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Matthew Smith

Matthew Smith

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…

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Venezuela’s Descent Into Anarchy Is Fueling Maduro’s Desperation

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Venezuela’s Descent Into Anarchy Is Fueling Maduro’s Desperation


After more than 15 years of U.S. sanctions which caused Venezuela’s one mighty petroleum industry to collapse, the crisis-driven Latin American state now appears on the verge of failure. More than two decades of autocratic socialist rule, which started with Chavez’s 1999 Bolivarian revolution, have gutted what was once South America’s most stable democracy and richest country. Venezuela is at the tail end of what is described as the worst economic decline of modern times ever to occur outside of war.

In 2020 alone the International Monetary Fund estimated that Venezuela’s economy shrank by a devastating 30% and will contract again this year by at least 10%. The scale of the economic crisis is underscored by the emergence of hyperinflation on a scale comparable to 1920s Weimar Germany forcing the unofficial dollarization of Venezuela’s economy. These events have triggered a staggering humanitarian crisis that has forced nearly six million Venezuelans to flee their beleaguered homeland since 2015. None of these developments, including the devastating humanitarian fallout precipitated by Chavez’s failed socialist experiment, have persuaded Washington to ease sanctions.

The immense gravity of the crisis now gripping Venezuela saw autocratic president Maduro recently call upon Biden to open diplomatic relations with his government and lift U.S. sanctions. These overtures, despite the many olive branches extended by Caracas in recent months, were rejected by the White House. The Biden administration refuses to negotiate with Maduro until his regime agrees to transformative changes including engaging with Juan Guaido, Washington’s recognized interim president, restoring political freedoms, and establishing a timetable for fair and democratic elections. Related: New Mexico Oil Output Recovers To Pre-Pandemic Levels

It is difficult to gauge whether Maduro will or even has the means of agreeing to the key elements of Washington’s stipulations. He may have outmaneuvered his political rivals in Venezuela, but the country’s socialist leadership remains under extreme pressure. That highlights why Maduro over recent months has noticeably moderated his one-time hardline stance toward Washington. That has included unilateral gestures of goodwill aimed at building political capital with the Biden administration and creating pressure to ease sanctions. The most notable of these measures were the naming of a new National Electoral Council including two opposition figures, moving six Citgo executives from prison to house arrest, and approving a UN World Food program. There are also indications that Caracas is attempting to remove illegal armed groups from Venezuelan territory, notably those designated by Washington as foreign terrorist groups.

Maduro’s desperation is easy to fathom. Despite defying harsh U.S. sanctions to strengthen his grip on power domestically by vanquishing his opponents and gaining control of the National Assembly, his position is increasingly vulnerable because of the impending implosion of the Venezuelan state. The petroleum-rich nation is nearly bankrupt. This not only is because of U.S. sanctions and the crumbling oil industry but because the Maduro regime has regularly plundered Venezuela’s gold and currency reserves to prop up the shattered economy and meet foreign debt obligations.

The disastrous economic fallout is amplified by rampant corruption with regime loyalists regularly pillaging government coffers for their own benefit. Even lenders of last resort such as the Kremlin, Beijing, and Teheran have done little to prevent the erosion of Venezuela’s all-important financial reserves or the country’s economy. The rapid decline of Caracas’ fiscal fortune forced Maduro’s regime to restructure Venezuela’s sovereign debt after defaulting in November 2017. While the regime reached an agreement with individual creditors, it remains to be seen whether Caracas possesses sufficient resources to meet Venezuela’s sovereign debt obligations unless it can gain access to international financial and energy markets. For as long as current U.S. sanctions remain in place this will not occur because of the inability to borrow from international lenders. That magnifies the complexity of the extreme economic and humanitarian crises that Caracas is being forced to resolve.

When it is considered that Venezuela’s oil reserves are the world’s largest at over 300 billion barrels the country’s deep-seated economic crisis is difficult to comprehend. With crude oil prices rallying substantially since the end of 2020 extracting those vast petroleum reserves would on face value offer an urgently needed solution. To generate interest and attract vital investment Maduro, earlier this year, stated Venezuela was open for business and seeking investment from foreign energy companies to exploit its vast petroleum reserves. Maduro even floated the idea that privately-owned energy companies could control petroleum projects in Venezuela, something which has not occurred since Chavez seized privately-owned oil assets between 2007 and 2010.

While this pricked interest from many smaller foreign energy companies it failed to attract the substantial investment required, estimated to be anywhere from $58 billion to $200 billion, to rebuild Venezuela’s shattered petroleum sector. This will not occur until Washington eases sanctions and allows Western energy majors, which are the only oil companies possessing the resources and technology required, to operate profitably in Venezuela. The crisis gripping Venezuela’s shattered petroleum industry is highlighted by it only pumping an average of 535,000 barrels per day during May 2021, which is 5% less than a year earlier and roughly a sixth of the 3.1 million barrels daily produced in 1998 before Chavez ascended to the presidency and initiated his socialist Bolivarian revolution.

Related: Dallas Fed: Oil And Gas Sector Is On Fire

The desperation of the Maduro regime is ratcheting ever higher as it loses control of sizable chunks of territory to non-state Venezuelan and Colombian armed groups. This is fueling considerable fear in the Miraflores presidential palace that even Maduro’s iron grip on power may be insufficient to prevent Venezuela from collapsing, leaving the president and his supporters vulnerable to U.S. arrest warrants or worse. Caracas’s inability to control large portions of Venezuela’s topography is due to its inability to fund basic public infrastructure and social goods combined with dilapidated armed forces.

Venezuela’s military, which has been bereft of funds for nearly a decade is a mere shadow of what it was when Chavez democratically won the presidency in 1998. Recent events in the western state of Apure highlight this with security forces struggling to defeat the battle-hardened Colombian dissident FARC 10th Front. The Colombian guerillas, who refused to demobilize in accordance with the 2016 peace agreement with Colombia’s national government in Bogota, have long taken refuge in the lawless border zone with Venezuela.

There they took control of lucrative smuggling routes, drug trafficking, and extortion along with occupying Venezuela territory with the tacit approval of Caracas. The guerillas, battle-hardened from decades of fighting Colombia’s military, have used hit and run tactics, including ambushes and improvised explosive devices, to great effect. In many instances, they have overwhelmed Venezuela’s poorly trained and equipped military, which is also battling the effects of low morale caused by their country’s deep economic malaise. Last month dissident FARC guerillas captured eight Venezuelan soldiers after an operation (Spanish) in La Capilla went wrong leading to the death of 16 soldiers. The captive soldiers were eventually released by the guerillas earlier this month after Venezuelan authorities proved incapable of rescuing them.

It is not only the border region where Caracas is unable to control Venezuelan territory. There are claims by regional analysts and human rights groups that Colombian guerillas including FARC groups and the National Liberation Army (ELN – Spanish initials) operate in up to 70% of Venezuela’s national territory. Venezuelan paramilitary groups, known as colectivos, are estimated to control 10% of the country’s cities and operate in at least 16 of its states.

The government’s inability to control its territory is even threatening major cities including Caracas, which were once firmly under the Maduro regime’s administration. The rapid influx and expansion of multiple non-state armed actors could cause a mortally wounded Venezuelan state to implode, explaining Maduros’ desperate plea to Washington to ease sanctions so the autocratic socialist regime can start rebuilding the country before it is too late.

By Matthew Smith for Oilprice.com 

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  • George Doolittle on July 01 2021 said:
    The entire Continent save Brazil has plunged into chaos just prior to the ahem "sudden appearance of the Covid-19" ahem which has created a massive shortage of US Dollars save for possibly Brazil which has something of an Industrial Base.

    Argentina is quite beautiful but suffering from a crazy economic collapse similar to what has befallen California in the USA. Chile is all too much like Venezuela of late as well...wholly resource dependent and that being just one resource (copper, unrefined.)

    Brazil has enormous workable energy resources in oil just as Columbia does in coal. Given current pricing these two at least can maintain a better fiction of not being a failed State. Venezuela, Chile, Ecuador, Peru, Bolivia...next to Mexico which is being flooded by US energy product at the moment are wholesale disasters. Unlivable, un-investable.

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