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Nov 20, 2018 | 09:00 GMT

7 mins read

Caracas' Push for Illegal Mining Is Creating Problems for Its Neighbors

A Colombian rescue crew evacuates a
(JOAQUIN SARMIENTO/AFP/Getty Images)
Highlights
  • As Venezuela's oil production declines, the government will rely more on revenue from illicit mining to help keep society and its political coalition intact. 
  • The reliance on illicit mining will end up encouraging miners — both those directly controlled by the state and those who are not — to expand their activities into neighboring countries.
  • The spread of Venezuela-supported illicit mining into northern Brazil will drive its incoming administration to join Colombia to push for heavier political pressure from the United States or other Latin American countries.

Editor's Note: This assessment is part of a series of analyses supporting Stratfor's upcoming 2019 Annual Forecast. These assessments are designed to provide more context and in-depth analysis on key developments in the coming year.

Venezuela's desperate attempts to offset the loss of revenue from its collapsing oil sector are creating headaches for its neighbors. During the past two years, the government has put in motion a survival strategy to replace its declining hydrocarbon income with proceeds from mining exports, often from illegal excavations operated by criminal and militant groups. But these illicit operations are spreading over the poorly patrolled borders into western Guyana and potentially into northern Brazil, meaning Caracas' game plan could soon come into direct conflict with the interests of those two countries.

The Big Picture

With the Venezuelan economic decline sharply worsening, powerful politicians within the ruling United Socialist Party will compete for a greater slice of the country's oil revenue. To mitigate this competition (as well as keep imports flowing and basic government services operating), the government is turning more to illicit mining as a source of revenue. But that illegal extraction of minerals could spread into Brazil, prompting it and like-minded allies such as Colombia and the United States to turn up the political pressure on Venezuela.

Desperate Times

For Venezuela's government, the decline in petroleum income represents an existential crisis. Oil provided nearly all of its export revenue, and it is the glue that holds society together. Without it, the economy, public services and political stability fall apart. Over the past 18 months, oil production has fallen by nearly 50 percent to 1.1 million barrels per day (bpd).

The decline is significant enough that tiny neighbor Guyana — which until several years ago received minimal investment for exploration and production — could produce more crude than Venezuela within a decade. Complicating matters even more, Chevron Corp. is considering pulling out of a joint venture with Petroleos de Venezuela (PDVSA), the state oil and gas company. Even if Chevron pulls out slowly, the move would cost Venezuela about 100,000 bpd of oil production, which would not soon be replaced.

In addition, oil workers continue to immigrate in droves, production and refining infrastructure is failing and not being replaced, while the PDVSA is struggling to meet Chinese debt payments with oil shipments. The government of President Nicolas Maduro is looking at a further drop in oil income in 2019, as these pressures worsen.

A Survival Strategy

To save the day, Caracas is turning to its mineral-rich hinterland. Illicit mining, particularly of gold, has long been common in the east and southeast. In 2016 and 2017, the government tried to entice foreign firms to come to the Orinoco Mining Arc, an area of south-central and eastern Venezuela rich in gold and other minerals. But foreign companies were wary of making sizable investments with the military-run mining firm Camimpeg amid the country's rapid economic collapse.

The illicit mining has now become a key revenue stream for the state, and recent events point to the government's growing dependence on it. In 2017, Stratfor received an unconfirmed report that the government was dredging areas in the Guri Dam flood plain in Bolivar state for gold and other minerals. In 2018, the U.S. Treasury Department enacted sanctions barring persons and companies subject to U.S. jurisdiction from trading in Venezuelan gold. The department targeted those exports because it believed they were an important source of funding for the Venezuelan government. 

As part of its survival strategy, the government is expanding its power over wildcat miners in these lawless areas. Military units and commanders have long been accused of charging illegal miners a "tax" for operating in areas under their jurisdiction. But over the past year, the National Liberation Army (ELN) — a Colombian leftist militant group — has expanded into parts of Venezuela hundreds of kilometers from the Colombian border. The militants took control of mines operated by criminal groups in the Tumeremo and El Bochinche areas of Bolivar state — supposedly with the blessing of Venezuela's government. Colombian President Ivan Duque and a U.S. Treasury Department official said in October that the ELN was involved in illegal mining on behalf of the Venezuelan government. Through the ELN, the government is allegedly trying to bring more illicit miners and their mineral production under the state's control. 

A Not-So-Good Neighbor Policy

Venezuela's shift toward illegal mining revenue is bad news for Guyana. With the government in Caracas encouraging illegal production, miners will spread beyond Venezuela's borders. Earlier this year, reports indicated that Venezuelan criminal gangs were laying claim to mineral deposits in western Guyana. The groups also reportedly engaged in extortion against the local residents and killed those who didn't comply with their demands. It's unclear whether these miners were acting on behalf of the government or were simply moving out of areas where the ELN is expanding its control. Still, the government's growing demand will likely spur more Venezuela-based miners to go after a share of Guyana's natural wealth. 

And Guyana is unlikely to respond effectively. Its armed forces are too small and poorly equipped to decisively challenge illegal mining along its western border. But southern neighbor Brazil, which is also likely to see more interlopers, has the capacity and will to challenge Venezuelan-sponsored illegal mining. Its northern state of Roraima, which borders Venezuela's Bolivar state, is most likely to see any spillover of miners.

The administration of President-elect Jair Bolsonaro, who takes office in January 2019, will be hostile to the Venezuelan government, and it will try to build momentum for regional action to pressure Venezuela's government to leave power. Duque, a conservative president, will join Brazil's new administration in looking for ways to challenge Maduro's government. The spread of Venezuela-based illicit mining could be such a trigger for more urgent action. One option is regional sanctions from Latin American countries, or Colombia and Brazil could urge the United States to hit government figures or institutions in Venezuela with heavier sanctions. On a tactical level, rising illicit mining in Roraima by violent criminal groups could drive Bolsonaro to deploy military and police forces against them — directly affecting the economic interests of Venezuela in the process.

Though the United States, Brazil, and Colombia are all looking for ways to increase pressure on Venezuela's government in 2019, Washington will likely lead the way. The United States is already considering placing Venezuela on the State Department's list of state sponsors of terror, particularly because of its close cooperation with Colombian militant groups. Such a designation would make Venezuela's already unattractive oil and gas sector an even riskier proposition for potential investors. This would exacerbate Venezuela's oil production decline and compel political figures in the country to find alternate sources of revenue to enrich themselves and keep the government functional. Brazil and Colombia will find ways to curb migrant flows into their territory and, in Brazil's case, limit the spillover of illicit mining. But those country's options for directly pressuring the Venezuelan government are far more limited than those available to the United States. Indeed, Brazil and Colombia will appeal to Washington for heavier sanctions on Caracas or the implementation of domestic measures, such as increased scrutiny of Venezuelan financial transactions within U.S. borders.

Editor's Note

This assessment was updated a few hours after publishing to add additional context to the conclusion. 

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