Big Bets and Black Swans 2014: A Presidential Briefing Book

Venezuela Breaks Down in Violence

49 Memorandum To: President Obama From: Harold Trinkunas Date: January 23, 2014 Subject: Venezuela Breaks Down in Violence Summary and Recommendations Economic mismanagement in Venezuela has reached such a level that it risks inciting a violent popular reaction. Venezuela is experiencing declining export revenues, accelerating inflation and widespread shortages of basic consumer goods. At the same time, the Maduro administration has foreclosed peaceful options for Venezuelans to bring about a change in its current policies. President Maduro, who came to power in a highly-contested election last April, has reacted to the economic crisis with interventionist and increasingly authoritarian measures. His recent orders to slash prices of goods sold in private businesses resulted in episodes of looting, which suggests a latent potential for violence. He has put the armed forces on the street to enforce his economic decrees, exposing them to popular discontent. Although the volume of crude oil that Venezuela supplies to the United States has declined in recent years, it is in the U.S. interest that Venezuela remain a reliable source of oil. Popular unrest in a country with multiple armed actors, including the military, the militia, organized crime and progovernment gangs, is a recipe for unwelcome chaos and risks an interruption of oil production. A violence-induced regime change in Venezuela would create a volatile situation regionally. Our leverage is limited, given our poor relations with the Maduro administration . I therefore recommend that your administration begin a conversation now with others in the Americas on the situation in Venezuela, particularly with Brazil, whose interests are also at risk. While dysfunctional economic policies are the immediate threat, at its core Venezuela’s problem is one of a failure of democratic institutions. We should engage others to see if they can help steer a possibly chaotic situation toward one in which Venezuelans BLACK SWANS 50 harold trinkunas have the institutional mechanisms by which to influence their government to change course. Background Production by the national oil company, Petroleos de Venezuela (PDVSA), has been falling for over a decade due to underinvestment, poor maintenance and the loss of skilled workers. International investment in the oil sector has been deterred by erratic and arbitrary government policies. Further aggravating balance of payments problems, Venezuela sells a substantial amount of its oil at below market prices to China, Cuba, its allies in the Americas and its own citizens. Dwindling oil revenues are a problem because oil constitutes over 95 percent of Venezuela’s exports, and two-thirds of food and consumer goods are imported. Hugo Chávez nationalized and then mismanaged many domestic industries, undermining local production. Maduro has since doubled down on these policies. In addition, his administration is increasingly financing the public sector by ordering the central bank to print more money. These policies produced the highest inflation rate in the world in 2013. The government’s response to scarcity has been to decree price reductions and create government agencies to manage all imports. This produced a rush to acquire what consumer goods remain, compounding the already existing shortage of staples. The Maduro administration has promised that it will ensure sufficient imports, but it has a poor record with the large segments of the economy it already controls. Venezuela still holds elections regularly, but the Maduro administration has undermined democratic institutions. It has centralized power in the executive branch, preventing other branches of government, opposition parties or civil society from influencing policy. State institutions are controlled by government supporters. Last November, the legislature gave Maduro essentially unlimited power to rule by decree. There are no checks on the executive when it uses state resources to win elections and selectively applies the law to intimidate opponents. Even when its opponents do win elections, the Maduro administration creates parallel governing institutions to route around them. The risk of a violent outcome may still be low, but it will rise as the true extent of scarcity in Venezuela becomes apparent in the coming months. The threat to the Maduro administration may come from popular unrest, an effort by moderates in the government to oust the radicals and the president, or (least likely) a traditional coup. A now unified national opposition continues Venezuela Breaks Down in Violence 51 to emphasize elections as the solution, but the playing field is hardly level, and elections are not scheduled to take place again until 2015. Ultimately, the armed forces are key to Maduro’s hold...