Endgame in Venezuela

Venezuelan soldiers on parade
These men will lay down the law in Caracas if mediation doesn't start soon (source: dpa)

The endgame is playing out in Venezuela and it is getting ugly. The pace of events has quickened and various actors, including the Organization of American States and the United States Treasury, have made moves that could unleash a crisis in the coming weeks. Adding to the sense of impending crisis, the national oil company, PDVSA, has fallen into technical default after failing to make its current debt payment. Food shortages are making daily life a nightmare for ordinary Venezuelans, while galloping annual inflation means that more and more people are losing patience with the government many of them voted for just two years ago.

Survival checklist

The basic elements of the Venezuelan dilemma were set forth in a GIS report by John Polga-Hecimovich in January. He suggested that President Nicolas Maduro’s political survival hinged on three factors: 1) avoiding a sovereign debt default, 2) containing hyperinflation and 3) preventing the political opposition (which has coalesced around the Democratic Unity Roundtable, better known by its Spanish acronym MUD) from developing the capacity to challenge his authoritarian regime. Mr. Maduro has now failed to satisfy the first two conditions, while doing all that he can to achieve the third. Will that be enough to bring the government down?

Production at PDVSA has continued to fall and global oil prices have dropped 10 percent since January. Annual inflation is estimated at more than 700 percent (the government stopped publishing price data some time ago). Sovereign default is now a question of definition.

A technical default was almost triggered at the end of 2016 by PDVSA’s shriveling cash flow, and it was only averted by selling bonds to the Venezuelan central bank and by pledging the remaining half of Citgo – the national oil company’s refining and distribution unit in the U.S. – to Russian oil giant Rosneft. These measures helped tide the country over for another three months at the cost of further reducing its already meager foreign reserves.

The conditions for a financial collapse are coming together

In other words, the conditions for a financial collapse are coming together. Its timing may be determined by the recent involvement of some outside actors.

One is the U.S. Treasury, which has added Vice President Tareck El Aissami to the list of high-ranking Venezuelan officials accused of being narcotics traffickers. Another is the OAS, which has called on its member countries to invoke the democracy charter (IADC) to bring Venezuela’s case before this international forum. Both procedures are significant because they involve timetables for action, either unilateral by the U.S. or multilateral by the OAS. For the Maduro government, they are ticking time bombs.

To make the timing more urgent, U.S. courts have confirmed the drug trafficking convictions of the nephews of Venezuela’s first lady, Cilia Flores, and upheld a $1.4 billion claim by international mining company Crystallex for illegal expropriation of their property in Venezuela. This decision allows Crystallex to go after Venezuelan assets in the U.S., most obviously Citgo, which has already been mortgaged to the Russians.

Paging Havana

As the international noose tightens, the best possible solution for all concerned would be some form of regional mediation, perhaps by an ad hoc “friends of Venezuela,” which would step in to convince the Maduro government that elections should be held in the next 90 days. That group could be led by Pope Francis, who has attempted to create a dialogue between the opposition and the government, with little to show for his efforts up to this point.

After a tense OAS meeting on March 29, it appears that Mexico is taking the lead to drag Venezuela’s increasingly defiant authorities back to the negotiating table. Most member countries oppose OAS Secretary General Luis Almagro’s efforts to expel Venezuela. This suggests a group of “friends” can be formed quickly. If one is, it should include Cuba.

Cuba can help reduce the exit costs of senior Venezuelan officials implicated in drug trafficking

Cuban involvement is crucial to any peaceful transition in Venezuela, because its military works side-by-side with their Venezuelan counterparts, including those accused of turning their country into a narco state. The involvement of senior Venezuelan officials in drug trafficking drastically raises the exit costs of the Maduro government. Cuba can help reduce those costs. It is worth noting that Venezuela now has more than twice as many political prisoners as Cuba, according to data collected by human rights groups.

Another efficient means to get Mr. Maduro to step aside would be mediation by the Community of Latin American and Caribbean States (CELAC), which has a democratic charter resembling that of the OAS. The key to CELAC’s potential effectiveness is that Cuba is a member, while the U.S. is not.

The next 30 days should see concerted action by one or the other of these international actors. Such regional efforts are probably the last opportunity to achieve a peaceful transition in Venezuela. Unless this intervention is successful, President Maduro will almost certainly cling to office with the military’s support until the 2018 elections – no matter how desperate conditions become.

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