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

9 comments

  1. I don’t agree to be honest, once Maduro has gone, it still has the educated population, the infrastructure – probably some of the best in Latin America and everything will be dirt cheap – the Yanks, Chinese and the EU will be in there to pick all the goodies off.

    The problem was and has always been its corruption and the violent population – even in its heyday it was dangerous – not as dangerous as it is now but it was never ‘safe’. As for the migration out – a lot of those people will be back once it gets going again, you’ve seen all those hats and jackets they wear – never met a more xenophobic or nationalistic bunch than the Venezuelans.

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    1. It all hinges on Maduro being gone. If he makes it out of 2020, do you still see his days as numbered? If so, what event or point in time would indicate to you that Maduro has secured his hold on the country?

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      1. Now, that’s true – of course the longer he lasts the longer the road back – but I can’t see it being left to its own devices by the powers-that-be once he is actually gone. As you said though, when that may happen is anyone’s guess.

        As long as the sanctions remain in place and the people are going without, he will never be ‘secure’ in the way Castro was in Cuba – if it was Chavez, I would go along with the comparison with the enigma that is Fidel being in a more secure position but Maduro is dead mans shoes – it will depend on the military and keeping them sweet, I think he could go anytime, even past 2020.

        I don’t know if you remember 1990 and the end of the Soviet Union and Apartheid South Africa – one minute they were there and literally the next minute, they were gone and it was over. I am hoping Boris Johnson goes first!

        Liked by 1 person

  2. Venezuela’s best bet right now is for Maduro to go full Deng Xiaoping. Say we fucked up but now are going to open up and abandon all intereference in the economy. It’s still going to be the Bolivarian Republic though and socialism with venezuelan characteristics. Incremental benefits will immediately be felt and it would shore up and legitimise the regime. Then I remember that this will never happen because Maduro is a moron and the regime have the smarts of glorified drug dealers, because that’s what they are.

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    1. I agree with everything except that Maduro is a moron. He has proven to be brilliant at staying in power by brutalizing the population and dividing the opposition. For now that will entail quietly embracing capitalism, but not particularly effectively.

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  3. The region hasn’t seen right wing death squads since the 20th century? That’s a blatant lie coming from a man who lived in Colombia.

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    1. We could go back and forth on this, but I have removed that sentence because that if I put on my objectivity hat to judge it as written, I would concede your point.

      However I imagine you would concede that the state-directed ideological violence of the 1970s is a different animal than for-profit narcoterrorism. I was in Colombia for the 2010 election, before Santos’s pivot to the dove brand, and at that time being a Mockus or Petro militant was not putting your life in jeopardy. The Operation Condors, Videlas and Pinochets were relics of the Cold War. Today, the opposition activists most likely to suffer police torture and forced disappearances are those in Venezuela and Nicaragua.

      That was my thinking, but as I said, I will concede. And I’d also take issue with “blatant lie.” I appreciate your holding me to account, because it makes the blog better. But give us the benefit of the doubt. Chalk it up to a careless error, as opposed to malice.

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      1. “For profit narcoterrorism” is a very reductive way to talk about the most dangerous country for trade unionists. Just because a group is financed by drug trafficking, it doesn’t mean they don’t have ideological motives. Perhaps those places are worse for the opposition, but that doesn’t take away the right wing terror that still takes place in Colombia.

        Liked by 1 person

  4. In case you missed it, Maduro has orchestrated a takeover of two major opposition parties, Primero Justicia and Accion Democratica. A great piece on Caracas Chronicles, While the Giant Sleeps, Maduro Goes All In, explains how big of a move this is.

    “[In] the arena of political competition, … the regime is closing a phase of erasing the domestic threats created in January 2019 when Juan Guaidó took his oath as caretaker president. The cohesion and drive to protest the opposition reacquired at that moment, and especially its chances of producing a break within the Armed Forces, are all but deflated now. The leadership is gone, with little support in the polls, and unable to mobilize protests. The April 30th failure and the Macuto incident showed the opposition has no influence in the military. The centrifuge forces inherent to the opposition alliance are working again to dissolve the existing links under the pressure of reality: the opposition failed and democracy is dead. The next parliamentary elections are just another wedge to divide what’s left of the opposition and has a very high potential of displacing Guaidó from the Speakership, and giving the AN back to PSUV. This means not only taking Guaidó out of the picture, but also accessing parliament approval for loans and contracts with foreign oil companies, for instance.”

    For those who still believe change is afoot, chavismo controlling the legislature and gaining legal approval for loans and foreign oil contracts will be an undeniable nail in the coffin.

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