How and Why Venezuela Will Weather the Financial Crisis

Regardless of the impact of the existing economic meltdown, the Venezuelan government has taken important economic decisions, even before the crisis was even known, that now benefits and secures its economy against the financial crisis.  A recent interview of the Minister of Economy and Finance, Ali Rodriguez, confirms that the Venezuelan economy has sufficient safeguards to deal with the negative effects of the economic slowdown afflicting the principal economies of the world.  Nevertheless, the Minister emphasized that close attention must be paid to the evolution of the United States and European measures to overcome the greatest challenge for capitalist western economies since the Great Depression of 1929. Such monitoring would include the impact of the crisis on the real economy and the fluctuation in the prices of commodities, on which Venezuela still relies.

A swift assessment of 2007 figures reveals that Venezuela tops most nations in the world and the entire American Hemisphere (including the United States and Canada) with the biggest international reserves (IR) per capita.  According to figures from 2007, for each single person that lives in Venezuela there are nearly $1,300 worth of IR at the end of 2007 ($34 billion total).[1] This per capita amount surpasses the main economies of Latin America, such as: Argentina ($1,141); Brazil ($919), Chile ($1,023) and Mexico ($799).[2] According to these figures, Venezuela's IR surpasses the second Latin American country with most IR per capita, that of Uruguay, by $113. This amount, if multiplied by the entire Venezuelan population (26.4 million), would total nearly $3 billion.  Such an amount could be used to tackle the negative impacts of the financial crisis and Venezuela would still be at the top of the Latin American list in IR per capita.

Country    IR Per Capita (IR/ Population)
Venezuela    $1,300
Uruguay      $1,187
Argentina    $1,141
Chile           $1,023
Peru            $932
Brazil          $919
Mexico        $799
Bolivia        $572
Colombia    $464
Paraguay    $362

OPEC and Economic Sovereignty

President Chavez's independent and sovereign economic policies aimed at the abolition of neoliberalism provides an explanation for the growth of Venezuela's IR.  Most of theses policies have been accompanied by harsh criticism from the private media in Venezuela and its affiliates across the world.  For example, amid prices of $8 per barrel of petroleum in 1999, the Clinton administration felt "irritated" by a trip made by President Hugo Chavez to Oil Exporting countries in the Middle East, including Saddam Hussein's Iraq, to reinforce OPEC.  Before Chavez, Venezuela was a country subjugated to the influence of the US and, as such, its participation in OPEC consisted in disrupting agreements aimed at the stabilization and search of a just price for the barrel of oil.  As a result of this trip, OPEC counties held a Summit in Caracas in 2000 that was closely monitored by Washington.

During the OPEC Summit, Venezuela gained an important leadership role in this organization, allowing it to play a significant part in the recovery of the lowest oil prices in recent years. Therefore, Venezuela secured a vital source of income for its economy.   Following these policies, the Chavez Government embarked on overturning the most perverse and antinational system of oil production ever implemented, "la apertura petrolera" (the petroleum opening).  By opening the petroleum sector, the Venezuelan Petroleum Company (PDVSA) gave transnational oil companies the right to extract oil while giving an insignificant portion back to the Venezuelan state.  This scheme meant that, even though the price of oil slightly recovered, most profits went to transnational corporations.  These agreements, signed against the interest of the Venezuelan people, were given to transnational corporations for a lifespan of 20 years.

The petroleum opening was the near privatization of the Venezuelan oil industry at the height of neoliberalism in Latin America.  Undoing the opening of the petroleum industry of Venezuela was not an easy task for the Chavez government.  Analysts coincide that the coup d'état against Chavez in 2002 and the elitist oil strike of 2002/2003 was a direct consequence for the enactment of a string of laws, including a new Hydrocarbons Law, drafted by presidential decree.  According to this new law, "Conjuncture Agreements" between transnational oil companies and PDVSA for the production of oil, signed at the peak of the opening of the petroleum industry, were to migrate into Mixed Ventures.  This new scheme would provide the Venezuelan State, through PDVSA, a majority participation in the production of oil.  Also, taxes and royalties for transnational companies were increased.  

Uncomfortable by sovereign decisions made by the Chavez government, Exxon-Mobil ridiculed itself by suing the Venezuelan State on British courts.  Initially, one of these courts ruled in favor of Exxon-Mobil for a precautionary measure to freeze $12 billion in PDVSA assets; but after arguments made by PDVSA were heard, on March 18 2008, another British Tribunal overruled this previous decision.  According to the Venezuelan Minister of Energy and Petroleum, Rafael Ramirez, this decision was "100% favorable" to Venezuela and a victory against "blackmail" from transnational corporations.  The end result has been clear; regardless of the price of the barrel of oil, the fact is that Venezuela, through the "re-nationalization" of the oil industry, now earns greater proportions of profits from the exportation of oil than ever before, some of which has been converted to IR.

Currency Exchange Control

One of the major factors that have contributed to the rise of IR has been the Currency Exchange Control (CEC).  An important point is that CEC was initially implemented at the peak of political instability in Venezuela instigated by opposition groups that lead to a strike in PDVSA.  This strike was accompanied by massive protests and TV ads in the private media instigating people to revolt. Oil production was halted and the result was dreadful for the Venezuela economy with huge drops in revenues and a massive GDP contraction. Ironically, Venezuela was forced to import gasoline.  Nevertheless, after successfully defeating these opposition efforts to overthrow the government and taking over operations at PDVSA, the Chavez Government sought the necessity to implement CEC, as a measure to avoid capital flight (a consistent problem in Latin American economies).  The rapid recovery of oil production in 2003, along with the CEC allowed Venezuela a fast increase in IR.  

Huge pressures from economists and the private media to lift the CEC have been constant. Thankfully, the Venezuelan Government has kept the CEC, allowing just minor adjustments in recent years.  As a result, upholding the CEC has provided Venezuela a huge safeguard in the midst of the current financial crisis demonstrated earlier by the growth in IR.  Another positive aspect of CEC has been that the price of the US dollar has remained fixed for a long period of time despite high inflation rates recorded in the Venezuelan economy in previous years [3].  Thus, in case the financial crisis deepens and the price of oil drops, a minor devaluation of the Bolivar (Venezuelan currency), along with austerity spending for the next fiscal year and other similar measures could provide Venezuela with sufficient defense mechanisms, without even using IR, to deal with the financial crisis.  

Martin Saatdjian is third Secretary at the Ministry of Foreign Affairs of the Bolivarian Republic of Venezuela

Notes:

[1] In an interview given by the Minister of Economy and Finance on October 05 2008, he announced that as of today IR stands at nearly $40 billon.

[2] Figures obtained from: https://www.cia.gov/library/publications/the-world-factbook/

[3] Although inflation is relatively high, salaries have increased at a faster rate than the inflation rate.