assessments

The Cocaine Ties That Bind Colombia and Venezuela

8 MINS READSep 12, 2018 | 09:00 GMT
A farmer shows cocaine base paste made from coca leaves at a clandestine farm next to the Inirida River in Colombia during September 2017.

A farmer shows cocaine base paste made from coca leaves in a "cambullon" (a small lab to produce the paste) at a clandestine farm next to the Inirida River, Guaviare department, Colombia, on Sept. 25, 2017. The illicit drug trade affects both Colombia and Venezuela.

(RAUL ARBOLEDA/AFP/Getty Images)
Highlights
  • South America's cocaine trade will directly and indirectly influence security developments in Colombia and political developments in Venezuela over the next several years.
  • In Colombia, the government's new policy of forcefully eradicating coca plants will worsen the ongoing competition among criminals, who could threaten oil and gas activities in central and eastern Colombia.
  • U.S. investigations of drug-related crimes by Venezuelan government officials will keep Caracas united for now, and the government will also emphasize the trade links that earn it export revenue and future loans.
  • Caracas will face a longer-term threat if bondholders and arbitration claimants demanding payment organize to seize the country's energy export, transport and refining assets.

Editor's Note: This assessment is part of a series of analyses supporting Stratfor's 2018 Fourth-Quarter Forecast. These assessments are designed to provide more context and in-depth analysis on key developments in the coming quarter.

Colombia and Venezuela share the problem of the illicit drug trade, but the ramifications of such trafficking could not be more different for the next-door neighbors. From the United States' point of view, Colombian criminality and Venezuelan authoritarianism are two looming foreign policy problems that are linked by the cocaine trade and that require vastly different solutions. In Colombia, a spike in rural violence is likely to occur in the coming years as criminal groups contest areas abandoned by the Revolutionary Armed Forces of Colombia (FARC) in its peace deal. Some FARC leaders will likely return to a life of crime, exacerbating the violence already occurring. Over the border in Venezuela, government officials — some under investigation by U.S. authorities in cocaine-trafficking and money-laundering cases — will band together in the face of increasing internal threats to cling to power and preside over a political and economic meltdown that will continue to induce mass migration. In the end, Bogota might be well-placed to apply a steady hand to some of the problems stemming from drug trafficking — in stark contrast to its ailing neighbor.

The Big Picture

Colombia's criminal groups and Venezuelan political officials are connected to one another by the cocaine supply chain. Colombian groups produce coca and refine it into cocaine, and some Venezuelan elites profit from its transit through their country. Though government action has weakened Colombia's insurgents and other drug traffickers, the cocaine trade remains a key, illicit industry that will continue to affect both countries.

A Manageable Fight

Although Colombia is undergoing a major transition with a new government and a new peace deal, renewed violence appears unavoidable. The FARC has splintered between a group of roughly 6,000 militants who have chosen to disarm and another collection of several hundred who have remained active as criminal groups. The only other organized militant group in the country, the National Liberation Army (ELN), represents more of a periodic nuisance to the state (instead of an existential threat), although it perennially threatens oil and gas companies and public transport activities in eastern and southwestern Colombia.

Since 2016, smaller criminal groups once held at bay by the FARC's dominance have begun moving into areas that the group vacated when it demobilized in accordance with the peace agreement. Now, the ELN, the Popular Liberation Army, the Clan del Golfo and others are contesting territory, increasing the frequency of violent confrontations. Most of these clashes will occur in remote, rural parts of the country where coca cultivation and mineral extraction occur and criminal groups can operate with impunity.

The government's new policy of forced coca eradication will also contribute to the rise in violence. Under former President Juan Manuel Santos, the government slowed the eradication of illicit coca crops, choosing instead to give local people the option of voluntarily substituting them with legal crops. The government also halted operations to spray defoliants on coca bushes from the air due to the local health risks. But President Ivan Duque intends to reinstate such spraying campaigns and to forcibly eradicate coca due to increases in the crop's production since 2014. The coming operations will inevitably result in clashes between authorities on one side and coca farmers and their criminal patrons on the other, while also spawning other forms of violence as criminal groups seek other forms of revenue, such as extortion. For businesses operating near areas of heavy coca cultivation, the government's campaign could ultimately make them a target of criminals.

The rise in violence will largely affect businesses in oil and gas exploration and production, the agricultural sector, and public and private transportation. The areas of the country that will suffer the most include Choco and Narino along the Pacific coast; Antioquia and Choco's Caribbean coast; Caqueta, Cauca and Meta in the country's center; and places along the Venezuelan border, such as Norte de Santander and Arauca. Foreign business interests are at greatest risk of violence in the oil-producing regions along the Venezuelan border, as well as Meta. In these areas, FARC dissidents and the ELN will be the main threats because both organizations have previously extorted money from foreign and domestic businesses, such as oil and gas companies and their contractors, and could do so again as they unite to redouble their opposition to the government.

A map showing the travel requirements for Venezuelans in Latin America.

Nevertheless, the militant groups operating in Colombia's hinterland are much smaller and weaker now, and the armed forces and police are better equipped and organized to deal with renewed violence. An outbreak of brutality by militants or major organized criminal groups is unlikely to last long. Violent clashes might prove to be an irritant, but they will pale in comparison to the savagery during the heights of the insurgency two decades ago.

Digging in Against U.S. Pressure

The Venezuelan crisis, which is indirectly connected to Colombia's militancy by the cocaine trade, is a more pressing issue for the region. As its crisis worsens, tens of thousands of Venezuelans are fleeing for neighboring states every month. The influx is forcing governments in the region to consider more stringent measures to stem the flow — but there's little they can do to address the factors that drive the migration. For years, Washington has pressed for regime change in the form of free elections, which Venezuelan officials have so far refused to allow. Because of the common understanding among elites that abandoning power could result in their imprisonment in Venezuela or the United States, the government in Caracas has become increasingly obstinate about U.S. pressure. President Nicolas Maduro faces an investigation by U.S. authorities over alleged money laundering, while political ally Diosdado Cabello faces investigation for alleged cocaine trafficking. But even if internal dissent continues to rise amid the threat of far-heavier U.S. sanctions, the ruling party is likely to remain united.

On the outside, the worsening crisis will draw the world's attention for two reasons: mass migration and declining oil production. The drop in output will affect oil markets and foreign stakeholders, such as companies involved in arbitration disputes with Caracas and holders of Venezuelan debt. As its economy collapses under the weight of hyperinflation and a lack of foreign currency to fund imports, the exodus to neighboring countries will accelerate. The tens of thousands of new arrivals each month will strain the public services of host countries and increase the risk of communicable diseases such as polio and tuberculosis. Latin American governments will search for ways to slow emigration, but their limited resources and limited enforcement capabilities, as well as the regional laws that facilitate travel between countries, will fail to stanch the flow.

As its oil production plummets, Caracas will emphasize energy shipments to the United States and other key lenders, such as Russian energy company Rosneft and the Chinese market.

As its oil production plummets, Caracas will emphasize energy shipments to the United States and other key lenders, such as Russian energy company Rosneft and the Chinese market. The United States remains the primary market for state energy company Petroleos de Venezuela (PDVSA). Between January and August 2018, oil shipments to the United States averaged about 500,000 barrels per day, totaling about half of the country's daily crude oil exports. However, the figure represents an average decline of about 235,000 barrels per day from shipments in 2016 — a development that has steadily raised global oil prices. PDVSA is currently sealing agreements to raise production from existing wells — in part by taking advantage of the improved cash flow from higher oil prices — but that is likely to only slow the rate of its production decline, rather than reverse it.

In such a situation, Caracas will prioritize imports over foreign bondholder or arbitration payments. Accordingly, defaults on bond payments will accelerate, prompting foreign bondholders to consider banding together to legally seize Venezuelan assets and pressure the country to pay up. Against this backdrop, companies such as Canadian mining firm Crystallex International Corp. will pursue the payment of multibillion-dollar arbitration awards from PDVSA. And after Caracas' nationalization of more than a dozen companies' assets in the mid-2000s, international courts are likely to order the government to compensate foreign companies to the tune of billions of dollars. The government is unlikely to make most of these payments, and that failure could eventually allow creditors to seize PDVSA assets, such as oil shipments and export terminals. In fact, such is the backlog in claims against PDVSA that even Maduro's removal in a coup — or his departure in a negotiated agreement with the United States — is unlikely to end the litany of cases against the company.

In Colombia and Venezuela, the role of both countries in the cocaine trade will drive security and political trends, though with vastly different outcomes. Colombia might experience a rise in criminal confrontation, but authorities are likely to ultimately bring it under control. Over the border, however, Caracas' role in facilitating illicit drug shipments to the United States will only cement the Maduro administration's desire to cling to power — compounding the problems for the country at home and abroad.

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