Don’t Think about Venezuela

My inbox indicates some people are curious about investing in Venezuela right now, that the time is right to get in early.

It’s not.

When people talk about investing, they mean one of two concepts. The first is a strictly financial investment in which they buy something (securities, commodities, etc.) and do nothing in hopes of a return. The second is an engaged investment, in which they buy something and then spend a lot of time working on it to add value, like a restaurant or real estate. It’s an investment of money AND blood, sweat and tears.

I don’t think anybody is interested in the passive, strictly financial opportunities. All of Venezuela’s government and state firms’ bonds are in default. Maybe a professional distressed bond investor or two is buying right now, but don’t ask me how to evaluate those.

There is a Caracas Stock Exchange, priced in bolivares, and probably only interesting to the kind of shrewd investor who bought Petros as a crypto play when they came out.

No, most people interested in Venezuela are thinking about engaged investments in which they would start a business there. The dream hinges on the assumption that the end of chavismo is near, and once things go back to the way they used to be … well, Venezuela will be rich again like it used to be. And if you get in early, you can ride the wave to wealth and whiskey at the beach.

Venezuela will Never be Rich Again

 “Never” is a strong word, but even if the country’s politics were to change 180 degrees overnight (which it won’t), the gaudy consumerist culture it was known for in Latin America won’t be back in my lifetime.

GDP peaked in 2011 at $334 billion. It is now $70 billion. Its economy is the size of Maine’s, but with 20 times as many people. You don’t need me to tell you it’s basically a subsistence economy, but it’s important to quantify opportunity. The total economy peaked at about the size of Missouri, and now it’s Maine. For you Euros, it peaked at Denmark, and now it’s at Luxembourg.

Population peaked at over 30 million and has since fallen to under 25 million. That’s a 17% drop in total workers and consumers. Even before accounting for the final death tally from Covid-19, it’s hard to imagine a country without a fifth of the (often most educated) people restoring national production to what it was before.

The price of oil peaked at over $120 in 2008, but hovered north of $100 until 2014 and has since fallen by over 70%. That crash is permanent. It wasn’t due to a financial crisis or global demand, but innovation in global supply. The viability of shale technology put a new ceiling on the price of oil. Anytime it gets higher than $50, you’ll see drillers from America’s shale patch come online to meet demand.

Venezuela’s oil production peaked in the 90s before Chavez, but stayed relatively high until soon after the new price ceiling. Today, at 594,000 barrels a day, production is just 17% of its peak. That production is not easily recoverable. It requires massive investment in infrastructure and years if not decades to materialize. And the kicker, there is no appetite in the market!

Depressed oil price and anemic production aside, the non-oil private sector was decimated under Chavez and Maduro. Those industries took generations to build. If a “V-shaped recovery” in oil doesn’t materialize, and it won’t, the others won’t either.

All of the metrics are discouraging, some with no viable path back to glory. And the kicker is, any viable path depends on a political transformation.

Democracy has Lost

People have been hoping for the fall of the PSUV government for 20 years. The most serious challenges that threatened to topple the regime were the 2002 coup, the 2014 protests, the 2015 parliamentary election, the 2017 protests and the disputed presidency of 2019.

Now Maduro faces a new challenge, and it may be his toughest to date: Covid-19. Venezuela’s healthcare system had already fallen, so an apocalyptic plague isn’t his greatest threat. The real wildcard is the oil supply glut as the world shelters in place. The price of oil briefly fell below $0 last month, and the price Venezuela can charge is often lower than the cost of production. A complete stoppage in revenue to the kleptocracy seems like it could create a tectonic shift.

While this may be Maduro’s toughest challenge to date, he has been preparing for years. They’ve been delving into wildcat gold mining, drug trafficking and skimming remittances. They have embraced capitalism, albeit quietly. The government has been evading American sanctions, now exhausted, for years.

Maduro has passed all the tests and emerged stronger each time.

What Comes Next?

Even if the pandemic shit hits the fan and Maduro steps down, will the legislature swear in Juan Guaido and hold fair elections? The likelier outcome is Vladimir Padrino, or a powerful cadre of military generals, oversee the installation of a “chavismo lite” government, maybe even with “democracy lite” elections and a “capitalism lite” economy.

But even if a compromise government implements an environment-and-workers-be-damned breed of capitalism, there aren’t enough people to build up a private sector to make up for the new ceiling in oil wealth. Not in my lifetime. Even that best-case scenario doesn’t lead back to what Venezuela was.

Actually, the best-case scenarios are pie-in-the-sky scenarios. One is that a right-wing, Pinochet-style dictator assumes power and implements that aforementioned capitalism while also being showered with billions in aid from the rest of the world. To be clear, I say “best case” only for the economy. Not endorsing political violence.

The even more pie-in-the-sky scenario, my favorite which would deliver the quickest results, is a regional consolidation to Make Latin America Great Again. Colombia annexes Venezuela and policy comes down from Bogota. That would be more effective than a Venezuelan Pinochet, but unlike right-wing death squads, I fully endorse Colombia annexing Venezuela.

In 2016 I wrote an article titled “Why Venezuela is More like Syria than Cuba” which argued that Maduro’s regime would fight to the death before they relinquish power. Where Syrian rulers would face an ethnic extermination, Venezuelan rulers face prison sentences in the States. They’re playing the Prefiero una tumba game.

I was right, but I missed an analogy that has emerged in the last year. Venezuela is most like Russia, where a ruling clique presides over a command economy. Venezuela can be nominally socialist but effectively capitalist, which it is doing at a glacial pace, and thereby survives for a long time. And of course an American antagonist all the way.

Global politics favored Chavez’s rise as the world soured on American leadership under George W. Bush and the war in Iraq. Stunningly, changing sentiment continues to favor Maduro. The rise in right-wing nationalism has little appetite to fix shithole countries, while the leftists are divided. Those most active leftists who might stand up for human rights curiously believe that Maduro isn’t a bad guy, or maybe a victim, that everything is America’s fault. The result it, nobody cares about Venezuela.

Cubans exiled in Florida and beyond hoped and prayed for the fall of Castro for two generations. It never came. At what point did they declare Cuba lost?

When do we declare Venezuela lost? The regime has survived every challenge to date, and each one makes it stronger. I’d be delighted to be proven wrong by history. But I think that if Maduro can survive 2020, you can call the game. He won.

And before you make plans to buy in, think about of one of my favorite quotes.

“You just have to remember that contrarians are usually wrong.” – Jeff Bezos