Deterioration of democracy, humanitarian issues, and an economic crisis in Venezuela have the potential to cause an implosion that destabilizes the greater region. As The Cipher Brief’s Erica Evans reported last week, the government is running out of money and resources; food, water, and basic necessities are scarce; and while the President is cracking down on protesters, the opposition is trying to remove him from office.
Colombia is likely the most concerned about the crisis within its eastern neighbor. The two countries share not only a border but also substantial trade flows and other economic ties. Next comes all of the countries in Latin America and the Caribbean that are reliant on Venezuela’s Petrocaribe for subsidized oil (which, as The Cipher Brief reported last month, is essentially a cheap credit program). At least 10 Caribbean countries still use the program, reports Americas Quarterly columnist Oliver Stuenkel. This includes Cuba.
Michael Shifter, President of the Inter-American Dialogue and Cipher Brief expert, says the Cubans are very worried about a change or collapse in Venezuela’s chavismo government, especially because there has probably already been a reduction in Petrocaribe subsidies to Cuba. It is important to note that although Petrocaribe ties have been weakened across the region, they are not broken. Shifter explains that this shows some continuing political support for Venezuela.
Brazil and Argentina, on the other hand, seem to be moving in a different direction. Brazil’s leftist president Dilma Rousseff – a Venezuelan ally – was suspended from office last month, after the Senate voted to move ahead with her impeachment trial. In Argentina, a new center-right government with an ambitious reform-minded finance minister is bolstering open markets and liberal democracy.
While both countries have a clear stake in ensuring Venezuelan democracy and the economy do not collapse, they have been somewhat reluctant to step in. This aversion to action embodied in most countries in the region has led Secretary General of the Organization of American States (OAS) Luis Almagro to make unprecedented moves.
On May 31, Almagro published a 132-page report calling for a Permanent Council meeting of OAS members this month, in response to the situation in Venezuela. The meeting is intended to decide whether to invoke the Inter-American Democratic Charter, which could lead to Venezuela’s suspension from the organization.
At an event at the Inter-American Dialogue in Washington, Venezuela’s Ambassador to the OAS, Bernardo Álvarez Herrera, claimed the report is not official and Almagro has no right to take this vote to the Permanent Council because the member states – not the Secretary General – are supposed to be the decision-makers.
However, Shifter told The Cipher Brief just because Almagro’s decision is not standard practice does not mean it is invalid. “There may be sort of a legal dispute […] but my own sense is he can do it, but it’s not common practice in the OAS because of deference to member governments,” he said.
In addition to OAS involvement, Paraguay requested a meeting last month of Mercosur foreign ministers to discuss Venezuela. Mercosur is a customs union and free-trade bloc made up of Argentina, Brazil, Paraguay, Uruguay, and Venezuela. Stuenkel points out that it took one of the region’s smallest countries – that is, Paraguay – to call a meeting, because of a lack of action from the region’s heavyweights.
Regional leaders will not be able to avoid the problem for much longer. The OAS meeting and a potential Mercosur meeting will force countries to decide whether they want to uphold democratic values and support open-market economics or allow Venezuela to continue its march toward implosion. Moreover, world leaders at the recent G7 Summit in Japan voiced their concern and asked Venezuela to resolve the current crisis and “respect fundamental rights, democratic processes, freedoms, and the rule of law.”
So far, Venezuela has not responded positively. The administration, led by President Nicolás Maduro, is doing all it can to avoid a referendum on Maduro’s presidency this year – even though the economy continues to spiral downhill, citizens face food and other basic necessity shortages, power outages are common, violence is intensifying, and more and more people are calling for Maduro to step down.
The National Electoral Council (CNE) must decide whether the opposition has collected enough signatures to instigate the referendum process. But the council, which is controlled by the executive branch, keeps delaying a ruling. “My sense is that the government – Maduro – has made it very clear that there will not be a referendum,” commented Shifter.
Cipher Brief expert Verónica Colón-Rosario says, “Venezuela has indeed turned more authoritarian since Maduro’s election in 2013.” She points to Maduro’s disregard for the National Assembly, which is led by the opposition, and his assigning of 12 seats in the Supreme Court to his supporters as evidence of his authoritarian crackdown. With such a government in power, meaningful reform appears a distant dream.
Still Ambassador Herrera does recognize the problems his country faces: The oil price drop has led to a 70 percent decrease in oil income and a 60 percent decrease in imports, and now the government cannot sustain expansive social programs and subsidized foreign exchange rates.
Yet the government’s exchange rate controls seem to be political – rather than economic – maneuvering, meaning that the system is unlikely to change as long as the current administration remains. Fabiana Perera, a Cipher Brief expert who studies social spending in resource-dependent countries, explains, “Devaluing the currency now would cost the government of Nicolás Maduro a lot of friends: all the people benefitting from the preferential exchange rate and the people that are somehow able to buy goods imported at this cheap rate.”
Without an exchange rate overhaul, Venezuela’s currency will continue to be overvalued and inflation – which is already extremely high – will skyrocket, further reducing Venezuelans’ purchasing power. At some point, the economy is likely to default, predicts Latin American economist and Cipher Brief expert Monica de Bolle. “It’s a completely collapsed state […] It has no room for maneuver anymore,” she says.
Default – although likely in the future – may not be imminent. Founder and Chairwoman of Strategic Investment Group, Hilda Ochoa-Brillembourg, says China is expected to lend to the current government to help it avoid defaulting on its international debt this year. Whether this is sustainable remains to be seen.
Meanwhile, the real losers in the situation are the Venezuelan people, who suffer from “heightened confrontation between the government and protesters, pervasive insecurity, and the scarcity of medicine and food,” says Colón-Rosario.
The people’s suffering and the government’s mismanagement of the economy are already creating repercussions across the region. A Venezuelan collapse that destabilizes places like Colombia and Cuba – two countries of importance to the U.S. that continue to grapple with their own internal problems – is a worrying possibility.
Kaitlin Lavinder is an International Producer with The Cipher Brief.
