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Expropriation Risk: 90 90 86 85 Political Violence Risk: 87 89 86 89 Terrorism Risk: 50 52 54 56 Exchange Transfer and Trade Sanction Risk: 90 90 88 92 Sovereign Default Risk: 90 94 94 96
TREND ▲ OUTLOOK ▲
Venezuela’s constitutional crisis, which now encompasses its political, social and economic crises, entered a new phase following the inauguration of President Nicolas Maduro on January 10. Any hopes that the ruling United Socialist Party of Venezuela (PSUV) may have had for a seamless transition between Maduro’s first and second six-year terms quickly evaporated. On January 11, Luis Almagro, the secretary general of the OAS, and US Secretary of State Mike Pompeo announced their recognition of National Assembly president Juan Guaido as the country’s interim head of state. Guaido, a member of the minority Voluntad Popular (VP) party, does not have a high-level political profile and had only been sworn into his post on January 5. However, citing Article 233 of the Constitution, Guaido and his domestic and international supporters argued that Maduro usurped power on January 10 because his inauguration was the result of elections in May 2018 that were neither free nor fair. The legitimacy of that election was not recognised by the Lima Group of 14 Latin American countries and Canada, and was also rejected by France, Germany, Spain and the UK. Despite the speedy recognition of Guaido and pressure for new presidential elections, Maduro refused to concede the presidency. This created a situation of parallel powers within Venezuela, with Maduro’s position reinforced by internal support from the military high command and external backing from powerful international allies including Russia and China. On January 25, Pompeo appointed Elliot Abrams, a former official during the Ronald Reagan and George W Bush presidencies, to the post of Special Envoy to Venezuela. His responsibility is to co-ordinate regime transition with Guaido. The appointment was sceptically received in some quarters as Abrams has a contentious legacy in Central America, and the move was cited by the Maduro government as further evidence of an undemocratic choreographing of his removal by the Trump administration. The US failed to achieve the unanimous backing of the UN Security Council for recognition of Guaido as Venezuela’s interim head of state at an emergency meeting in New York on January 26. However, in a further escalation of US pressure, National Security Advisor John Bolton subsequently announced oil sanctions on Venezuela. This has long been described as a ‘nuclear option’ because of the catastrophic implications for the people of Venezuela, which relies on oil for 96% of its export income. While it was unclear if the sanctions included export of refined US crude to Venezuela, which is still running at 200,000 barrels a day, they resulted in the immediate freezing of remaining assets held by state oil company PDVSA in the US and required that payment for the 500,000 barrels a day of Venezuelan heavy crude imported for processing in US refineries must be diverted to a special fund reserved for use by an interim Guaido administration. Amid ongoing tension and uncertainty, the United Nations, the Vatican, Mexico and Uruguay all emphasised the need for dialogue.
TREND ▼ OUTLOOK ▼
During Maduro’s presidential campaign in 2018, the ruling PSUV pledged to its supporters on the left that it would step up expropriations from the private sector. Once Maduro was re-elected, however, the urgent need to boost government revenues appeared to force it in a different direction. In August, for example, the government announced that it would sell public assets in the aviation and transport sector. Early instances took place very much under the radar with little public awareness, and the gathering political crisis soon limited further moves towards partial privatisations. The prospect of the opposition taking power from Maduro now raises the possibility that a much more extensive and overt period of privatisation may quickly follow a change of government.
The stand-off between Maduro and Guaido, together with their respective international allies, significantly raises the risks of political violence. This could include anti-government street protests, repression by security forces loyal to Maduro, clashes between different elements of the security sector, or between pro- and anti-government groups, or a combination of any of these. The recent visit to Colombia by the head of the US Southern Command has put the Venezuelan armed forces on high alert. President Maduro has also called on civil defence forces and militias to defend the revolution in the event of a US intervention.
Terrorism has not traditionally been an aspect of either the pro- or anti-government movements, but the possibility of terrorist violence will increase if groups see this as a means of advancing their political cause. If Maduro is forced from office, there is a prospect that armed Chavista cells may link up with left wing insurgent groups in Colombia in an effort to destabilise a new government through the use of terrorist incidents.
The latest US oil sanctions will impede Venezuela’s ability to obtain dollars by forcing a rerouting of oil exports to refineries in China and India. So long as it remains under Maduro’s control, PDVSA may seek to circumvent the sanctions by bartering oil for food and medicine. The EU is extending its sanctions on individual government officials. However, a change of government in Caracas would see the speedy lifting of international sanctions affecting the financial, oil, and gold sectors.
TREND ▲ OUTLOOK ►
Despite a sustained record of debt repayments during the Chavez era and the early years of the Maduro presidency, US financial sanctions in 2017 precluded Venezuela from restructuring its debt. This led to default on 65 billion dollars of repayments on sovereign and PDVSA bonds in 2018, and on loan repayments to China. In December 2018, investors holding dollar-denominated bonds issued between 1998 and 2002 filed suit in New York amid a scramble by bond holders and expropriated multinationals to realise outstanding claims through liquidation of Venezuelan assets in the US. China continues to receive heavily discounted oil exports in exchange for missed payments. The removal of Maduro will further complicate the situation of many creditors as the opposition-dominated National Assembly may choose not to recognise some debt issues by the PSUV government.
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