reflections

Oct 9, 2013 | 01:03 GMT

5 mins read

Venezuela's President Moves to Consolidate Authority

(Stratfor)
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

A reorganization of power is taking place in Caracas. In a move that became publicly known Tuesday, Venezuelan President Nicolas Maduro appointed Minister of Petroleum and Mining Rafael Ramirez as vice president responsible for the economy, unseating Finance Minister Nelson Merentes from the position. Merentes will continue to oversee the country's finance ministry, but he appears to have been ousted from Maduro's innermost circle of advisers. Maduro also traveled to the National Assembly on Tuesday to request sweeping powers to rule by decree, following the example of his late predecessor, Hugo Chavez, in establishing himself as the supreme decision-making authority in Venezuela.

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In the most immediate sense, the Cabinet shift seems to put an end to the discussion of a new foreign exchange system supported by Merentes that would have permitted the kind of open exchange of bonds and currency that was outlawed in 2010. The issue has been under discussion for weeks and would have helped facilitate the provision of U.S. dollars to private companies seeking access to foreign exchange in order to import foreign goods. The trading mechanism would almost certainly have devalued the Venezuelan bolivar rapidly, bringing it closer to the black market rate for currency, which has fallen sharply in the past year to around 45 bolivars per dollar. Indeed, an explicit part of the plan supported by Merentes was to bring the official exchange rate in line with black market rates.

Such a plan would have had a significant inflationary effect in a country that has seen 45 percent inflation so far this year and can probably expect to see inflation nearing 60 percent by the end of the year, even without another devaluation. Not surprisingly, the plan had its opponents, chief among them Vice President for Planning Jorge Giordani. Merentes originally replaced Giordani as finance minister at the beginning of Maduro's presidency when the position was split off from the Planning Ministry, and his appointment seemed at the time to be a sign that the government would prioritize a slightly more pragmatic and less ideological approach to economic policy-making in the wake of Chavez' death. Given that he remains in his position as finance minister for the moment, it is not clear that Merentes has completely lost influence in economic decision-making, but his replacement by Ramirez in the vice presidency is evidence that his standing has diminished.

From this decision alone we cannot precisely determine Maduro's next moves, but there are several aspects that we can surmise. First, in addition to his ministerial position, Ramirez is the president of the state-owned oil company Petroleos de Venezuela (better known as PDVSA). Because PDVSA is the core of the Venezuelan economy and the country's main industry, its fate is more or less equivalent to the fate of the government, and right now PDVSA is on shaky ground. Production is declining, and the company must transfer tens of billions of dollars annually to the state to finance government spending programs. Over the years, PDVSA has taken a leading role in a significant portion of government-led economic programs, ranging from the importation and distribution of food to agriculture development and electricity projects. In short, the company is key to government survival not only because of its revenues but also because it handles the logistics of the state's social programs.

Ramirez's assumption of the leading economic role in Maduro's inner circle may be an indication that PDVSA is set to continue and perhaps deepen its integral role in Venezuela's economic system. There will still likely be a devaluation of some sort, though perhaps not as drastic as it would have been under the recently discussed exchange system. A devaluation would help ease financial pressure on the company by giving it a better exchange rate for the dollars it brings in from exports. However, any additional imposition on PDVSA's finances or logistical capacity will make the energy sector in Venezuela even more dependent on foreign investors, and although Maduro has had some luck in negotiating extra financing for projects led by Western energy investors, the majority of interest seems to be coming from China and India. Even Russian companies seem to be backing away from Venezuela's projects, with both LUKoil and Surgutneftegaz announcing they would back out of a consortium, possibly selling their stakes to Russian state-owned energy firm Rosneft.

In addition to the Cabinet reshuffle, Maduro's request on Tuesday that the National Assembly pass the aforementioned enabling law could raise the stakes considerably for the president. Used four times by Chavez to pass around 200 laws by presidential decree, Venezuela's enabling law allows the president to enact reforms without having to pass legislation through the National Assembly. Securing these extra powers now will give Maduro more maneuverability later and will help to circumvent possible political fractures within his own party by minimizing legislative debate on controversial moves. The move is a gamble, however; although it gives him greater control, it also puts all the responsibility for failures right at the doorstep of the presidential palace.

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