For decades during the Cold War, Latin America was a focal point of conflict between the two superpowers, the U.S. and Soviet Union. While the U.S. emerged victorious after the Soviet Union dissolved in 1991, Putin's Russia could achieve what the Soviet Union couldn't for four decades, gain an upper hand in the silent war for Latin America.
A key development supporting Moscow's ambitions in Latin America is Venezuela's economic collapse and the emergence of one of the worst humanitarian crises in modern history. Venezuela, which holds the world's largest oil reserves, was once Latin America's richest and most stable democracies. Its thriving cosmopolitan capital Caracas has long been considered the cultural jewel of South America.
Venezuela's vast oil wealth, which has been squandered over the last two decades, provided a ready source of capital that allowed it to become South America's most developed nation. After decades of mismanagement at the hands of Chavez and now Maduro, the country lies in ruins. The severity of Venezuela's crisis is illustrated by 2019 GDP contracting by an unbelievable 35%, compared to growing by 6.5% annually 30 years earlier.
Civil unrest, rampant corruption and Caracas's malfeasance aren't solely to blame, oil's prolonged price slump has wrought considerable havoc on Venezuela's petro-economy. The oil rich nation's petroleum industry is decaying rapidly. In June 2020, Venezuela's oil output fell to a record low of 422,400 barrels daily, which was less than a sixth of its 2015 average daily production. That severely impacts Caracas's fiscal revenues and Venezuela's economy because oil accounts for 99% of export revenues. Production will keep deteriorating because of declining investment in Venezuela's oil industry and the flight of skilled labor, placing greater pressure on the imploding economy. The Trump administration's aggressive use of sanctions, which are aimed at preventing companies and countries from conducting business with Maduro's regime, is intensifying Venezuela's economic woes and the populations suffering. The aggravated hardship of every day Venezuelans caused by the sanctions is amplifying considerable anti U.S. sentiment which scholars believe endures at all levels of Latin American society, because of the long history of American high-handedness and regional intervention.
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This creates the ideal opportunity for Moscow to reinforce its ties with Venezuela and gain a sizable foothold in Latin America. This is enhanced by Russia's lack of neocolonial baggage in the region compared to the U.S.. Moscow has long coveted a prominent role in Latin America to strike at U.S. regional hegemony, gain control of the areas considerable petroleum wealth and solidify Russia's image as a world power.
Acting as a lender of last resort to Maduro's cash-strapped regime forms a key part of Moscow's strategy, especially since the introduction of U.S. financial sanctions. Those measures make it virtually impossible for Venezuela to conduct business with other countries and companies to earn much needed hard currency. The impact of the coronavirus pandemic on Latin America makes Moscow's offers of assistance more attractive in a region which is bearing the brunt of the disease.
In exchange for generous loans, Maduro's government not only pledged consignments of oil as repayments but handed energy assets to Russian oil company Rosneft. Those included a lien on 49.9% of Venezuelan refiner Citgo, the jewel in the PDVSA crown, and oil fields.
In a sign Moscow is consolidating its position in Venezuela, a wholly Russian state-owned company acquired Rosneft's Venezuelan energy assets earlier this year. That allows Putin's government to assist Venezuela in circumventing U.S. sanctions, while preventing them from impacting Rosneft which is already implicated in facilitating the sale of Venezuelan oil.
The Trump administration's officious application of sanctions against Caracas, despite the sharp impact on the Venezuelan people and ineffectiveness at triggering regime change, is magnifying Moscow's leverage in Latin America. Academic studies and the post-Cold War history of sanctions demonstrate their inability to initiate regime change. The cost of abdicating, for a regime viewed as illegitimate, is far greater than clinging to power. For Maduro and his key supporters who are implicated in human rights breaches and drug trafficking, stepping down from power would mean a lengthy jail sentence, which is a considerable deterrent.
Trump's mishandling of relationships in Latin America, including conflicting messages last month stating he would consider meeting Maduro and soft-pedalling support for Venezuelan opposition leader Guaido, further tarnished America's reputation in the region. That, along with a long history of destabilizing U.S. foreign policy and high-handedness in Latin America, is fueling existing anti-American sentiment at all societal levels in many regional nations.
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Putin's regime has demonstrated that its geopolitical ambitions are not hamstrung by dealing with pariah states. Moscow backed Bashar al-Assad in Syria's long running civil war which saw it rewarded with significant petroleum concessions, boosting its influence over oil prices. Russia is employing a similar strategy in Venezuela. Latest events give Russia appreciable leverage in a region it has coveted since the early days of the Cold War.
By gaining significant influence over Caracas, Moscow gains control of Venezuela's vast oil reserves, bolstering its ability to control oil prices. That will compound the considerable influence Moscow has already accumulated through its close cooperation with OPEC, notably Saudi Arabia. The threat of an oil price war between Moscow and Riyadh caused oil prices to crash to a level which is not profitable for the U.S. shale oil industry.
Washington's latest missteps, recent chaotic foreign policy and regional insensitivity is undermining U.S. hegemony in Latin America. This creates an opening for Russia to expand its regional influence and secure access to the region's vast oil wealth. Ultimately, that forms part of Moscow's strategy to expand its global geopolitical power and gain greater control over world oil supplies thus muscling-up its ability to manipulate energy prices. That will enhance Russia's status, protect its oil dependent economy, assure fiscal revenues and pressure America's oil industry. The March 2020 oil price crash triggered by the outbreak of a price war between Moscow and Riyadh, pushing many U.S. shale oil companies to the brink of bankruptcy, highlights the tremendous stakes at play.
By Matthew Smith for Oilprice.com
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Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located… More