Transitions

Venezuela's Government Versus the World's Airlines

International airlines serving Venezuela are not on good terms with the country's government. The government owes them close to $3 billion in ticket sales, and is now trying to "negotiate" the debt, i.e., water it down so that it doesn't have to pay as much. In fact, one could say the government is downright expropriating the airline's hard-earned profits.

How did the two parties get to this point?

The story begins in 2003, when Hugo Chávez first established the country's currency exchange controls to trim capital flight. He decided that purchases of dollars would have to be approved by the central government at a fixed price.

As part of the implementation of the exchange, Chávez decided that airlines could sell their tickets in bolívares, the local currency, and the government would let them change the proceeds into dollars at the official rate. (In the photo above, the late Chávez indulges in his dreams of flight.) Venezuelan tourists flying overseas could also get access to dollars at the official rate for their personal expenses. The official rate remained fixed, a black market for currency appeared, and Venezuelans began traveling overseas in droves to take advantage of the government's cheap dollars. And airlines seemed happy: Since local airlines are over-regulated to the point of atrophy, foreign airlines had little competition. In essence, the Venezuelan government has been subsidizing wealthy Venezuelans' overseas vacations for years. The airlines were more than glad to transport them.

Sadly, the Venezuelan government hasn't upheld its side of the bargain.

Months have passed since the last time airlines were allowed to repatriate their profits. In the meantime, they continued selling tickets in bolívares, as Venezuelans continued flying abroad. As the gap between the black market and the official rate widened, airlines continued to find it profitable to sell tickets. But with their coffers flush with bolívares, the airlines now have too much cash in their hands. Since the Venezuelan currency is quickly losing its value -- inflation last year was close to 60 percent -- they have begun investing in local real estate. Partly as a result, prices for offices in Caracas have gone through the roof.

The crisis came to the forefront a few weeks ago when the Spanish airline Air Europa decided it would stop selling tickets in local currency and consider pulling out of Venezuela altogether. Other airlines have hinted at similar moves. Given their large exposure to Venezuela's risk and the real threat of not getting their money back, the game might not be worth it. Panama's Copa Airlines, for example, said that it has about $400 million trapped inside the country, and United Airlines has told investors its cash is also being held up. American Airlines and Colombia's Avianca have already cut back on their sales in local currency.

In response, the government made Air Europa an offer it cannot refuse: it promised the company a combination of cash, government bonds, and cheap airplane fuel. Air Europa has not responded, but this feels like a final offer from the government, given the dire state of its finances. By acknowledging it does not have the cash to compensate the airlines, the government is reneging on its promise and, essentially, defaulting on its debt.

The Venezuelan government is used to rewriting the rules under which it does business. It did so with oil companies operating in the country, and it has also done so with the slew of companies it has nationalized. The government does not court foreign direct investment, so it basically does what it wants.

The prospect for the airlines seems dim. Yesterday, in an announcement that amounted to a devaluation of the official dollar rate, the government surprised the airlines by announcing that their ticket sales would now be translated into dollars at a new, higher rate. It also said it was exploring ways to honor its commitment to past sales.

The airlines had better brace themselves. After the Venezuelan government expropriates their profits, many airlines will decide to leave the country altogether, leaving Venezuelans increasingly isolated from the world. Venezuelans may not face the travel restrictions faced by Cubans, for example, but if there are no airlines serving the country, and with increasing restrictions on the amount of currency available for travel, the government doesn't need to actually block the exit of its people.

Its regulations and the realities of the market will take care of that.

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

ANDREY MOSIENKO/AFP/Getty Images

Transitions

Democracy Lab Weekly Brief, January 20, 2014

To keep up with Democracy Lab in real time, follow us on Twitter: @FP_DemLab.

Anna Nemtsova travels to Chechnya, where she finds that its people are all too eager to escape the shadow of its violent past.

Su Mon Thazin Aung reports on maneuvers by Burma's top general to position himself for electoral politics.

Mohamed El Dahshan worries that Egypt's post-revolutionary government is undermining entrepreneurs.

Mohamed Eljarh explains why Libya's central government threatened to sink oil tankers docking in Barqa.

Juan Nagel examines the reasons behind the Venezuelan government's failures to address the epidemic of violent crime.

And Asma Ghribi wonders why some Tunisians are feeling wistful toward their former dictator.

And now for this week's recommended reads:

In the latest issue of Journal of Democracy, Andreas Schedler examines Mexico's high rates of violence and explores how they undermine democracy. Venelin Ganev examines the links between Bulgaria's extraordinary year of civic protest in 2013 and the legacy of 1989's democratic revolution. And four leading democracy experts debate the validity of the "transition paradigm."

Writing for the Center for Strategic and International Studies, David Steinberg looks at scenarios for amending Burma's constitution ahead of next year's presidential election. The Women's League of Burma documents the Burmese military's systematic sexual abuse of ethnic women in conflict-ridden states.

Writing for the Atlantic Council, Dem Lab blogger Mohamed El Dahshan explains why the Egyptian government's push to pass the new constitution undermines democracy. Matthew Hall points out that the Egyptian government also lacks a credible way to assess the referendum's results.

In the Washington Post, Anne Applebaum asks whether Indian and Ukrainian protest movements will be able to move past slogans to develop a viable political alternative.

On OrientXXI, Peter Harling and Yasser El Shimy argue that the Muslim Brotherhood's failure in Egypt is just one symptom of the country's ongoing struggle with pluralism. Writing for the New York Times, David D. Kirkpatrick and Carlotta Gall compare the paths of two Arab Spring alumni: Egypt, which has fallen off the rails, and Tunisia, which has struck a precarious balance.

Tunisia Live's Nissaf Slama reports on the latest political brouhaha surrounding Tunisia's outspoken political rappers.

And finally, the International Foundation for Electoral Systems lists elections to watch in 2014 -- complete with a handy infographic. (One of them will be in Thailand. The photo above shows Thai nurses and doctors demonstrating on the streets of Bangkok over the weekend.)

Ed Wray/Getty Images