Venezuela’s woes continue as Covid-19 spreads globally

• The country continues to face an economic, political and human rights crises
• Venezuela battles on many fronts

In our previous blogs, we discussed the extent of financial & human rights crises that Venezuela has been facing over the last several years: a crisis orchestrated by none other than its own leaders. The country’s economy contracted by ~25.5% in the year 2019, which approx. translates into a cumulative loss in GDP of ~62.2% since 2013. While Venezuela’s population continues to face very trying times, a host of issues have added to the country’s distressed state: further tightening of US sanctions, the Covid-19 pandemic coupled with the multiweek price war amongst world oil producers (primarily Russia & Saudi Arabia), all of which combined have further slashed Venezuela’s revenues thereby exacerbating an already deep financial & economic crises. In the blog that follows, we will briefly look at the issues that the country is currently facing:

• The Covid-19 Pandemic:

Venezuela’s healthcare facilities are in a dire state- it is said that the hospitals in the country lack even basic equipment with just about a quarter of the country’s doctors’ having access to a supply of clean water while the remainder are devoid of access to even basics such as gloves, masks or even soaps. As appalling as it sounds, there are apparently only 73 intensive-care beds in the entire country. Most doctors, earning in the range of US$ 6-8 a month, are not being provided with even masks. As per Maduro’s statistics, the number of positive cases in the country are currently pegged at 113, along with 2 deaths, a statistic questioned by many doctors in the country. As per Ivan Briscoe, Latin American and Caribbean director at the International Crisis Group, “If the virus were to take off in Venezuela, and the country were not to receive a huge injection of international support, it would face an absolute disaster”. In addition to the high level of unemployment and poverty in the country, those who continue to live within Venezuela have increasingly become dependent upon remittances from relatives who live abroad, however, with Covid-19 making its grip on the global economy, that money is going to likely dry up, further worsening an already pretty bad state of affairs. In addition to the national health disaster that Venezuela is facing, calls for travel restrictions globally, further slash demand for the black liquid and hit Venezuela where it hurts the most. Diego Area (AD at Atlantic Council) paints a rather grim picture of the devasting impact that Covid-19 can bring for the country of Venezuela. He warns “the precarious state of Venezuela’s healthcare system, the uncertain state of manufacturing, the collapse of gas prices and the political conflict could result in a spiral of violence and a humanitarian catastrophe without historical precedent”.

• Oil slump:

Venezuela’s significant dependence on crude oil is a commonly known fact, the country’s oil industry accounts for ~99% of its legal export earnings. The steep decline in the oil price lately, owing to the weakening demand expectations due to the Covid-19 crisis alongside the multi-week price war initiated by Saudi Arabia with Russia on 8^th March 2020 resulted in a ~50% decline in the price of oil (as per closing on 6^th March and the ending price on 31^st March) to ~$22 barrel and resulting in a nearly 65% fall in oil price during the last quarter. Weaker prices severely impact Venezuela’s government coffers by depriving it of a huge chunk of foreign revenue. Even prior to Covid-19, the country was selling oil at a rather hefty discount in order to entice potential buyers to run the risk of the US sanctions. Head of Investment Bank- Caracas Capital Markets (Russ Dallen) stated in a report last week that Venezuela was selling its oil for as low as US$3 per barrel. President, Nicolas Maduro, recently commented, on how the crashing oil market has been a “brutal blow” to Venezuela, which has brought the price below even the cost of production with the country’s production falling to less than 700,000 BPD last week. Nevertheless, Venezuela gained some respite on 13^th April 2020, as major oil producers managed to pull off a historic deal to cut down global petroleum output by a tenth and putting an end to the rather devastating price war between Russia & Saudi Arabia.

• US sanctions:

US sanctions on Venezuela have been in practice ever since 2017 but have so far failed to oust Maduro, who has very connivingly cultivated loyalty within the military by handing out key sectors of the Venezuelan economy to military leaders and embedded Cuban security to stamp out any form of dissent. The US, in its latest attempt of ousting Maduro has resorted to the “maximum pressure” policy, thereby stepping up sanctions against Venezuela by specifically targeting both oil exports as well as high ranking officials. In spite of the growing voices from around the world as well as the US Democratic lawmakers for ease on sanctions given the pandemic, the US has so far resisted such calls. Around 3 weeks ago, Maduro was charged with narco-terrorism, conspiracy to import cocaine, possession of machine guns and destructive devices, and conspiracy to possess machine guns and destructive devices. Additionally, an award of US$15 mn was proposed to anyone who could give out information that could lead to the conviction and/or arrest of Maduro. With this the US policymakers are looking to weaken Maduro’s stronghold and cause defections with the military and in the government. Around 2 weeks back, the US State Department also rolled out a proposal- ‘Democratic Transition Framework for Venezuela’, which entailed an ease on sanctions in exchange for Maduro and opposition leader Guaidó (backed by the US and 50 other countries) to form a power-sharing government until the time fair elections can be held in the country. Mike Pompeo, US Secretary of State, recently commented on the aforementioned proposal, “Economic pressure will continue until Maduro accepts a genuine democratic transition”.

In a recent blow to Venezuela, Rosneft (Russian state oil company), who had so far helped Venezuela manoeuvre US sanctions by buying a large chunk of PDVSA’s crude oil production and then rerouted it to India and China, finally came in under pressure and announced it would sell its assets in Venezuela to Roszarubezhneft (a wholly owned company by the Russian government). In addition, Russia gave up 9.6% of its shares, thereby ceding its majority. Shareholders- BP and Qatar accounting for 19.75% and 18.93% respectively are said to have pressured the company in ceasing its Venezuelan operations after the negative impact of US sanctions along with the hit on its stock price. The recent sanctions undermined Rosneft’s global exports by preventing it from conducting commercial operations in US dollars. This has been a crucial blow to Venezuela as it marks an interesting shift in Russia’s policy towards Venezuela, wherein it came down to sacrificing business gain over political gain. Rosneft’s withdrawal is a clear signal of US sanctions succeeding to an extent in isolating Maduro’s regime. Roszarubezhneft is said to lack Rosneft’s technical & financial capacity and clearly lacks the capability of entirely replacing Rosneft, who had been nothing less than a lifeline to Maduro.

As the US tries to tighten its noose on Maduro’s regime, Venezuela continues to battle on several fronts. Ecoanalitica estimates the country’s foreign exchange deficit at ~US$ 7.6 bn. Maduro’s request for US$ 5 bn loan was rejected by International Monetary Fund last month on the basis that he lacks international recognition. This has left Caracas leaning towards China for monetary support with government officials reaching out to Chinese banks for financial support. With the global economy at a standstill owing to the pandemic, Maduro’s attempt at reducing controls on the economy in order to allow companies as well as individuals to operate with more freedom and bring in more dollars has also failed. All of these volatilities along with a significant drop in demand owing to the Covid-19 pandemic has resulted in Venezuela’s oil inventories building up, right at a time when the country is in a dire need to sell much more. While the world looks at a possible global recession, will Covid-19 provide the final blow to Venezuela already reeling under deep economic crisis or will Maduro be able to win this one yet again?