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contributor perspectives

Jul 21, 2017 | 15:32 GMT

7 mins read

Making a Safe Bet on Venezuela's Future

Board of Contributors
Mike Rosenberg
Board of Contributors
The question for multinational companies active in Venezuela is how to handle the country's current crisis.
(RONALDO SCHEMIDT/AFP/Getty Images)
Contributor Perspectives offer insight, analysis and commentary from Stratfor’s Board of Contributors and guest contributors who are distinguished leaders in their fields of expertise.

Over the past few weeks, Venezuela's economic and political circumstances have gone from bad to worse. Thanks to a series of events — the death of the charismatic Hugo Chavez, a sudden drop in oil prices in 2014, and gross mismanagement by President Nicolas Maduro, to name a few — the country has been mired in crisis for years. And now, as members of the Maduro administration begin to turn on one another, it remains unclear when the country's troubles will end.

The most recent wave of protests against Caracas has entered its fourth month. Nearly 100 people have died, the ruling elite have begun to break ranks and the country seems more divided than ever. Maduro's administration, moreover, is trying to push through changes to the constitution, and the opposition-led parliament has held a plebiscite calling for him to step down.

Meanwhile, the state appears to be running out of money because of a drop in oil prices. Since Venezuela produces an average of 2 million barrels of oil per day, the $50 dip has likely resulted in a loss of as much as $10 million per day, opening a $36 billion hole in Caracas' annual accounts since 2014. To make matters worse, Venezuelan output has fallen as state-owned energy giant Petroleos de Venezuela (PDVSA) struggles to pay its bills.

Complicating matters even further, China lent as much as $60 billion to Venezuela during the Chavez years, and it is not at all clear that those loans will ever be repaid. Though China secured its loans against future oil production, it may have a hard time collecting on the debt as PDVSA implodes, particularly if an opposition-led government does not recognize the loans as sovereign debt since they never received parliamentary approval.

Time for an Intervention?

As Venezuela's opposition squares off against the Maduro government, the prospect of foreign intervention will become an increasingly likely proposition. Of course, it is hard to imagine China forcefully intervening in Venezuela to protect its investments. It is even harder to imagine the United States looking the other way if it did, although Washington did just that in 1902 when Britain, Germany and Italy imposed a naval blockade on Venezuela citing unpaid debts. In the event of a massive failure of governance in Caracas, it is easier to picture the United States stepping in itself, invoking the Roosevelt Corollary to the Monroe Doctrine to occupy the country and return power to its parliament.

In his annual speech to Congress in 1823, U.S. President James Monroe explicitly referenced the importance of the newly independent states of South America. Pointing to European monarchies and alliances, he emphatically stated that the United States "should consider any attempt on their part to extend their system to any portion of this hemisphere as dangerous to our peace and safety." These words became the foundation of the Monroe Doctrine, and they have been a fundamental tenet of American foreign policy ever since. Teddy Roosevelt later extended the Monroe Doctrine, embracing the idea that the United States would intervene in the internal affairs of other countries in its hemisphere in "flagrant cases of … wrongdoing or impotence."

Venezuela is clearly one such case, and there is an argument to be made for intervening in the country in order to protect its people from a government that no longer recognizes the sovereignty of the elected National Assembly. But this approach is not without its flaws. If an initial intervention were to fail, the United States could find itself caught in a drawn-out guerrilla war that, in the end, may actually generate support for Maduro and his allies.

A better solution would be for the Organization of American States (OAS) to step in without the help of U.S. troops on the ground. Founded at a conference in Bogota in 1948, the group was established to encourage security cooperation in the region. Over time, the OAS has added economic and social development, the protection of human rights and the promotion of democratic governance to its core objectives. Yet while an OAS intervention might make sense from a geopolitical standpoint, it seems unlikely given the conflicting political agendas of its members and the danger of setting such a precedent.

Geopolitical Analysis Through a Business Lens

The question for multinational companies active in Venezuela, then, is how to handle the current situation. Many are asking themselves whether they should stay in the country and continue running a business that is no longer making money, or consider withdrawing and writing off the assets and good will that will certainly be lost in the process.

Regardless of each firm's answer, Venezuela's case highlights the importance that international companies should place on following geopolitical trends in the places they do business. It is also a good example of a framework for considering geopolitics, loosely based on accounting terminology, that I find to be particularly useful when speaking with businesspeople.

Company executives routinely look at their assets. On one hand, firms have fixed assets such as land, buildings and equipment that are bought for long-term use and often can't be quickly converted into cash. On the other hand, current assets are goods that are expected to be used within a year. The same thought process can be applied in a company's framework for geopolitical analysis, replacing assets with aspects of a country or region's geopolitical circumstances.

We can loosely group these aspects into three categories, taking some liberties with respect to the principles of accounting. In the first category are fixed aspects — things like topography, natural resources, location and history — that will change only over the span of many decades or centuries, if at all. Venezuela, for instance, boasts the world's largest oil deposits, a convenient location near the giant U.S. market, a temperate climate and abundant water supplies. In other words, it has the potential to be very, very rich.

In the second category, meanwhile, are current aspects, or features that will likely change within the next few years (an extension of the timeline accountants use for current assets). These include the government in power, the country's position in the economic cycle and the more volatile political issues making headlines. In Venezuela, the ongoing conflict between the opposition and the Maduro administration, the persistent protests and the possible collapse of PDVSA are all current aspects.

In geopolitical analysis, there is also a third group of aspects that falls somewhere between the first two. These semi-fixed aspects are subject to change over more than a few years, and though they normally behave like fixed aspects, they can sometimes evolve abruptly. In Venezuela, the government in power, the country's advanced industrial fabric and a well-trained labor force are all semi-fixed aspects.

Making the Business Case

From a managerial standpoint, the strength of this framework lies in its ability to isolate what is fickle and ambiguous from what is certain and steady. This, in turn, allows executives to focus their time and resources on the in-country factors that are most important, enabling them to perform a more targeted risk analysis.

An international firm with a history of involvement in Venezuela, for instance, might choose to remain engaged in Venezuela if it can find a way to do so without giving the appearance of propping up or siding with the Maduro government in its fight against the opposition. After all, Venezuela's fixed geopolitical aspects almost guarantee that in the longer term, the country will be prosperous sooner or later. The business case for such a strategy, then, would look ahead to a post-crisis Venezuela and think through the benefits a company might enjoy by being seen as a source of support for the country at such a critical time in its history.

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