[Mb-civic] The US and the Chavez question

[Michael Butler]

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The US and the Chavez question
>By Patrick Esteruelas
>Published: July 1 2005 17:31 | Last updated: July 1 2005 17:31
>>

President Hugo Chavez¹s forays outside of Venezuela¹s borders and his
policies at home have incited a great deal of interest among the readers of
the Financial Times, both as a matter of regional curiosity and as a means
to determine what political direction will Venezuela and Latin America be
heading towards in the medium to long term. The large majority of the
contributions to the debate dealt with both Chavez¹s influence abroad and
the domestic underpinnings of his political agenda. Given that Chavez¹s
regional integration platform is a direct offspring of his domestic social
revolution, my answers will specifically address both.

* * *

M. Alvarez suggested that we run the risk of minimizing the effects of
Chavez¹s foreign policy outside of Latin America. Venezuela¹s budding
partnerships with China and Russia provide, in Mr. Alvarez¹s view, a clear
indication of Chavez¹s far-reaching influence.

Chavez¹s influence however is as limited outside of Latin America as it is
within the region, confined to specific commercial deals that have little
hope of making much diplomatic headway. Chavez¹s attempt to diversify
exports away from the US and turn to China as the future primary destination
of Venezuela¹s crude exports perfectly illustrates this point. Venezuela has
so far only just begun to export a mere 30,000 barrels per day of its
cheaper trademark Orimulsion boiler fuel to China a full six months after a
first memorandum of understanding was signed by both President Chavez and
Chinese Premier Hu Jintao in January of this year.

Venezuela¹s lack of direct access to the Pacific will make it extremely
difficult for Venezuela to ramp up crude or derivative exports to China in a
cost effective manner, forcing Chavez into selling crude at a heavy discount
for China to later trade to any interested third parties at a profit. More
importantly, China does not have the refining capabilities in place to
process Venezuela¹s sulphur-rich heavy crude, forcing Venezuela into a
dependent relationship with the US until China or Venezuela build an
adequate refining infrastructure. China is more likely using the possibility
of establishing a long term trading arrangement as a means to gain
preferential bidding access in Venezuela, capitalizing on Chavez¹s desire to
bring in friendly state national oil companies to help ramp up Venezuelan
crude production in the future.

China¹s presence in Venezuela is however limited so far, and informed purely
by commercial interests. The chances that an imperfect commercial
partnership could turn into a full-fledged diplomatic alliance are for the
moment quite remote.

* * *

Alexander Harper asked if Chavez could be looking to profit from Bolivia¹s
power vacuum and gain access to Bolivia¹s vast natural gas reserves for
further leverage in the region. If so, should foreign gas dependent nations
like Argentina and Chile be concerned?

While much has been made of President Chavez¹s efforts to support and
counsel radical Bolivian leader Evo Morales and his Socialist Movement
(MAS), Venezuela has little or no incentive to tap and exploit Bolivia¹s
natural gas reserves. Venezuela¹s proven natural gas reserves, estimated at
148.9 trillion cubic feet, far outweigh Bolivia¹s at 31.4 trillion cubic
feet. Instead of looking abroad for natural gas, Venezuela has offered added
incentives for oil companies to develop Venezuela¹s own offshore natural gas
fields in Plataforma Deltana and Rafael Urdaneta for the best part of last
year. Furthermore, state oil company PDVSA has very few funds with which to
invest abroad after diverting the large majority of its revenue base to
sustain flagging production and finance Chavez¹s infrastructure and social
projects.

As Mr. Harper accurately indicated in his question, many of Bolivia¹s
erstwhile partners have already begun to look elsewhere for natural gas.
Brazil, which traditionally imports up to 20 million cubic meters a day from
Bolivia to satisfy internal demand, is looking to develop its shallow-water
gas fields in the Santos Basin as an alternative supply source. Chile, which
has recently been denied gas from Bolivia and Argentina, is looking to the
Pacific for much needed liquefied natural gas (LNG). Despite its struggle to
attract further investment and a general reluctance to raise gas tariffs,
Argentina has been making every effort to ramp up domestic gas production.
Several oil companies in Bolivia have also begun to look to Peru¹s Camisea
natural gas fields as a potential alternative investment destination,
raising the possibility of partnering with Hunt Oil in a consortium to
develop existing gas reserves and supply the regional and US LNG markets.
Bolivia therefore risks losing relevance in the natural gas sector as
pressures build to nationalize the hydrocarbons sector and drive out foreign
investment.

* * *

Moving on to Chavez¹s domestic political agenda, Alberto Mejia questioned my
decision to describe Chavez¹s recent practices at home as ³increasingly
anti-democratic.² According to Mr. Mejia, Chavez is a legitimately elected
leader confirmed in his post by former US President Jimmy Carter and the
Organization of American States, who were invited to Caracas in August 2004
to monitor a controversial recall vote.

Chavez¹s government is indeed a democratically elected government, with very
little evidence to support that fraud was committed to win the recall
referendum in August 2004.

However, his government has since the beginning of the year introduced
measures that put into question President Chavez¹s current democratic
credentials. First among these is an ongoing judicial purge that has seen
several dozen lower court judges disbarred all over the country with the
help of the secret police (Disip). Venezuela¹s judicial workers have been
complaining again and again that no evaluation has been carried out to
enforce these dismissals, which are set to continue until -- in the words of
Supreme Court President Omar Mora Diez -- 80 percent of Venezuela¹s
provisional judges are disbarred.

Most recently, with the help of a new media law that bans any violent
content or government slander from being disseminated in all media outlets,
the government has effectively cut all coverage of anti-government
demonstrations that could be considered violent and dramatically reduced the
number of political shows that used to dominate TV programming in the
morning. Several media commentators have been sentenced to time in prison
for criticizing the government, and program sponsors face hefty bans for
supporting these programs, effectively starving these programs of any
funding. The only relative survivor has been Radio Caracas Television, which
will reportedly risk a media ban thanks to the revenues its soap opera
productions generate outside Venezuela. While the opposition-controlled
media giants showed a strong bias against the government before the
referendum, the government has corrected this bias by pushing the envelope
of a free and democratic media.

* * *

Manuel Wally suggested that many of President Hugo Chavez¹s social programs
set positive benchmarks and expectations for Latin America¹s more ³modest²
governments and therefore should not be negatively branded.

While an effective, responsible social platform is more than welcome in a
region plagued by chronic poverty and inequality, Chavez has gone about it
in a very irresponsible way. Fiscal spending has increased by 39% over the
last four years, and currently accounts for an estimated 30% of GDP. While
record oil prices have permitted Venezuela to accumulate over $28bn in
international reserves (equivalent to Venezuela¹s external debt) and debt
servicing costs are currently 20% of exports, fiscal spending growth has
exceeded oil revenues and threatens to make the current situation
unsustainable. Given that many of Venezuela¹s present social spending
commitments are locked in and bound to grow further as the government begins
to tackle high-cost infrastructure projects, Venezuela¹s negative fiscal
balance is set to grow further as state oil company PDVSA struggles to ramp
up oil production and foreign oil companies question their commitments in a
scenario of creeping fiscal expropriation down the road. Given Venezuela¹s
new baseline level of social expectations, Chavez¹s struggle to finance an
aggressive social platform in the future could generate further instability
in Venezuela.

Secondly, many of these programs have been financed through parastatal
organizations known as ³missions,² bypassing the government¹s ministerial
structure and producing no fiscal accounts to speak of. As a result, we
don¹t know the true value of these missions nor do we know where or how
these resources have been allocated. Bar the announcement of symbolically
strong literacy programs and rural mobile health care units, their overall
impact has been questionable. Venezuela¹s latest poverty indices in fact
show a 10 percent increase in Venezuela¹s poverty rate over the last 6
years.

Social programs can bring much needed benefits provided they are well
structured, transparent and responsible.

* * *

Kevin Murphy would like to know if Chavez is liable to expropriate assets,
ramp up oil taxes and make further land grabs should oil prices fall
substantially.

Oil prices, as Mr. Murphy is quick to point out, will determine how far
Chavez will be willing to push his revolutionary agenda. With oil sales
accounting for over 50% of the government¹s income and production stagnant
at 2.65 million barrels per day, the government will only be able to ramp up
revenues through high prices and fiscal earnings.

Government officials in Caracas have already made a consistent effort to
generate more fiscal revenues through tax hikes and hostile expropriations.
Foreign oil companies are being pressured to convert all existing operating
agreements to new joint ventures where PDVSA will hold a
majority-controlling stake by the end of the year or face the risk of seeing
their contracts revoked. Both service operators and investors in the heavy
crude Orinoco belt reserves, which together account for 1.1 million barrels
per day or 40% of total production, are facing higher royalties and income
tax rates as the oil and energy ministry makes every effort to extract a
more favourable deal. Non-metal mining companies and landholdings in the
radical eastern states of Cojedes and Carabobo have also seen their titles
revoked and will be replaced by state run cooperatives.

In a scenario of declining oil prices and shrinking government resources,
the Chavez administration is more likely to continue squeezing the private
sector for funding and consider more radical measures. Oil prices however
should not necessarily collapse to trigger a radical response. As fiscal
spending continues to increase at the present rate, oil prices only need to
fall slightly for Venezuela to start facing a financing shortfall.

Washington and the Chavez question
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