Tuesday, January 22, 2013

Venezuela: The Consequences of a Delayed Transition

Venezuela's Vice President Nicolas Maduro.

Source: ISN

Venezuela's Supreme Court recently decided to allow Hugo Chavez to remain the country's president without being sworn into office. Given the controversy it aroused, Stratfor considers what impact the Court's decision might have on Venezuela's domestic politics and global energy security.


An ambiguous period is about to begin in Venezuela. Just one day before President Hugo Chavez was to be inaugurated, the country's Supreme Court ruled that because the ailing leader is an incumbent, an inauguration is merely a formality. The Supreme Court ruling means Chavez's fourth consecutive term has effectively begun and Nicolas Maduro will continue as both the vice president and the acting president.

Without domestic or external pressure forcing a transition, Chavez's inner circle now may take its time before calling new elections. The ruling United Socialist Party of Venezuela, commonly known by its Spanish acronym, PSUV, may use this time to address pressing economic issues and to further consolidate support behind a successor, or a team of successors, before risking a democratic transition. But the delay is also a sign of weakness, signaling that the unity of the ruling party might be tenuous. The longer the party waits to begin the transition, the more precarious Venezuela's economic, political and social situation will become, and instability in Venezuela would have a huge impact throughout the region and in global energy markets. At the same time, a haphazard transition in which the country's economic challenges and the ruling party's internal problems are not addressed could be even more problematic.


The run-up to the inauguration was perhaps the opposition's last opportunity to force a transition on its own terms, but with minimal domestic and international support, it was unable to do so. Because the stakes are so high in Venezuela, all of the regional actors, including the United States, Colombia and Brazil, have ignored the Venezuelan opposition's charges that the ruling party violated the constitution, preferring continuity to a potential crisis.

Without an external sponsor, Venezuela's opposition is weak and authority rests with Chavez's inner circle. However, the PSUV's decision to delay the transition suggests that it might be weaker and more divided than expected. The party could need more time to resolve several outstanding issues, especially the balance of power among politicians weakened by Chavez's removal from the political scene.

Venezuela is facing an economic crisis unless serious reforms are enacted. The bolivar is overvalued and the country's fiscal deficit is worsening. Both of these issues are contentious and, if not handled carefully, they could affect Venezuelans and potentially stir up social unrest. Fearing a devaluation, the value of the U.S. dollar has increased fourfold against the bolivar on the black market since Chavez's health deteriorated in December. Estimates are that the government needs $1.5 billion monthly to maintain the bolivar at its current exchange rate. Without an adjustment, Venezuela's access to foreign currencies will continue to plummet, and without access to dollars, Venezuela will be unable to afford its import bill. If that happens, food imports, which have skyrocketed over the past two years, would become increasingly scarce. Already reports have emerged indicating that it is becoming difficult to import food because of low dollar availability. Given the rate of economic decline, if the transition period lasts more than several months, the ruling elite may be forced to devalue before elections.

Venezuela's leaders have two options: They can either devalue the bolivar or divert public funds away from social spending and toward supporting the value of the currency by making foreign exchange more readily available. Decision-makers could also soften the blowback and put off the date of addressing the country's distortionary economic policies by borrowing from abroad. China, which enjoys a highly advantageous economic relationship with Venezuela, has offered to step in and provide an $8 billion line of credit to help avoid an economic crisis. Since social spending is unlikely to be lowered if an election is imminent, the inner circle may devalue the currency and borrow from abroad but continue spending, which would temporarily relieve but not solve the country's economic problems.

Devaluations have happened in the past and, though risky, they can be managed somewhat. While the government would have preferred to devalue after, not before, the election, it may have no choice. The worst-case scenario for the ruling party would be an economic crisis during an election. As a result, it may prefer to enact moderate, piecemeal economic reforms before initiating any transition.

Another factor that could explain why the ruling elite might try to delay the transition is a lack of unity within the military, the party, the energy sector and among economic policymakers. In broad strokes, Diosdado Cabello represents the military, Nicolas Maduro represents the party, Minister of Economy and Finance Jorge Giordani represents the economy and Rafael Ramirez represents the energy sector. The opposition is weak, and the PSUV could capitalize on the momentum generated by the recent presidential and gubernatorial elections and the sympathy generated by Chavez's illness. However, without full unity and support, even a weak opposition would have a better chance against a divided PSUV. As a result, it is in the inner circle's interests to delay the transition until cohesion is ironclad.

The difficulty will be that the longer the party waits, the harder it will become to hold the various factions together, assuming the economic situation continues to worsen as it has over the past few years. Although Chavez handpicked Maduro, the vice president will need to take decisive action to shore up his position or else his rule will be tenuous. Each inner circle faction will be reading the other factions' moves and working to protect its own interests in the post-Chavez political environment. This political jockeying may create a shaky transition period.

The next few months will be defined by competition and negotiation between the various groups within the PSUV. If they can confidently call for elections, Maduro likely will win and assume uncontested control over the country for the next six years. Maduro would have an official mandate and would attempt to keep things afloat as his predecessor did. However, if Chavez's inner circle fails to unify behind a single leader, all of the decisions needed to keep the country's economy functional -- currency manipulation, decreased social spending and keeping state energy firm Petroleos de Venezuela stable -- will become more difficult. Chavez is leaving behind weak institutions since he relied on his persona to get things done. Thus, it is no surprise that a unified and smooth transition has proved difficult to accomplish.