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  HOME | Opinion (Click here for more)

Ellis: Anticipating the Collapse of Venezuela

By R. Evan Ellis

The question for businessmen and governments with a stake in the deteriorating situation in Venezuela is no longer if the regime of Nicholas Maduro will come to a premature end, but under what circumstances.

This reality has little to do with the determination or sophistication of the Venezuelan opposition, nor of the resiliency of its almost completely compromised institutions. Rather, the Maduro regime has locked the country on a course of national self-destruction, responding to the deepening economic crisis with counterproductive, and simply bizarre measures, such as criminalizing the attempt of the market to respond to shortages, or reducing the federal work week, destroying the little productive capacity that remains in the country.

Similarly, in the face of the population’s demand for a change in course, evinced by the massive opposition victory in the December 2015 mid-term elections, Maduro’s intransigence increases the probability that the suffering and frustration of the Venezuelan people will eventually give rise to violence.

As the Maduro government cynically uses its accumulated control of executive and judicial institutions (such as the electoral council and the constitutional chamber of the Supreme Court), to cling onto power without deviating course, it fritters away the last of the country’s gold and foreign exchange reserves, approaching the moment when it will no longer be able to postpone the choice between paying its creditors, and importing the foodstuffs, medical supplies and basic goods that its people must have to survive.

Little by little, the regime has exhausted the patience and illusions of those who lent it the resources which previously allowed it to persist in irrational policies. Foreign businesses and partner nations arguably tolerated mounting government dysfunction in order to maintain or advance their own position, unable to believe that a country so resource rich as Venezuela could actually fail. Yet foreign businesses operating in the country, from airlines to petroleum service companies such as Schlumburger and Halliburton, one by one, have given up on the open ended providing of goods and services to the regime without getting paid. Even China, while allowing the regime to save face with the appearance of new loans, has actually done little more than formalize IOUs for work already performed, and provide a symbolic quantity of additional resources (secured by Venezuelan oil pumped by the Chinese themselves, and tied to work done by Chinese companies).

This is not, however, another editorial to condemn the managerial ineptitude, corruption, or anti-democratic practices of the Maduro regime. Rather, it addresses the question increasingly raised about Venezuela by my colleagues in both the corporate and government worlds: “How will it end?”

As the country’s resources rapidly dwindle to zero within the timeframe in which the current recall referendum initiative will play out, the possibilities are beginning to center on a limited number of scenarios, each with important implications for the U.S. and the region.

If nothing is done to change the present course, international oil prices do not significantly rise, and a country such as the P.R.C. does not step in to provide yet more hard currency and credit to postpone the nation’s collapse, Venezuela may reach the point of governmental and societal self-disintegration by the end of the present year.

From the perspective of the nation’s currency reserves, once it sells off the last of its gold reserves, now estimated by financial analyst Russ Dallen to be less than $8 billion, it will physically be unable to both make its loan payments (of which several billion dollars come due in the 3rd quarter), while also importing even the minimum quantity of food, medicine and other basic goods needed by the Venezuelan people. Dwindling reserves have already prompted the government to cut back imports by more than 40%, and shortages of even the most basic goods are rampant.

If, as the last of its reserves run out, the government attempts to default on its debt payments in order to continue importing minimal quantities of food and medicine, the result in practical terms will be almost identical. Since slightly more than half of Venezuela’s $70 billion in debt is owed by Venezuela’s national oil company PdVSA (and not the Venezuelan government), non-payment of such obligations would spawn an almost instantaneous series of legal actions worldwide, seizing PdVSA accounts and assets. Within days, the Maduro regime would not only find its remaining hard currency reserves paralyzed, but would lose access to the only real vehicle for generating those reserves.

As currency reserves near zero, while the government will surely attempt to prioritize supplying the basic necessities of the Venezuelan armed forces, it will not have enough to shield from suffering the wives, children, and extended families of Venezuela’s junior officers (whose actions have played a key role in the fate of the nation). Under the watchful eye of Cuban intelligence and senior officers who stand to lose fortunes (and perhaps face imprisonment or extradition to the United

States if the Maduro regime collapses badly), a rebellion of junior officers may still not occur. Nonetheless, in the face of widespread social protests accompanying the escalating suffering as food and medicine run out, even in the black market, military units may refuse to repress the massive crowds against which they will be deployed, or the units will simply disintegrate. The events which would follow would likely be violent and fluid, involving millions of desperate hungry people, military units of uncertain loyalties, violent pro-regime “collectivos,” and armed criminal groups taking advantage of the breakdown of order to rob, loot, and even kill meet the need for basic goods.

The good news is that virtually all sides in Venezuela, including senior bureaucrats and military officers wedded to positions of privilege and ill-gotten gains, are well aware of this “doomsday scenario.” With the exception of President Maduro and the most ideological or intellectually challenged of his supporters, the cynical leaders who have quietly become wealthy by tapping into Chavismo will do what is needed to save at least themselves.

Against the backdrop of this looming threat, the defining event in Venezuela in 2016 will likely be the opposition campaign for a recall referendum to oust the Maduro regime. Based on the overwhelming number of signatures collected in a short span of time by those supporting the referendum, the pro-regime Venezuelan National Electoral council will probably will not deny--but will delay--the process so that the referendum (which almost certainly will remove Maduro from office) would occur after he has passed the fourth year in his present term. Within the rules established by the Venezuelan constitution, under such circumstances, Maduro would be replaced by his Vice President, currently Aristóbulo Istúriz.

Knowing this, it is also possible that the more pragmatic core of the Venezuelan opposition, including senior military officers, would pressure Maduro to first select a vice-President acceptable to them, acceptable to the Cubans, and/or acceptable to other key actors such as the Chinese, and that subset of international businesses whose support they will be forced to seek, to recover the country from approaching insolvency after the referendum. Although, according to what is Istúriz may be an acceptable candidate, if this scenario holds.

In the most positive reasonable outcome, the former Vice-President, now President would extend a hand of goodwill and the promise of compromise to the opposition. He or she might, for example, eliminate some of the more anti-market price and exchange control policies of the Maduro regime and release some political prisoners, then reach out to key potential donors like the PRC and Russia, as well as international institutions and key companies with business interests in the country, imploring them to return to the table with emergency credits, in return for the protection of their investments and privileged access to Venezuelan petroleum and markets under the new regime. As under Maduro, with the lure of more than 300 billion barrels of recoverable oil in the country (albeit of low quality, and with depressed prices that do not currently support its exploitation), the new government would likely have no shortage of partners willing to take that risk.

The new regime would also likely move quickly to throw Maduro and many of his less adroit followers “under the bus,” prosecuting them for corruption, violations of the constitution, and an array of other crimes, while carefully managing the process to protect from prosecution those more “practically minded” persons within the government such as Diosdado Cabello, Nestor Reverol or Tarek El Aissami, who would presumably have supported the move.

As a show of goodwill, the new government might even appoint select, controllable or co-optable opposition figures to positions of power. The opposition, needing the appearance of victory more than its achievement, would be tempted to trumpet its accomplishment, as would the club of fellow Latin American leaders, as politics in Venezuela returned to something in their comfort zone. The Chinese, and probably the Russians, would take advantage of the new leadership preserve and deepen their investment position in the country, and Venezuela would move toward a marginally functional model of state-led crony capitalism.

As a variant on this scenario, however unlikely, if the opposition appeared poised to hold the recall referendum before the two-thirds-point in Maduro’s term, the government itself could covertly orchestrate social unrest with the military stepping in to restore order, delaying the realization of the recall referendum just enough to ensure that power fell to the vice-president after Maduro’s loss.

If instead of the possibilities discussed in the preceding paragraphs, the pro-regime electoral council completely blocked the referendum from occurring, or if (presumably through massive fraud and intimidation), the government prevailed, the result would be a scenario similar to the “national collapse” previously described, perhaps precipitated or complimented by political violence arising from the non-occurrence of the referendum. Yet it is actually likely that the more pragmatic senior government and military leaders who had derived their illicit fortunes from the regime would quietly jump at the chance for a superficially constitutional way to do away Maduro, the simpleton who talks to birds, if by doing so, they could preserve their ill-gotten gains and protect themselves from prosecution.

The survival interests of the kleptocrats also minimize the danger, identified by some Venezuelan experts, that prior to losing a recall referendum vote, Maduro could appoint a loyalist as Vice-President who, upon Maduro’s ouster, could take possession of the presidency and, on the same day, resign and appoint Maduro to return to power as his successor. Because such a trick would effectively deny the

kleptocrats a pseudo-constitutional option to save themselves and their money, it is not clear that Maduro or his would-be Vice President would live long enough to implement it.

While none of the scenarios and variants discussed in this article are encouraging for Venezuelans or the U.S. policy agenda in the region, they provide reason for hope that, at least the country may avoid the type of tragedy suggested by the “collapse” scenario.

Whatever the course that Venezuela follows, the outcome is likely to present the U.S. with difficult policy choices. It may, for example, have to work with a regime nominally socialist kleptocrats closely aligned with and dependent on China and Russia, in order to avoid the collapse of the country in a way that could destabilize the region.

Reciprocally, if Venezuela does implode, it will likely do so on the eve of what will likely be the most controversial and hotly contested U.S. presidential election in modern times. Any U.S. response, or the failure to respond, will impact the outcome of that U.S. election.

Whatever the outcome in Venezuela, the region will have to rely on the strength of its institutions to manage the crisis. The Organization of American States, and associated financial and other institutions of the inter-american system, will be key to allowing a kleptocrat-led post-Maduro Venezuela to economically recover, while pressuring it to rebuild true democratic institutions. Reciprocally, a multinational force led by Brazil (presuming its own political crisis would not impair it from doing so) or other Latin American states, without U.S. troops, may be the only politically acceptable way of restoring order to a Venezuela that has imploded.

However the Venezuela crisis plays out, it should be a wake-up call to the incoming U.S. president regarding the importance of the region, to which the U.S. is bound by ties of geography, economic interdependence, and family.

Dr. R. Evan Ellis is Latin America Research Professor at the U.S. Army War College Strategic Studies Institute with a focus on the region’s relationships with China and other non-Western Hemisphere actors. Dr. Ellis has published over 130 works, including the 2009 book China in Latin America: The Whats and Wherefores, the 2013 book The Strategic Dimension of Chinese Engagement with Latin America, and the 2014 book, China on the Ground in Latin America. Dr. Ellis holds a PhD in political science with a specialization in comparative politics.

The views expressed in this article are strictly his own, and not necessarily those of his institution or the U.S. government. The author would like to thank Dr. Gustavo Cornel for his input into this work.


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