Transitions

Is Venezuela becoming a failed state?

Venezuela remains mired in a political and economic crisis that shows no signs of letting up. But while street protests, soaring inflation, scarcity, and skyrocketing crime are massive headaches, the government can count on still-high oil prices to soothe the pain a bit.

The question that begs asking is: How will Venezuela maintain stability if oil prices drop?

A recent report by the International Energy Agency underscores the challenges the country faces in the short term. The United States has made huge progress in oil extraction thanks to fracking technology. It is set to become the world's largest oil producer by the year 2020, and the global spread of fracking is bound to significantly increase international recoverable oil reserves in the near future. The agency crows that fracking is creating a "supply shock that is sending ripples around the world."

This obviously matters to Venezuela, a country that exports large amounts of oil and little else. Venezuela is increasingly reliant on high oil prices to maintain some semblance of stability. A prolonged drop in oil prices will undoubtedly shake the foundations of the petro-state to its core.

Being an oil producer, Venezuela can earn money in two ways: by sustaining high prices, or by increasing production. (Obviously, if it can do both things, it has hit the jackpot). Fracking threatens the first, and the country has seriously failed on the latter.

Venezuela produces less oil now than it did in 1999, the year Hugo Chávez first came to power. Worryingly, the IEA sees few prospects for increased production. For example, in spite of increasing investment to $22 billion last year, Venezuelan production barely budged. State oil giant PDVSA vows to increase production by 3 million barrels per day in the next six years, but the IEA believes that a combination of the company's inefficiency and its heavy debt burden means the increase will actually be a tenth of that amount.

Two other developments conspire against the future viability of Venezuela's oil industry. The country is increasing sales of crude oil to China, as part of a geo-strategic move the Chávez administration embarked on many years ago. The problem is that the oil being shipped has already been paid for, and the government has also already spent the money.

The other issue is Venezuela's creaking refining infrastructure. Last year, following several accidents at its refineries, Venezuela became a net importer of gasoline and other refined products. In the last part of the year alone, PDVSA bought refined products for $1.5 billion, only to turn around and give it away for practically nothing, thanks to the heavy subsidies that characterize its internal market.

The consensus is that Venezuela needs high oil prices just to stay afloat. But if the fracking oil boom results in low oil prices, what does the future hold for the South American country?

Sadly, Venezuelans have nothing else to fall back on. Its private industry is a shambles, and the country is even importing toilet paper. Years of populism have left the state crippled and heavily in debt. The public deficit reached a whopping 15 percent of GDP last year, even in the context of high oil prices. Most of the spending came in the form of entitlements and subsidies that will not be easily eliminated. Furthermore, the country's current power clique seems particularly inept in dealing with the complicated economic and political conditions it has inherited.

Nicolás Maduro's only claim to legitimacy is that Hugo Chávez chose him. Now he is left with the thankless task of dealing with the Chávez mess. He has surrounded himself with a Cabinet composed of many of the same old faces, and neither his policies nor his rhetoric suggest any shift toward the type of solutions that could steer Venezuela away from the precipice.

The problem for Venezuelans is that there is no great reformer in the governing party. And while opposition leader Henrique Capriles would undoubtedly steer Venezuela toward greater economic freedoms, there is little he would be able to do if the price of oil were to tank.

A long period of low oil prices spells doom for Venezuela's political sustainability. Without high oil revenues, basic services would practically disappear, and the potential for instability would be enormous. Already the country is stuck in a state of undeclared in civil war, and there are claims that drug smuggling has permeated the higher echelons of the government.

Venezuela has so far avoided the fate of its neighbor Colombia, a country still deep in a long civil war with Marxist guerrillas and drug cartels. This is largely due to the deep pockets oil has afforded the government, which allowed for state presence even in the most remote corners of the country. It is hard to see how that presence could be maintained if oil rents were to dry up significantly, and for a prolonged period. This could lead to the type of problems that have bedeviled Colombia, or even poorer neighboring failed states such as Haiti.

Even though its problems are of its own making, the thought of a large, failed state in the heart of the Western Hemisphere should trouble the continent's leaders.

Juan Nagel is the Venezuela blogger for Transitions and co-author of Blogging the Revolution. Read the rest of his posts here

JUAN BARRETO/AFP/Getty Images

Transitions

The latest plot twist in Egypt's IMF soap opera

Lately I've found myself thinking back to those horrible American soap operas (the "Bold and the Beautiful," etc.) that my late grandmother used to watch. She managed to find interest in what seemed to me like a sickeningly repetitive story (love, betrayal, and borderline incestuous relationships). Each season introduced new protagonists and guest stars who frolicked alongside the core cast. This ensured, for lack of a new storyline, some diversity of faces and names to keep the audience entertained (or at least mildly interested).

These days it's a rather different kind of serialized drama that's plaguing my country -- namely, the negotiations between Egypt and the International Monetary Fund (IMF). After months of relative quiet punctuated by the occasional hopeful declaration from the government, stoic comment from the IMF, doomful analysis from economists, and even a little side-drama in the negotiations, last week witnessed some fundamental changes in Egypt's side of the cast.

Prime Minister Hesham Kandil reshuffled his cabinet on May 9, appointing nine new ministers, including a new team for the IMF negotiations.

The new minister of finance, Fayad Abdel-Moneim, is an Azhar University academic who spent his entire career, starting with his doctoral thesis, pouring over questions of Islamic finance. But he doesn't seem to have any real market experience, aside from a bit of consulting for a few university or government bodies.

Yehia Hamed was appointed minister of investment. A spokesperson for President Morsy during his campaign, his qualifications amount to -- wait for it -- working in marketing and sales for the telecom company Vodafone Egypt. Somehow this was viewed as suitable and sufficient experience to be appointed as the person tasked with developing and facilitating local and foreign investment to the country.

Finally, in an even more egregious political reward appointment, Amr Darrag, a leading figure in the Muslim Brotherhood-allied ruling Freedom and Justice Party, was appointed minister of international cooperation and planning. Darrag holds a doctorate in soil mechanics and foundations. He was recently found responsible for a scandalous incident of double-speak, having told a Turkish think-tank, in a document published in English, that his party was "striving to establish a free society, where citizens have equal rights, where women are treated with respect, and have equal access to education, jobs, and politics. A society where Copts, Jews and atheists live side by side in peace with equal citizenship rights." But in the Arabic version of this article however, the reference to the rights of said women, Copts, Jews, and atheists was conveniently omitted.

The state-owned Ahram Online newspaper mentioned that Darrag will be leading the negotiations from now on -- deviation from the habitual leading role of the Ministry of Finance on the IMF negotiations. This change follows the weakening of the Ministry of Finance by the appointment of a minister whose expertise is remarkably remote from the subject. The ministry also recently lost a key negotiator with the recent resignation of Hany Qadry Demian, the senior assistant to the minister of finance and a veteran economist who has been integral to the process since its very beginning.

In short, the powers-that-be have turned Egypt's IMF negotiating team on its head. This would be bad enough as it is; any coach will tell you that's it probably not a good idea to change the whole line-up on the eve of a big game. Just to make matters worse, though, the new members of the group appear ill-equipped, but also unprepared, for the task ahead.

Perhaps I'm making too much out of it. Two years into the discussions, Egypt's strategy in the negotiations has been reduced to attempting to convince the IMF that it really does plan on introducing difficult economic reforms (which it's doing rather unconvincingly) and to take risky maneuvers such as rejecting emergency finance to put pressure on the IMF. Given the essential weakness of Egypt's position, there's only so much we can expect from our negotiators.

The new members of Egypt's team may have little to offer, but at this point, the perception of professionalism is probably as important as the real thing. Unfortunately, it's looking thin on both fronts.

In the meantime, the soap opera drags on with its new cast of characters. Let's see if it ever ends.

Mohamed El Dahshan is the Egypt blogger for Transitions. Read the rest of his posts here

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