Venezuela, from Prosperity to Bankruptcy: Interview with Kevin Parthenay

Venezuela is on the brink of the abyss... While it has the largest oil reserves in the world, and was one of the most prosperous countries in Latin America back in the 1970s, it is now in partial default on its debt and all the indicators have turned to red. How do we explain such an economic disaster? What are the short and long term perspectives for this country? Is its situation comparable to that experienced by Greece following the 2008 crisis? Kevin Parthenay, Academic Coordinator at Sciences Po, Research Associate at the CERI and specialist on this region, explains the situation.

How can the country with the largest oil reserves in the world (ahead of Saudi Arabia and Iran) be in such financial distress?

In just four years, Venezuela’s GDP has been declining more than that of the United States during the Great Depression (35% versus 28%). The external debt estimation is now at $150 billion, and the country only has $9.7 billion in reserve (including 8 billion in repayment planned for 2018). This financial distress is explained by the conjunction of a poorly controlled oil diplomacy and falling oil prices.

96% dependent on oil for obtaining foreign currency, the government of Hugo Chávez (1999-2013) largely benefited from high prices to commit, as early as 2005, to energy cooperation agreements with States in the region (Alba, Petrocaribe). These agreements introduce oil deliveries at preferential rates. Following the sharp rise in prices during the summer of 2008, Hugo Chávez decided to relax pricing patterns, proposing that only 40% of the oil bill be paid within 90 days of delivery, and the remaining 60% within 25 years. This adventurous policy helped to dry up the source of foreign currency. In this context, the fall in oil prices since January 2012 led to a drastic decrease in exports, thus limiting foreign exchange inflows. The vicious circle of external debt accumulation was therefore triggered.

Facing American and European criticisms of Nicolás Maduro's current government, Venezuela appealed to China and Russia, which have gradually become the country's main creditors. The Chinese bank CITIC recovered, in August 2014, the management of the accounts of PdVSA (Petróleos de Venezuela, S.A.) for its oil transactions, protecting them from possible lawsuits in the event of non-payment. Russia, for its part, was able to take advantage of US sanctions, which caused PdVSA to lose all borrowing capacity in the United States and European banks for its repayments or the refinancing of its debt. In April 2017, Rosneft (a Russian State-owned company) lent an additional $1 billion to PdVSA (a total of $5 billion) in return for oil delivery. Today, two of the five largest Venezuelan oil projects are owned by Rosneft, and PdVSA's default of payment announced by the rating agencies could put even further the country's assets in its hands.

How do you interpret the November 14 rating agencies decision to downgrade once more Venezuela’s note? Does this precipitate the sinking of the country?

On November 14, the US rating agency Standards and Poors (S&P) decided to downgrade Venezuela's credit ratings from CC to D, and to lower the long-term credit rating of sovereign debt from CC to partial default (SD). This decision came after the country missed two interest payments on long-term loans (bonds maturing in 2025 and 2026, or $237 million). On November 20, the International Swaps and Derivatives Association (ISDA) also declared both Venezuela and PdVSA in default.

This decision is part of a context of clearly deteriorating relations with the United States. Following the first sanctions imposed by the Obama administration, the election of President Donald Trump has only intensified the harshness of American positions and the (rhetoric) confrontation between the two leaders. New sanctions have been imposed against the regime and the threat of a military intervention even reinstated the US President's speech.

The intervention of rating agencies in this crisis has only amplified a gradual process towards the banishment from the international community.

Can the Venezuelan situation be compared to that of Greece following the economic crisis of 2008?

While Greece and Venezuela have faced deep debt crises, their origins and consequences significantly differ. Greece has entered a spiral of indebtedness due to an initial falsification of public accounts, intended to favor the country's entry into the euro. Subsequent borrowings on the European financial markets thus added to a massive public debt - also fuelled by the underground economy and tax evasion -, which led to the payment default announced since 2010. In Venezuela, the crisis comes from the combination of State mismanagement of the oil rent and an exogenous factor, the collapse of oil prices.

Both populations were immediately hit by increasing unemployment, respectively from 12 to 26.5% (Greece) and from 8.5% to 25.3% (Venezuela) between 2010 and 2015. Similarly, the poverty rate respectively increased from 27% to 35.7% and from 26.8% to 33.1% over the same period. In the turmoil of the crisis, real wages had fallen by around 30% in both countries, with Venezuela also facing hyperinflation of 720% in 2016. In addition, there is a greater deterioration of living conditions for the population. Willing to honor the deadlines of the external debt, the government of Nicolás Maduro has decided to limit imports, including goods (food and medicine) and services, whose volume decreased by 75% between 2012 and 2016. Social distress is now increasing: infant mortality has increased by 100% in 2016, and cases of undernutrition are increasing in the country (11.4% in April 2017 according to the World Health Organization).

In Greece, the weakening of the State and successive austerity plans did not fundamentally call into question the rule of law and democratic principles. Conversely, Maduro's presidency in Venezuela is trapped in an authoritarian spiral, as suggested by the numerous arbitrary arrests (especially of political opponents), the violent repression of demonstrations that have caused more than 120 deaths since March 2017, and accusations of repeated violations of human rights. 

Finally, while the Greek crisis has undeniably highlighted the deficiency of European institutions, Venezuela has led to a paralysis of regional organizations by fragmenting Latin American multilateralism. Beyond the region, the Venezuelan crisis has also led to a restructuring of the continent's geopolitical order, notably by promoting the enhanced presence of both Russia and China.