Venezuela - Big Strikes Weigh Heavily on the Country

By Scott B. MacDonald

Venezuela has become the major political flashpoint in Latin America. Despite the ongoing civil war-like conditions in Colombia and the long downward economic spiral in Argentina, Venezuela has come front and center as leftist President Hugo Chavez is seeking to cling to power in the face of a determined opposition that wants elections in early 2003, well before the end of the presidential term in 2006. Outright civil war or a military coup cannot be ruled out, considering the highly polarized nature of the country’s political arena. Although we remain hopeful that there can be a negotiated settlement through the good offices of the Organization of American States, tensions run high and hardliners on both sides increasingly lean in the direction that power grows out of the barrel of a gun.

The opposition to President Hugo Chavez initiated a large strike in early December, which eventually came to include the country’s oil industry. The strike at the state-owned oil company, PDVSA, has in effect taken more than 2.5 million bpd of crude and refined product out of circulation in international markets. The strike is also disrupting daily life in most of the major cities and towns in Venezuela as food and other basic staples of life are only reaching markets with difficulty.

Venezuela remains a highly polarized political arena, with an opposition of big business, labor unions, the middle class and parts of the armed forces favoring an early referendum on whether President Chavez should leave office. They also expect to win such a vote, considering that Chavez’s popularity has fallen from 80% to around 30% in opinion polls. There is a strong feeling within opposition circles that Chavez and his leftwing civilian advisors want to take Venezuela through a Cuban-style revolution. This view has been bolstered by Chavez’s close personal relations with Fidel Castro, the appointment of a number of leftist intellectuals to government posts and a foreign policy clearly geared to anti-U.S. forces in the global arena. Chavez has also managed to ruffle relations with the country’s oil industry leadership, claiming that the top executives lived in “luxury chalets where they perform orgies, drinking whisky.” Rounding things out, he also has been critical of the Catholic Church.

While poking at the U.S. and the old order in Venezuela, Chavez has mismanaged the economy. For an oil-rich country, the last couple of years of higher oil prices have not translated into a boom. Instead, the economy is in shambles, with real GDP expected to contract in excess of 8% for the year. The 4th quarter could see a contraction of 10%, considering the damage to the national economy from the strike. Complicating matters, the government is seeking to bridge the fiscal deficit and Venezuela has no access to international capital markets. President Chavez’s ordering the army to break up the strike in the oil industry on December 5 only reflects the dire nature of the confrontation Venezuela faces. The military is seeking to restart the shipment of oil, but this is proving to be a difficult process.

Chavez, the promoter of his own hazy Bolivarian revolution, maintains the support of the country’s lower classes, left wing intellectuals and elements of the military. Having already survived one coup attempt in April 2002, which briefly ousted him from power, he is showing little inclination to be caught unaware a second time. However, Chavez can take little comfort when leaders of the opposition, such as Carlos Ortega, president of the largest labor union federation, the Confederation of Venezuelan Workers, states: “The active national strike continues until the resignation of Chavez.”

The scenarios ahead for Venezuela are either a slow-moving slide into civil war, another coup, or a negotiated settlement leading to early elections, probably in August 2003. The ongoing political uncertainty, of course, is not good news for the Venezuelan economy or foreign investors. Venezuela has a little over $12 billion in foreign exchange reserves. This is enough to keep making its payments on its external debt - in the short term. However, if the political crisis continues through 2003 and oil exports are negatively affected, there could be problems on the repayment front. Above all else, Venezuela depends on oil to generate capital. The oil industry accounts for around 75% of GDP.

An additional factor concerning Venezuela’s political and economic crisis is what role Washington want to play. U.S. policy has been keenly focused on the Middle East. A war against Iraq could disrupt oil prices and flows from the Persian Gulf. It is in the U.S. national interest to have some degree of stability in Venezuela before a new Gulf War, possibly as early as January. Venezuela accounts for 13-15% of U.S. oil imports and is one of its major sources in the Western Hemisphere. Having no oil flowing from this South American country would be bad news with a war in the Middle East, as it would no doubt push oil prices up even higher. In turn, higher oil prices could hurt the U.S. economy, which is in the midst of a sluggish recovery. Consequently, we see greater U.S. pressure on all the actors, both in the opposition and in the government. It is not in the U.S. interest to have Venezuela in the middle of a civil war.

Venezuela has some dark days ahead. The struggle between the Chavez government and the opposition is now a bitter affair in which it is difficult for either side to compromise. However, considering the stakes for the United States and other Latin American nations as well as the country’s population, a negotiated settlement could produce results, creating a timetable for an early election. Getting to the point where a compromise can take place will be difficult. Until then Venezuela will continue to be Latin America’s flashpoint.