The failure of the Bolivarian process (Part 2)

There’s proof of the failure of the Bolivarian process in the economic disaster Venezuela is experiencing. It’s particularly seen in the collapse of the oil industry, but also in the improvised policies with their backs to the law. Less known is the social-environmental tragedy the regime decreed, by which the resource-rich ands of the Orinoco Arc, 12% of the country, have been handed over to big transnational mining companies

Edgardo Lander

There is no up-to-date official information with which to analyze the current state of Venezuela’s economy. Most of the statistics disclosed by the Central Bank of Venezuela and the National Institute of Statistics, which is in charge of the national statistics system, are between three and four years behind schedule. The government has clearly decided not to disclose information that would confirm the depth of the economic crisis. The calculations disseminated by economic analysts, academia, business associations and international institutions show great variations.

All are catastrophic figures

In recent years, Venezuela’s economy has saen a decline greater than that experienced during the oil strike/business lockout of 2002-2003. The gross domestic product (GDP) has fallen for four straight years: -3.9% in 2014, -6.2% in 2015, -16.5% in 2016 and the IMF estimates it at -12% for 2017, which means that by the end of that year, the GDP was only 66% of what it was in 2013. Given that the crisis has only deepened in 2018, some projections are that by the end of 2018 it will probably be almost half of what it was in 2013. That is a catastrophic decline.

During these years there has also been a significant fiscal deficit in the public sector: 15.1% in 2012; 13.2% in 2013; 8.8% in 2014; 10.3% in 2015; and 17% in 2016. Inflation in 2017 exceeded 2,000%, initiating a hyperinflationary period. In mid-2018 inflation was over 100% per month. The IMF estimates that by the end of 2018 annual inflation will have reached 1,000,000%.

A severe cash shortage

Widespread speculation, a lack of foreign currency and structural imbalances caused by the accelerated decline of the supply of goods, services and currency have contributed to the hyperinflation, as consumption expectations can hardly adapt to these new conditions. But a substantial cause has been the massive and growing printing of unbacked local currency by the Central Bank of Venezuela to guarantee the expansion of public spending and the government’s clientelist policies under conditions of severe fiscal deficit. In May 2018, after three years of recession, the money supply was 509 times higher than that of May 2015. And this uncontrolled expansion of the monetary mass has only accelerated. Between January and May 2018, it multiplied sevenfold, from 177 billion to 1.255 trillion bolivars.

The circulation of printed money has been left far behind, generating a severe cash shortage as banks allow customers to withdraw very restricted amounts of money each day. While traditionally circulating paper currency accounted for up to 14% of the money supply, today it doesn’t reach 2%. The lack of cash has become an additional difficulty the population faces every day as there are expenses, such as urban and interurban transportation, that can only be paid in cash. That usually requires customers to buy currency through bank transfers with fees of up to 300%.

Russia, China and
the great debt burden

The total value of exports fell from US$98,877 billion in 2012 to US$27.407 billion in 2016. In a country completely dependent on imports, these fell from US$65.951 billion to US$16.370 billion between 2012 and 2016, a 75% drop, with
a severe impact on overall economic activity due to a lack of supplies and spare parts. The impact on food, medicine and transportation availability has been particularly dramatic.

There has been a deficit in the current account since 2015. International reserves fell from US$35 billion in 2009 to US$ 8.7 billion in July 2018. The total foreign debt is estimated at US$184.5 billion dollars, not including commercial debt commitments, a debt to PDVSA suppliers, a debt for nationalizations, commitments with multilaterals and others. This is twenty times greater than the country’s total international reserves and represents almost seven times the total amount of exports in 2016 (there is no updated information about the following years). Although there were years when oil prices were very high, the per-capita foreign debt went from US$1,214 in 1999 to US$3,916 in 2017. The fact that the government has prioritized timely payment of this debt over the population’s most urgent food and health needs has been a basic factor in the current social crisis.

China and Russia have been the main sources of external financing during the years of the Bolivarian process. By mid-2018, however, the country’s struggle to pay that debt is such that these countries are apparently no longer willing to continue supplying fresh money.

The collapse of the oil industry

The collapse of oil prices, which went from an average $100 per barrel between 2012 and 2014 to an average $41 per barrel in 2015, was a fundamental cause of the country’s economic crisis, but this factor is by no means enough to explain the crisis. No other oil exporting country has experienced a similar deterioration in these years. On the other hand, oil prices have been increasing again, reaching over $66 per barrel in mid-2018, higher than the average price during the 14 years of the Chávez administration.

Beyond prices, Venezuela’s oil industry is essentially collapsing, dramatically revealing some of the main distortions and contradictions of the Bolivarian process. According to the OPEC monthly statistics bulletin from June 2018, the Venezuelan government had set a target for 2019 of increasing oil production to six million barrels per day, but secondary sources say that production had fallen to 1.34 million barrels per day, only 44% of the 2009 production level and the lowest level in decades. This production collapse has nothing to do with either an intention to reduce greenhouse gas emissions or OPEC policies aimed at protecting oil prices. It is simply an extraordinary disparity between the production goals the government established and the production levels it has achieved.

Not all the oil that is exported translates into new revenues since a significant proportion of it goes to pay Venezuela’s oil debt with China. Refineries are operating so precariously that they no longer have the capacity even to supply the domestic market. In recent years, the operating expenses of PDVSA, the state oil company, have increased with a subsequent reduction in the tax share of the company’s total revenues. The latest publication of PDVSA’s Consolidated Financial Statements, which is for 2016, shows its net profits having plummeted from more than US$9 billion in 2014 to US$828 million in 2016.

The decapitalization of PDVSA

There are many reasons for PDVSA’s deterioration and production collapse. In addition to the external factors, they include management incompetence leading to inefficiency, improvisation, corruption, scandalous price premiums
in its operation, continued outflow of qualified personnel and flew investments in maintenance and technology. The almost free distribution of gasoline in the domestic market and the subsequent massive smuggling of extracted products cause billions of dollars of losses a year for the national budget.

The government has systematically caused PDVSA’s decapitalization, forcing the company to hand over its foreign currency to the Central Bank at an exchange rate that extraordinarily and unsustainably overvalues the bolivar. To continue operating, the company began increasing its external debt starting in 2007. In 2017, it owed a total of US$71 billion, a debt the company is unable to pay, which brings it critically close to a bankruptcy that would jeopardize its overseas facilities, especially CITGO, its US subsidiary.

Megalomania and environmental
destruction in the Orinoco oil belt

The strategic decision of the Bolivarian government to prioritize the development of heavy and extra-heavy oils from the Orinoco Oil Belt over traditional fields had enormous consequences not only for the oil industry, but also for the present and future of the country. Megalomaniacal dreams of making Venezuela a Great Energy World Power, based on the largest hydrocarbon reserves on the planet, led to having the future of the country rest on the exponential development of oil fields on the Orinoco Belt. The expected production levels of those heavier oils would require technology and investment the country doesn’t have,, especially if, as stated in the 1999 Constitution, the participation of transnational corporations was to be limited. Investments in oil in the Belt would only be profitable if oil prices were kept close to U$100 per barrel and it could be assumed that using oil as a fuel was guaranteed in the very long term.

Meanwhile, a high proportion of the traditional oil fields were neglected or abandoned, with lighter crude oils and much lower operating costs. These are mature wells, many of which have been operating for decades, but still had enough reserves to provide more modest production levels during the time required to make the transition to a non-rentier economy, not dependent on fossil fuel extraction. At the moment, the country does not produce light oil for the blends required to exploit heavy and extra-heavy oil reserves, nor enough fuel to meet the demands of the domestic market. During this economic/financial strangulation, they have to be imported, almost all from the United States.

Beyond the economic calculation, the fundamental problem with this huge project is the extreme environmental damage generated by the scale of production of such a highly polluting fossil fuel when a drastic reduction in greenhouse gas emissions has to occur in the very short term in order to preserve life on the planet. Even though these are well- known facts and the Bolivarian government has issued numerous documents and declarations defending the planet in the name of 21st century anti-capitalism and socialism,. the production levels it has set undermine the conditions that make life possible.

Monumental corruption in PDVSA

Another reason for the collapse of the national oil industry is the corruption across the industry. Sub-contracts with overpricing—and additional fees—even in operations that could be done by the company itself, have become widespread practice. In the last months of 2017, some 69 industry managers were arrested due to corruption accusations, including PDVSA’s ex-president, the former minister of oil and energy, and part of CITGO’s management team.

These accusations—related to massive acts long known in the country—were uncovered as a result of increasingly virulent confrontations within the government and the United Socialist Party of Venezuela (PSUV). There have not, however, been similar public accusations in other areas of the economy where embezzlements have been conducted against the country, such as food imports, the corrupt transfer of highly subsidized currencies, and the illicit actions that caused the country’s massive indebtedness.

Despite the major role played by Odebrecht, the scandalous Brazilian conglomerate of construction, chemical, petrochemical and engineering companies, in the construction of infrastructure during all the Bolivarian process years and the fact that a good part of these works was paralyzed, none of the corrupt activities of Odebrecht or of its government counterparts have been investigated, unlike in other affected countries in the continent.

Without such monumental embezzlement occurring during these years, surely the economic situation of the country would be different today.

Ethnocide in the
Orinoco mining arc

Instead of seeking alternative options to the primary rentier export approach that has caused so much damage to the country, particularly in light of the sustained deterioration of oil revenues, the Venezuelan government decided to develop it even more, now through large-scale mining. With that in mind, Maduro issued the Orinoco Mining Arc Decree in February 2016, by which 112,000 square kilometers, 12% of the national territory, a surface equivalent to the entire island of Cuba, are opened up international mining. This large area is rich in minerals such as, gold, aluminum, diamonds, coltran and radioactive minerals.

The government has mainly focused on gold exploitation. According to the former minister of oil and mining and current president of PDVSA, Eulogio Del Pino, the gold reserves in the area are estimated at 7,000 tons, a value of some US$280 billion.

The area defined as the Orinoco Mining Arc can has more socio-environmental and even economic wealth than the potential monetary value coming from mining reserves. It is a part of the Amazon region that plays a critical role
in regulating the planet’s climate and its preservation is vital to slowing down climate change. This territory has extraordinary biological diversity and is Venezuela’s main source of water. It accommodates the hydroelectric dams that supply more than 70% of the power consumed in the country.

It is also part of the ancestral territory of indigenous peoples such as the Warao, E’Ñepa, Hoti, Pumé, Mapoyo, Kariña, Piaroa, Pemón, Ye’kwana and Sanema, whose livelihoods would be devastated by mining exploitation. This not only violates these peoples’ constitutional rights, but also threatens them with ethnocide.

By enhancing the extractivist approach, preference has been given to obtaining short-term monetary income, even if this implies irreversible socio-environmental devastation. All this has been done by presidential decree in a total absence of public debate, in a country whose Constitution defines it as democratic, participatory, multiethnic and pluricultural.

Large-scale mining
violates the Constitution

This decree constitutes a clear violation of environmental responsibilities and rights specifically established by the Constitution of the Bolivarian Republic of Venezuela, current environmental laws and international agreements signed by the country such as the Convention on Biological Diversity. Likewise, the Indigenous Peoples Habitat and Lands Demarcation and Protection Act (January 2001) and the Indigenous Peoples and Communities Act (LOPI, December 2005) are also violated. These violations affect all the provisions on prior and informed consultation undeniably established in both Venezuelan and international legislation (ILO Convention 169) for cases where activities that could negatively impact the habitats of these peoples are planned.

“Private, state and joint ventures” are to take part in the Mining Arc project. The decree includes a wide range of public incentives for these mining corporations, such as flexibility of legal regulations, simplified and swift administrative procedures, non-requirement of certain legal conditions foreseen in Venezuelan legislation, creation of “preferential financing mechanisms” and a special customs system with preferential tariffs and tariff-related fees for imports. They would also have a special tax regime that provides total or partial exemption from paying income and value-added taxes.

The decree regulations prohibit any possibility of challenging the negative impacts of the large mining industry in the Mining Arc area. In order to prevent the companies’ activities from being hindered by groups opposing them, a Strategic Development Zone was created under the responsibility of the Bolivarian National Military Force. The decree in question explicitly establishes the suspension of civil and political rights throughout the Mining Arc area.

The consequences of this “prevalence of the general interest over personal interests” are extraordinarily serious. “General interest” is understood as mining exploitation as it is conceived in this presidential decree. All other views and all other interests, including appeals to the Constitution, are defined as “personal” and are therefore subject to the “state security agencies” conducting “the immediate actions necessary to safeguard the normal development of activities foreseen” in the decree.

But what are or can be the interests referred to here as “personal”? The decree is written in such a way as to allow a broad interpretation. On the one hand, it explicitly defines trade union and other associative interests as “personal.” This could surely lead to the suspension, in the whole zone, of workers’ rights established in the Constitution and the Organizational Labor Act.

Does this also mean that “guild” and thus “personal” rights of journalists to report on the development of mining activities are suspended? Are the rights of indigenous peoples, according to this, also personal interests?

There’s volence
in the mining zone

By mid-2018, large transnational investments expected by the government had not yet arrived, mainly due to the lack of legal stability. But illegal gold and coltan mining by tens of thousands of miners is expanding rapidly. This great area has become a territory outside the State, beyond any legal system. Armed groups, paramilitary groups, ELN members, FARC dissidents and criminal gangs called “unions” control different areas within these territories and set the prices at which they force miners to sell the extracted minerals.

All this takes place in complicity with members of the Venezuelan armed forces. This illegal mining activity operates with high levels of violence. There are frequent deaths of miners due to territorial disputes, with severe socio-environmental impacts. Mercury is used massively for the gold mining. Large concentrations of this metal have been found in the bodies of mothers and children in the area. Indigenous girls are kidnapped in their communities and forced into prostitution in the mining camps.

Nicolás Maduro responds
with improvised policies

Lacking initiatives and proposals to deal with the country’s serious economic, political, humanitarian and ethical crisis, the government has tended to respond to protests with repression. By refusing to acknowledge the depth of the crisis and especially its causes, and being incapable of owning up to its responsibility in all of this, as well as failing to provide even moderately systematic and coherent proposals, the government has reverted repeatedly to improvised policies that never seem to tackle the core of the problems at hand.

The great solution Maduro offered in July 2018 was to issue a new currency, the Sovereign Bolivar (Bolívar Soberano), which was expected to remove five zeros from the national currency. It was announced that ownership of the Ayacucho I Bloc of the Orinoco Oil Belt would be transferred to the Central Bank of Venezuela to serve as backing for the new currency and would, according to Maduro, drastically halt hyperinflation as of August 20, the date on which the new currency would come into force.

This announcement has generated much debate and rejection. If the oil is meant as a guarantee for the new currency, it would mean unconstitutionally mortgaging those assets because, according to Article 12 of the Constitution: “Mineral and hydrocarbon deposits, whatever their nature, existing in the national territory, under the territorial sea bed, in the exclusive economic zone and on the continental shelf, belong to the Republic, are public assets and are, consequently, inalienable and imprescriptible…”

In immediate practical terms, it is likely that backing the currency with oil earnings will have little impact on the control of hyperinflation. Oil serves as effective backing for the currency only to the extent that the currency holders have foreseeable access to such oil, which is evidently not the case here. These reserves only have cash value if they can be extracted from the ground and the government could lack the massive financial resources required for this. Could it be that this is a first step aimed at privatizing not only these reserves but also the oil industry as a whole?

Keep control of the
State at all costs

In these conditions, it’s not clear what the government’s political project is, beyond the self-evident fact that it seeks to maintain control of the State at all costs.

Its main instruments for this purpose are the support given by the Bolivarian National Armed Forces and the total power granted by a “supra-constitutional” and “plenipotentiary” National Constituent Assembly. The army has much to lose with a change of government. In addition to having considerably better salaries than other public employees, members of the different entities that make up the Army are responsible fora high proportion of the outstanding corruption in this government.

With respect to the future of the National Constituent Assembly, the government has sent contradictory messages. It had initially been announced that it would be in effect for two years. But Assembly president Diosdado Cabello has said it could continue in power for up to four more years. Given its “plenipotentiary” and “supra-constitutional” nature, it could even extend its term indefinitely.

Without legal security
or political stability

A new constitutional text is allegedly being drafted so secretly that even members of that Constituent Assembly aren’t included. There is therefore no reliable public information about its fundamental guidelines or what a new Constitution could do that the 1999 Constitution cannot.

There are, however, two main hypotheses, most likely complementary ones, regarding the possible main objectives of the new constitutional text. The first is to look for short-term options to tackle the severe lack of resources to respond to the economic crisis. The government is unquestionably aware that it’s running out of time in the current conditions. Given the urgent need for new revenues, it has been taking measures over the past three years to attract foreign investment, the most important ones being the creation by presidential decree of the Orinoco Mining Arc, the creation of special economic zones, and the approval by the National Constituent Assembly of a new law to promote and protect foreign investment.

Nonetheless, the massive investments the government expected haven’t materialized, despite the extraordinarily favorable conditions offered foreign capital in both regulatory flexibility and tax incentives of all kinds, and the extraordinary energy and mining resources the State is offering multinational corporations. This is basically because at issue are large-scale investments that would only be profitable in the medium and long term. For this the companies would require both political stability and legal certainty in addition to the favorable conditions offered by the Venezuelan State.

Neither are guaranteed in the country today. There is no legal certainty because all the decrees, regulations and contracts of this new mining/energy policy are unconstitutional and violate the hydrocarbon laws, as well as the legislation on indigenous peoples, environment and labor. Moereover, these decisions haven’t been supported by the National Assembly, the only legislative body recognized by most countries.

All these unconstitutionale neoliberal policy measures could be reversed with a change of administration. The government will thus surely seek to give them constitutional legitimacy In order to attract the investment it so urgently needs. But it is very unlikely that these constitutional changes would modify the perception of the country and generate trust.

Secondly, to remain in control of the State for an indefinite period, the current political leaders of the government-PSUV would have to substantially modify the political-legal structure of the Venezuelan State, leaving to one side or severely limiting the “impediments” of liberal representative democracy.

Like the Stalinist times

The government can’t guarantee its control over the state apparatus given Venezuela’s current political system, which is based on universal, direct and secret elections that are sufficiently legitimate for most citizens to participate in them,. There are different ways of organizing the State, and above all the electoral system, to achieve this control. They are based on other principles that, like those that existed in the times of “real socialism,” are in the name of furthering democracy but actually end up extinguishing any possibility of democratic expression.

Second-tier elections, or those based on organizations and social sectors that can be controlled by the government, could be incorporated into the new constitutional design. A step in this direction has already been taken in the election of the so-called National Constituent Assembly, where a discriminatory regime was established that arbitrarily divided the population between first-class citizens, entitled to two votes, and second-class citizens, entitled to one.

In a context of internal divisions and much grassroots distress due to the country’s dire situation, the Fourth Congress of the PSUV was held at the end of July 2018, with some 670 delegates. In the weeks prior to the event, several people, including senior leaders, publicly argued that the time had come to democratize the party and give more importance to the opinion of the grass roots. In the congress itself, however, he party’s vice president proposed that Maduro be ratified and elected as party president. He proposed “to also grant President Maduro all the authority necessary to make all decisions he considers appropriate to appoint his national leaders and political teams, and make any organizational decisions necessary to strengthen the party and the revolution.” It was approved by acclamation.

“Democratically” and “voluntarily,” the delegates to the congress accepted that all decisions could be made by the top leader. This repeats a top-down power system and a total absence of internal party democracy typical of the darkest times of Stalinism.

is the end near?

All this defines a new political moment characterized by a deepening humanitarian crisis, a fragmented and very weakened partisan opposition, the mixed momentum that escalating social protests acquire, and attempts to advance the authoritarian neoliberal project that, against all odds, the government intends to impose.

Sociologist Edgardo Lander is a tenured professor at the Central University of Venezuela and associate researcher at the Transnational Institute. For decades he has also been connected to social and leftist movements in Venezuela.
The full text of this analysis was written in Caracas in August 2018 and published in WWW.aporrea.org. It was published in tnvío in two parts, the first in the November 2018 issue, and was subtitled and lightly edited by envío.

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