Bottom Line: As Maduro expels two US government officials from Venezuela, cutting off informal channels of communication, and the US reciprocates by expelling 2 Venezuelan diplomats, optimism surrounding a post-Chavez regime wanes.
Analysis: Despite some optimistic reports that Chavez's passing could start a new chapter in the relationship between the US and Venezuela, tell-tale signs in the last few weeks debunk this. Maduro expelled 2 US government officials on 5 March, and a week later the US reciprocated by expelling 2 Venezuelan diplomats. This latest diplomatic tit-for-tat came after public statements of support by a US State Department official for Maduro's challenger, Henrique Capriles.
Though Maduro will almost certainly win the election, he will need to contend with weak infrastructure, rampant inflation, long-term contracts that provide below-market-price crude oil to China and other partners, and social problems including high crime rates. Pdvsa, the state oil company, is under extraordinary pressure to increase production and bring in more money to help solve those problems. Accidents like a refinery fire, pipeline explosion or oil spill could trigger a political breakdown or irreparably damage Pdvsa's production capacity. It is entirely conceivable that President Maduro will be forced to reckon with major protests and strikes, possibly including violence or sabotage of infrastructure.
Bottom line: The Venezuela-U.S. relationship is…
Bottom Line: As Maduro expels two US government officials from Venezuela, cutting off informal channels of communication, and the US reciprocates by expelling 2 Venezuelan diplomats, optimism surrounding a post-Chavez regime wanes.
Analysis: Despite some optimistic reports that Chavez's passing could start a new chapter in the relationship between the US and Venezuela, tell-tale signs in the last few weeks debunk this. Maduro expelled 2 US government officials on 5 March, and a week later the US reciprocated by expelling 2 Venezuelan diplomats. This latest diplomatic tit-for-tat came after public statements of support by a US State Department official for Maduro's challenger, Henrique Capriles.
Though Maduro will almost certainly win the election, he will need to contend with weak infrastructure, rampant inflation, long-term contracts that provide below-market-price crude oil to China and other partners, and social problems including high crime rates. Pdvsa, the state oil company, is under extraordinary pressure to increase production and bring in more money to help solve those problems. Accidents like a refinery fire, pipeline explosion or oil spill could trigger a political breakdown or irreparably damage Pdvsa's production capacity. It is entirely conceivable that President Maduro will be forced to reckon with major protests and strikes, possibly including violence or sabotage of infrastructure.
Bottom line: The Venezuela-U.S. relationship is not on the verge of a friendly transformation. However, political rhetoric is one thing, the business of oil and gas is another. Investors may get better terms than under Chávez in the near-term (this year), but they should be prepared for political and economic problems in the medium term (1-5 years). Foreign investors should also proceed with extreme caution, with a back-up plan in place in the event of widespread political and social disruption.
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