third of what it needs. The USDA reports on grain production make for thoroughly depressing reading. In short, the country cannot buy the amount of food it needs from abroad and does not grow enough at home to fill the gap. 

I am not sure if Venezuela could be self-sufficient in food. I suspect that it could, were oil not allowed to systematically distort the economy. 

But the problem is not that Venezuela is not self-sufficient in food.

The problem is that the Bolivarian Republic has systematically attacked its own farm sector, destroying its ability to buy inputs or operate without losses. For all the decline in food imports, they are still above the levels of the mid-1990s ... but the domestic production is  no longer there.

The below chart tracks food imports per capita (nominal data from here). In 2016, Venezuela imported about one billion dollars of food products. The IMF tracks the international price of food, so we can convert that to real imports per capita. In real terms, Venezuela in 2016 imported about as much food per capita as it did in 1997. Venezuela was not short of food in 1997. But in 2016 that same level of imports was not enough to prevent famine. 

What political advantage accrued from destroying domestic agriculture, even during the good years, is utterly beyond me. And that, yet again, is the tragedy of Venezuela. It isn’t the evil, it’s the incompetence. Raving, insane, pointless incompetence.

In order to understand the current Venezuelan crisis, we need to turn to the economic and political science literature on famine ... which is not something I ever expected to say about an American country in the early 21st century. 

In Venezuela, the system worked, and the leaders did not care

 Under Hugo Chávez, the Bolivarian Republic developed an excellent election system, which made cheating impossible without detection. Under Nicolás Maduro, the Bolivarian Republic just held a ludicrously fraudulent “election.” 

One might conclude from this that the system President Chávez bequeathed was flawed. Such conclusion would be wrong. The fraud in the recent “election” has been blatant. The National Election Commission’s (CNE) own data, publicly available, showed that only 3.7 million people had voted by 5:30pm on election day. With the polls scheduled to close at 6pm, the government first ordered the CNE to stop reporting data and then held polls open to 7pm. The company that managed the electronic voting system, Smartmatic, almost immediately reported that the final counts had been tampered with. 

In other words, the Chavista voting system worked! The government could not manipulate the results without being found out. 

Of course, the fact that they have been found won’t make any difference. Venezuela is now a full-on dictatorship, ruled by Nicolás Maduro through a supine “constituent assembly” that is putatively charged with writing a new constitution but which has now assumed de jure authority over the state. (President Maduro holds the de facto power.) Another democracy has bitten the dust (at least for now) and Doug Muir has sadly won his argument that dictatorship is not dying.

Thinking outside the box on Venezuela

Boz, one of the most perceptive analysts of Latin America out there, wrote the following: 

If the only Venezuela policy options you can think of are no sanctions, targeted sanctions and oil sanctions, you lack imagination.

— boz (@bloggingsbyboz) August 4, 2017

So I thought about it! Mexico City is conducive to the imagination. And here is what I came up with, in order of reverse crazy.

(1) Blockade: I do not mean “bloqueo” the way Cubans hyperbolically refer to it. I mean a real genuine blockade, nothing in or out. That would strangle the Venezuelan economy. It would also kill small children. And be an act of war. Not a good idea.

(2) Covert action: Venezuela is a perfect target for American covert action. We have full intelligence. We have full cultural understanding. Hell, POTUS is practically venezolano! So it is certainly tempting. But it is still a bad idea. Playing with coups is dangerous, even at home. 

(3) Oil sanctions: The United States could stop buying Venezuelan oil. How much would that hurt? Badly, but not as badly as banning American exports to Venezuela. Right now, Venezuela is exporting about 1.9m bpd, expected to fall to 1.7m bpd by the end of the year. Of that, the U.S. takes about 750,000.

Venezuela produces heavy sulfurous crude. That requires specialized refineries to process it. American Gulf coast refineries are so specialized. Elsewhere, not so much: as of 2011, the United States possessed a bit more than half of all heavy-crude refining capacity. (Figure 4.) That has been changing, however, as China builds new capacity. In addition, Europe has some refineries that could process heavy crudes if need be. In other words, alternative markets exist for that 750,000 bpd.

It would cost Venezuela. First, shipping cost estimates run as high as $6 per barrel. (Page 15 and page 25.) That is around $4 more per barrel than to ship to the gulf coast. Second, foreign refineries would need to be bribed to take Venezuelan oil over its counterparts. Third, Venezuela currently imports light oil to blend with its exports in order to make them more palatable for refineries; it would have to import even more if it had to move its oil to refineries less optimized to take it. Switching to other suppliers there would cost another dollar per barrel. Call it a worst-case loss around $7 per barrel. Considering that the Venezuelan export basket fetches around $44, that is a lot. 

But it is not catastrophic. The U.S. could wreck Venezuela by imposing a ban suddenly, but that would also hurt U.S. refiners and raise oil prices at home. A phase-in would avoid that, but it would also give the Venezuelans some time to adjust. If the U.S. imposes sanctions, there will be a phase-in, so count against catastrophe. 

The awful drawback is that oil sanctions would kill children from the resulting (further) contraction in imports, since the current regime seems to have no compunctions about cutting off supplies to its enemies. And the best case is that the resulting hardship promotes either a coup (see above) or civil war. (Luckily the Russian Federation is broke; otherwise it would also result in a giant Russian naval base in the Caribbean and Tupolevs buzzing U.S. airspace from the south.) I am not a fan of this option.

(4) Criminal indictments: Not a terrible idea, but not likely to work. First, while European law is clear, American law is far fuzzier. Second, it would have the effect of making the regime dig in for fear of what might happen should they step down. And unless we are willing to do a bigger version of Operation Blue Spoon — call that Option Zero — it would not have much effect.

(5) Targeted sanctions: Already happening. Note that people are willing to pay money for power. So good luck with that. 

(6) Diplomatic isolation: A great idea, but you run into the problem of the West Indian microstates. Venezuela will not be able to keep buying them off for long, but it has done a good job of it for longer than anyone expected. This resulting diplomatic fracaso is another reason why the West Indies should become one country as of yesterday, as if more reasons were needed, but that’s unlikely to happen before my children battle robot armies in the world revolution or Skynet kills us all. 

The list shows imagination, even if the images are mostly stupid. So what else? Well, Boz suggests trying to help the Venezuelan population. I am all in favor of that. But I do not see how it would weaken the regime. Consider Africa: aid has been blamed for propping up dictatorships and prolonging civil wars. (The link is a to a paper by Nathan Nunn and Nancy Qian.) Still, the Nunn and Qian paper suggests that food aid has little to do with starting civil wars, which is what we want to head off in Venezuela. It also finds that the effect is more pronounced in countries with a recent history of civil war, which Venezuela does not have. (Mostly.) So it probably will not lead to war but it could prop up the dictatorship.

Is this missing anything? Help! A great American nation needs your ideas. 

Venezuela’s 1999 constitution always contained a press-here-for-dictatorship button

Francisco Toro has an excellent translation of Venezuela’s political crisis into an American context in today’s Washington Post. Read it!

It does have one flaw, however, which is that it intimates that the 1999 constitution prohibits Maduro from trashing the constitution. That’s not quite right.

Part of Toro’s translation of Venezuelan events to an American context runs as follows:

President [Trump] is not out of the woods yet. He’s still massively unpopular, protests rock the streets of Washington every day,and he still has to face the voters in November 2020. Realizing he can’t win — his approval rating hovers around 20 percent — he opts for a radical course of action: He invokes Article V of the Constitution to convene a Constitutional Convention, and signs an executive order setting out an unprecedented method for selecting members of that convention.

Article V of the constitution of the United States is pretty clear: the president has nothing to do with calling a convention. That power resides with state governments:

The Congress, whenever two thirds of both houses shall deem it necessary, shall propose amendments to this Constitution, or, on the application of the legislatures of two-thirds of the several states, shall call a convention for proposing amendments, which, in either case, shall be valid to all intents and purposes, as part of this Constitution, when ratified by the legislatures of three-fourths of the several states, or by conventions in three-fourths thereof, as the one or the other mode of ratification may be proposed by the Congress; provided that no amendment which may be made prior to the year 1808 shall in any manner affect the first and fourth clauses in the ninth section of the first article; and that no state, without its consent, shall be deprived of its equal suffrage in the Senate.

Articles 347 to 349 of the constitution of the Bolivarian Republic are rather less clear. In fact, if read literally, they contradict each other. First click the link and read the Spanish. Now my translation:

Article 347: The original constituent power rests with the people of Venezuela. In exercise of this power, it may call a National Constituent Assembly for the purpose of transforming the State, creating a new juridical order and drafting a new Constitution.

Article 348: A National Constituent Assembly may be called by the the President of the Republic in consultation with the Cabinet; the National Assembly via the approval of two-thirds of its members; by the county councils in open session via the vote of two-thirds of same; or by 15% of the voters inscribed in the civil and electoral registry.

Article 349: The President of the Republic shall not have the power to object to the new Constitution. The existing constituted authorities shall not be permitted to obstruct the Constituent Assembly in any way. Once the new Constitution is promulgated, it shall be published in the Official Gazette of the Bolivarian Republic of Venezuela or in the Gazette of the National Constituent Assembly

Some lawyers claim that Article 347 implies that a referendum is needed in order to call a constitutional convention. Maybe it does, but it sure doesn’t say that. And the next article, Article 348, explicitly says that the President can call up a constitutional convention by his or her very own lonesome, limited only by the cabinet.

It seems like old Hugo Chávez knew what he was doing back in 1999 by including a reset button in his constitution. I have no idea when or if he might have thought it would be needed, but it was there. Press here for dictatorship, indeed. 

Venezuela is not having a coup, but who cares, because it already had a coup

What little was left of Venezuelan democracy died when the Supreme Tribunal usurped legislative authority back in March, even if it later reversed parts of its decision. 

But the Maduro regime keeps insulting what remains of democracy in Venezuela. On May Day, President Maduro called for a convention to write a new constitution. He did not do that because the current one grants him insufficient power. Partisan control of a supreme court unbound by any norms has shown that the existing document basically lets him do whatever he wants to do. 

Rather, the reasons are subtler. I will get to them at the end. But first, is his call itself unconstitutional?

One response might be, who cares? The government does not consider itself bound by the constitutional anymore. That said, the government runs a risk in violating the Magna Carta too blatantly. So the question is worth asking. After all, many have claimed that Article 347 of the current constitution bans the President from calling for such a convention. (Here is an English version of the constitution.) 

For what it is worth, President Maduro is acting within his powers, as unreasonable as it may be to grant the President the unilateral power to call a constitutional convention.

Here are articles 347 and 348: 

Article 347: The original constituent power rests with the people of Venezuela. This power may be exercised by calling a National Constituent Assembly for the purpose of transforming the state, creating a new juridical order and drawing up a new Constitution.

Article 348: The initiative for calling a National Constituent Assembly may emanate from the President of the Republic sitting with the Cabinet of Ministers; from the National Assembly, by a two-thirds vote of its members; from the Municipal Councils in open session, by a two-thirds vote of their members; or from 15% of the voters registered with the Civil and Electoral Registry.

Most observers are yelling about Article 347, claiming that Maduro needs a referendum to call a constitutional convention. But that is not what the article says. What the article says is that the people will have to elect a constitutional convention. Article 348 pretty clearly gives him the power to call one whenever he wants. (Weirdly, the version of the Bolivarian constitution on the Georgetown website changes the “or” in Article 348 to an “and,” which would in fact make it much harder to call a convention. But I assume that Hugo Chávez knew what he was doing when he wrote the thing back in 1999.

But don’t worry. Maduro still may manage to violate Article 347 in his decree. (Text of the decree is here.) Consider the second article of the decree calling for the convention:

Article 2: The members of the National Constituent Assembly will be elected on a sectoral and territorial basis, under the supervision of the National Electoral Council and by universal, direct and secret suffrage.

We have as yet no idea what he means by “sectoral and territorial.” But the indications are that representation will be rather less than proportional. The link, from the Ministry of Information, says that half the representatives will be elected “from the working class, the missions, the peasants, the social movements.” In addition, “the elderly, the youth, the workers, the indigenous, and others will have a directly selected representative.”

That sounds like a lot less than one person-one vote. And then there are the territorial representatives. Presumably the districts will be of equal size, but who the hell knows?

Anyway, it does not matter. Maduro will say that whatever system he chooses does not violate Article 347, since the wording is vague and who is anyone to say how the power of the people is to be exercised? 

Which brings us back to the question of what it is that Maduro intends to accomplish. Well, it seems pretty clear:

1. Divide the opposition by luring parts into negotiations about irrelevant issues;
2. Call elections under rules that might allow the Socialist Party to win without blatant fraud;
3. Use the new constitution to retroactively legitimize the games of the past few months, which is what Chávez managed to do back in 1999.

The risk? Well, Francisco Toro called it: each step of the process will provide a focal point for the opposition. Each one could get violent and snowball into mass revolt. 

The stakes keep getting higher. I was wrong in 2013. To my partial credit, I began to see disaster coming by February 2014, but I was still wrong four years ago. Civil unrest is here and explosive violence is starting to seem inevitable. 

I wish I had been right. Is there any chance that the constitutional hail Mary can avoid a confrontation? 

Hoisted from the archives: Cracks in the Maduro machine

I wrote this on April 4th and then forgot about it. I am now exhuming it for those who are interested.

Short version of recent Venezuelan events:

1. The Supreme Tribunal, packed with regime loyalists, invalidates every legislative action.
2. For reasons unclear, the Tribunal goes further and abolishes the legislature.
3. The Tribunal reverses action (2), but makes it clear that it will continue to hamstring the legislature.

Longer version:

1. In December 2015, the opposition wins the legislative elections; they get 112 out of 167, for a two-thirds supermajority.
2. Candidates of the ruling party from opposition-controlled Amazonas sue over an alleged tape of someone in the state government offering money for votes. The Supreme Tribunal annuls the election of three opposition deputies. This decision is of questionable constitutionality, but I am an American in the age of Bush v. Gore and probably should not throw stones. I invite Canadian readers to do so in comments. 
3. The opposition says “screw you”  to the Tribunal. That was stupid.
4. The Tribunal holds the legislature in contempt of court and invalidates all its actions. The deputies in question resign, but the legislature refuses to approve a formal agreement stripping them of their offices. 
5. The Tribunal, unilaterally, not as the result of a case, issues two very strange decrees (155 and 156, no longer on their website, but partially translated below):
   1. It is ordered that the President of the Bolivarian Republic of Venezuela, in accordance with Article 337 and Decree no. 113 of March 20, 2017, among others, shall take such international measures as he deems appropriate and necessary to safeguard the constitutional order, as well governability fo the country, as well as, in the exercise of its constitutional powers, take such civil, economic, military, criminal, administrative, political, juridical and social actions as it deems appropriate and necessary to avoid unrest, and in the context of the state of emergency and in the face of contempt and continued legislative inaction by the National Assembly, exceptionally revise all substantive and secondary legislation ...
   2. ... this Constitutional Chamber resolves that there are no impediments preventing the national executive from establishing joint ventures in the spirit of Article 33 of the Hydrocarbons Organic Act ... as long as the situation of contempt and nullification of acts by the National Assembly persists, this Constitutional Chamber will guarantee that parliamentary functions will be exercised by this Chamber or whatever body that it puts in place in order to ensure the rule of law. 
6. On March 28th, the Tribunal turns around and issues two more decrees, clarifying that legislators will not be stripped of their immunity under Decree 155 nor lose their legislative power to the Tribunal under Decree 156.

What seems to have happened is that the people within the Socialist Party thought these actions were a bridge too far and forced Maduro to walk it back. That assumes, of course, that Maduro was responsible; this easily could have been the Tribunal going off the reservation. 

Plus, Maduro keeps his authority over oil fields and other assets. Not that it matters; everything he does is still subject to being overturned by the next government. But at least he can now pretend to have the power to sign stuff should any foreign companies want to take the risk. 

Venezuela keeps getting worse

In a future post I may recount the recent strange power grab in the Bolivarian Republic. The latest twist has been banning Henrique Capriles from running for office for the next 15 years. 

Right now, I want to flag a worrying development. Short version: the Socialist Party is reorganizing the Unidades de Batalla Bolívar-Chávez (UBCH) from a giant GOTV-patronage operation into what really looks like a militia. Of course, the Bolivarian Republic already has a militia, albeit with minimal training. These new additions also look to have minimal training. 

One might think that the government is preparing for a military coup or (more likely) preparing a force that it thinks will be easier to use against opponents. I suspect neither. I suspect that elements inside the party are preparing for a breakdown of order and trying to insure that they will control networks to distribute aid to their followers when that happens.

Which might be scarier than the other two possibilities. 

A new dictatorship?

 Back in 2011 (it feels like ten years ago, not five) my co-blogger, Doug Muir, published a list of old-fashioned personalized dictatorships. To be clear, these were not merely authoritarian governments: rather, they were non-monarchies where power was centralized in one despotic individual. Three years later, in 2014, I was shocked to find that the respected Polity database had downgraded Venezuela to a dictatorship. While the country was clearly sliding down the democracy league tables, little had happened to merit a fall into open authoritarianism. The opposition legislative victory in 2015 proved me correct. Finally, in 2015, Doug revisited his list of dictatorships. The big change was Russia, although he worried about where the Bolivarian Republic was heading.

There is now growing evidence that Venezuela may has finally have tipped over into dictatorship.

On October 17th, in a decision that was hard to find and gave me a headache to read, the Venezuelan Supreme Tribunal of Justice altered the procedure for approving a recall petition. Short version: the National Electoral Council decided that the opposition would have to get 20% of the voters in each and every state rather than 20% of the voters across the nation. Considering as opposition is not evenly spread across the country, this would make a recall impossible.

When there was a recall petition in 2004 the signatures were gathered across the country. Article 72 of the Constitution says only that the signatures must be gathered in the “corresponding district,” which logically is the entire country for a presidential election.

But the Tribunal decided, in effect, that since the Constitution does not say that the Electoral Council cannot require signatures by state, then it is fine to require signatures by state. At least I think that is what they decided. Seriously, it gave me a headache.

That decision would have been bad enough, but then a bunch of Socialist governors declared that the opposition was gathering fraudulent signatures in their states. (The governors were Tareck El Aissami of Aragua, Francisco Ameliach of Carabobo, Francisco Rangel Gómez of Bolívar, and Ramón Carrizales of Apure.)The National Electoral Council then suspended the signature drive. Poof, end of referendum.

This comes on top of another Supreme Tribunal decision giving the President the unilateral authority to approve the budget. 

I think that this qualifies Venezuela for straight-up dictatorship.

Thoughts? 

How big is the threat that oil exports will be seized in a Venezuelan default?

 It is pretty clear that oil exports could be attached if PDVSA defaulted on its bonds. It would work as follows. PDVSA would sell oil to a refinery in the United States. Creditors would sue. The refinery would still get the oil, but a U.S. court would attach its payment to PDVSA and transfer it to the creditors. PDVSA, therefore, would get nothing from its exports.

If the Venezuelan government defaulted, however, the legality would get a bit dicier. It is possible that American courts would “pierce the corporate veil” and conclude that PDVSA is an instrumentality of the Bolivarian Republic, but that is not certain. Still, it is the way many investors and lawyers (inclduing myself) would bet. 

So in theory sovereign default would lead to a fall in oil prices, as exporting countries with state-owned companies cast around for alternative markets.

In practice, however, the courts are slow and (as mentioned above) the legalities are far from certain. It is quite possible that a defaulting country would merrily continue selling oil while its buyers merrily continued buying. After all, the buyers might not care. They would still get the oil; what do they care if the seller wouldn’t get its money?

But the seller would still want its money. It would likely therefore sell to middlemen who would demand a discount and then resell the oil at some legal risk to themselves. In other words, the price of oil exports would certainly go down.

The empirical question, however, given all the legal uncertainties, is how quickly it would go down. It is quite plausible that the export price of a country’s oil would not be affected by default for months or years.

Well, Ecuador provides a nice test of that question!

Let me walk you through the data. This is going to be a little chart heavy, so I ask readers to comment if it is ever unclear or you lose the chain of the argument.

Ecuadorean oil generally trades a discount to the WTI benchmark price. That is because its oil is heavier than WTI and needs to travel from Ecuadorean fields to (mostly) Californian refineries. The below chart shows the percentage discount on Ecuadorean oil between the start of 2006 and the end of 2009. It shows a very steep fall in November 2008.

That seems convincing, until you add a control. Mexico also exports heavy oil to the United States. Its discount on WTI also widened in November 2008, although Mexico did not default.

Still, the increase in the discount on Ecuadorean oil was greater than the discount on Mexican oil. Might that have something to do with the default? Certainly! But to be sure of that, you need to also account for the fact that Ecuador and Mexico sell into two different geographic markets. Ecuadorean oil goes primarily to refineries in California, whereas Mexican oil goes overwhelmingly to the Gulf Coast of the United States. The price of crude oil can vary by several dollars per barrel between the two locations, given transport costs and varying demand conditions. 

The below chart, therefore, compared the export price of the two countries’ blends to the price paid by refineries in California and the Gulf Coast (60% in Texas), respectively. Once you account for the fact that the price of oil in California fell more than the price of oil on the Gulf Coast, then the oil price dynamics in the two countries look pretty similar between 2006 and the end of 2008. This chart compares the price received by the exporting countries and the price paid by their primary customers:

 

The dynamics look similar when you express the discounts in dollar terms, rather than as percentages of the sale price. The stark increases in November 2008 go away completely, as artifacts of the general fall in oil prices. Mexican crude is a bit more volatile in the lead-up to November, but otherwise looks similar to Ecuadorean:

It is true that Mexican oil recovered faster than Ecuadorean oil. In fact, after January ‘09, Pemex managed to sell its oil for roughly the average price paid by all Gulf Coast refineries, elimating a long-standing discount. PetroEcuador also managed to improve its position relative to the pre-crisis era, but it took rather longer. 

I do not know what happened in the Gulf Coast oil market. There are two hypotheses to explain the Ecuadorean recovery, however. One is that the Ecuador announced the form of its default in mid-2009 — a form brilliantly and perfectly designed to leave creditors without legal recourse. Freed of fears of attachment, therefore, the discount fell.

The other is that May is around when PetroEcuador began selling its oil to state-owned Chinese middlemen at a significant premium. The discount on Ecuadorean oil fell because Chinese companies absorbed it. 

It is still possible, of course, that without the default Ecuadorean oil prices would have bounced back in January 2009 like Mexican ones and without the need to involve the People’s Republic of China. But there is no direct evidence for that story.

The next thing to do would be to nail down an explanation for the disappearance of the Mexican discount in January 2009. If an explanation for that can be found that Ecuador could not possibly have replicated, then the hypothesis that the Ecuadorean default affected the export price of its oil is likely incorrect. On the other hand, if the strategy employed by Pemex was one that Ecuador was prevented from using because it was in default, then the default cost Ecuador.

To be frank, my prior is that whatever happened to Mexican oil in January 2009 was likely idiosyncratic. I doubt that Ecuador suffered in oil markets for its big sovereign default.

Now, this is not to say that default would be costless for Venezuela. It could prove very costly! Eventually, Venezuelan receivables would probably be attached; sooner if PDVSA debt goes into default rather than Venezuelan sovereign debt. But in both cases Venezuela could continue to sell oil.

In short, the evidence from the Ecuadorean default of 2008 is not completely clear-cut ... but the preponderance of the evidence seems to be that any fall in oil prices will take some time to manifest.

Sources tell me that Venezuelan ministers fervently believe that default will lead to cut off in immediate oil exports, or at least a drastic fall in realized oil prices. I suspect that they are wrong ... but it is a good thing for creditors that they do not know that they are wrong.

And now for something completely different

 Venezuela! An economy in such bad shape that the Economist is now comparing it to Zimbabwe circa 2001.

The immediate question is: will Venezuela default? Ricardo Hausmann says yes. The markets say maybe. And Francisco Rodríguez says no. 

Here is the logic behind a “no.” Venezuela has $52 billion of liquidatable external assets. It has internal assets that include 7,000 tons of gold deposits, worth about $274 billion. (Admittedly, that is gold under the ground.) Moreover, while Venezuela is importing a lot, the level of those imports is due to the country’s distorted exchange rate. 

Of course, the Bolivarian Republic would default if default were costless. But it’s not. First, the country has a lot of external assets that creditors could try to seize. Second, Venezuela would run the risk that the receipts from its oil exports could be attached. According to Rodríguez, Ecuadorean oil prices fell almost 20% against Brent when that country defaulted and did not rise again until the 2009 buy-backs. He estimates that something similar happening to Venezuela could cost the country $5.2 billion per year. Third, if the price of Venezuelan oil goes back to $42, the country will be fine, and that will happen within a year or so.

If oil prices stay low, Venezuela will need to finance $25.4 billion in 2016. If they rise, those needs will drop to $20.3 billion. Either way, they can be financed, as this table shows:

2016 oil price	$ 24.9	$ 41.3
External financing needs (bn)	$ 25.4	$ 20.3
Sources of financing:
Chinese fund renewal	$ 5.0	$ 5.0
Use of existing Chinese deposits	$ 2.5	$ 1.5
Mining concessions	$ 2.5	$ 2.0
Bond swap	$ 3.1	$ 3.1
Asset-backed loans	$ 5.0	$ 3.5
Sale of Petrocaribe trade credits	$ 2.0	$ 1.0
Net bond sales	$ 0.5	$ 1.2
Change in reserves	$ 4.8	$ 3.0

Not all of these would be easy. Mining concessions means mining concessions granted by a government with a long history of expropriation. Asset-backed loans means issuing loans against assets (like Citgo refineries and stations) that might be attached in event of default. And as for the cost of default, well, I do not think Francisco is correct when he argues that Ecuadorean oil prices took a hit when the country failed to pay.

I suspect that Venezuela will avoid default his year, because it can. But in the next two posts, I will explain why it won’t be easy to take loans out against Citgo and show that Ecuadorean oil prices suffered no hit when that country defaulted. In other words, Venezuela will put off default for another year, but the costs will be higher and the benefits rather lower than Francisco calculates.

Is Ecuador’s resource nationalism hurting it in the oil price crash?

 In comments, reader Cad points out that Ecuador’s oil policy has a downside: the same fixed-price policy that lets the country take all of a price windfall exposes the government to large losses in the event of a price crash. 

Under the best-known service contracts, the Ecuadorean government pays private companies a fixed price per barrel. It then resells the oil at the market price. In other words, it takes all the upside from price rises. (This new policy was the cause of several of the country’s big expropriation disputes.) A subset of service contracts allow private companies to help Ecuador’s state-owned companies (Petroamazonas and Petroecuador) extract oil, also at a per barrel fee.

Finding out Ecuadorean operating costs has proven remarkably hard, although there is some rough evidence that costs have recently risen rather dramatically. What we do know, however, is how much money crude oil extraction has generated for the Ecuadorean state. That revenue, in real terms, has fallen 55% since 2013. On a per barrel basis, revenue for the state has fallen 56%.

Of course, prices have also fallen. Ecuadorean exports fetched $95.63 per barrel in 2013, $84.14 in 2014, and $42.00 in 2015. (Those are weighted averages.) That is a ... 56% decline, which is the same as the per barrel decline in state revenue. 

So not much evidence that resource nationalism has hurt revenues from those data.

What about international comparisons? Sadly, the data for Colombia only runs through 2014, but the Mexico data is available through 2015. In Mexico, oil revenues declined 55% in 2013-15. Revenues per barrel, however, declined by only 50%. So Mexico did slightly better than Ecuador at squeezing the upstream oil sector. (These figures do not count revenues from excise and value-added taxes on refined products.) 

In short, Ecuador’s oil policy has not led the country to do worse than would be expected given the crash in oil prices ... but it is possible that an alternative policy would have kept government revenues from falling quite as far. 

Now, Mexico’s oil tax policy is not particularly recommended. It is fiendishly complex, but it essentially boils down to a tax on Pemex’s gross revenues. The result is a company starved of resources and declining production. (Down 10% on 2013, whereas Ecuador is up 3%.) It is not clear that Mexico is an example to emulate.

But at least from these data it appears that Cad was incorrect when he wrote, “Mashi Correa’s greedy and short-sighted gamble was a disaster and now the people of Ecuador stand to suffer.” Rather, thus far his oil policy seems to be holding up remarkably well both in comparison to the price crash and to at least one benchmark comparison. Colombia may have done better; when we have the numbers, I will analyze them.

Dictators, revisited

 Four years ago this week, I had a debate with John Quiggin over at Crooked Timber. Briefly, he said that dictatorship was on the way out as a form of government. I sharply disagreed. Four years seems like a reasonable amount of time to circle back and ground-truth.

Here is the original post. Take a moment to click through, so that we’re all agreed on definitions. Good? Okay, then: Who are the world’s remaining dictators, and have their numbers changed since 2011? The 2011 list is below, with original comments in italics and 2015 updates in parentheses.

Angola: Dos Santos has been the President nonstop since 1979. There are significant limits on his power, but IMO he qualifies. (Dos Santos celebrated 35 years in power last year. NO CHANGE.)

Azerbaijan (NO CHANGE)

Belarus (NO CHANGE)

Cambodia: Hun Sen, a bland and retiring little man, has ruled unchallenged since the middle 1980s. (He rules still. NO CHANGE.)

Cameroon: Paul Biya since 1982. The country has kept the trappings of a democratic republic, including opposition parties, but Biya is in charge and he’s not going anywhere. (He hasn’t gone anywhere. NO CHANGE.)

Chad (It’s still Idriss Déby. NO CHANGE.)

Congo Republic (NO CHANGE)

Congo, Democratic Republic: President Kabila, son of the late President Kabila, is likely to stay in power for the foreseeable future. He’s in a tie with Aliyev of Azerbaijan for youngest dictator — they’re both just 40. (And now they’re both 44. But otherwise, NO CHANGE.)

Cuba: Raúl, not Fidel. It’s surprising how many people think it’s still Fidel. (NO CHANGE.)

Djibouti (NO CHANGE.)

Equatorial Guinea: This is a nasty one. Doesn’t get much attention, of course. (It’s still nasty. NO CHANGE.)

Eritrea: Afewerki is another nasty one. A shame, since his rule started with really high hopes. (NO CHANGE.)

Ethiopia (Ethiopia’s long-term dictator Meles Zenawa died in 2012. However, his successor, Hailemariam Desalegn, has been governing in much the same manner — centralized one-party rule with no public opposition or criticism. In May 2015 Ethiopia held parliamentary “elections”; the ruling party won 90% of the seats and its allies took the rest.  Ethiopia’s human rights record continues to be dire, and it looks like Desalegn has settled in for the long run. NO CHANGE.) 

Kazakhstan (NO CHANGE.)

North Korea (Supreme Leader Kim died in late 2011, and was replaced by his son, Supreme Leader Kim. NO CHANGE.)

Rwanda (NO CHANGE.)

South Sudan: I’m jumping the gun here, because the country of South Sudan is just a few months old. But President Kiir has already made it pretty clear that he’s not going anywhere. (And he hasn’t. Four years later, Kiir is a post-colonial African dictator in the classic style. But the country is in the middle of a civil war, and therefore by definition not stable. So ... CHANGE.)

Sudan (NO CHANGE.)

Syria: At least for the nonce — I think Assad has a decent chance of sticking around. (And four years later he is still around. You can argue whether he’s a proper dictator, though, as he has now lost control of about half his country’s population and ¾ of its territory. I’ll give this CHANGE.)

Tajikistan (NO CHANGE.)

Turkmenistan (NO CHANGE.)

Uganda: To nobody’s surprise, President Museveni won a fourth term a few months ago. (And he’ll likely win a fifth next year. NO CHANGE.)

Uzbekistan (NO CHANGE.)

Zimbabwe: Robert Mugabe, still hanging in there at age 87, has been the world’s oldest dictator for a while now. (And, good grief, he’s STILL hanging in there at age 91. NO CHANGE.)

So, of 24 clear dictatorships in 2011, two have perhaps slipped out of that category — South Sudan is in the middle of a civil war, and Syria’s Assad has lost control over much of his country.

Did we overlook anything in our original list? Gambia has a good case: Yahya Jammeh came to power in a 1994 and shows no sign of leaving soon. So did Burkina Faso, but Blaise Compaoré fled at the end of 2014. Acting retroactively, that would make Burkina the third country to have left dictatorship since the original post. 

Have any new dictatorships been added? We would say yes, three. Two of these are pretty minor and one is not minor at all. The minor ones are Fiji and Togo, both of which I listed as borderline cases back in 2011. In Fiji, the Prime Minister operates within what looks like a British-style constitutional framework, but a permanent legislative supermajority, a hand-picked judiciary and an unfree press means he can basically rule at will. In Togo, President Gnassingbe has just won another “election” and looks good to stay in power indefinitely.

The not so minor one is Russia. Back in 2011 I said that Russia was authoritarian, but not a dictatorship. But in the last four years, Russia has become dramatically more illiberal, power has been ever more centralized, multiple critics and opponents of the regime have been prosecuted, imprisoned, or murdered outright, and the cult of personality around Putin has grown extreme. All of these things were just getting started in 2011, but they’ve moved very rapidly since. At this point we think it’s reasonable to call Russia a dictatorship.

We also have two new borderline cases. The small one is Burundi, where President Pierre Nkurunziza plunged his country into unrest after what looks to have been a power grab. He hasn’t established full control, however, so it’s not a dictatorship and looks unlikely to become one. The big one is Venezuela. A while back, we argued that the Polity IV database had jumped the gun by classifying the country a dictatorship. It still isn’t there yet — President Maduro does not rule by decree and he is facing contested legislative elections in December. But the trend since Chavez’s death has been sharply authoritarian. The government has banned opposition candidates, refused to permit foreign observers, and arrested opposition leaders. We hesitate to call it a dictatorship yet, however — partly because this trend is fairly recent, and partly because it is not clear how much power is really consolidated in President Maduro’s hands. The December elections should provide strong evidence one way or another.

In summary: two medium-size countries have fallen out thanks to ongoing civil wars. One small one has ousted its dictator. Meanwhile two small countries and one large important country have joined the club.

In other words, dictatorship does not seem to be on its way out as a form of government.

Venezuela tries a Russian strategy without being, well, Russia

 Russia has a strategy for reclaiming key territories that it wants, even without formal annexation. Part of that strategy is passport distribution. This has a number of advantages. First, it gives you a plausible pretext to intervene: hey, it isn’t a 19th-century-style land grab, you’re just protecting your citizens! Second, it makes it easy to run a detached territory without formal annexation. Just erase the border without incorporation; with your citizens on both sides formal territorial sovereignty becomes a distinction without a difference. Third, the mere distribution gives you a propaganda windfall: they residents of the place-in-question prefer being part of us to being part of them!

It is so obviously successful a formula that now Venezuela is trying it in Guyana. Colonel Pompeyo Torrealba is now the man in charge of the Special Essequibo Unit inside the Essequibo Reclamation Office. According to the Venezuelan press, “He proposed to start granting identity cards to the 200,000 estimated residents of the Essequibo, in addition to an educational campaign intended to make the population of Guyana understand that this territory is Venezuelan.”

Except here’s the rub: the residents of the territory in question need to want your citizenship for the strategy to work. Five years ago, the Bolivarian Republic might have been able to pull this off. Right now, not so much. 

The near-war with Colombia and the sad state of the Venezuelan military

 The Bolivarian Republic had a “Georgia moment” in 2008. I’m referring to the Russo-Georgian War of that year, when the Russians discovered just how severe were their training and mobilization problems. The result was a sustained modernization program. The Russian armed forces are not a par with the United States, of course, but they have improved markedly. The Russian Federation will not become a peer competitor with the United States because of its long-term economic and demographic problems, not because its military institutions are irredeemably broken.

In 2008, Venezuela almost went to war with Colombia. On March 2, President Chávez ordered ten battalions to the Colombian border. 48 hours later the U.S. embassy reported that “less than 12 light tanks or armored fighting vehicles have been seen preparing for movement at Carora in the western state of Lara and at Fuerte Mara in the border state of Zulia.” The embassy went on to say,  “A lack of training, rehearsal and failure to invest in unglamorous military equipment like trailers and cargo planes has slowed the Venezuelan military's mobilization. This may explain the lack of patriotic visuals, from this otherwise propaganda savvy leader, of troops marching to the front.”

Six days later, not much had happened. Five heavy equipment transports, capable of carrying five main battle tanks or two light tanks, finally made it to a military base in Valencia. There was also the first evidence of desultory helicopter movements. The military was apparently buying fuel on the spot from commercial vendors. The U.S. believed that the AK-103 assault rifles purchased from Russia had been issued to Army units, so that was something. But generally, the mobilization was a complete disaster.

Chávez was a political genius and rarely averse to recognizing reality ... so on March 9th he pivoted to peacemaker after it became clear that only a third of his troops had made it to the border. (And those were operating beyond their logistical tail.) The deterioration in capabilities was a little ironic considering that the logistical and aviation branches had remained loyal during the 2002 putsch.

How did President Chávez react to the Georgia moment? Not by modernizing. Rather, in December 2009 a new law gave the President the authority to declare military districts that could be used to undercut recalcitrant state governors; it also further pushed resources towards the militia and allowed foreigners to serve in the military. (Our 2009 post on the subject is here.) Presumably the relaxation on the citizenship requirement was made to allow Cubans to take up posts in the service.

The result has not, shall we say, been an increase in operational capabilities. 

In other words, Guyana can breathe easy. So can Aruba, for that matter. Seriously, stop worrying. This stuff stopped around the same time that Caracas realized its military was useless for interstate war.

Petrocaribe: What is it good for?

 We have discussed Petrocaribe a few times on this blog. The basics are here. To recap, under the scheme, Venezuela sells Caribbean countries oil on credit. At current prices, receiving countries pay 70% up front; the rest they can pay off over 25 years at 1%. (Some of the new adherents to the agreement pay 2%.) In addition, the recipients can pay in kind, if they desire: Guyana has paid in rice and the Dominican Republic in beans. (Page 6.)

The Caribbean buyers have to establish state-owned entities to handle their end; the price difference, in effect becomes a long-term cheap loan to the entity, which uses it to finance development projects. That is how Nicaragua uses Venezuelan money to pay for the prep work on the Gran Canal.

Occasionally the Venezuelans give an even bigger subsidy than that. In 2011, for example, Caracas decided that countries participating in its subsidized oil schemes would not be liable for the royalty payments that PDVSA owed the Venezuelan government. That effectively transferred $13.1 billion to Venezuela’s putative allies. (It is not well-known that Venezuela has extended this arrangement to non-Caribbean countries: frex, here is Uruguay’s. Here is Paraguay’s.)

And what does Venezuela get?

Not much. Caricom just declared that they support Guyana in its border dispute with Venezuela. (It is a big border dispute; Caracas claims half the country.)

This is only the latest failure in Venezuela’s attempt to buy influence. In 2009, the Caribbean countries politely told the Bolivarian Alliance that they were not interested in military integration, they would stick to their own Regional Security System, thank you. In 2010, when Nicaraguan troops blundered into territory claimed by Costa Rica, the West Indian nations backed Costa Rica rather than their fellow Bolivarian in Managua. 

Hey! St. Lucia is backing Caracas against U.S. sanctions!

Oh, wait, that article says that some individual St. Lucians back Caracas. 

There must be something.

ADDENDUM (March 15): No, not Security Council membership. In the 2014 UNSC election, Venezuela won its seat on a vote of 181-1 with no serious opposition; Caribbean support was entirely irrelevant.

When U.S. law is an ass, but the Venezuelan government is a CENSORED

 Setty and I have been having a pretty good back-and-forth at his place. (Am I going to have to join Twitter? Please, no.)

We came to a consensus about the propiety of personal sanctions against foreign officials, in which we both changed our initial opinions. (Yes, it happens on the Internet!) Here is the state of play:

There is an argument for the use of economic sanctions against foreign officials. The opposition to their use generally stems from two sources. The first is a blanket aversion to the use of American power; we don’t have a lot to say about that. The second, however, is a worry that such sanctions are applied without due process. That is a reasonable worry, but it is misplaced.

It is possible for foreign residents to harm Americans while outside the reach of the police power of the U.S. government. The alternative to applied sanctions is the issuance of arrest warrant. The problem is that when the foreign resident is outside the reach of American law, issuing an arrest warrant is a hollow move. The only options would be to do nothing or dispatch American forces to carry out an arrest inside the territory of a foreign state. The former is practically unacceptable for any representative government; the latter runs massive foreign policy risks. Sanctions on individuals believed to have violated American law or otherwise harmed American interests is an excellent way to square that circle. 

The problem of extraterritorial jurisdiction is compounded when the targeted foreign resident is an official of a foreign state acting in their capacity as a member of the government. In that case, the U.S. has no right to simply criminalize their actions without tossing aside the totality of international law. Moreover, the U.S. has no way short of invasion to enforce any such criminalization. It can impose sanctions on the government. But imposing sanctions on the government harms civilians …. which sometimes is what you want to do, but sometimes is gratuitous or counterproductive. 

Once again, you come to personalized sanctions as the best option between a complete abdication of the state’s responsibility and an economic sledgehammer. 

In short, the analogy with due process doesn’t hold. We’re not on much of a slippery slope, either. First, individual sanctioning is not something new and it has not yet led us to perdition. Second, the wording of the Economic Powers Act, specifically section 1702, makes it clear that the President has less power here than your typical local government under America’s (admittedly appalling) civil forfeiture laws.

But there is another issue, which is that American law is an ass when it comes to human rights. Setty: “The U.S. should support human rights, without having to (pretend or really) pee itself in fear of the human rights violator or his or her country. I think this sort of language unnecessarily alarms and alienates some people who would be natural allies of efforts in favor of human rights. The U.S. continues to act like a scrappy underdog even when much of the world sees it as an over-muscled bully.”

Exactly! The International Emergency Economic Powers Act should be for actual emergencies. There may be cases where a foreign government’s internal political actions really do constitute “an unusual and extraordinary threat.” For example, a repressive government could be in the process of starting a civil war. Or it might be generating large-scale refugee flows. Or it might be threatening American expats. None of which is really yet on the table on Venezuela, thank the Lord. 

In other words, the U.S. needs better legislation. The Venezuela Defense of Human Rights and Civil Society Act of 2014 (ohmigod reading the name of that bill hurts HURTS makes me sad a crime against English it is) could have contained its own authorization instead of going through the Economic Powers Act. Better still, Congress could create a new sanctions law, along the lines of the Venezuela Rights Act. Even better than that would be a law authorizing the President to impose sanctions in pursuit of resolutions from the U.N. or OAS.

Still, absent that, we have the laws we have. They are not terrible. The law may be an ass, but the Maduro government may just need a kick from one.

Is Venezuela a threat to U.S. national security? No, but that does not matter

 I’m in Trinidad, and my father-in-law just asked me why President Obama would declare Venezuela to be a “unusual and extraordinary threat to the national security.” This was in the context of the kind of argument that he loves, where he insists that Venezuela’s economic woes are the fault of American intervention and I tell him that’s the dumbest thing I’d heard since that British guy in the previous post. We go back and forth, I admit that duh-obviously the U.S. cares, he admits that he has no reason to think that U.S. actions have contributed in any material way to the woes of the Bolivarian Republic. 

Then the President of the United States declares, “The situation in Venezuela ... constitutes an unusual and extraordinary threat to the national security and foreign policy of the United States, and I hereby declare a national emergency to deal with that threat,” and I gotta start all over again.

At the same time, my friend James Nicoll decides to make an anti-American jab. “DOES AMERICA NEED A CUBA? That is, some eternal enemy to show the other New World nations what the alternative to be a satrapy is? Just sticking to horrible petrostates, the Saudis do worse but they’re smarter diplomatically than the guys down in Caracas.” 

So here I am with an explainer.

(1) Nobody believes that Venezuela is a threat to national security.

The reason for the wording of declaration isthat the authority to sanction Venezuelan officials comes from the  International Emergency Economic Powers Act of 1977. From Section 1701: “The authorities granted to the President by section 1702 of this title may only be exercised to deal with an unusual and extraordinary threat with respect to which a national emergency has been declared for purposes of this chapter and may not be exercised for any other purpose.” 

And so the President had to declare that the situation in Venezuela was indeed an “threat to national security” if he was going to impose personal sanctions.

The legislative history behind the 1977 act is interesting. Presidents had long imposed economic sanctions in response to foreign events, especially under the Trading with the Enemy Act of 1917. The problem was that those emergency declarations were open-ended and subject to no oversight. The post-Watergate congresses were not happy about that, and so they passed the Economic Powers Act to regulate the imposition of sanctions. The law does not directly limit presidential power, but it forces him or her to make six-month reports on the actions being taken and gives Congress the ability to terminate those actions under the National Emergencies Act of 1976.

(2) The Administration cares about Venezuela because it is in this hemisphere and the U.S. cares about democracy in this hemisphere.

I would love to find that the U.S. has some nefarious purpose in Venezuela. In fact, I wrote an entire book  about U.S. actions in Latin America that had a nefarious purpose. (Go read! James, I will send you a free copy on request. Would you review it?) I am having trouble seeing how these sanctions will advance American goals in Venezuela. Regarding our public goals, the sanctions thus far apply to individuals and will not worsen the economic situation. Those individuals are unlikely to change their behavior due to the threat. 

For two decades, the U.S. has put democracy promotion atop its Latin American agenda. It is extremely difficult for the United States to claim that democracy is an important foreign policy goal when a major government is violating the norms of democracy. With the rest of the Latin America apparently unwilling to move (for various reasons) that left the United States few other options other than acquiescing to Maduro’s dictatorial actions. That is certainly an option, of course ... but why would you want the United States to do that?

While the sanctions themselves will not change behavior, they will have two salubrious goals. First, it will put Caracas on notice that it cannot cancel or subvert the upcoming elections without courting diplomatic isolation. Second, it will embolden the opposition, at least on the margin. Finally, as a Hail Mary it might exacerbate some cracks in the Chavista coalition.

As for private benefits from U.S. action ... well. American companies are not getting paid, but those are not the policies that the U.S. is sanctioning. Washington can and will leave that to ICSID and wait for Venezuela to default on those obligations. 

(3) Nobody in Washington cares about hypocrisy and neither should you.

The U.S. is inconsistent about supporting democracy in this hemisphere. Across time, well, our record is worse than bad. The only two periods where we supported democracy in any sort of remotely consistent way were the 1920s (really! It surprised me too) and since 1990. 

Across space, well, on the one hand we have (rightfully!) decided that it is time to open relations with Cuba and (not quite as rightfully) look the other way in Honduras. (I am not referring to the 2009 coup; I am referring to the current actions of the current government. Like these.) So we are not consistent, even in our hemisphere.

But so what? There are good reasons to engage with Cuba. There are good reasons not to sanction Honduras. I have no idea what purpose perfect consistency would serve.

In short: these are mild personal sanctions, imposed to declare that the U.S. is serious about democratic norms in Venezuela. They will have little direct effect, but at least on the margin they make it a little more likely that elections will be held on schedule. And I do not see a cost for U.S. interests. So why not?

I invite James to change my mind! Why should the Obama administration have done nothing instead?

Is Venezuela financing the Nicaragua Canal?

 It looks as if Managua may be losing patience with HKND over the delays in starting the canal. According to source from within Albanisa, the company that handles Venezuelan aid and investment to Nicaragua, “We are hoping they [the Chinese] will release the money to compensate landowners in the canal route, but so far they have only made excuses and want the government to provide the funds.” The source went on to allege that Albanisa has been financing HKND’s operations thus far. “My understanding is that the government already told HKND that they should stop using Albanisa funds and now invest their own money.”

That is triply interesting. Albanisa is 49%-owned by Nicaragua’s state oil company (Petronic) and 51% owned by PDVSA. Petronic buys oil from PDVSA at market rates, financed via Petrocaribe. Petronic then resells the oil and hands over the resulting revenue to Albanisa. 50% of the money goes back to PDVSA, while the remainder is split between a social fund administered by the Bolivarian Alliance and Albanisa itself. In other words, Albanisa and the social fund are financed by cheap loans from Venezuela. (The details can be found here, an English interview with the then-head of Petronic.)

Albanisa then uses that revenue to finance investment projects. (Details here.) The flow is around $400 million per year; as of June 2014 the company had received a total of $3.1 billion. Given that all the activity so far has consisted of some rather desultory roads around Brito, it is certainly plausible that Albanisa is financing everything. 

The story has three implications. (1) Venezuela has been keeping the project moving forward, at least indirectly; (2) HKND is having real trouble finding investors; and (3) Managua is having second thoughts.

I would have thought that HKND would be able to get going on the free trade zone; after all, they will need it. But it seems as though they are having trouble getting even the funds to start that. Maybe Beijing does not think this is such a good idea after all.

Heterodox Friday: Panamanian price controls

 This blog has long taken the position that Hugo Chávez was uniquely incompetent. There was a time, back in 2008, where we gave him political props for building an effective machine. That admiration began to fade with the electricity crisis. Then some of this blog’s old readers (where have you gone?) made good arguments that the Chávez boom wasn’t all that it was cracked up to be, although we remained on the positive side of neutral. Sure, there were some shortages caused by price controls. But other than the insanity in the electricity sector, the controls could be justified as a means of income redistribution in a country that lacked the administrative ability to impose punishing income taxes. (This gets to a question from Randy that I will try to get back to.) 

Unfortunately, the Socialists proceeded to run completely off the rails. Their cardinal sin was keeping the bolívar pegged at 6.3 to the dollar. The resulting capital controls have led to massive shortages of imported goods. Had the exchange rate regime been liberalized after the 2013 elections, living standards would have been hit, but the economy would be in better shape now. As importantly, the Maduro administration would have the space to engineer a mini-boom before the midterm elections. As it stands, however, Venezuelan exchange rate policy stands as an incredible example of economic and political incompetence. 

After all, in a another world the people lined up to buy cheap goods at a state-owned supermarket would be grateful to the government which got it for them. But in this world they are quite angry at the government. Here is a good article by David Smilde of Tulane University that argues that it is too late to effectively reform. The Socialists are going to (a) lose the next election; (b) pull some sort of hat-trick involving Chinese money and a short-election season; or (c) actually turn Venezuela into a dictatorship. (The link goes to an earlier post here that argues that the Polity IV score ranking Venezuela as already dictatorial is bullshit. But we were would agree that it is not far-fetched to imagine Maduro abandoning democracy, possibly via unconstitutionally postponing the midterm elections. That Polity IV ranker may have been prescient.) 

Or maybe Trinidad will come to the rescue? On Wednesday, the Trini prime minister, Kamla Persad-Bissessar, offered to swap tissue paper for bitumen. “The government of Trinidad and Tobago will purchase goods identified by the government of Venezuela from T&T’s manufacturers, such as tissue paper, gasoline, and parts for machinery.” It is part of the Trinidadian charm offensive that just enabled a deal for joint exploration for natural gas in the Gulf of Paria.

But as strange as it is to see T&T riding to the of the Bolivarian Republic, I would argue that it is probably too late for (b). The government certainly has started to throw a lot of opposition leaders in jail. That is more (c) than (b), even if they manage to pull off a win without election fraud. (Stealing elections, we have to add, is hard to do in Venezuela. Some things Chávez did right.)

So what does all this have to do with Panama? Well, mainly a demonstration that I am not an orthodox right-wing buzzword-of-the-day. 

When President Juan Carlos Varela took office on July 1st, 2014, Panama faced an inflationary spiral. (See page 4.)To some extent, the idea of inflation in Panama sounds odd: the country uses the U.S. dollar. There has been no sign of inflation in the United States, so why were prices escalating in Panama? Simple: Panama was in the middle of a huge economic boom. (See page 19.) Incomes were rising fast and pulling up prices.

The traditional diagnosis in such a situation is that supply bottlenecks are the cause of the inflation. In that view, the right answers are (a) wait it out; or (b) slow economic growth via austerity. There were two problems with (a). First, the inflation hit the poor hard. In Panama, unlike the United States, overall turnout tops 75% and most people are still relatively poor ... governments cannot safely ignore them the way they do in North America. Second, prices are sticky. Increases in the price of food will translate into wage increases. In a dollarized economy, that means a loss of competitiveness and a serious adjustment problem ahead. (To some extent, that is what happened to Spain during the early years of the euro.) If you can keep inflation from escalating, you should.

The problem with solution (b), of course, is that austerity is painful. And there is a diagnosis in which austerity is unnecessary. What if the bottlenecks aren’t physical? Rather, what if they are caused by an uncompetitive wholesale sector? In that world, rising demand leads to rising prices not because goods are scarce but because wholesalers and retailers are using the opportunity to take profits. If that view is correct, a big if, then the government can use price controls to break the inflationary spiral. Merchants will have lower profits, but there will be no shortages: it will still pay for them to provide goods. 

My esteemed colleague in what remains of the blogosphere, Fausta, confidently predicted that shortages would result if Panama imposed price controls. (She is correct in pointing out that former-president Martinelli was a supermarket magnate!) Economists were more divided (the headline of the article is misleading) although they did universally insist that the controls should be temporary. 

President Varela went ahead with his campaign promise and imposed controls. The decree with the list of the prices can be found here. The ones I recognize are lower but not that different from the price in D.C.: frex, we buy chicken breasts for about 90¢ a pound. 

So what happened? No shortages. Lots of fines. A dramatic fall in inflation. The Varela administration has decided to extend the controls until July 2015. For more details you can find an August 2014 analysis from the Economics and Finance Ministry here. 

In short, a victory for economic heterodoxy, hooray! (FWIW, President Varela is from the conservative party in Panama.)

Of course, with no independent monetary policy, nobody in Panama has any incentive to take advantage of the controls to, say, print money and engineer an electoral boom. But still.

So there. I am against the Chavistas because they are incompetent and authoritarian, not because they are left-wing or heterodox. May there be an election in Venezuela and may the Socialist Party lose.

Boz on the coup attempt in Venezuela

 President Maduro yesterday ordered the arrest of a retired Air Force general for planning a coup. They were going to attack the presidential palace on Thursday with a Super Tucano light aircraft. 

Obviously, given that the government just devalued the bolívar (sort of) and is in the middle of a self-imposed and completely unnecessary economic meltdown, there are reasons to think that this is all bullshit.

But let’s say that the plot is real. What does it imply that eleven officers believed that they could take down the entire government with a single close-attack aircraft? 

See Boz for the answer.

Key quote:

So why would seven Air Force officials believe that they could take down the government? Because Chavez’s military doctrine and the lessons from 4 February 1992 in some way taught them that they could and should. What should concern the Maduro government, but doesn’t, is that there are thousands of other military officers in Venezuela who have been taught the same lesson. There must be a few dozen more out there, soldiers who probably consider themselves good Chavistas, who wonder if they could do it better than Chavez in 1992, actually succeed where he failed.

February 4th, 1992, is when a young Hugo Chávez launched his failed coup attempt against the Venezuelan government. Once he became President that coup attempt came to be lauded as a noble failure, the Día de la Dignidad Nacional, rather than a regrettable error of judgment. 

Read the whole thing. 

The Caribbean can survive the collapse of Petrocaribe

 There has been a lot of worry that the increasingly penurious Venezuelan government may cancel the Petrocaribe program that helps Caribbean nations (and El Salvador) buy Venezuelan oil. The fear is that fragile Caribbean economies will collapse if Caracas withdraws its support.

I think these worries are misplaced.

Petrocaribe finances Caribbean oil purchases on a sliding scale. When the price is between $30 and $40 per barrel, it will finance 25% of the purchase price. When the price is $90 per barrel (as it was back in July), Petrocaribe finances 40% of the purchase price. The terms are laid out in Article IV the Petrocaribe Cooperation Agreement. 

Upshot: the price of Venezuelan oil is currently $39 per barrel with no subsidy. Six months ago, Caribbean countries had to shell out $59 in cash for a barrel of oil valued a hair below $99. It is true that if Petrocaribe holds the Caribbean countries will have to stump only $29 in cash ... but at the end of the day, $39 < $59.

Meaning that even if Venezuela abandons its Bolivarian ideals and dumps its Caribbean allies, the Caribbean countries will still be better off than they were last year.

The extraterritorial British empire

 The U.K. goes a little bit further than the United States in letting people use its courts against foreign sovereigns. The basic law is laid out in the State Immunity Act of 1978. First, the British law does not require that any state-owned property must have some sort of economic connection with the activity that gave rise the underlying claim. (E.g., there is no equivalent of Section 1610(a)(2) in the British law.)

Second, in general it is a little easier to “pierce the corporate veil” and go after the assets of state-owned companies. For example, 2006 a British company went after the Congolese Republic for unpaid debts. The Congolese government tried to sell oil through the  state0owned Société Nationale des Pétroles du Congo (SNPC), which then sold it through a web of holdings. The British courts held that SNPC was an “organ of state” because:

1. The board of SNPC could delegate powers to a chairman appointed by the President of Congo;
2. SNPC had unaudited and unverifiable financing arrangements with the state; and
3. SNPC neither declared dividends nor returned profits to the state in cash. Instead it made expenditures normally made by government.

Other than maybe the first half of the third clause, that would certainly apply to PDVSA.

Now, that case did not involve sovereign debt per se, but a similar one did in 2005. That year, a British vulture fund managed to grab the revenues from Congolese oil sales. Now, the Congolese had done a good job of protecting themselves. SNPC established a subsidiary, Cotrade.  Cotrade sold oil to the Africa Oil & Gas Corporation (AOGC), incorporated in Canada. AOGC then sold the oil to a company called Sphynx, which in turn sold it to Glencore. The vulture fund successfully intercepted the money that Glencore owed Sphynx by arguing that SNPC and Cotrade had no independent existence from the Congolese state and AOGC was nothing more than a convenient front. (This is the best link for the story.) That seems rather more direct than what happened in Texas! 

Now, to be fair, a similar attempt to go after a joint venture part-owned by the government of the Democratic Republic of the Congo failed in 2012. So while easier than in America, it is not a sure thing.

Finally, there is the global Mareva injunction. British courts can freeze assets in advance of a judgment. No sneaking things out of the country here! 

I AM NOT A LAWYER! I have no idea how difficult it would be to wield these tools against Venezuela in the advent of a default. I kinda think it would be hard, since the bonds were issued under New York law and Citgo assets are in the United States. But Mareva injunctions can be global. So I suspect U.K. courts will play a role in whatever happens.

Which will be default --> legal mess --> restructuring. Hold on to your hats.

Can Venezuela’s creditors grab Venezuelan assets in a default?

 If PDVSA defaults on its debts, then yes. It would be a standard commercial dispute. Once a court made its final ruling, U.S. officials would seize Citgo shares, sell them, and give the proceeds to the creditors after deducting expenses and taxes.

But if the Bolivarian Republic defaults, not PDVSA, then it gets harder. Let’s say I own shares in a company and I default on my debts. Creditors can go after my shares in the company, but they cannot go after the company’s assets. This is true even if I am the only shareholder in the company. (Limited liability goes both ways.)

This principle applies to companies owned by foreign states. An official House of Representatives report (see footnote 185 on page 196) bluntly stated: “Section 1610(b) [of the Foreign Sovereign Immunities Act of 1976] will not permit execution against the property of one agency or instrumentality to satisfy a judgment against another, unrelated agency or instrumentality. There are compelling reasons for this. If U.S. law did not respect the separate juridical identities of different agencies or instrumentalities, it might encourage foreign jurisdictions to disregard the juridical divisions between different U.S. corporations or between a U.S. corporation and its independent subsidiary.” 

So far, so clear. Citgo is safe from creditors of the Venezuelan government. 

But here’s the thing: I can’t hide from creditors by creating a separate me-controlled firm and transferring my assets to it. In the words of the Supreme Court, “where a corporate entity is so extensively controlled by its owner that a relationship of principal and agent is created, we have held that one may be held liable for the actions of the other.” Morever, there is a “broader equitable principle that the doctrine of corporate entity, recognized generally and for most purposes, will not be regarded when to do so would work fraud or injustice.” 

In 1983, the Supreme Court specifically extended that principle to foreign state-owned entities in First National City Bank v. Banco para el Comercio Exterior de Cuba (Bancec).

Here’s the backstory. In 1960, Bancec arranged to sell some Cuban sugar to a Canadian company. Citibank issued a letter of credit to Bancec for the sugar. Bancec handed it to the Cuban central bank  (the Banco Nacional) for collection. On September 15, 1960, the Banco Nacional presented the letter to Citibank. The next day, the Cuban government nationalized all Citibank branches. (This was remarkably poor timing.) Citibank, not surprisingly, did not pay Bancec. Bancec sued in the Southern District of New York. The Cubans let the claim sit around until 1975. When they picked it again, they argued that Bancec was an independent state-owned company; why should it be liable the Cuban government’s actions?  

The case went all the way up to the Supreme Court. The Supreme Court upheld the lower court ruling: “Bancec is not a mere private corporation, the stock of which is owned by the Cuban government, but an agency of the Cuban government in the conduct of the sort of matters which even in a country characterized by private capitalism, tend to be supervised and managed by government. Where the equities are so strong in favor of the counter-claiming defendants, as they are in this case, the Court should recognize the practicalities of the transactions. . . . The Court concludes that Bancec is an alter ego of the Cuban government.”

Alright, then. Easy! It might be impossible to seize Citgo assets because Citgo is clearly not an agent of Caracas, but it might be possible to take Citgo shares away from PDVSA. After all, it would not be hard to argue that PDVSA has not been an independent commercial entity since 2002. 

So I ran this past a lawyer friend of mine who works on this stuff.

And ... oh boy ... PDVSA does not own Citgo directly. It owns it through PDV America Inc which is in turn a subsidiary of PDV Holding Inc, both incorporated in Delaware. And those two companies are not legally beholden to PDVSA. 

So now you have to show that PDVSA has no independence and that PDV Holding Inc and  PDV America Inc have no independence. That ain’t so easy. In short, Lex is too sanguine about the prospects for seizing Citgo. It could happen, and my lawyer friends think it will happen ... but only after a long delay.

But there’s another problem! Venezuela has ICSID judgments against it. Unless Venezuela pays them, then ExxonMobil and ConocoPhillips will be sniffing around those assets. Their claims rank higher than claims by bondholders, since uncompensated expropriation, unlike default, involves a clear denial of justice. 

In short, you have a mess. Sure, the fact that Citgo is there will make the Bolivarian Republic think six times about defaulting. But the economic mismanagement in that country is of such a scale (sorry, Shah8 ☺) that Caracas no longer really has any other options.  

Now, creditors have another recourse.

The creditors could go after Venezuelan oil exports directly. There is a recent history of this. In 2007, Texas courts ordered American companies to turn over not only royalties but also physical oil due the Congolese Republic. (See here and here; the decision itself is here.) Now the legal approach used in Texas did not have legs. But to be fair, the suits were quite different than the suits that might happen regarding Venezuela. 

The Venezuelans could sell their oil at the point of embarkation and try to hide it, but that opens up foreign refineries to lawsuits. With the world awash in oil, many will be behooved to avoid going anywhere near the Venezuelan stuff. 

So here is the upshot: a default will cause much pain in Venezuela but it will not make creditors whole. Having Citgo as a target does not cancel out all the problems with legal enforcement of sovereign debt because even if the creditors win it will take forever and a day to collect. But because of the legal challenges to oil sales, default be a big enough disaster for Venezuela that the country will likely make an offer that 75% of its creditors will accept. They will then abandon any attempts to go after Citgo. 

Given what Venezuelan bonds are yielding, I’m tempted to buy them. How bad could the restructuring be?

Venzuela keeps shooting down Mexican planes

 When I was in Mexico a few weeks ago, one of the big stories was a Venezuelan shoot-down of a Mexican plane. In fact, this was at least the third time that the Bolivarian armed forces had shot down a Mexican-origin plane in the last year.

What is going on? In 2011, we published some maps showing that since at least 2008 large numbers of unidentified aircraft took off on the Colombia-Venezuela border and flew over Venezuela before landing in eastern Honduras. The route makes it clear what most of them were doing.

President Chávez was less-than-thrilled with the implication that his country was complicit in the cocaine trade. “It’s hard to think about it but, look at what’s going on here. Planes from neighboring countries come here and our Sukhoi or F-16 airplanes try to make them land, but they make some maneuvers and at times get away. … They mock our pilots.” So he sent a bill to the National Assembly allowing the military to shoot down unidentified air traffic. Chávez’s illness and death slowed things down, but President Maduro pushed the bill through in 2013.

And since then some unknown number of aircraft have gone down over the Bolivarian Republic. It should come as no great shock that there are a lot of worries that these planes may not have been all carrying narcotics. 

I have a friend who works for the Air Force. There may be unclassified data that will let us see if the hair-trigger Venezuelans have had an effect. He knows who he is.

Chinese beneficence towards Venezuela runs out ... maybe

 The increasing impenetrability of Venezuelan statistics is well known. What I find annoying above all is the way the Oil Ministry quotes oil prices. Rather than give the average price fetched by Venezuelan crude, they include the prices of the refined products that PDVSA exports. (Venezuela is a net importer of refined products, but it does export some.) 

That makes it hard to understand what happened in the oil market in 2011-13.

Venezuelan crude is heavier and therefore costlier to refine. It generally therefore traded at a discount compared to West Texas Intermediate. (WTI is a generally-used benchmark for North  American domestic crude.) In mid-2011, however, that changed: for the next two years the “Cesta Venezolana” fetched a premium. Sometime in the middle of 2013, things then returned to normal.

So what happened? I do not know for sure. (Is Francisco Monaldi out there?) But I have a hypothesis.

The hypothesis is not that the price of refined exports spiked enough to drive up the price of the Cesta Venezolana. Refined prices did spike in the United States. But gross volumes of Venezuelan refined exports faded to near nothing. (In fact, Venezuela started importing significant quantities of American gasoline and other products around 2010.) Refined product exports are not big enough to explain the massive fall in the discount on the Cesta Venezolana. 

Another possibility is that heavy crude began to command a premium in the United States. After all, domestic production was skyrocketing, and that production was of light crudes. At the same time, Venezuelan exports to the United States continued their decline. (As did, for other reasons, Mexican exports.) American refineries in the Gulf region are optimized for heavy crudes. So maybe they began paying more for all heavy crudes. The Canadians could not enjoy that premium because it cost so much to move their stuff to the coast, but the Venezuelans could sit back and look pretty.

Still, there is something unsatisfying with that story. Venezuelan exports to the United States had been falling for some time. There was no sudden shift. It seems unlikely that the American demand for Venezuelan crude suddenly spiked. 

On the other hand, it seems more possible that the non-American demand for Venezuelan crude suddenly spiked. 2011 was around the time that Hugo Chávez’s policy of redirecting exports to China began bearing fruit. There are reasons to believe that Venezuelan oil fetched higher prices in China than in the United States. Chinese refineries indexed to Brent, not WTI, and Brent enjoyed a premium over WTI at that time. In fact, when you add the WTI-Brent discount to the graph of the WTI-Cesta Venezolana discount, the correlation is hard to miss. 

The hypothesis is the following. The Venezuelan government deliberately redirected exports to China, where they fetched a higher price than in the United States. (This does not include the cost of the new refineries in China that the Bolivarian Republic, in effect, financed.) For a time, that gave Venezuelan crude a significant price premium. The current ~$10 gap between Brent and the Cesta Venezolana is within historic margins, albeit on the high side. It does seem as though the Chinese may have adopted a less-favorable pricing policy.

Of course, given recent market movements, the Venezuelan government has other things to worry about as far as oil prices are concerned. The disappearance in the premium is only an insult added to injury. I wish I could make out what prices President Maduro is looking at in this graph ...

Panama backs down in the face of the Bolivarian revolution

 Many months ago, we discussed the growing confrontation between Panama and Venezuela, which cumulated in a Panamanian threat to expose the Venezuelans who were hiding their money in Panama. As of May, the new Panamanian administration had decided not to follow through. So what happened then?

Short version: the Varela administration normalized relations right after his inauguration on June 1st. No more shouting.

But what about the unpaid Venezuelan debt that started the whole thing? Well, on October 29th, Panamanian trade minister Melitón Arrocha flew to Caracas to try to hammer out a settlement. That succeeded ... in the sense that on November 18th the two countries agreed to appoint two joint working groups to negotiate payment. The markets are not reassured: Copa Airlines (which is owed about $600 million) stock took a beating. 

Meanwhile, Venezuela suffers. The number of international flights has been cut in half. And since the airlines now require payment in dollars, access to flights for Venezuelans has been reduced by even more. Meanwhile the collapse of trade with the  Colon Free Zone has contributed to Venezuela’s shortages. 

Given Venezuela’s woes, I would not expect payment in full.

Why Panama did not follow through on its threat to the Bolivarian Republic

 Panama-Venezuela relations remain at an all-time low because of the money that Venezuelans owe Panamanians. Venezuela’s capital controls are the reason the debts have not been paid. Panama responded in three ways. First, various forms of moral suasion, which are continuing but useless against the Maduro administration. Second, a case at the WTO, which is continuing but very slow. And third, a threat to publicize the moneys that corrupt Venezuelan officials have hidden in Panama ... which has sunk like a stone and disappeared.

Via Randy McDonald comes the likely reason: wealthy Venezuelans are continuing to move to Panama. Some of them are assuredly hiding money from the Venezuelan government, ill-gotten or not. Moreover, banking secrecy is the kind of thing that it is hard to half-violate without spooking clients from elsewhere. And, finally, the fact is that if the Maduro administration were going to respond to the Panamanian threat it would have already responded. Since Panama has no other real arrows in its quiver, it loses no credibility from not following through on its threat.

Plus, there is a new administration in Panama, from one of the two opposition parties. It is not bound by statements from the previous presidency. Venezuela is a scary place and an economic wreck, but it is a wreck in a very Venezuelan way. Panamanians rightfully discounted attempts to frighten them into thinking that the (conservative) opposition would create such a mess at home ... although President-elect Varela does intend to impose price controls on food. 

We will continue to bring you more news in the Panama-Venezuela spat as it continues.

The beginning of the end of Venecuba was in 2007

Venezuela has a special relationship with Cuba. The number of Cuban officials who can be found throughout the Bolivarian government is quite astounding, as is the volume of financial aid that Venezuela grants its Cuban partner. Moisés Naím has a good piece on it at the Financial Times, although it relies too much on a qualitative picture for my taste.

There are two things to note about “Venecuba,” as Hugo Chávez once called the alliance.

The first is that the two countries reached the current level of integration fairly early, around 2008. Evidence? One estimate for 2008 is that transfers to Cuba came to $5.6 billion in payments for Cuban officials working inVenezuela and $2.5 billion in subsidies for oil sold at $27 per barrel. (See page 109.) For 2010, the same source estimated the value of the same two transfers at $5.4 billion for personnel and $2.8 billion for oil. (See also here.) That is not a big change.

Ernesto Hernández-Catás (using a different methodology) gets the same result: not a whole lot of change in net Venezuelan transfers (in billions of current US$) after 2008:

The more qualitative reports of Cuban officials operating inside the Venezuelan state are harder to measure. But it should be noted that the U.S. was worried about Cuban influence in the foreign ministry and the Cuban presence in Venezuelan ports in 2008. Juan José Rabilero, the coordinator of Cuba’s Committees for the Defense of the Revolution, boasted, “We have over 30,000 members of Cuba’s Committees for the Defence of the Revolution in Venezuela” ... in 2007.

In short, the Cuban-Venezuelan relationship reached its peak around 2007-08. That is not to say that the relationship isn’t an astoundingly tight one. It is. It is to say that it hasn’t gotten much tighter since ‘08.

The second thing to note about Venecuba is that there was a lot of talk of deeper union in 2007. The State Department noted this in an internal cable. The political benefits of greater institutionalization were obvious. It would secure Cuba’s access to Venezuelan resources and make it easier for President Chávez to call on Cuban support to help him cement his control over Venezuela. Randy McDonald discussed the idea here.

So what happened? One possibility is that plans to institutionalize the Venecuban links were just hot air. That was true of a lot of Hugo Chávez’s initiatives.

But that isn’t what happened. What happened was that Chávez put the possibility of a federation before the Venezuelan people in 2007 and got beat at the ballot box. Here’s the story. Chávez proposed a series of constitutional amendments to the National Assembly in 2007. In the Assembly, his party added a series of additional amendments. (This almost certainly occured under the supervision of the executive branch.) Among them were reforms to Articles 152 and 153.

The original text of both articles read as follows:

Article 152: The international relations of the Republic serve the ends of the State as a function of the exercise of sovereignty and the interests of the people; they are governed by the principles of independence, equality between States, free self-determination and non-intervention in their internal affairs, the peaceful resolution of international conflicts, cooperation, respect of human rights and solidarity among peoples in the struggle for their liberation and the welfare of humanity. The Republic shall maintain the finest and most resolute defense of these principles and democratic practices in all international organs and institutions.

Article 153: The Republic shall promote and encourage Latin American and Caribbean integration, in the interest of advancing the creation of a community of nations, defending the region’s economic, social, cultural, political and environmental interests. The Republic shall have the power to sign international treaties that implement and coordinate efforts to promote the common development of our nations, and to ensure the welfare of their peoples and the collective security of their inhabitants. To these ends, the Republic may transfer to supranational organizations, through treaties, the exercise of the necessary authorities to carry out these integration processes. In its policies of integration and union with Latin America and the Caribbean, the Republic shall give privileged status to relations with Iberoamerican countries, striving to make this a common policy throughout our Latin America. Provisions adopted within the framework of integration agreements shall be regarded as an integral part of the legal order in force, and shall be applicable directly and with priority over internal legislation.

The new versions would have read:

Article 152: The international relations of the Republic are based on the full exercise of the sovereignty of the Venezuelan state and are governed by the principles of: political independence, equality of States, self-determination and non-intervention in internal affairs, the peaceful resolution of international conflicts, defense and respect of human rights and solidarity among peoples in the fight for their emancipation and the welfare of humanity. The Republic shall develop the finest and most resolute defense of these principles in international organs and institutions, fostering their permanent democratization for the construction of a just and balanced order. The foreign policy of the Republic shall be actively oriented towards the construction of a multipolar world, free from the hegemony of any imperialist, colonialist, or neocolonialist power center. In order to guarantee that this article be carried out, the Foreign Service is declared a strategic activity of the State. Its organization and functioning will be established by law.

 Article 153: The Republic shall promote the integration, Confederation, and Union of Latin America and the Caribbean with the aim of configuring a great regional political, economic, and social power bloc. In order to obtain this objective, the State will favor the construction of new models of integration and union across our continent, to permit the creation of a geopolitical space within which the peoples and governments of our America shall construct a single supranational project, which Simón Bolívar called “A Nation of Republics.” The Republic may sign treaties and international conventions based on the broadest political, social, economic and cultural cooperation, supranational productive complementarity, solidarity, and fair trade.

In practical terms I cannot make heads-or-tails of either article ... but as a statement of principle the reform is clear. The original version committed the Bolivarian Republic to defending motherhood in article 152 and enabled the construction of something like the European Union in Article 153. The new version changed that. Article 152 now committed the country to an effectively anti-American foreign policy. Article 153 declared the aim of uniting as much of Latin America as possible into an anti-American confederation.

At the time the reform of Articles 152 and 153 was seen as part of the Venecuba trial balloon.

Anyway, the Venezuelan electorate narrowly defeated the reform at the polls. These reforms were not the main reason for the loss, of course, but President Chávez decided that he had pushed de jure union with Cuba as far as it could go. He had also pushed the de facto alliance as far as possible. And that was the end of that.

But not of Cuban involvement in Venezuela, for better or for worse. To be perfectly frank, I believe that the Cuban presence is both very large and largely inconsequential.

Panama’s other recourse against Venezuela

The Panama-Venezuela spat is continuing. (I know, among news from Venezuela this is among the least important, but it is a big deal in Panama.) No revelations yet on the bank account front, but Panama has taken a leaf from the E.U. will sue Venezuela at the WTO. The justification is that Venezuelan capital controls are, in effect, an illegal trade restriction.

This is the same route that the European Union took against Argentina after the YPF nationalization. Brussels could not legally retaliate for the act itself, but it could throw the book at Argentina over its capital controls.

Continuing.

And Panama strikes back!

Randy McDonald asks if Panamanian creditors have any recourse against Venezuela; we answer “yes, but not very much.”

But it looks as if there is something that the Panamanian government can do: publicize secret Venezuelan bank accounts in Panama!

Let’s turn the mike over to President Martinelli’s chief-of-staff, Roberto Henríquez. “How can Maduro talk about corruption, when they have used the [Panamanian] banking center to hide fortunes? They’ve looted their country. Maduro has placed Venezuela at the service of a little group, that supports him, that controls the country through the force of arms, and much of that money is in the banking center.”

Mwa hah! It will be much fun to see what they report if the Panamanians follow through. Man, I hope they do.

For what it’s worth, it also seems that the Colón Free Zone companies have called President Maduro’s bluff: they are willing to open their books to the Venezuelan government. To quote Luis Germán Gómez, head of the CFZ merchants’ association: “We are open to investigating what has to be investigated, reviewing what needs to be reviewed, but we are also open to being paid.”

Don’t mess with the Revolution; or why Latin American governments do not criticize Venezuela

Because the Venezuelan government will hit them as hard as it can at large cost to its citizens.

In Panama’s case, that is pretty hard indeed. Venezuela importers owe exporters in the Colón Free Zone (CFZ) about $1.2 billion. That is to say, CFZ companies have already sold goods to companies in the Bolivarian Republic and are awaiting payment. In retaliation for voting with the U.S. and Canada at the OAS, the Venezuelan foreign minister now says that the Panamanian companies won’t be paid.

To make matters worse, Copa Airlines has $487 million locked up in Venezuela which the government won’t let them take out of the country.

Add it up and you have about 3% of Panama’s GDP. Now, the companies that are being hit will probably be able to finance the losses, so there likely won’t be much spillover to the broader economy. But it is a nasty punch in the nose. Now, it’s also one that hurts Venezuela quite a bit worse, but that’s likely the point. Caracas is demonstrating that it is not to be trifled with.

In that kind of situation, why bother to make noise? Nothing to gain, something to lose.

UPDATE: Yesterday President Maduro spoke out about the dispute. First, he sort of walked back the default, saying “The debt owned to Panamanian businesspeople will be paid without intermediaries.” Except that really makes very little sense. Unless they advanced credit for their goods, this proposal would mean paying twice whomever sold the goods to the CFZ businesses that sold them to Venezuelan customers. It would also be a bit of an investigatory nightmare. Moreover, the Venezuelan government keeps implausibly claiming that 90% of the goods were never delivered, which sort of puts a damper on their credibility.

What it really fun, however, is how Maduro then took a personal stab at President Martinelli. “He will be a fugitive from justice when he leaves the presidency. He’s involved in all the fishiness. He was into some abnormal dealings with the Canal expansion and will certainly go to jail.”

Well, then.

A good post on the other Venezuela, slightly marred by a bad translation

In comments, there a mention of the Venezuelan Politics and Human Rights blog, coordinated by David Smilde of the University of Georgia. The link went to an excellent post by Rebecca Hanson on how the protests have not yet reached the working-class western half of Caracas.

The post is worth reading. It brings home two things. First, although there have been protests in Chavista neighborhoods since the violence, they are not typical.

Second, it shows why the opposition gained so much ground in the last election, coming within a hair’s breadth of victory. It isn’t that poorer voters have enthusiastically embraced the opposition as much as their faith in the Socialist Party has waned. That said, they have turned to the opposition with their votes; it is not just a matter of lower enthusiasm. Consider this chart using data from the IDEA:

Between 2006 and 2012, as crime rose and shortages began to appear, the opposition vote increased by over two million. The Socialist vote also increased, but by much less. Now, the voting-age population increased by a little over three million: either the opposition won 80% of all voters aged 18-24 (unlikely) or substantial numbers of people switched their vote between the two elections.*

From 2012 to 2013, without Chávez on the ballot, the Socialist vote shrank while turnout remained stable. (And remarkably high!) The opposition vote grew again. This time the evidence of vote-switching is impossible to miss.

Moreover the swing towards the opposition was quite uniform across the country, as you can see in the below county-level map.

These data indicate Chavismo losing quite a lot of popular support, which should not be surprising given both that the Socialists lost Hugo Chávez’s unparalleled political skills and presided over a rapidly deteriorating economic and security environment. 

For a great post that really brings home the government’s waning support, read this. It’s from Counterpunch and written right after the 2013 election.

Which brings us to the mistranslation in Hanson’s (excellent!) post. At the very end, she recounts seeing a banner draped over a pedestrian bridge on Sucre Avenue. (I have lifted her photograph and posted it below.) She translated it as, “If you want to get to the government win elections! Get tough on organizers of violence!”

That’s not quite right. A better translation would be: “If they want to take office, then they should win elections! Crack down on the violent demonstrators!”

Is Venezuela a democracy?

Let me caveat the rest of this post with a reiteration of the fact that I am not a defender of the Venezuelan government. Nor should you be. Mark Weisbrot, a smart fellow, makes a bit of a fool of himself by trying. (One of our commentors makes a rather better effort, but ultimately fails.) I am on the record as thinking that the current bout of violence and repression is both the government’s fault and rather inexplicably stupid.

Had Maduro held his calm, the violence would have been minimal and passing. The fact that he did not and put gasoline on the flames comes as a surprise to me.

In short, the Venezuelan government is run by incompetents. But is it a dictatorship?

To my surprise, I discovered on Caracas Chronicles that one of the most-prominent political databases, Polity IV, says yes, the Bolivarian Republic is a dictatorship.

What is Polity IV? In the words of Anabella Abadi and Bárbara Lira it is “a project of the Center for Systemic Peace, which codifies characteristics of political regimes in order to classify them — in opposite extremes — as ‘Institutionalized Democracies’ or ‘Autocratic Regimes’. To formulate the indicator, Polity IV considers the election mechanism for the Executive Power (meaning regulations, competition and open participation); institutional constraints on the exercise of power by the Executive Power; and the degree of regulation and political competition.”

It is a good database; I have used it myself in academic work. But something seemed odd about the rapid decline in Venezuela’s polity score after the establishment of the Bolivarian Republic:

So I decided to dig into the numbers and see what was going on.

The basic polity score has two components: democracy and autocracy. The total score is determined by subtracting one from the other. In 1998, when Hugo Chávez first won election, the democracy score was 8 and the autocracy score was zero, for a total score of 8. That made it a solid democracy: France was 6 in 1958 and ranks at 9 today.

So what happened?

Well, in 1999 the score dropped by one. The fall was due to a fall in the “executive constraints” score from 6 to 5, presumably as a result of the new constitution. The highest value is 7. By definition, the index gives all parliamentary systems a value of 7, since the legislature can depose the executive. The U.S. also gets a score of 7, since the president cannot introduce legislation. A value of 5 is defined as “substantial constraints on the executive” and still falls well within democratic norms. (Page 24.)

There is a little bit of wiggle room here since a ranking of 6 on “executive constraints” is just an intermediate placeholder. In other words, the difference between 6 and 5 is not defined. But to be honest, the drop was fair: the 1999 constitution gave the president the power to dissolve the National Assembly, which is a powerful tool. (One might not consider executive constraints to be the best measure of democracy and quibble with the way parliamentary systems get the highest score, of course.)

OK, then, fall in 1999 explained. No problem.

In 2001 the score falls again by one point. This time, the fall in the was due to a fall in the “competitiveness of participation” score from 4 to 3. This variable is a little odd. The top value is 5, or “competitive.” OK, gotcha. A value of 4 is an ill-defined transitional category. A score of 3 means that “parochial or ethnic-based political factions that regularly compete for political influence in order to promote particularist agendas and favor group members to the detriment of common, secular, or cross-cutting agendas.” (Page 26.)

I am not entirely sure that I understand what that means in the Venezuelan case.

Even if I did, the fall does not have to do with the Second Enabling Act of 2001, under which the Assembly gave President Chávez temporary decree power. That should have changed the executive constraint score, not the political competitiveness score. (The law did not change the executive constraint score because the Act was constitutional; moreover the previous constitution contained a similar provision.) Anyway. the Second Enabling Act had been preceded by the First Enabling Act in 2000.

But what did happen in 2001 to cause the fall in the “competitiveness of participation”? I do not know. The drop is a bit mysterious. Not necessarily wrong, but not immediately obvious. Help?

In 2006, the executive constraint variable drops by another point. Now, one problem is that a score of 4 is still an undefined transitional category (page 24) but it seems justifiable. The Bolivarian Republic is still a point above the early years of the French Fifth Republic on the executive constraint tip, meaning that Hugo Chávez was more constrained than Charles de Gaulle.

A bigger problem is that the drop seems a little inexplicable. The Chavistas won a two-thirds majority in 2005, so the timing is off. Is it the scale of the Chavista presidential victory in ‘06? A score of 4 still involves an independent judiciary and some legislative autonomy, so it is not unreasonable, but it has a Potter Stewart feel to it.

Thus, 2006 is when Venezuela loses its status as an institutionalized democracy, but not as a democracy. Such a loss does indeed pass the Potter Stewart test, even if the timing is odd.

I am not entirely sure I understand it, but it is not unreasonable. Opinions on what happened in 2006? Right move, wrong timing?

Things fall apart in 2009, though, and that is where I get confused.

First, the summary. The polity score plunges eight points from 5 to −3. How do we get there?

1. A one-point rise the “regulation of participation” variable from 2 to 3 raises the autocracy score from 0 to 1. (Polity = 4.)
2. A one-point fall in executive constraints takes off two points by dropping the democracy score from 5 to 4 and raising the autocracy score from 1 to 2. (Polity = 2.)
3. A one-point fall in “regulation of chief executive recruitment” from 3 to 2 drops democracy from 4 to 3. (Polity = 1.)
4. A two-point fall in executive competition (to be explained) gets us the rest of the way there by dropping the democracy score from 3 to 1 and raising autocracy score from 2 to 4. (Polity = −2.)

How reasonable are these changes? From most to least:

1. The first one makes sense, even if the timing is off. A value of 2 for “regulation of participation” means that “there are relatively stable and enduring political groups which compete for political influence at the national level — parties, regional groups, or ethnic groups, not necessarily elected — but there are few, recognized overlapping (common) interests.” (Page 26.) It also implies that political parties are unstable. The new value, 3, indicates that “political demands are characterized by incompatible interests and intransigent posturing among multiple identity groups and oscillate more or less regularly between intense factionalism and government favoritism.” That sure does define Venezuela under Chavismo! I might disagree with the timing, but not the change.
2. The fall in executive constraints from 4 to 3 is still in the democratic zone, more or less, since it allows for an independent judiciary. But I am not sure that the constitutional changes approved that year justifies the drop. It seems reasonable, but once again, why 2009? There is an ad hockiness to the fall that I do not like.
3. The fall in “regulation of chief executive recruitment” does not seem reasonable. A score of 3 means that chief executives are selected by a constitutional process, democratic or not. A score of 1 means violent transition. Venezuela moved from 3 to 2 in 2009, meaning that “chief executives are chosen by designation within the political elite, without formal competition (i.e., one-party systems or ‘rigged’ multiparty elections).” (Page 21.) I do not buy that Venezuelan elections were rigged after 2009.
4. Finally, the drop in executive competition from the highest score of 3 to the lowest score of 1 means that the Polity IV index-makers believe that there was no democratic way to vote the president of the Bolivarian Republic out of office from 2009 onwards.

Really?

A skeptical analyst could argue that the one-point drop in 2001 and five of the eight-point drop in 2009 do not make sense. That would give Venezuela an overall polity score of 3. That is low. It would put the Bolivarian Republic in the same range as Gabon and Iraq, a point below the Russian Federation and Sri Lanka. It is a bad score. But a believable one.*

The putative −3, on the other hand, puts Venezuela with Ethiopia, Jordan, Burma, and Tajikistan and one point worse than Angola, Chad, Mauritania, Sudan, Togo and Singapore.

All ten of the countries in the above sentence are far less democratic than Venezuela. For all the incompetence of the Maduro government, a score of −3 does not pass the smell test.

Am I wrong?

Ecuador can be trusted, says ICSID

On October 5th, 2012, a split ICSID tribunal awarded Occidental Petroleum $1.8 billion ($2.3 billion with interest) for the assets the Ecuadorean government expropriated in 2006.

The Correa administration did not just take Oxy’s stuff for the hell of it. Or even necessarily for the money. (Although that probably was a factor.) Rather, the ostensible reason was that Oxy had sold a 40% stake in it operations to a Canadian company (Encana) in contravention of Ecuadorean law, which clearly stipulated that all such sales required ministerial approval. The ICSID tribunal decided that expropriation was disproportionate to the offense (Ecuadorean law being mum as to the penalty) but knocked 25% off of Oxy’s interest in determining compensation.

Ecuador, understandably, has filed to annul the decision. Oxy asked to be allowed to enforce the decision (i.e., go after Ecuadorean assets and income streams in foreign courts) while the annulment proceeded. They said that they earned 12.6% on their assets while the tribunal granted then only 4.2% interest, and so they were losing money.

And here it gets interesting: the Ecuadorean attorney general stated that Ecuador “does not adopt the same controversial position as the Argentine Republic in ICSID proceedings – i.e. that the enforcement obligations under Article 53 of the ICSID Convention are conditioned upon an award-creditor having recourse to a domestic enforcement procedure in the host-country. Rather, Ecuador’s position as a matter of law, is that ICSID awards are not subject to judicial review by local courts and that the obligation of Ecuador to comply with an award is not conditional upon recourse to a domestic enforcement procedures.” Moreover, the government acknowledged that the award was binding even though the country’s Constitutional Court has declared the Ecuador-U.S. bilateral investment treaty to be unconstitutional. Finally, ICSID pointed out, in somewhat annoyed terms, that Oxy was just making stuff up when they claimed that Ecuador had failed to pay past judgments. Rather, it had only lost two: in one with Duke energy it paid and with another with Oxy it placed part of the award in escrow while a further arbitration determines if the award was too large.

In short, ICSID found that Ecuador has a track record of paying in the past and has promised to pay in the future.

From a putatively Bolivarian government, this is rather interesting.

It also puts that Ecuadorean debt default and buyback of 2009 in a rather different light. Was it a sign of an irresponsible government defaulting for the hell of it ... or a sensible decision for a country locked into a currency union to rid itself of foreign debt when it was still cheap to do so?

Why is President Maduro ratcheting up the tension in Venezuela?

The thing that has always gotten to me about the Venezuelan government under Chavismo has been the incompetence. It is just a mess. You did not need to have electricity shortages caused by freezing rates to the extent that power consumption became free. (Rates have been frozen since 2002. Electricity in Venezuela costs 0.11 bolívares per kWh — at the black market exchange rate, that’s ... uh ...  0.13 cents. This is down from 18.4¢ when the government froze rates.) You did not need to create a crazy exchange rate scheme. You did not need to allow inflation to accelerate. You did not need to send all this money overseas to no political benefit.

The problem isn’t that the goals of the Bolivian Revolution necessarily involve a bad economy or high crime or a stupid foreign policy. It is that they cannot figure out how to accomplish whatever goals they may have. Hell, if you tasked me with building socialism or uniting with Cuba or whatever, I could do a better job. It’s just a mysterious incompetence.

Which brings us to the recent tragic deaths. It is terrible. But demonstrations do get out of control. So it would be very easy for the government to regret the deaths, blame the protestors and continue its crackdown without screaming treason and issuing warrants for opposition leaders. Or censoring Twitter ... which gains you nothing but bad press.

Why ratchet things up? One possible answer, consistent with everything else, is incompetence. Chávez was never incompetent at domestic politics. Maduro is not so skilled. So maybe he is just making mistakes.

Or perhaps he is acting quite deliberately. Javier Corrales, a very smart guy, thinks that ratcheting up the tension will allow Maduro to unite his coalition.

For that to be true, however, you would need to believe that the one-two punch of the economy and crime was on the verge of destabilizing his coalition.

So ... how would know whether that was true?

PDVSA is probably not losing money on its sales to China

A few months ago, we mentioned Venezuela’s success in reorienting its oil sales from the United States to the People’s Republic. We lauded the move, since American refineries on the Gulf were (and are) experiencing oil gluts.

Early last month, however, a group of Venezuelan oil analysts called Subaeshi (their Twitter account is here) argued that PDVSA had incurred a terrible opportunity cost from this policy. So I took a look at it.

Unless I am missing something, they are wrong. PDVSA is not incurring huge opportunity costs by selling to China instead of the United States.

On slide 13, they assume that sales to China earn only 10% of the WTI price because of “shipping and insurance costs and debt-repayment obligations”  against 85% in the U.S. because of only “shipping and insurance costs.”

Huh?

PDVSA receives less cash when the oil is delivered simply because its Chinese customers have pre-paid for it.

The analysis makes no sense. A cash-flow analysis would book the loan revenue when the loan was made rather than when the oil was delivered. An income analysis would book the income when the account payable (the loan) was extinguished. (Simple version of the latter: the loan would raise PDVSA’s cash (an asset) and the loan (a liability) by the same amount. Delivery of the oil would then extinguish the loan liability, generating income.)

Inasmuch as PDVSA loses money on sales to China relative to America, it is a function of higher transport costs, the interest rate on the loans, and any price discounts granted the Chinese buyers. Caribbean freight rates are about $1.35 per barrel (some OPEC data); since there is no data on shipping rates from the Caribbean to China, let’s double it for an opportunity cost of $1.35. (That’s actually kind of silly, since there is no real relationship between spot rates and distance: see page 55.) The interest rate on Chinese loans is around 3.4%; so call it 0.9% for a nine-month gap between borrowing and payback ... or 85¢ per barrel.

Total cost: $2.20 per barrel. It would not be unheard of for a supplier to offer discounts of up to $2 per barrel to regular buyers. Call it $4.20, then. Not huge, not chump change.

But there is the possibility that PDVSA gets a much higher price in China. Venezuela’s Merey blend generally tracks WTI. (See page 6 at OPEC’s December Monthly Report and page 27 at OPEC’s 2012 annual report. Maya from Mexico generally trades at a larger discount.) But WTI is still cheaper than Brent: $14.21 per barrel in November; $10.97 now.

And China benchmarks to Brent, not WTI. It is illegal to export crude from the United States; only Americans can buy at WTI.

It is possible that Venezuelan crude trades at less, because it is heavy. But it would have to trade at $10.97 − $4.20 = $6.77 less for PDVSA to be losing money on this deal. That does not seem likely.

In short: the Subaeshi analysis seems fundamentally flawed. I will of course change my mind with new data, but right now the Venezuelan turn to China seems like good business, even if done for the wrong reason.

POSTSCRIPT: Looks like the indispensable Setty got to this issue first.

I support the revelation of the NSA programs; I do not support Edward Snowden

The Edward Snowden saga has confused me. He decided to reveal information about NSA surveillance. He revealed that information in a piecemeal and confusing way. He decided to surface in Hong Kong. Hong Kong is sovereign Chinese territory: we are supposed to believe that Chinese intelligence did not get any information from him while he was there. He then travelled to the Russian Federation. Once the U.S. began extradition proceedings in Hong Kong he might not have had any other options but Russia ... but nonetheless that is where he wound up.

Glenn Greenwald just told me on national television that Russian agents have not had any interactions with Mr. Snowden (or copied his data by other means) because they “want him gone.” I have immense trouble believing that.

The NSA surveillance programs are complicated things that deserve to be brought to light and debated. I am glad that Snowden revealed what he revealed. We now need to debate them. An American court of law seems not a bad place to have that debate. A braver man than Mr. Snowden would have risked going to court, as did Daniel Ellsberg. No?

Still, one can imagine why he would want to remain outside the American criminal justice system. But why then did he not surface in one of the Bolivarian nations in Latin America? Going to Hong Kong seems entirely mysterious unless Mr. Snowden intended to pass information to the Chinese government. And it was not hard to know that Hong Kong has an extradition agreement with the United States.

It is possible that Snowden wants to end up in Russia. It is not unreasonable to think that in Latin America he would not be safe from be vulnerable to apprehension by U.S. agents. But going to Russia, I would think, means giving Vladimir Putin all the information that he has. Am I wrong to assume that?

I am glad that Mr. Snowden revealed what he revealed. And I am gratified that the revelations have moved American public opinion despite Mr. Snowden’s odd decisions. But until new information is revealed, the man himself has not got my sympathy.

How do you say “goldbug” in Spanish?

There is no one word that I know of.

Anyway, the big news from Venezuela is that President Maduro has announced that he will grant asylum to Edward Snowden. I think that calling the move “illegal” is too much: there is nothing wrong with a government pre-emptively announcing that it will give asylum to somebody once they legally qualify for it. More problematic is that Mr. Snowden is a terrible candidate for asylum.

Some seem to think the action is a reaction to the way American allies stopped Evo Morales’ jet, but I doubt that. I have been waiting for Cuba or Venezuela to make a move ever since President Correa decided that there was no gain in tweaking the United States. My guess is that Putin is sick of the problem and asked Maduro to announce.

Of course, the question now is: how does Mr. Snowden get to Caracas?

And what does this have to do with goldbuggery?

Well, back in 2011 the Venezuelan government decided to transfer 211 tons of gold reserves from outside the country (47% was held in London). The move did not really make much sense. Central bank reserves are immune under international law, so there was no reason to fear foreign legal actions. But hey, it sounded good and on January 31, 2012, the central bank declared “Mission Accomplished.” (They only moved about 150 tons, but close enough.)

It was pretty stupid to physically move the gold to Caracas. After all, if you wanted to use it to pay for something you would now have to either move it out or trust that your counterparty would accept a paper claim to gold located in Venezuela.

But Chávez did not seem to be playing an economic game. The move was for show. President Chávez wanted the central bank to go long on gold. So it moved gold to Venezuela and moved more than 70% of reserves to the metal.

Unfortunately, economics comes back to bite you. The recent slide in gold prices is creating major headaches for the government. It comes at a bad time. As predicted here, the major threat to the Venezuelan economy is a sudden stop of foreign capital inflows. With reserves both illiquid and falling in value, that is becoming ever more likely.

Taking Snowden feels similar. A political move, intended purely for show, but with serious logistical issues, no practical current gain and a potential future liability. The revolution continues in form, I guess.

Successful Chavista initiative

Five years ago, I was skeptical of Hugo Chávez’s plans to reorient Venezuela’s oil exports from the United States to the People’s Republic. But it looks like he did it. Considering that U.S. demand for Venezuelan oil is set to plunge what with Canada (regardless of Keystone) and domestic production, it seems like a prescient move.

It wasn’t easy to reorient sales. China needed to build the downstream refining capacity to process Venezuelan crude. Venezuela’s production is very sour. (Data from Eni’s 2012 Oil & Gas Review.) To refine high-sulphur oil, you need refineries with cokers. In 2007, only 2.5% of China’s refining capacity had the necessary machinery. Moreover, it was all already in use: new crude from Venezuela had noplace to go besides the United States.

As a result, when Venezuela started signing the loans-for-oil deals with China, the Chinese oil companies mostly sent the crude along to the United States. The below figures show PDVSA’s sales to Chinese buyers and the amount of physical petroleum products that arrived on Chinese soil from Venezuela. Note the difference? Chinese companies took possession of Venezuelan oil in Venezuela ... and then shipped it to the United States. As late as 2010 (when I saw the 2009 figures) it looked like Chinese companies were going to stick to shipping Venezuelan oil north to the Imperio but not really take much of the stuff east to the PRC. Moreover, a lot of what it did take was used to make asphalt, considering how hard it was to process. Not exactly a strategic necessity.

	PDVSA sales to China	Chinese imports from Venezuela	Difference
2006	97,000	84,000	13%
2007	95,000	82,000	14%
2008	321,000	129,000	60%
2009	370,000	105,000	72%
2010	178,000	151,000	15%
2011	319,000	230,000	28%
2012	451,000	367,500	19%

Source: Informe de Gestión Anual de Petróleos de Venezuela S.A. (PDVSA), 2006-2012; “Zhongguo shiyou he tianranqi jin chukou zhuangkuang fenxi [Analysis of Chinese Oil and Natural Gas Imports and Exports],” in Zhongguo shiyou jingji, March 2012. The standard accounting measure for oil is in thousands of barrels per day equivalent, but China measures imports in millions of metric tons. The industry standard of 20,000 b/d equivalent to 1 million metric tons was used for the conversion. 2012 data is from Platts: http://blogs.platts.com/2013/05/21/venz-numbers and page 93 of the audited PDVSA financial statements.

It no longer looks that way. Chinese companies are still not taking all Venezuelan crude and products back to China, but the resale percentage has crashed. Last May 2012, PetroChina and PDVSA started construction on a $9.4 billion refinery capable of processing 402,000 barrels per day (bpd). PDVSA is supposed to pay 40% of the cost ... funded via a loan from China. (See page 9 at the link.)

(In fact, the Chinese refinery-upgrading began back in 2008.)

PDVSA has also been beefing up its tanker fleet. In March, it added four tankers with a combined capacity of 2.9 million barrels, taking its fleet up to 18 vessels. The company is purchasing enough new ships to take its fleet up to 46 and supposedly will move 40% of production in its own fleet.

That last will take a little while to achieve. Venezuelan tankers travel to China by via the Cape of Good Hope (really!) with a travel time around 55 days at sea, roughly 65 days total. Call it 130 days round-trip. That means a tanker can make 2.8 round-trips per year. At 750,000 barrels per tanker per trip, PDVSA needs about 64 Aframax tankers just to carry its current exports. The new Sino-Venezuelan refinery includes VLCC berths, but that still means 24 supertankers. New, that would run PDVSA about $2.9 billion.

Does buying the tankers make sense? Lease rates bounce around all over the map, but a VLCC is now running around $12,00 per day, so 24 tankers would cost $40 million per year ... only a hair under 4% of the capital cost. Now, $12,000 is close to an all-time low. (Prices in fact touched $4,000 earlier this year.) PDVSA currently can borrow around 6.5% (the minimum LIBOR is usually 2% in PDVSA contracts) which implies that buying ships makes sense if you think that lease rates will go above $21,000 ... a price not only well within historic norms, but on the low-end of rates over the past decade.

So, yes, at first glance buying tankers makes sense; it is not just a vanity project.

In short, Hugo succeeded in convincing the Chinese to reorient the diet of their refining facilities around Venezuelan oil, redirected the oil to go there, and began to construct the fleet needed to get it their at a competitive rate. And if use the same data another way, it is not hard to show that a pipeline through Colombia makes sense. (Link to Tom O’Donnell’s great blog.)

The only problem, of course, is that Venezuelan product is flat and domestic consumption is rising. So there is only so much oil that can be redirected from the U.S. to the People’s Republic. And all those loans from China will have to be paid back. But that shouldn’t to take away from what seem to have been a pretty good move, carried out well.

Even if it is almost certainly a case of doing the right thing for the wrong reasons.

Smart move, Mr. Snowden

So, it’s Ecuador. Good move.

First and foremost, while Ecuador has an extradition treaty with the United States, it covers only murder, rape, piracy (as in, of actual physical seagoing vessels), mutiny, burglary, robbery, forgery, and embezzlement of public property. A supplemental treaty (scroll down to page 5 at the link) added other crimes, but not espionage or treason. Moreover, Article 3 explicitly states, “The stipulations of this treaty shall not be applicable to crimes of a political character.”

Second, President Correa is already on-record as supporting Julian Assange. In theory, if the U.S. really wanted to, it could squeeze Ecuador’s economy until the pips squeak. (Ecuador refines most of its consumption of fuel in the United States.) In practice, that isn’t going to happen. Ecuador would likely resist, the attempt would generate outrage across Latin America (and be of dubious legality) and at best the U.S. would simply get custody of a man who no longer poses any national security threat.

Finally, he can get a pretty good quality-of-life. Cuba is ... well, Cuba. Venezuela has out-of-control crime, an economy careening towards collapse, and a burgeoning political crisis. Ecuador has none of the above. There is some (weak) doubt about the recent decline in the homicide rate, but in general crime is, if not quite low, then well within the American experience and not something that would seriously affect day-to-day life. President Correa looks pretty secure and has not generated the kind of opposition that would throw Snowden to the United States just to tweak their Bolivarian predecessor. Finally, the economy is doing okay ... besides which I suspect that Snowden will find some way to monetize his notoriety.

Like I said, smart move.

Colombia is not joining NATO, but it is an American ally

OK, I got some emails about Colombian membership in NATO. The rumors are true: President Santos did float a trial balloon about joining the organization. NATO, unsurprisingly, said no. NATO would have said no regardless, but it was useful that the North Atlantic Treaty states that new parties to the organization have to be in Europe. Article 10:

The Parties may, by unanimous agreement, invite any other European State in a position to further the principles of this Treaty and to contribute to the security of the North Atlantic area to accede to this Treaty. Any State so invited may become a Party to the Treaty by depositing its instrument of accession with the Government of the United States of America.

The country will sign a cooperation agreement with NATO, but it is still not clear what that means. NATO says, however, that all cooperation agreements are the same, and you can find out what the organization says about said cooperation here.

NATO member or not, Colombia and the U.S. are close allies. We have a free trade agreement. Small numbers of U.S. troops operate in-country. The Colombian supreme court overturned an agreement giving the U.S. access to Colombian bases (see page 39 of this CRS report) but the U.S. still builds facilities there. (The text of the agreement can be found here.)

And the U.S. is surprisingly popular. Here is Latinobarómetro’s 2009 results on the question, “Does the U.S. treat your country with respect?”

SIDE OBSERVATION #1: It is interesting that Venezuelans place themselves in a category with Uruguay and Brazil, and not with their Bolivarian comrades in Bolivia, Ecuador and Argentina. My hypothesis is that it reflects Venezuelan polarization: all Venezuelans know that relations between the U.S. and Venezuela are bad, but many more Venezuelans take the American side than do their compatriots in the other big Bolivarian countries.

Here are the results to a general question on the state of bilateral relations:

Colombians do not see their relationship with the U.S. to be as good as do members of America’s near-abroad (like the D.R. and Panama) but they do see it as very good.

SIDE OBSERVATION #2: The Venezuelan results are consistent with my hypothesis: everyone knows that relations with the U.S. are terrible, but many of them blame their own government. 

SIDE OBSERVATION #3: A large subset of Mexicans are uniquely suspiscious of the United States, and uniquely prickly about national sovereignty. In fact, the U.S. treats Mexico with at least as much respect as Colombia (likely more) and relations are at least as good as with Colombia (likely better). But for understandable historical reasons, Mexicans don’t see it that way.

Finally, the Colombian results appear to hold over time. It is not just a phenomenon of the Obama-Santos relationship.

In short, even though Colombia will not be joining NATO, it has a uniquely close relationship with the United States. Moreover, that special relationship is supported by Colombian public opinion, and thus likely to endure.

None of this is to say that the U.S.-Colombian relationship is necessarily good for Colombia. The jury is out on that one, although if there is demand I will present some evidence that it just might be bad.

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.

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.

Ecuador is not a colony of China

Since its big default on its foreign debt (which I should really write about, it was ingenious) Ecuador has made a lot of oil-for-loans deals with China. The FT reported that Ecuador sold oil at $14-$15 per barrel. Felix Salmon wrote a post entitled “How Ecuador sold itself to China.” Neat stuff.

But exaggerated. The Bolivarians in Quito have not sold their sovereignty to China. Here’s the deal. The China Development Bank (CDB) loans money to Ecuador. Petroecuador repays by shipping oil to China. The Chinese pay for the oil at market prices. The money is deposited in the CDB, which withdraws 21% of the revenue to repay the loan. China has made three of these loans, at fairly cheap interest rates: 7.25% for the first , 6% for the second and 6.9% for the third, at a time when Ecuador basically could not borrow and paid 8.45% on its outstanding issues.

OK, so no Chinese empire ... but is China freeing Ecuador from dependence on the United States? (We will ignore that whole dollarization thing.) Not really. There are some reports that the country is now exporting all its crude to China and Latin America. The official figures for the first half of 2012, however, tell a different story. By value, 59% of oil exports went to the United States; another 11% went to Chile and 10% to Peru. Only 2% worth (or $137 million) went to China. Ditto, imports of refined products from the U.S. of A. came to 55% of Ecuadorian petroleum imports; an additional 8% came from Panama. Only 5% came from Venezuela and nothing from China. Ecuadorian crude isn’t the best quality, but it’s good enough for Chinese refineries ... except they do not seem to really want it.*

(A useful resume of different oil blends is here: scroll to Table 1.)

OK, then. Unless something drastically changes, Ecuador is going to pay Occidental. Maybe not for a while, but it will pay. And China does not have a colony across the Pacific, fun as it is to imagine such a thing.

I should mention that the international courts thing runs both ways. Maybe Ecuador will pay Occidental with assets taken from Chevron ...

* UPDATE: I imagine that Petroecuador is swapping its oil for oil from other sources to send to China. PDVSA does this all the time, so it would not be unprecedented, and it would explain why the Central Bank reports almost no crude exports to the PRC despite the loan deals.

Ecuador loses round one to Occidental

Ecuador just lost at ICSID, where the panel ruled that it owes Occidental $1.77 billion, plus interest at 4.2% compounded annually back to May 16th, 2006. If the Ecuadorians paid right now, they would owe $2.4 billion. If they delay, it will add up at the six-month LIBOR, compounded monthly. (FWIW, Occidental initially asked for $3.4 billion, but companies always highball their claims.)

What now? Ecuador will attempt to have the award annulled on the basis of some procedural or factual error. If they fail at that, then they will pay. The reason is simple: Ecuador is an oil exporter and its export sales can be attached. There won’t be the need to go fishing around the world for small change (or sailing ships) the way Argentina’s creditors need to do. It gets better: Ecuador exports crude to be refined for the home market! If it thumbs its nose at ICSID, not only will it lose export revenues, it will see domestic gasoline prices spike upwards hard. (Of course, Ecuador has been working overtime to try to get Chinese or Venezuelan interests to finance a refinery expansion.)

Ecuador might, however, pay Oxy and stiff the other claimants. There have been some declarations in this direction. Depends on how much they think China cares about its stake.

Few appreciate how Saudi Arabia undergirds the viability of this system. Ecuador exports 212,000 bpd to the United States. That is not a lot, but its sudden disappearance could upset a tight market ... except for the fact that Saudi Arabia stands every-ready to step in with its extra capacity.

Next up: another entry in the long China-doesn’t-have-an-empire series.

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.